Share Capital

Share

Section 2(84) defines the term ‘share’ as a share in the share capital of a company and includes
stock. Section 44 provides that the shares in a company shall be movable property transferable in the
manner prescribed by the articles of the company.

Publication of authorized, subscribed and paid up capital

Section 60(1) provides that where any notice, advertisement or other official publication, any
business letter, billhead or letter paper of a company contains a statement of the amount of the
authorized capital of the company, such notice, advertisement or other official publication, or such
letter, billhead or letter paper shall also contain a statement in an equally prominent position and in
equally conspicuous characters, of the amount of capital which has been subscribed and the
amount paid up.

Section 60(2) provides that if any default is made in complying with the requirements of Section
60(1), the company shall be liable to pay a penalty of `10,000. Every officer of the company who is in
default shall be liable to pay a penalty of `1,000 for each such default.

Kinds of share capital

Section 43 provides that the share capital of a company limited by shares shall be of two kinds
namely-

Equity share capital; and

Preference share capital.

Equity share capital

The expression ‘equity share capital’ is defined with reference to any company limited by shares as
all share capital which is not preference share capital. Equity share capital is of two types:

With voting rights; or

With differential rights as to dividend, voting.

Equity shares with differential rights

Cannot issue equity shares with differential rights unless:

the articles of association of the company authorizes the issue of shares with differential rights;

the issue of shares is authorized by an ordinary resolution passed at a general meeting of the
shareholders;

where the equity shares of a company are listed on a recognized stock exchange, the issue of
such shares shall be approved by the shareholders through the postal ballot;

the shares with differential rights shall not exceed 26% of the total post issue paid up share
capital including equity shares with differential rights issued at any point of time;

the company having consistent track record of distributable profits for the last three years;

the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue such shares;

the company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of preference shares or
debentures

the company has not defaulted in payment of the dividend on preference shares or repayment
of any term loan from a public financial institution or default in crediting the amount in Investor
Education and Protection Fund to the Central Government;

Provided that a company may issue equity shares with differential rights upon the expiry of five
years from the end of the financial year in which such default was made good.

the company has not been penalized by Court or Tribunal during the last three years of any
offence under the RBI Act, 1934, SEBI Act, 1992, the Securities Contract Regulation Act, 1956, the
FEMA, 1999 or any other special Act, under which such companies being regulated by sectoral
regulators.

Explanatory Statement

the explanatory statement to be annexed to the notice of the general meeting in pursuance of
Section 102 or of a postal ballot in pursuance of Section 110 shall contain the following particulars:

the total number of shares to be issued with differential rights;

the details of differential rights;

the percentage of shares with differential rights to the total post issue paid up equity share
capital including equity shares with differential rights issued at any point of time;

the reasons or justification of the issue;

the price at which such shares are proposed to be issued either at par or at premium;

the basis on which the price has been arrived at;

in case of private placement or preferential issue-

 details of total number of shares proposed to be allotted to promoters, directors and key
managerial personnel;

 details of total number of shares proposed to be allotted to persons other than promoters,
directors and key managerial personnel and their relationship with any promoter, director or key
managerial personnel;

in case of public issue – reservation, if any, for different classes of applicants including
promoters, directors or key managerial personnel

the percentage of voting right which the equity share capital with differential voting right shall
carry to the total voting right of the aggregate equity share capital;

the scale or proportion in which the voting rights of such class or type of shares shall vary;

the change in control, if any, in the company that may occur consequent to the issue of equity
shares with differential voting rights;

the diluted Earnings per Share pursuant to the issue of such shares, calculated in accordance
with the applicable accounting standards;

the pre and post issue shareholding pattern along with the voting rights as per clause 35 of the
listing agreement issued by SEBI from time to time.

Conversion

The company shall not convert its existing equity share capital with voting rights into equity share
capital carrying differential voting rights and vice-versa.

Disclosure in the Board’s report

Rule 4(4) provides that the Board of Directors shall disclose in the Board’s Report for the financial
year in which the issue of equity shares with differential rights was completed, the following details:

the total number of shares allotted with differential rights;

the details of the differential rights relating to voting rights and dividends;

the percentage of the shares with differential rights to the total post issue equity share capital
with differential rights issued at any point of time and percentage of voting rights which the equity
share capital with differential voting right shall carry to the total voting right of the aggregate equity
share capital;

the price at which such shares have been issued;

the particulars of promoters, directors or key managerial personnel to whom such shares are
issued;

the change in control, if any, in the company consequent to the issue of equity shares with
differential voting rights;

the diluted Earnings Per Share pursuance to the issue of each class of shares, calculated in
accordance with applicable accounting standards;

the pre and post issue shareholding pattern along with voting rights in the format specified.

