Module 2

Company Law

Prospectus of a Company

Prospectus is a document containing detailed information

about the company and an invitation to the public for
subscribing to the share capital and debentures issued by the
company. The Companies Act, 2013 defines
a prospectus under Section 2 (70).
It defines Prospectus as “any document described or issued as
a prospectus and includes any notice, circular, advertisement
or other document inviting deposits from the public or
inviting offers from the public for the subscriptions or
purchase of any shares in or debentures of a body corporate.”
A public company can issue the prospectus to offer its shares
and debentures, whereas a private company cannot issue
prospectus.
Objectives of Prospectus:
1. To bring to the notice of the public that a new company has
been formed.
2. To preserve an authentic record of the terms and allotment
on which the public have been invited to buy its shares or
debentures.
3. To secure that the directors of the company accept
responsibility of the statement in the prospectus.
Contents of a Prospectus:
- Name and address of the registered office of the Company,
CS, auditors, etc.
- Dates of the opening and closing of issue (made by the
Board).
- Statement by the Board of Directors about separate bank
account.
- Disclosure of the details of money.
- Details about underwriting of the issue.
- Consent of auditors, Directors, bankers, etc.
- Details of the resolution passed.
- Procedure and time schedule for allotment and issue of
security.
- Capital structure of the Company.
- Details of the Directors, including their appointment and
remuneration.
- Particulars such as present business and location, object of
the issue, purpose of funds, schedule of implementation,
funding plan, summary of project, interim use of funds
- Particulars relating to management, litigation, gestation
period, extent of progress, deadlines for completion of project
Major Requirements of Prospectus
 A prospectus must contain a statement purporting to be
made by an expert. Expert includes an engineer, a valuer,
a CA, a CS and a CMA.
 The prospectus must be issued after incorporation
 Every prospectus must be dated. The date of publication
and the date of issue must be specifically stated in the
prospectus.
 Prospectus must be registered by Registrar of Companies
 The golden rule of the prospectus is that every detail has
to be given in strict and scrupulous accuracy. The aterial
facts given in the prospectus are presumed to be true.
 Consequences of applying for shares in fictitious names
to be prominently displayed
Golden Rule of Prospectus
The 'Golden Rule' for framing of a prospectus was laid down
by Justice Kindersley in New Brunswick & Canada Rly. &
Land Co. v. Muggeridge (1860). The rule holds that It is the
duty of those who issue the prospectus to be truthful in all
respects.
The public is invited to take shares on the faith of the
representation contained in the prospectus. Everything must,
therefore, be stated with strict and scrupulous accuracy.
Nothing should be stated as fact which is not so and no facts
should be omitted which might affect the nature or quality of
the prospectus. The true nature of the company’s venture
should be disclosed.
In Rex v. Kylsant (1932), the prospectus stated that dividends
of five to eight percent had been regularly paid over a long
period. The truth was that the company had been incurring
substantial losses during the seven years preceding the date of
the prospectus and dividends were paid out of the realised
capital profit. The court held that the prospectus was false
and misleading. According to the court, the statement, though
true, was rendered false in the context in which it was stated.

Misrepresentation in Prospectus of a Company

A prospectus is a document with information that the general
public can use to subscribe securities from a corporation. It
will have significant effects if any of the information is
inaccurate. Misstatement in the prospectus means any
inaccurate or deceptive statements in the prospectus.

The inclusion or removal of an information that is likely to

mislead the public is referred to as a misrepresentation. If a
material fact has been left out of the prospectus and that
omission is likely to mislead the public, the prospectus will be
deemed to contain an error.

Consequences of Misrepresentation
A half-truth, for instance, represented as a whole truth may
tantamount to a false statement (Lord Halsbury in Aarons
Reefs v. Twisa). In case of any untrue statement in the
prospectus, the liability will be on the director of the company
during the time of issue.

A person who purchases shares based on misstatement in

prospectus may
1. apply to court for recission of the contract only when there
is misrepresentation relating to the material facts. The
rescission has to be done within a reasonable time.
Handerson v Lacon Case: The prospectus stated that
directors and friends had subscribed to a large portion when
actually they had subscribed to just 10 shares. The court then
allowed recession.
Rex v Lord Kylston case: The company made a false of
paying dividends when it was actually running in a loss. The
court allowed the recession of the contract.
2. claim damages for deceit.
3. file a suit against directors for deceit.
4. claim compensation from directors, promoters or other
persons who has authorized their name to be written during
the issue of the prospectus. The penalty for non-compliance of
these provisions is a minimum fine of Rs. 50, 000 not
exceeding Rs. 3,00, 000 or with imprisonment for up to 3
years or with both.
Rule in Derry v Peak (1889): In the prospectus released by
the defendant company, it was stated that the company was
permitted to use trams that were powered by steam, rather
than by horses. In reality, the company did not possess
such a right as this had to be approved by a Board of Trade.
Gaining the approval for such a claim from the Board was
considered a formality in such circumstances and the claim
was put forward in the prospectus with this in mind.

