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SHARES[1]

Table of Contents

QUESTION BANK

Q.1 Discuss valid allotment of shares.

Q.2 Define shares and explain kinds of shares.

Q.3. Define kinds of share capital.

Q.4. What is the share and share capital? Discuss the rights of shareholders and

provisions regarding buy-back of shares.

Q.5. “A valid allotment of shares has to comply with the requirements of the Act? And

principles of the law of contract. Explain and evaluate the statement.

SHORT NOTES

Q.1 Certificate of shares.

Q.2 Issue of share at discount.

Q.3. Transmission of shares.

Q.4. Share warrant.

I] DEFINITION AND MEANING OF ‘SHARE’:-

A share in a Company signifies a definite portion of the capital of a company. Following are some of the definitions of the share, viz-

(1) S. 2 (84) of the Companies Act 2013:-

“Share’ means ‘a share in the share capital of a company and includes stock’.

(2) According to Dixon J,[2] “Primarily, the share of any company is a piece of property conferring right in relation to the distribution of income and capital.

In fact, the capital of a company is divided into a number of small units. Each unit is called a ‘share’. A share cannot be equated with a share in money or money’s terms, but it is an interest or right to participate in a profit of the company or the assets of the company at the time of winding up.

The holder of a Share in a company is treated as the owner of certain rights and interests and is burdened with certain liabilities. By nature, a share is an existing bundle of rights.

Thus, a shareholder can be treated as an owner of certain rights and interests in the company and cannot be treated as part owner of the company’s capital or part owner because the company has a separate independent personality from its shareholders. Shareholders may come and go, but the company’s existence still remains. In short, the company is an independent legal personality different from its members.

The shares, debentures, etc., are movable property and transferable as provided in articles of associations (S.44). The shares are goods as defined under S. 2 (7) of the Sale of Goods Act. Every share in a company having a share capital should be distinguished by its distinctive number (S. 45).

The terms ‘share’, ‘stock’ and ‘joint stock’ are synonymous. ‘Stock’ is actually ‘a set of fully paid up shares,’ whereas shares may or may not be fully paid up. Moreover, for the purpose of transfer, a stock may be broken up into any division, but a share cannot be broken up into parts.

II] KINDS OF SHARES (S. 43):-

There are following two kinds of shares, viz-

A) Equity Shares / Ordinary Shares[3]:-

Equity share or ordinary share is that which is not preference share.

Equity share capital may be (i) with voting rights (S. 47) or (ii) with differential rights as to dividend, voting or otherwise.

B) Preferential Share[4]:-

A preferential share entitles shareholders (i) to a preference for a dividend at a fixed rate over an ordinary share and (ii) to a preference for capital in a winding-up.

In other words, preference shareholders get preferential rights to get dividends at a fixed rate and preference over ordinary shareholders to get the amount of paid-up shares on the winding-up of the company.

Kinds of Preference Share:-

There are the following kinds of preference shares- viz-

(1) Cumulative[5] and non-cumulative preference shares:-

Preference shares may be cumulative or non-cumulative. In the case of cumulative preference shares, if no profit in one year is earned or if the profit of the company in a year is not enough to pay a fixed dividend on preference shares, the arrears of the dividend are to be carried forward to the next year and paid before the dividend is paid on the ordinary shares. However, in the case of non-cumulative preference shares, the unpaid dividend is not brought forward for the next year. Preference shares are presumed to be cumulative unless the Articles of Association provide the contrary.

In Foster V/s Coles, Foster and Sons Ltd[6]

Facts—The articles of Association originally stated that the preference shares should be cumulative. However, the Article was, and the expression “cumulative” was omitted.

Court Held– the preference shares are still cumulative.

In another case, Staples V/s Eastman Photographic Material[7]

Facts- The Article of Association of the company provides that “the holders of preference shares shall be entitled out of the net profits of each year to a preference dividend at the rate of 10% p.a.

Issue– Whether share is cumulative or non-cumulative.

Held– that the expression. “Out of the net profits of each year” signifies shares as non-cumulative.

(2) Participating[8] and non-participating Preference Shares:-

When preference shareholders are entitled to a share in the distribution of surplus profit, they are called ‘participating preference shares’. If they are not entitled to share in the distribution of surplus profit, it is called ‘non-participating preference shares’. In short, participation or non-participation of preference shareholders in surplus profit determines whether the share is participating.