Privileges

The holders of equity shares with differential rights shall enjoy all the other rights such as bonus
shares, rights shares etc., which the holders of equity shares are entitled to, subject, the differential
rights with such shares have been issued.

Register of members

Rule 4(6) provides that where a company issues shares with differential rights, the Register of
Members maintained under Section 88 shall contain all the relevant particulars of the shares so
issued along with details of shareholders.

Certificate of shares

Rule 5(1) provides that where a company issues any share capital, no certificate of any share or
shares held in the company shall be issued, except-

in pursuance of a resolution by the Board; and

on surrender to the company of the letter of allotment or fractional coupons of requisite value,
save in cases of issues against letters of acceptance or of renunciation, or in cases of issue of bonus
shares;

if the letter of allotment is lost or destroyed, the Board may impose such reasonable terms, if
any, as to seek supporting evidence and indemnity and the payment of out-of-pocket expenses
incurred by the company in investigating evidence, as it may think fit.

Section 45 of the Act provides that every share in a company having a share capital shall be
distinguished by its distinctive number. If the shares are in the dematerialized form this numbering
is not there.

A certificate issued under the common seal, or signed by two directors or by a director and the
Company Secretary, specifying the shares held by any person, shall be the prima facie evidence of
title of the person of such shares.

A director shall be deemed to have signed the share certificate if his signature is printed thereon
thru any means except rubber stamp (even digi sign).

Every certificate of share or shares shall specify the name of the person in whose favour the
certificate is issued, the shares to which it relates and the amount paid up thereon.

The particulars of every share certificate issued shall be entered in the Register of Members along
with the name of person to whom it is issued, indicating the date of issue.

Issue of renewed share certificate

Rule 6 provides that the certificate of any share(s) shall not be issued in replacement of those which
are defaced, mutilated, torn or old, decrepit, worn out unless the certificate in lieu of which it is
issued is surrendered to the company.

The company may charge such fees as the Board thinks fit, not exceeding `50 per certificate issued in
replacement of share certificate(s) that are defaced, mutilated, torn or old, decrepit or worn out. In
such cases it shall be stated on the face of the share that it is “Issued in lieu of Share Certificate No.”

A company may replace all the existing certificates by new certificates without requiring old
certificates to be surrendered. The details of such nature are to be entered in the Register
maintained for this purpose.

Duplicate share

Section 46(2) provides that duplicate certificate of shares may be issued, if such certificate –

is proved to have been lost or destroyed; or

has been defaced, mutilated or torn and is surrendered to the company.

The duplicate share certificate shall not be issued in lieu of those that are lost or destroyed, without
prior consent of the Board and without payment of such fees as the Board thinks fit, not exceeding
`50 per certificate and on such reasonable terms, such as furnishing supporting evidence and
indemnity and the payment of out-of- pocket expenses incurred by the company in investigating the
evidence produced.

Where a duplicate certificate is issued, it shall be stated prominently on the face of it and be
recorded in the Register maintained for this purpose, “duplicate issued in lieu of share certificate
no… ” and the word ‘duplicate’ shall be stamped or printed prominently on the face of share
certificate.

In case of unlisted companies, the duplicate share certificates shall be issued within a period of 3
months and in case of listed companies such certificate shall be issued within 45 days from the date
of submission of complete documents with the company respectively.

Punishment

Section 46(5) provides that if a company, with intent to defraud, issues a duplicate certificate of
shares, the company shall be punishable with fine which shall not be less than 5 times the face
value of the shares involved in the issue of the duplicate certificate but which may extend to 10
times the face value of such shares or `10 crores whichever is higher. Every officer of the company,
who is in default, shall be liable for action under Section 447.

Register of Renewed and Duplicate share certificate

Rule 6(3) provides that the particulars of every share certificate issued shall be entered forthwith in a
Register of Renewed and Duplicate Share Certificates maintained. Indicating against the name(s) of
the person(s) to whom the certificate is issued, the number and date of issue of the share
certificate in lieu of which the new certificate is issued and the necessary changes indicted in the
Register of Members by suitable cross reference in the “Remarks” column.