However, the claim of the company for this right was later
refused by the Board of Trade. The individuals who had
purchased a stake in the business, upon reliance on the
statement, brought a claim for deceit against the defendant’s
business after it became liquidated. The claim of the
shareholders was rejected by the House of Lords.

The court held that it was not proven by the shareholders that
the director of the company was dishonest in his belief. The
court defined fraudulent misrepresentation as a statement
known to be false or a statement made recklessly or carelessly
as to the truth of the statement.

Civil Liability for Misrepresentation in Prospectus

If a person who has purchased securities from a corporation
experiences any loss or harm as a result of a misstatement in
prospectus or the inclusion of a misleading item, or acting on
the information in the prospectus, the company and everyone
listed in the prospectus including the directors, promoters and
professionals, will be responsible for compensating that
person.
Exceptions to Civil Liability: When a person can show that
the claim or exclusion was irrelevant, that they had good
reason to think it was true, that now the exclusion or omission
was required, and that they held that belief up to the
prospectus release, they will not be held accountable under
Section 34.
A person may also avoid civil liability under Section 35 (1)
when they can demonstrate one of two things: either the
prospectus was given without their consent or knowledge.
They informed the public as soon as they became aware of it.
A person who might not be held accountable for a
misrepresentation made by a specialist.

Criminal Liability for Misrepresentation in Prospectus

The Criminal liability for misstatements in prospectuses is
dealt with in Section 63 of the Companies Act. Anyone who
authorizes the publication, distribution, or issuance of a
prospectus that contains information that is false, deceptive, or
both, or that includes or omits information that is likely to
mislead, is guilty of fraud.
Any action, omission, or concealment of information with the
intent to deceive, get an unfair advantage, or injure the
corporation, its shareholders, creditors, or any other person is
considered "fraud" under Section 447 of Companies Act,
2013.
It is not necessary for such behaviour to cause any unfair gain
or loss. Under this rule, it also constitutes fraud for someone
to misuse their position.
If someone is found guilty of fraud, they will receive a term
that ranges from six months to ten years in prison.
Additionally, he will be subject to a fine that will not be less
than the sum involved in the fraud but may be up to three
times that sum. The punishment must be at least three years if
the fraud was committed in the name of benefit for the public

Types of Prospectus

Shelf Prospectus: “Shelf prospectus” (Section 31) means a

prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one
or more issues over a certain period without the issue of a
further prospectus. A shelf prospectus is a type of prospectus
issued by companies making multiple issues of bonds for
raising funds.
Companies file the Shelf Prospectus with the RoC at the first
stage of the offer, having a period of validity which does not
exceed one year from the date of opening the first offer. It
does not require a prospectus for the subsequent offers during
the validity period. Along with Shelf prospectus, the company
should also file Information Memorandum. It should contain
all the material facts of the created charges, the company’s
financial position changes.

Red herring Prospectus: A company proposing to make an

offer of securities may issue a Red herring Prospectus
(Section 32) prior to the issue of a prospectus. Red herring
prospectus means a prospectus which does not include
complete particulars of the quantum or price of the securities
included therein.

A company proposing to issue a Red herring Prospectus under

sub-section (1) shall file it with the RoC at least three days
prior to the opening of the subscription list and the offer. A
Red herring Prospectus shall carry the same obligations as are
applicable to a prospectus. Any variation between the Red
herring Prospectus and the real prospectus shall be highlighted
as variations in the prospectus.

Upon the closing of the offer of securities under this section,

the prospectus stating therein the total capital raised, whether
by way of debt or share capital, and the closing price of the
securities and any other details as are not included in the Red
herring Prospectus shall be filed with the Registrar and the
Securities and Exchange Board (SEB) .

Deemed Prospectus: According to Section 25(1) of the

Companies Act, 2013, a Deemed Prospectus is a document
through which a company offers its securities for sale to the
investors. A Deemed Prospectus is used when a company
wants to issue shares to the public through an intermediary to
bypass the SEBI (Securities Exchange Board of India)
regulations and compliance standards.

First, the company allows or agrees to allot its securities to a

third party for sale to the public. Then, the intermediary, such
as a merchant bank, issuing house or another company, files
an ‘Offer for Sale’ for the securities received. This offer for
sale is referred to as a Deemed Prospectus when it fulfils the
following criteria:
 The offer of sale is made to the public within six months
of the share allotment to the intermediary.
 The company allotting the shares to the intermediary has
not received any consideration or compensation until the
issuing house files the Offer for Sale.