When the fixed rate of dividend is paid to the preference shareholders, and some of the amounts is paid by way of dividend to the ordinary shareholders, and still, profit remains, it is called ‘Surplus profit’. Usually, such surplus profit is distributed among ordinary shareholders. Therefore, preference shares are presumed to be non-participating. They are made to participate if expressly provided in the Article of Association or Memorandum.[9].

Another controversy is whether participating preference shareholders are entitled to surplus assets at the time of winding up. In Isle of Thanet Electricity Supply Company. Ltd—Re, the above controversy was set at rest, and it was held that the preference shareholders are not ipso facto entitled to participate in the surplus assets on the wind-up.

In other words, unless specifically provided in the Memorandum or Article of Association, preference shares are not entitled to participate in surplus assets at the time of winding up.

(3) Redeemable Preference Shares[10] (S. 55):-

Redemption of shares means getting the share amount back from the company.

No company limited by shares shall issue any preference shares which are irredeemable, provided-

Issuing of irredeemable shares should have been authorised by its articles and
Such shares should be redeemed within a period of twenty years (from the date of their issue). However, irredeemable shares beyond 20 years may be issued subject to some conditions for infrastructural projects.

There are some other conditions for such redemption, viz.

(a) Redemption should be out of the profits of the company, or

(b) Redemption should be out of the proceeds of a Capital Redemption Reserve Account (i.e. the account maintained by the issue of shares for the purpose of redemption).

If the shares are redeemed as stated above, a sum equal to the amount paid on redemption should be transferred to a reserve fund called “the Capital Redemption Reserved Account.” The company may apply the reserved account to pay off unissued shares of the company as fully paid bonus shares.

The distinction between Preference Shares and Equity or Ordinary Shares:-

There are following differences between the two, viz-

1) As to Preference:-

Preference shares carry preferential rights to be divided and/ or redeemed. Ordinary shares do not.

2) Risk:-

Preference shares get dividends at a fixed rate, and therefore, there is less risk, whereas equity shares carry no such fixed rate of return, but in times of prosperity, they carry the best part of profits.

3) Full Membership:-

Preference shareholder’s rights and membership are restricted, whereas equity shareholders hold full membership. Equity shareholders have the right to vote, whereas preference shareholders do not carry such a right except in a few circumstances. (S. 47).

4) Redemption:-

Equity shares are not redeemable except by a company’s special resolution, whereas preference shares may be redeemable.

III] ALLOTMENT OF SHARES[11]:-

Shares come into existence by an allotment, and a person becomes their holder. An application for a share is an offer to buy shares; an allotment is an acceptance of the offer.

Before allotment, the company needs to issue a prospectus. The prospectus contains necessary particulars about the company, relying upon which person applies for shares. In the contract’s language, issuing the prospectus is an invitation to receive an offer; an application for shares is an offer to buy shares and allotment of it is acceptance of that offer by the company. In this way, the general principles of contract apply to the allotment of shares.

There are the following Requirements of Allotment-viz.

1) Requirement of Minimum Subscription (S. 39):-

A company cannot allow any of its share capital to be offered to the public for a subscription unless the minimum subscription is subscribed.

A minimum subscription shall be received within 120 days from the first issue of the prospectus.

‘Minimum subscription’ is the minimum amount mentioned in the prospectus to be raised to provide the following expenses and costs, viz.

(i) the price of the property purchased or to be purchased,

(ii) the preliminary expenses and the underwriting commission payable by the company,

(iii) the payment of any money borrowed by the company in respect of any of the aforesaid matters,

(iv) working capital, and

(v) any other expenditure, stating the nature and purpose thereof and the estimated amount in each case.

If a minimum subscription is not received or collected within 120 days, all money received from applicants for shares shall be forthwith repaid to them without interest.

2) No Allotment unless Application Money is received:-

No allotment can be made of any share offered to the public for a subscription unless the sum payable on the application, as stated in the prospectus, has been paid to and received by the company.