The register shall be kept at the registered office of the company or at such other place where the
Register of Members is kept and it shall be preserved permanently and shall be kept in the custody
of Company Secretary of the company or any other person authorized by the Board for this purpose.

All entries made in this register shall be authenticated by the Company Secretary or such other
person as may be authorized by the Board for the purpose of sealing and signing the share
certificate.

Delivery of certificate

Section 56(4) provides that every company shall, unless prohibited by any law or any order of Court,
Tribunal or other authority, deliver the certificates of all securities allotted, transferred or
transmitted-

within a period of 2 months from the date of incorporation, in the case of subscribers to
memorandum;

within a period of 2 months from the date of allotment, in the case of any allotment of any of its
shares;

within a period of one month from the date of receipt of the company of the instrument of
transfer or of the intimation of transmission, in the case of transfer or transmission of securities;

within a period of 6 months from the date of allotment in the case of any allotment of
debentures.

Issue of sweat equity shares

Section 2(88) defines the expression ‘sweat equity shares’ as such equity shares as are issued by a
company to its directors or employees at a discount or for consideration, other than cash, for
providing their know-how or making available rights in the nature of intellectual property rights or
value additions, by whatever name called.
For this purpose, the term ‘employee’ means-

a permanent employee of the company who has been working in India or outside India; or

a director of the company, whether a whole-time director or not; or

an employee or a director as defined above of a subsidiary, in India or outside India, or of

holding company of the company.

The expression ‘value additions’ means actual economic benefits derived by the company from an
expert or a professional for providing know-how or making available rights in the nature of
intellectual property rights.

Explanatory statement

Rule 8(2) provides that the explanatory statement to be annexed to the notice of the general
meeting shall contain the following particulars:

the date of the Board meeting at which the proposal for issue of sweat equity shares was
approved;

the reasons or justification of the issue;

the class of shares under which sweat equity shares are intended to be issued;

the total number of shares to be issued;

the class or classes of directors or employees to whom such sweat equity shares are to be
issued;

the terms and conditions including basis of valuation;

the time period of association of such person with the company;

the names of the directors or employees to whom shares will be issued and their relationship
with the promoter or/and Key Managerial Personnel;

the price of the share;

the consideration including the consideration other than cash, if any to be received for the
sweat equity;

the applicable accounting standards;

diluted EPS calculated with the applicable accounting standards

The special resolution shall be valid for making the allotment within a period of not more than 12
months from the date of passing of the special resolution. The company shall not issue sweat equity
shares for more than 15% of the existing paid up share capital in a year or shares of the issue value
of `5 crores, whichever is higher. The issuance of sweat equity shares shall not exceed 25% of the
paid up equity capital of the company at any time. The sweat equity shares shall be locked in for a
period of three years from the date of allotment.

The Board of Directors shall disclose in the Director’s Report for the year in which such shares are
issued. The company shall maintain a Register of Sweat Equity Shares

Bonus shares
Section 63 provides for the issue of bonus shares. Section 63(1) provides that a company may issue
fully paid up bonus shares to its members out of its-

free reserves;

the securities premium account; or

the capital redemption reserve account.

No bonus shares shall be made by capitalizing reserves created by revaluation of assets.

Section 63(2) provides that no company shall capitalize is profits or reserves for the purpose of
issuing fully paid up shares unless-

it is authorized by its articles;

it has, on the recommendation of the Board, been authorized in the general meeting of the
company;

it has no defaulted in payment of interest or principal in respect of fixed deposits or debt

securities issued by it;

it has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;

the partly paid up shares, if any outstanding on the date of allotment are made fully paid up;

it complies with such conditions as may be prescribed;

Section 63(3) provides that the bonus shares shall not be issued in lieu of dividend.

Rule 14 provides that the company which has once announced the decision of the Board
recommending a Bonus issue shall not subsequently withdraw the same.