Abridged Prospectus: An Abridged Prospectus is a

memorandum provided in Section 2(1) of the Companies Act,
2013. It includes all the significant features of a prospectus,
specified by SEBI. It is being issued along with the
application form of public issues. It is basically a brief
version of the information, containing all prescribed details in
a prospectus, in order to reduce the public issue of capital.

It helps the company fulfil a statutory mandate prior to

accepting offers from the public. If the company fails to issue
the abridged prospectus, then it will be charged Rs. 50,000 for
each default. It saves the cost of public issue of capital.

Distinction between Member & Shareholder

1. The term “shareholder” refers to a person who holds or
owns share in a company. The term “member” refers to a
person whose name appears on the register of members.
Both the words “shareholder” and “member” are usually
used interchangeably and synonymously.
2. A member is a person who subscribed the memorandum
of the company. A shareholder is a person who owns the
shares of the company.
3. The term member is defined under section 2 (55) of the
Indian Companies Act, 1956. Conversely, the term
shareholder is not defined in the Indian Companies Act,
1956.
4. The bearer of a share warrant is not a member since his
name is removed from the register of members
immediately after the issue of such share warrant.But,
the bearer of a share warrant can be a shareholder.
5. All shareholders whose name are entered in the register
of members are members. On the other hand, all
members may not be the shareholders.
 6. In the case of a public company, there must be a
minimum of 7 members. There is no such cap on the
maximum number of members. Similarly, a private
company can have a minimum of 2 and maximum of 200
members.
7. A person may become a member of a company without
being its shareholder in unlimited companies or
companies limited by guarantee having no share capital.
8. A transferee or the legal representative of the deceased
person may be a shareholder but he may not be a
member until he gets his name entered in the register of
the members.
Who can be a Member of a company: Any person who is
competent to contract as per section 11 of the Indian contract
Act may become a member of a company. This is subject to
the provisions of the MOA and AOA of the company.
Articles of a company may also provide that who are eligible
or not eligible for becoming members of the company.
Minors: Mohri Bibi Vs. Dhamadas Ghosh (1903: Minors
are not competent to become the members of a company
because an agreement with a minor is void. In England, an
infant may become a member of a company unless this is
forbidden by the AOA of the company.
Firms: A partnership firm cannot become the member of a
company because it has no separate legal status from the
partner. The partner of the firm can have the shares as joint
holders and become member of the company.
Company: A Company may, if so authorized by its AOA,
become a member of another company.
Hindu Undivided Families (HUF): If the HUF purchases
shares of a company in the name of Karta, then only Karta
shall be the member of a company, not the Hindu Undivided
Family.
Insolvent: An insolvent can remain a member until his name
appears on the Register of Members. He is also entitled to
vote and attend meetings although his shares pass on to the
Official Receiver.
Fictitious Person: A person who takes the shares in the name
of a fictitious person becomes liable as a member. However,
such a person shall be imprisoned up to 5 years under section
68 (a).
Foreigners: Foreigners can become members of companies
in India but permission of Reserve Bank of India has to be
obtained for this purpose. The right of the foreigner as a
member will be suspended if he becomes an alien enemy.

Shares
A share is the single smallest denomination of a company's
stock. An individual unit of stock is known as a share. Section
2(84) of the Companies Act, 2013 defines share as a share in
the share capital of a company and includes stock. It
represents the interest of a shareholder in the company,
measured for the purposes of liability and dividend. It attaches
various rights and liabilities.

A share is the smallest denomination of a specific company's

stock. As per Section 43 of the Act, there are two kinds of
shares of a company limited by shares: ♦ Equity shares ♦
Preference shares
 • Equity shares: Equity shares yield the highest returns on
total investment in the stock market. However, it has the
highest level of risks associated as well. All shares that
are not preferential shares are equity shares and are also
known as ordinary shares.
• When you invest in equity shares, you become a
fractional owner of the company. You have the right to
vote in the annual general meetings of a firm and have a
say on the decision-making of the company. As an equity
shareholder, you are entitled to receive dividends

Benefits of Equity Share

• Potential to earn a high income
• Provides Creditworthiness
• Highly liquid
• Say in the company affair
• Capital appreciation due to the increase in stock price
• Regular income if the company declares dividends. 
• Protection against inflation
• Diversification across assets
• Transferable
• Permanent in nature
•
Equity shares are divided into

1. Equity shares with Voting Rights: These are the

normal shares.

2. Equity Shares with Differential Voting Rights (DVR)

are same as ordinary equity shares except these provide
additional voting rights to the holder. These shares
should be authorised by Articles of Association.
To become eligible to issue equity share with DVR, the
company should have
 Distributable profit for last 3 years
 Not defaulted in filing financial statements and
annual returns for last 3 years
 No default in payment of declared dividend to
shareholders
 Not penalised by court or Tribunal for last 3 years

The issue of equity shares with DVR should be through

ordinary resolution passed by the general body. The
maximum percentage of equity shares with DVR to be issued
is 26% of post-issue paid up equity share. The conversion of
existing equity share capital into equity share with DVR is not
allowed.