3) No fresh offer unless an earlier offer is completed (S. 42 (3):-

No fresh offer or invitation for subscription of shares shall be made unless an earlier made offer or invitation for subscription has been completed, withdrawn, or abandoned by the Company. (Held by Delhi High Court in Kal Airways Private Ltd. V/s Spicejet Ltdin O.M.P 71/2016)

SHORT NOTES

A) Certificate of Shares[12] (S. 46):-

The share certificate is a formal statement by the company under its common seal that the person named therein is the holder of the number of shares in the company specified in the certificate. The certificate is prima facie evidence of the person’s title to the shares.

The object of issuing a share certificate is to facilitate dealings with the shares. However, a share certificate is not negotiable; therefore, merely handing it over to somebody or by loss does not create any right for the transferee.

1) Duplicate Share Certificate:-

A Duplicate certificate may be issued if such a certificate-

Is proved to have been lost or destroyed; or
Has been defaced, mutilated or torn and is surrendered to the company.

Where a share is held in depository form, the record of the depository is the prima facie evidence of the beneficial owner’s interest.

2) Punishment for issuing a duplicate certificate to defraud:-

However, suppose a company intending to defraud issues a duplicate certificate of shares. In that case, the company shall be punishable with a fine, which shall not be less than five times the face value of the share involved in the issue of the duplicate certificate. However, it may extend to ten times the face value of such shares or rupees ten cores, whichever is higher, and every company officer who is in default shall be liable for action under S. 447 (i.e. punishment for fraud).

B) Sweat Equity Shares[13]–

1) Issuing shares at a discount is prohibited (S. 53):-

Issuing shares at a discount is prohibited by S. 53. The section provides that except as provided in S. 54 (Sweat Equity Shares), a company shall not issue shares at a discount. Any share issued at a discount is void. However, it has some exceptions, as follows-

(i) Share to its creditors:-

A company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines, directions, or regulations specified by the Reserve Bank of India.[14].

(ii) Sweet Equity shares:-

2) Punishment for Issuing Shares at Discount Price (S. 53 (3):-

Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to (i) an amount equal to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is less, and the company shall also be liable to (ii) refund all monies received with interest at the rate of twelve per cent per annum from the date of issue of such shares to the person to whom such shares have been issued.

3) Sweat Equity Shares (S. 54):-

a) Definition of “sweat equity shares”:-

As per S. 2 (88), “Sweat Equity Shares” means such equity shares as are issued by a company-

(i) to its directors or employees,

(ii) at a discount or for consideration other than cash,

(iii) for providing their know-how or making available rights in the nature of

intellectual property rights or value additions, by whatever name called.

b) When sweat equity shares are issued (S. 54)?

Notwithstanding anything contained in S. 53, a company may issue sweat equity shares of a class already issued if the following conditions are fulfilled-

the issue is authorised by a special resolution passed by the company;
the resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued[15].
Where the equity shares of the company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board on this behalf. If they are not so listed, the sweat equity shares are issued in accordance with such rules as may be prescribed.

The rights, limits, restrictions, and provisions applicable to equity shares shall apply to the sweat equity shares issued under this section, and the holders of such shares shall rank pari passu (at par/equal) with other equity shares.

C) Buying Back of Securities[16] (S. 68):-

Generally, a company is not permitted to buy back its own securities. However, in the following circumstances, the company is permitted to buy back its own securities, i.e. buy, back has to be-

out of free reserves.
out of the securities premium account; or
out of the proceeds of the issue of any shares or other specified securities.

However, no buyback of any shares or other specified securities shall be made from the proceeds of an earlier issue of the same kind of shares or other specified securities.

1) Conditions for Buy Back:-

No company shall purchase its own shares or other securities as mentioned above unless-

the buyback is authorised by the Articles of Association of the company.
A special resolution was passed at the company’s general meeting authorising buyback. However, no such resolution is required if-
buyback is ten per cent or less of the total paid-up equity capital and
such buyback has been authorised by the Board of Directors by means of a resolution passed at its meeting.
the buyback is twenty-five per cent or less of the aggregate paid-up capital and free reserves of the company.
the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the capital and its free reserves.
all the shares or other specified securities for buy-back are fully paid up.
the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board on this behalf, and
no offer of buy-back of securities shall be made within a year, the period reckoned from the date of the closure of the preceding of buy-back if any.
Every buy-back shall be completed within a period of one year from the date of passing of the special resolution or the resolution passed by the Board, as the case may be.
The buy-back may be-

(i). from the existing shareholders or security holders on a proportionate basis,

(ii). from the open market.