Issue of Employees’ stock option

A company, other than listed company shall not offer shares to its employees under a scheme of
employee’s stock option unless it complies with the following conditions: The issue of Employees
Stock Option Scheme has been approved by the shareholders of the company by passing a special
resolution;

The company shall make the following disclosures in the explanatory statement annexed to the
notice for passing of the resolution-

 the total number of stock options to be granted;

 identification of classes of employees entitled to participate in the Employees Stock Option

scheme;

 the appraisal process for determining the eligibility of employees to the Employees Stock
Option Scheme;

 the requirements of vesting and the period of vesting;

 the maximum period within which the options shall be vested;

 the exercise price or the formula for arriving at the same;

 the lock-in period, if any;

 the maximum number of options to be granted per employee and in aggregate;

 the method which the company shall use to value its options;

 the conditions under which option vested in employees may lapse;

 the specified time period within which the employee shall exercise the vested options in
the events of a proposed termination of employment or resignation of employee; and

 a statement to the effect that the company shall comply with the applicable accounting
standards.

Employee

For the purpose of this rule, the term ‘employee’ is defined as-

a permanent employee of the company who has been working in India or outside India; or

a director of the company, whether a whole time director or not but excluding an independent
director; or

an employee of a subsidiary in India or outside India, or of a holding company of the company

but does not include-

an employee who is a promoter or a person belonging to the promoter group; or

a director who either himself or through his relative or through anybody corporate, directly or
indirectly, holds more than 10% of the outstanding equity shares of the company.

Special Resolution

A special resolution has to be passed to make any variation in the terms of the stock option, and it
shouldn’t be against the interest of employees.

Other aspects

The employees shall have not the right to receive any dividend or to vote or in any manner enjoy
the benefits of a shareholder in respect of option granted to them, till shares are issued on exercise
of option.

The amount, if any, payable by the employees at the time of grant of option-

may be forfeited by the company if the option is not exercised by the employees within the
exercise period; or

the amount may be refunded to the employees if the options are not vested due to non
fulfillment of conditions relating to vesting of option as per the Employees Stock Option Scheme;

The options granted shall not be transferable to any other person. No person other than the
employees shall be entitled to exercise the option. In the event of the death of the employee while
in employment, all the options granted to him till such date shall vest in the legal heirs or nominees
of the deceased employee.

If the employee suffers a permanent incapacity in employment, all the options granted to him shall
vest in him on that day. In case of resignation or termination, all options not vested in the employee
on that day shall expire.

Disclosure

Rule 12(9) provides that the Board of Directors, shall, inter alia, disclose in the Directors’ Report for
the year, the following details of the Employees Stock Option Scheme:

options granted;

options vested;

options exercised;

the total number of shares arising as a result of exercise of option;

options lapsed;

the exercise price;

variation of terms of options;

money realized by exercise of options;

total number of options in force;

employee wise details of options granted to-

 key managerial personnel;

 any other employee who receives a grant of options in any one year of option amounting to
5% or more of options granted during that year;

 identified employees who were granted option, during any one year, equal to or exceeding
1% of the issued capital of the company at the time of grant.

Register

Rule 12(10) provides that the company shall maintain a Register of Employee Stock Options and
shall enter therein the particulars of options granted. The Register shall be maintained at the
registered office of the company. The entries in the Register are to be authenticated by the
Company Secretary of the Company or by any other person authorized by the Board for this
purpose.

Listing Company

Where the equity shares of the company are listed on a recognized stock exchange, the Employees
Stock Option Scheme shall be issued, in accordance with the regulations made by SEBI.

Voting rights of equity share holders

Section 47(1) provides for voting rights. Every member of a company limited by shares and holding
equity share capital shall have a right to vote on every resolution placed before the company. His
voting right on a poll shall be in proportion to his share in the paid up equity share capital of the
company.
Voting rights of preference share holders
Section 47(2) provides that every member having any preference share has a right to vote only on
resolutions placed before the company which directly affects the rights attached to his preference
shares and any resolution for the winding up of the company or for the repayment or reduction of
its equity or preference share capital and his voting right on a poll shall be in proportion to his share
in the paid up preference share capital of the company.

Where the dividend is not paid to the preference shareholders for a period of 2 years or more, such
preference shareholders shall have a right to vote on all the resolutions placed before the company.

Variation of shareholders’ rights

Section 48 provides for the variation of shareholders’ rights. A company may have different classes of
shares. The rights attached to the shares of any class may be varied. The rights may be varied-

with the consent in writing of the holders of not less than three fourths of the issued shares of
that class; or

by means of a special resolution passed at a separate meeting of the holders of the issued
shares of that class.