Preference Shares
Preference shares, more commonly referred to as preferred
stocks, are different from ordinary shares since its owners are
given certain 'preferred' rights compared to the ordinary
shares. The rights attaching to these shares should be set out
in the company's Articles of Association.
The primary advantage for preference shareholders is that the
preference shares have a fixed dividend. If the company enters
bankruptcy, preferred stockholders are entitled to be paid
from company assets before common stock dividends are
issued. However, preferred stock shareholders typically do not
hold any voting rights. Preference shares are ideal for risk-
averse investors and they are callable.

Types of Preference Shares

• Cumulative Preference Shares

The dividend is a part of the profit, and there are chances
that a company may not mark profit in some years.
Cumulative shares require the companies to pay cumulative
dividends in the coming year when they incur profit in case
there are any unpaid dividends.

• Non-cumulative Preference Shares

In the case of non-cumulative shares, the shareholders do
not get accumulated outstanding dividends for the years
when there are insufficient profits. In other words, the
investors only get dividends for those years when the
company records profits.

• Convertible preference shares

Convertible shares are those in which the holder gets the
right to convert them into equity shares after a specific time
period mentioned in the Memorandum of Association of the
Company.

• Non-convertible preference shares

Non-convertible shares are those in which the holder does
not get the right to convert them into equity shares. As
preference shareholders, they get preference in dividend
payments and repayments in case of company liquidation.

• Participating preference shares

Preference shareholders usually get a fixed rate of
dividends. However, participating preference shares offer
additional benefits. If the company marks extraordinary
earnings, these shareholders get the opportunity to earn
from extra profits, in addition to a fixed dividend, after
other shareholders are paid. Plus, in case of company
liquidation, they get the right to earn from the profits after
the rest shareholders are paid.
 • Non-participating preference shares
As the name suggests, shareholders owning these shares do
not enjoy the right to participate in extra profits and only
get fixed dividends.

Redeemable Preference Shares

These preference shares are also known as callable preferred
stock and serve as one of the most effective ways to finance
big companies. These shares come with a blend of equity and
debt financing and are readily traded on stock exchange.

Redeemable preference shares are repurchased at a fixed rate

on a fixed date or by announcing the same in advance.
Notably, redeemable preference shares come in handy for
cushioning the impact of inflation and the decline of monetary
rate.

Provisions under Companies Act, 2013 Section 55(1) says

that no Company Limited by Shares shall issue any preference
shares which are irredeemable. Section 55(2) says that a
Company Limited by Shares if authorized by its AoA can
issue preference shares which are liable to be redeemed within
a period not exceeding 20 years from the date of their issue
subject to the following conditions;
1. The issue of such shares has been authorized by passing
a special resolution in the general meeting.
 2. The company, at the time of such issue of preference
shares, has no subsisting default in the redemption of
preference shares issued either before or after the
commencement of this Act or in payment of dividend
due on any preference shares.

Irredeemable preference shares

This particular share cannot be redeemed or repaid during the
active lifetime of a company. To elaborate, shareholders will
have to wait until the company decides to wind up its current
operations or liquidate the venture altogether to initiate the
same. It makes the shares a perpetual liability for the
company.
Adjustable-rate preference shares
The rate of dividend paid on this share is floating in nature
and is heavily dependent on the prevailing market rates. It
directly influences the amount of dividend received by the
shareholders throughout the investment.

Benefits for Preference Shareholders

1.They earn fixed dividends
2.They benefit from capital appreciation.
3.They enjoy preference over equity shareholders for dividend
payments.
4. They have the right to claim the company’s assets before
equity shareholders in case of company liquidation, which
makes it a less risky investment than equity.

Benefits for Company in Issuing Preference Shares

1. The cost of these shares may be less than equity shares
2. The company can preserve voting rights by issuing
preference shares

Risks involved in Preference Shares

• Market risk: The value of these shares can decrease in
unfavourable market conditions.
• Interest rate risk: If the prevailing interest rate in the
market increases, the demands for these shares are likely
to decrease, resulting in a reduction in market prices.
• Liquidation risk: Though preference shares have lesser
liquidation risk than equity shares, the risk is still there.
Preference shareholders can only claim assets remaining
after creditors and bondholders/debenture holders are
paid in case of liquidation.

Stock
A bundle of shares owned by different shareholders of one
company or more than one company is called stock.
Companies issue stock in order to raise capital to finance
future growth. Stocks, also known as equity, are a security
representing a holder's proportionate ownership of
a corporation.

There are two types of stocks: common stocks and preferred

stocks.

1. Common Stock comes with the ability to cast votes at

shareholder meetings and the right to receive dividends.