(iii). By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Before making a buy-back, a company is required to file with the Registrar of Companies and Securities and Exchange Board a declaration of its solvency signed by at least two Directorsany.
Where a company buys back its own shares or other specified securities, it shall extinguish and physically destroy the shares or securities so bought back within seven days of the last date of completion of the buy-back.
Where a company completes a buy-back, it shall not make a further issue of the same kind of shares or other securities (except provided).
Where a company buys back, it shall maintain a register of the shares or securities bought back, etc.
A company shall, after the completion of the buyback shall, file with the Registrar and the Securities and Exchange Board a return with the information prescribed thereto.

If a company defaults in complying with the provisions of this section (or regulation made by the Securities and Exchange Board), the company shall be punished with a fine which shall not be less than 1 lakh rupees. However, it may extend to three lakh rupees or with both, and every officer defaulting will be similarly punished.

2) Prohibition of Buy Back (S. 70):-

No company shall directly or indirectly purchase its own shares or other specified securities-

Through any subsidiary company, including its own subsidiary companies,
Through any investment company or group of investment companies; or
If a company defaults in repayment of deposits,
If the company does not comply with other provisions under S. 92, 123, 127 and 129.

D) Bonus Shares (S. 63):-

Shares may be issued as bonuses to existing shareholders. This is generally done when a company has extra money. Bonus shares are usually issued to capitalise profits, i.e., convert profit into capital.

The section provides that a company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of-

It’s free to reserve,
The security premium account, or

(iii)The capital redemption reserve account,

However, no bonus shares shall be issued by capitalising reserves created by the revaluation of assets.

1) Bonus Shares can be issued under the following Conditions:-

No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares unless-

It is authorised by the Articles of Association of the company,
It has, on the recommendation of the Board of Directors of the company, been authorised in the general meeting of the company,
It has not defaulted on payment of interest or principal amount/sum with respect to fixed deposits or debt securities issued by the company.
It has not defaulted in respect of payment of statutory dues of the employees, i.e. the contribution of PF, gratuity and bonus.
The partly paid-up shares, if any, outstanding on the allotment date are fully paid up.
The bonus shares shall not be issued in lieu of dividends.

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[1]भाग [“शेयरकामतलब, किसीकंपनीकीपूंजीको, छोटे–छोटेबराबरहिस्सेमेंबांटनेपर, जोपूंजीकासबसेछोटाहिस्साआताहै, उसहिस्सेकोशेयर/भागकहतेहै ]

[2] In Peter’s American Delicacy Company Ltd. V. Heath (1939) 61 CLR 457.

[3] सर्वसाधारण भाग [साधारणभाग]

[4]विशेषाधिकारोंवाला भाग [अग्रहक्क भाग]

[5]लाभांश संचितभाग [संचीत लाभांष]

[6] (1906) 22 T.LR 555

[7] (18960 2 Ch. 303

[8] मुनाफे के वितरण में हिस्सेदारीलेने वाले भाग [जादाच्या नफयात सहभागी होणारा भाग]

[9] Will vs. United Lanket Plantation Company (1896) 2 Ch. 303

[10] कंपनीने परत विकत घेन्याचे भाग [कंपनी से शेयर की राशि वापस प्राप्त करना]

[11] भाग वाटप [शेयरों का आवंटन

[12] भाग दाखला [भाग का प्रमाणपत्र]

[13] घामासाठी / कश्टासाठी / बौधिक अधिकारासाठी कामगार अथवा संचालकांस कमी रक्कमेत अथवा रक्कमेच्या षिवाय दिलेले भाग [पसीने के लिये/ बौद्धिक निवेश के लिए दिये जानेवाले बौद्धिक निवेश के लिए] सर्वसाधारण भाग

[14] Added by S. 53 (2-A) by 2019 amendment

[15] Earlier clause C i.e. “not less than one year has, at the date of such issue, elapsed since the date on

which the company had commenced business” is omitted by the 2019 amendment”.

[16]प्रतिभूति योंको वापस खरीदना [स्वताःचे भागभांडवल परत विकत घेणे]