There shall be a provision in the articles or memorandum of the company with respect to such
variation. In the absence of such provision in the articles or memorandum, if such variation is not
prohibited by the terms of issue of the shares of that class, then the voting rights may be varied.

Dissent to variation of rights

Section 48 (2) provides that if the holders of not less than 10% of the issued shares of a class did not
consent to the variation or vote in favor of the special resolution for the variation, such shareholders
may apply to the Tribunal to have the variation cancelled. Such application shall be filed before the
Tribunal within 21 days from the date on which the consent was given or the resolution was passed.
Such application may be made on behalf of all the shareholders who dissented by such one or more
of their number as they may appoint in writing for the purpose. If an application is made before the
Tribunal, the variation shall not be effected until it is confirmed by the Tribunal.

Section 48 (3) provides that the decision of the Tribunal shall be binding on the shareholders. The
company shall file a copy of the order of the Tribunal with the Registrar of the Company within 30
days from the date of the order.

Penalty
Section 48(5) provides that where any default is made in complying with the provisions of Section 48,
the company shall be punishable with fine which shall not be less than `25,000 but which may
extend to `5 lakh. Every officer of the company, who is in default shall be punishable with
imprisonment for a term which may extend to 6 months or with fine which shall not be less than
`25,000 but which may extend to `5 lakhs, or with both.

Instrument of transfer

Rule 11(1) of the Companies (Share Capital and Debentures) Rules, 2014 provides that an instrument
of transfer of securities, in physical form, shall be filed in Form No. SH-4. Every instrument of transfer
with the date of its execution specified thereon shall be delivered to the company within 60 days
from the date of such execution.
Rule 11(3) provides that a company shall not register a transfer of partly paid shares, unless the
company has given a notice in Form No. SH -5 to the transferee and the transferee gives no
objection to the transfer within 2 weeks from the date of receipt of notice.

Preferential Offer

The expression ‘preferential offer’ means an issue of shares or other securities, by a company to any
select person or group of persons on a preferential basis and does not include shares or other
securities offered through a public issue, rights issue, employee stock option scheme, employee
stock purchase scheme or an issue of sweat equity share or bonus shares or depository receipts
issued in a country outside India or foreign securities.

Where the preferential offer of shares or other securities is made by a listed company, then such
issue shall be done in accordance with the provisions of the Act and regulations made by SEBI. If the
company is an unlisted company, then it can be made subject to the compliance of the requirements
as specified.

Alteration of share capital

Section 61 provides that a limited company having a share capital may, if so authorized by its articles
alter its memorandum in its general meeting to –

increase its authorized share capital by such amount as it thinks expedient;

consolidate and divide all or any of its share capital into shares of a larger amount than its
existing shares. No consolidation and division which results in change in the voting percentage of the
shareholders shall take effect unless it is approved by the Tribunal

convert all or any of is fully paid up shares into stock and reconvert that stock into fully paid up
shares of any denomination;

sub division of shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so,

cancel shares which, at the date of the passing of the resolution in that behalf, have not been
taken or agreed to be taken by any person.

Notice for alteration of capital

Section 64(1) provides that where-

a company alters its share capital;

an order made by the Government has the effect of increasing authorized capital of a company;
or

a company redeems any redeemable preference shares, the company shall file a notice in Form
No. SH-7 along with fee, with the Registrar within a period of 30 days of such alteration or increase
or redemption, along with an altered memorandum.

If a company and any officer, who is in default, contravene the provisions of Section 64(1) it or he
shall be punishable with fine which may extend to `1,000 for each day during which such default
continues, or `5 lakhs, whichever is less.

Reduction of share capital

Section 66 (1) provides that a company limited by shares or limited by guarantee and having a share
capital may, by a special resolution, reduce the share capital and may-

extinguish or reduce the liability on any of its shares in respect of the share capital not paid up;
or

either with or without extinguishing or reducing liability on any of its shares-

 cancel any paid up share capital which is lost or is unrepresented by available assets; or

 pay off any paid up share capital which is in excess of the wants of the company alter its
memorandum by reducing the amount of its share capital and of its shares accordingly. This
reduction is subject to the confirmation by the Tribunal on application by the company.

No such reduction shall be made if the company is in arrears in the repayment of any deposits
accepted by it, either before or after the commencement of the Act or the interest payable thereon.