2.) Preferred Stocks doesn't come with the right to vote, but

does come with the right to receive dividends prior to
common stockholders and higher priority in getting paid back
if the company goes bankrupt and is liquidated.

Difference between Shares & Stock

1. Issued shares comes into existence before the stock and it is
issued initially. Stock comes into existence after conversion of
shares into stock.
2.Shares in physical form bear distinct numbers. Stocks are
the consolidated value of share capital
3. Shares may or may not be fully paid up. Stock is always
fully paid-up
4. Shares have a nominal value. Stock does not have any
nominal value. Stock is always fully paid-up
5. All shares are of equal denomination. Denomination of
stocks varies.
6. It is not possible to transfer shares into fraction. Stock is
divisible and transferable into any fractional value.
Stake
A stake is often used to describe the amount of stock an
investor owns. If you own stock in a given company, your
stake represents the percentage of its stock that you own.

Share Capital
Share capital is referred to as the capital that is raised by the
company by issuing shares to investors. Share capital
comprise of capital that is generated from funds generated by
issuing of shares for cash or non-cash considerations.

Companies have a requirement of share capital for the

purpose of financing their operations. The share capital of the
company will increase with the issuance of new shares. The
share capital amount raised by the company comprises two
vital components:
 Face Value

 Share Premium

Face Value or Par Value is the nominal amount at which the

stock sales are reported or accounted for in the ‘Balance
Sheet’. This is the original price of the share. Generally, one
nominal share amount in India varies such as ₹5, ₹10, or
₹100, etc based on the company and the nature of shares.
Share Premium or Additional Paid-in Capital is the excess
amount of Face Value paid by the investors to the company.
This is also known as capital in excess of Par Value or
Securities Premium.
The separate account dealing with this Securities Premium is
Securities Premium Account. It is reported in the Balance
Sheet under the shareholders’ equity section. 

Types of Share Capital

 Authorised Capital: Section 2 (8): It is also known

as Nominal Capital or Registered Capital. It is the
maximum amount of the capital for which shares can
be issued by the Company to shareholders. The
Authorised Capital is mentioned in the MoA under
the heading “Capital Clause”. The Authorised
Capital is fixed prior to incorporation of the
Company. The Authorised capital can be increased at
any time in future by following necessary steps as
required by law.
• Issued Capital: Section 2 (50): It is that portion of the
Authorised Capital which is usually circulated to the
public for subscription. It comprises the shares assigned
to the merchants.
• Unissued Capital: The Authorised Capital which is not
proffered for public consent is called as Unissued
Capital.
• Subscribed Capital: S 2 (86) : Subscribed Capital is
referred to as that part of Issued Capital that is subscribed
 by the company investors. It is the actual amount of
capital that the investors have taken.

 Paid-up Capital: It is the amount of money for

which shares of the Company were issued to the
shareholders and payment was made by the
shareholders.

• Called-up Capital: Section 2 (15): The amount of share

capital that the shareholders owe and are yet to be paid is
known as Called-up Capital. It is that part of the share
capital that the company calls for payment.

• Fixed Capital: Fixed capital is the portion of total

capital outlay of a business invested in physical assets
such as factories, vehicles, and machinery that stay in the
business almost permanently, or, more technically, for
more than one accounting period.
• Reserve Capital: Reserve capital refers to that part of
the authorised capital which is yet to be called up and
will be available for drawing when needed. Reserve
capital can only be called when a company goes into
liquidation.
• Circulating Capital: Circulating capital is money being
used for core operations of a company. Circulating
capital includes cash, operating expenses, raw materials,
 inventory in process, finished goods inventory, and
accounts receivable.

Types of Allotment or Issue of New Shares

When a firm distributes and forms new shares, it is known as

the allotment of shares. Allocation of shares is the procedure
of appropriating a specified amount of shares as well as
distributing them among persons who have filed share return
requests.
The allotment of shares must be communicated within a
stipulated time. Allotment of shares must be done with the
requirements such as minimum subscription, board resolution,
etc.
As per the law, the reasonable time is 6 months which means
there should not be more than a duration of 6 months between
application and allotment of shares.
The allotment of shares should not contain any condition
precedent to it. It should be absolute and unconditional. The
bank account used for application money should not be used
for any other purpose.

Public Placement
Public placement is one where the general public applies for
shares, and out of them, shares are allotted to the public as per
the company’s preference. Public placement is an option
available with only public companies and not private
companies.

Section 23 of the Companies Act, 2013 mentions Public Issue

as a way of raising funds through public. It means the selling
or marketing of share for subscription by the public by issue
of prospectus.
The importance of public issue is by issuing share to public
and getting listed to a recognized stock exchanges in India.
Public Offer” includes Initial Public Offer or Further Public
Offering of securities by the company.
IPO: Initial Public Offering (IPO) is the first issue of shares
made by the company to the public. IPO means that the
Company will be converted into a Public Listed Company and
the shares of the Company can be traded on stock exchanges.
The company can list its shares at the designated stock
exchanges by the successful completion of the IPO. Through
the IPO, the company can get additional capital by selling
shares to the public directly. IPO happens only once.

FPO: Follow on Public Offer (FPO) is a process by which a

company, which is already listed on an exchange,
subsequently issues new shares to the investors or the existing
shareholders. The company can go for FPO anytime it wants
once it is listed in stock exchange.
Private Placement
Private Placement is any offer of securities or invitation to
subscribe securities to a select group of persons by a
company, other than by way of public offer. The invitation is
made through issue of a private placement offer letter which
satisfies the conditions specified in Section 42 of 2013 Act.

The offer to make private placement should be approved by

shareholders through a special resolution. Private placement
can be made to persons identified by the board to a maximum
of 200 person in a financial year. Offers may be made to
NBFC and HFC outside this 200 cap.

The offer letter shall not have the right of renunciation. The
shares can only be subscribed by the person to whom the offer
is made. The offer shall be made either in writing or through
electronic mode within 30 days of recording the name of such
person Every identified person willing to subscribe to the
offer shall apply along with the subscription money.

The monies received shall be kept in a separate bank account

in a scheduled bank and the amount shall not be utilized for
any purpose. The allotment shall be made within 60 days from
the date of receipt of application money. If the company
fails to do so it must refund the money to the subscriber
within 15 days

Rights Issue
Rights issue is fresh shares offered to existing shareholders in
proportion to their existing holding in the share capital of the
company. When a company needs additional capital and
keeps the voting rights of the existing shareholders
proportionately balanced, the company issues Rights shares as
per Section 62 (1). The issue is called so as it gives the
existing shareholders a pre-emptive right to buy new shares at
a price that is lesser than market price.

The offer letter should specify the numbers of share offered.

However, the offer shall remain open for more than 15 days
but less than 30 days.

The AoA should have provision to issue rights issue.

The board of directors has the power to decide the time, price,
number of shares and other terms and conditions of the issue.

In a private company, this time limit can be reduced if more

than 90% of the shareholders agree. Apart from this, they
must also get an option for renunciation, i.e., to offer it to
someone else.
Pre-emptive right: The pre-emptive right to buy now shares
is a statutory right of existing equity shareholders.
Right to Renunciation: The pre-emptive rights includes the
right to renounce, if it is not restricted by the Articles of
Association of a company. Public and private companies can
have articles either to restrict or prohibit the right to renounce
the rights shares. If permitted, renunciation of issue rights
shares can be made fully or partly in favour of any person,
who need not be an existing shareholder of the Company.

Needle Industries Case (1981): The rights issue is not

necessarily made at the time of requirement of the
funds. It can be even made to create the desired number of
shareholders to enable the company to exercise its legal
powers or to comply with legal requirement.

Sri Hari Rao Vs. Gopal Automative Limited (1999): The

minority shareholders can’t approach the court to
stop the rights issue saying they don’t wish to subscribe the
same and it would lead to oppression.

Green Infra ltd. Case: Right issues may be offered at a

premium. It is the prerogative of the board of directors of a
company to decide the premium amount and it is the wisdom
of the shareholders whether they want to subscribe to shares at
such premium or not.

Bonus Issue
Bonus Shares are additional shares given to the current
shareholders without any consideration. The new shares
given to the existing shareholders in proportion to the number
of shares they hold. For example, if investor holds 100 shares
of a company and a company declares 2:1 bonus offer, his
holding of shares will now be 300 instead of 100.
The issue of Bonus Shares increases the total number of
shares issued and owned, but it does not increase the value of
the company. The ratio of number of shares held by each
shareholder also remains constant.

The Companies Act, 1956 did not deal with issue of bonus
shares. But, Section 63 of the Companies Act 2013 deal with
issue of bonus shares. The Company shall not issue bonus
shares by capitalizing reserves created by the revaluation of
assets.

Advantages of Bonus Issue

1. It is sign of good health of the Company. It is a signal that
Company is in position to service its larger equity.
2. The Investor does not have to pay any tax upon receiving
the bonus shares.
3. Bonus issue allows the company to conserve cash for
reinvesting back into the business.
4. Issue of bonus share increases the number of outstanding
shares and participation of smaller investor in the company
shares and hence enhances the liquidity.

Sources of Bonus Issue

1.Free Reserves of the Company built out of genuine profit of
the Company.
2.Securities premium Account.
3. Capital Redemption Reserve Account which may be
created from Buy Back of shares or redemption of preference
shares out of profits.