Procedure before the Tribunal

On the filing of the application by the company for reduction of share capital, the Tribunal shall give
notice of every application to the Central Government, Registrar and to SEBI, in the case of listed
companies and the creditors of the company. The Tribunal shall take into consideration the
representations, if any, made to it by that Government, Registrar, the SEBI and the creditorswithin a
period of three months from the date of receipt of the notice. Where no representation has been
received from any of them within the said period, it shall be presumed that they have no objection
to the reduction.

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. No application for
reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment is in
conformity with the accounting standards and a certificate by the company’s auditor has been filed
with the Tribunal.

Filing with Registrar

Section 66(5) provides that the company shall deliver a certified copy of the order of the Tribunal
and of a minute approved by the Tribunal showing-

the amount of share capital;

the number of shares into which it is to be divided;

the amount of each share; and

the amount, if any, at the date of registration deemed to be paid up on each share to the
Registrar within 30 days of the receipt of the copy of the order, who shall register the same and
issue a certificate to that effect.

Liability of the member

Section 66(7) provides that a member of the company, past or present, shall not be liable to any call
or contribution in respect of any share held by him exceeding the amount of difference, if any,
between the amount paid on the share, or reduced amount, if any, which is to be deemed to have
been paid thereon, as the case may be, and the amount of the share as fixed by the order of
reduction.

Objection of creditor

Section 66(8) provides that where the name of any creditor entitled to object to reduction of share
capital is, by reason of his ignorance of the proceedings for reduction or of their nature and effect
with respect to his debt or claim, not entered on the list of creditors, and after such reduction, the
company is unable to pay the debt or claim-

every person, who was a member of the company on the date of registration of the order for
reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an
amount not exceeding the amount which he would have been liable to contribute if the company
had commenced winding up on the date immediately before the said date; and

if the company is wound up, the Tribunal may, on the application of any such creditor and proof
of his ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute and make
and enforce calls and orders on the contributors settled on the list, as if they were ordinary
contributories in a winding up.

Penalty

Section 66(10) provides that if any officer of the company-

knowingly conceals the name of any creditor entitled to object to the reduction;

knowingly misrepresents the nature or amount of the debt or claim of any creditor; or

abets or is privy to any such concealment or misrepresentation as aforesaid, he shall be liable

under Section 447.

If a company fails to comply with the directions of the Tribunal to publish its order, it shall be
punishable with fine which shall not be less than `5 lakh but which may extend to `25 lakh.

Further issue of share capital

Section 62 provides for the further issue of share capital. Where at any time, a company having a
share capital proposes to increase its subscribed capital by the issue of further shares, such shares
shall be offered-

to persons who, at the date of the offer, are holders of equity shares of the company in
proportion, as nearly as circumstances admit, to the paid up share capital on those shares by sending
a letter of offer subject to the following condition-

 the offer shall be made by notice specifying the number of shares offered and limiting a time
not being less than 15 days and not exceeding 30 days from the date of the offer within which the
offer, if not accepted, shall be deemed to have been declined;

 after the expiry of the time or on receipt of earlier intimation from the person to whom
such notice is given that he declines to accept the shares offered, the Board of Directors may
dispose of them in such manner which is not disadvantageous to the shareholders and the company

to employees under a scheme of Employees’ stock option, subject to special resolution passed
by the company and subject to such conditions as may be prescribed; or

to any persons, if it is authorized by a special resolution, whether or not those persons include
the persons referred above either for cash or for a consideration other than cash, if the price of such
shares is determined by the valuation report of a registered valuer subject to such conditions as may
be prescribed.

The notice is to be dispatched through registered post or speed post or through electronic mode to
all the existing shareholders at least 3 days before the opening of the issue.

Securities Premium Account

Section 52 provides that where a company issues shares at a premium, whether for cash or
otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be
transferred to a ‘Securities Premium Account

The securities premium account may be applied by the company-

towards the issue of unissued shares of the company to the members of the company as fully
paid bonus shares;

in writing off the preliminary expenses of the company;

in writing off the expenses of, or the commission paid or discount allowed on, any issue of
shares or debentures of the company;

in providing for the premium payable on the redemption of any redeemable preference shares
or of any debentures of the company; or

for the purchase of its own shares or other securities.