Conditions for Issue of Bonus Shares

A company may issue fully paid bonus shares, subject to the
following conditions:
1. The Company must be authorized by Articles of
Association of the Company to issue bonus shares
2. The Board of Directors in their meeting has to recommend
the issue of Bonus shares.
3. The Company shall authorize bonus issue of shares in its
General Meeting.
4. The Company has not defaulted in repayment of the
deposits, debt securities, or payment of statutory dues such as
PF, ESI, gratuity etc
Sweat Equity Issue
According to Section 54 of Companies Act 2013, sweat equity
shares are shares issued by a company to its employees or
Directors, either at a discount or for consideration other than
cash. Sweat equity shares are often issued for providing the
know-how or creation of valuable intellectual property rights
or key value additions to the company.Further, it also
includes an employee or a director as defined above of a
subsidiary, in India or outside India, or of a holding company
of the Company.

These types of shares are rewarded to the employees and

directors of the company who bring in their expertise and
knowledge. It is done to keep them productive and motivated
towards the company. The sweat equity shares can be
issued after one year of incorporation of the company
It must be authorized by passing a special resolution by the
company in the general meeting. The resolution must specify
how many sweat equity shares were issued, the market price
of shares and to whom sweat equity shared were issued.

Employee Stock Ownership Plan (ESOP)

ESOP is an employee benefit scheme that enables employees
to own shares in the company. ESOP is a scheme where a
company proposes to increase its subscribed share capital by
issuing further shares to its employees at a predetermined rate.
Section 2(37) of the Companies Act, 2013 defines employees
stock option scheme. Section 62(1)(b) of the Companies Act,
2013 governs the issuance of ESOP.
These shares are purchased by employees at price below
market price or discounted price. ESOP motivates the
employee to be committed towards the company for a long
term and also take ownership of the company. All companies
other than listed companies should issue it in accordance with
the provisions of the Companies Act, 2013. In the case of
listed companies, they should issue in accordance with the
SEBI Employee Stock Option Scheme Guidelines.

Alteration of Share Capital

Section 61 (1) of the Companies Act, 2013 provides that a

company limited by shares or guarantee and having a share
capital may, if so authorized by its articles, alter, by an
ordinary resolution, its memorandum in the following ways:
• (a) Increasing its nominal capital by issuing new shares.
• (b) Consolidating share capital into shares of large
denomination.
• (c) Converting fully paid up shares into stock or vice
versa.
• (d) Sub dividing its shares into shares of smaller amount.
shares of any denomination.
In order to alter its capital clause in the Memorandum, the
company requires authority in its articles. But if the articles
give no power to this effect, the articles must be amended by a
special resolution before the power to alter the capital clause
can be exercised by the company.

Section 64(1) states among other thing that when a company

alters its share capital u/s 61(1), it shall file a notice in the
prescribed form with the Registrar within a period of 30 days
of such alteration or increase or redemption, as the case may
be, along with an altered memorandum

Reduction of Share Capital

According to Section 66 (1) of 2013 Act, subject to

confirmation by the Tribunal, a company limited by shares or
limited by guarantee and having a share capital may, by a
special resolution, reduce the share capital in the following
manner.

• (a) Extinguishing or reducing the liability of members in

respect of the capital not paid up.

• (b) Paying off any paid-up share capital which is in

excess of the needs of the company.
 • (c) Paying off any paid-up capital which is found to be
lost for ever.

It is also given in Section 66(2) that if no representation has

been received from the Central Government, the Registrar of
the Company, the SEBI or the creditors within the said period,
it shall be presumed that they have no objection to the
reduction.

The confirmation of reduction of capital is given in Section

66(3). It says that the Tribunal may, if it is satisfied that the
debt or claim of every creditor of the company has been
discharged or determined or has been secured or his consent is
obtained, make an order confirming the reduction of share
capital on such terms and conditions as it deems fit.

How Alteration & Reduction of Share Capital Differed

• 1. Section 61 deals with alteration of share capital.

Section 66 deals with reduction of share capital.
• 2. Alteration of share capital is required to be done by
ordinary resolution. Reduction of share capital is
required to be done by special resolution.
 • 3. Alteration of share capital is not required to be
confirmed by the Tribunal. Reduction of share capital is
to be confirmed by the Tribunal.

Transfer of Shares

Transfer of shares in a public company is statutory right and

cannot be prevented by the board or AoA. Right to transfer
includes right to pledge and hypothecate the shares.

Mathrubhoomi Printing v Vardhaman Publisher (1992):

Transfer becomes complete only when it is recorded in the
register.
Forged transfers or transfers on basis of forged documents are
null and void. Original owner remains the shareowner.
But if company has issued a share certificate to transferee and
transferee has sold it to an innocent buyer, the company is
liable to compensate the purchaser. The company can recover
the loss from the person who sold it.

Forfeiture of Shares
The company has first lien on all shares except fully paid-up
shares. The company has the right to sell not fully pad-up
shares giving the required notice for the shareholder. If
registered owner fails to make payments to a call, the
company can forfeit the shareholders share. This is subject to
following conditions;
1. AoA should allow such forfeiture.
2. 14-day notice is to be given to the registered shareholder to
make the payment.
3. Directors should pass a resolution of forfriture after 14
days.
4. The proceedings should be in good faith.

On forfeiture, the person ceases to be a member for the

forfeited shares. He is not liable to make future calls, but
remains liable for earlier calls. He has no right to recover
amount already paid (for partly paid shares).

If company is wound up within one year of forfeiture such

members are put in List B of contributors. The Board of
Directors may re-issue forfeited shares with a resolution

Surrender of Shares
If AoA allows, a member may surrender the shares to the
company. In case of fully paid-up shares, directors may accept
surrender in exchange of new shares of same nominal value.

Transmission of Shares
Transmission is the automatic transfer of shares by operation
of law. It takes place in a number of circumstances.
(i) Death of Shareholder: Shares of deceased shareholder
transmit to his executor to deal with as directed by the will or
the rules of intestacy.
(ii) Insanity of Shareholder: If shareholder becomes a
patient under the Mental Health Acts and a public guardian is
appointed, the shares transmit to the public guardian.
(iii) Bankruptcy of Shareholder: Shares held by a bankrupt
transmit to his trustee in bankruptcy. Holder of
shares through transmission has the same rights and benefits
as a member even if not registered as a member - but he
cannot vote. He can choose to be registered and can then vote.
Shareholder has right of nomination over the shares held by
them.

Buy-Back of Shares
When a company who issued the shares decides to take back
its share from the market and buys its own share by paying the
existing shareholders higher than the market value per share,
it is known as buy-back. Section 68, 69, and 70 of the
Companies Act, 2013 read with Rule 17 of the Companies
(Share Capital and Debentures) Amendment Rules, 2016
regulates the procedure of Buyback of shares.

A stock buy-back is a way for a company to re-invest in

itself. The liability of a company decreases when they do the
buy-back process. Companies usually buy-back its share when
they have extra surplus cash.
Objectives of Buy-Back
To dispense a portion of surplus cash.
To cut down number of shares so as to reduce number of
shareholders with voting rights.
To reduce tax burden.
Increase in earnings per share.
To give confidence to the shareholders at the time of falling
price
To increase promoters’ shareholding to reduce the chances of
unwelcome takeover bids.
To improve return on capital, return on net-worth.
To return surplus cash to the shareholder.

Buy-Back Takes Place Out of

 Free reserve;
 Securities Premium Account;
 Proceeds of any issue.

Modes of Buy-Back
1. From the existing shareholders or security holders on a
proportionate basis
2. From the open market
3. By purchasing the securities issued to employees of the
company pursuant to a scheme of stock option or sweat
equity.

Conditions of Buy-Back
Buy-backs can be from the existing shareholders only.
Buy-back shall be authorized by the articles of the
Company [Section 68(2)(a)].
Obtaining Shareholder’s/members’ approval by passing a
special resolution in the general meeting authorizing buy-back
except when buy-back is 10% or less of the company’s total
paid-up equity capital and free reserves: [Section 68(2)(b)].
Such Buy-back shall be authorized by the Board through a
board resolution passed in its meeting.
Buy-back is 25%* or less of the aggregate of paid-up capital
and free reserves of the company [Section 68(2)(c)].
Post-buy-back Debt–Equity Ratio is not more than
2:1 [Section 68(2)(d)].
All shares or other specified securities for buy-back are fully
paid up [Section 68(2)(e)].
Time-lapse amidst two buy-back offers should be one
year [Section 68(2)(g)].
Every buy-back must be completed within a period of one
year from the date of passing of the special resolution, or
Board resolution as the case may be [Section 68(4)].

Prohibition of Buy-Back

Section 70 deals with restrictions on buy-back.

1. Company cannot buyback through their Subsidiary
Company or Investment Bankers or Investment
Company.
2. No buy -can be made if there is any kind of default in
payment of dividend, loans, or repayment. 
 3. There should be no liability on the company because
buy-back in itself means that only surplus money can
be used which means there should be no liability on
the company.

Dematerialisation of Shares
Dematerialisation is a process through which physical
securities such as share certificates and other documents are
converted into electronic format and held in a Demat Account.
A demat account helps investors hold shares and securities in
an electronic format. It also helps to keep proper track of all
the investments an individual makes in shares, exchange-
traded funds, bonds, and mutual funds in one place.
A depository is responsible for holding the securities of a
shareholder in electronic form. These securities could be in
the form of bonds, government securities, and mutual
fund units, which are held by a registered Depository
Participant (DP).
A DP is an agent of the depository providing depository
services to traders and investors as per the Depositories Act,
1996. Currently, there are two depositories registered with
SEBI and are licensed to operate in India:
NSDL (National Securities Depository Ltd.)
CDSL (Central Depository Services (India) Ltd.)