The securities premium account may be applied by such class of companies, as may be prescribed
and whose financial statement complies with the accounting standards prescribed-

in paying up unissued equity shares of the company to be issued to the members of the
company as fully paid bonus shares; or

in writing off the expenses of or the commission paid of discount allowed on any issued of
equity shares of the company; or

for the purchase of its own shares or other securities.

Prohibition on issue of shares at discount

Section 53 provides that except for the issue of sweat equity shares, a company shall not issue
shares at a discount. Any share issued by a company at a discounted price shall be void.

However, a company may issue shares at a discount to its creditors when its debt is converted into
shares.

Section 53(3) provides that where a company contravenes the provisions of this section, the
company shall be punishable with fine which shall not be less than `1 lakh but which may extend to
`5 lakh. Every officer, who is in default, shall be punishable with imprisonment for a term which may
extend to 6 months or with fine which shall not be less than `1 lakh but which may extend to `5
lakhs, or with both.

Transfer and transmission of shares

Section 56 provides that a company may transfer the shares of a person to another person, provided
he applies for the same to the company in the prescribed form duly stamped, dated and executed by
or on behalf of the transferor and the transferee specifying the name, address and occupation, if
any, of the transferee has been delivered to the company by the transferor or transferee within a
period of 60 days from the date of execution. The certificate relating to the securities is also to be
sent along with the application. If there is no such certificate, then the letter of allotment of
securities is to be attached.

Where an application is made by the transferor alone and relates to partly paid shares, the transfer
shall not be registered, unless the company gives notice of the application to the transferee and the
transferee gives no objection to the transfer, within 2 weeks from the receipt of notice.

The transfer of any security or other interest of a deceased person in a company made by his legal
representative shall, even if the legal representative is not a holder thereof, be valid as if he had been
the holder at the time of the execution of the instrument of transfer.

Punishment

Section 56(6) provides that where any default is made in complying with the provisions of Section 56
the company shall be punishable with fine which shall not be less than `25,000 but which may
extend to `5 lakhs. Every officer of the company who is in default shall be punishable with fine which
shall not be less than `10,000 but which may extend to `1 lakh.

Where any depository or depository participant, without prejudice to any liability under the
Depositories Act, 1996, with an intention to defraud a person, has transferred shares, it shall be
liable under Section 447.

Punishment for personation of shareholder

Section 57 provides that if any person deceitfully personates as an owner of any security or interest
in a company, or of any share warrant or coupon issued under this Act and thereby obtains or
attempts to obtain any security or interest or any such share warrant or coupon, or receives or
attempts to receive any money due to any such owner, he shall be punishable with imprisonment
for a term which shall not be less than one year but which may extend to 3 years and with fine
which shall not be less than `1 lakh but which may be extend to `5 lakhs.

Refusal of registration and appeal against refusal

Section 58(1) provides that if a private company limited by shares refuses to register the transfer of,
or the transmission by operation of law of the right to, any securities or interest of a member in the
company, it shall within a period of 30 days from the date of receipt of instrument of transfer or the
intimation of such transmission send notice of refusal giving reasons for such refusal.

The transferee may appeal to the Tribunal against the refusal within a period of 30 days from the
date of receipt of the notice or in case no notice has been sent by the company, within a period of
60 days from the date on which the instrument of transfer or the intimation of transmission, was
delivered to the company.

If a public company without sufficient cause, refuses to register the transfer of securities, within a
period of 30 days from the date of receipt of the instrument of transfer or the intimation of
transmission delivered to the company, the transferee may, within a period of 60 days of such refusal
or where no intimation has been received from the company within 90 days of the delivery of the
instrument of transfer or intimation of transmission, appeal to the Tribunal.
The Tribunal while dealing with an appeal may, after hearing the parties, either dismiss the appeal or
by order-

direct that the transfer or transmission shall be registered by the company and the company
shall comply with such order within a period of 10 days of the receipt of the order; and

direct rectification of the register and also direct the company to pay damages, if any, sustained
by any party, aggrieved.

Punishment

If a person contravenes the order of Tribunal, he shall be punishable with imprisonment for a term
which may extend to 3 years and with fine which shall not be less than `1 lakh but which may
extend to `5 lakh.

Rectification of register of members

(1) If someone's name is wrongly added or removed from the company's member list, or if there's a
delay in updating the list to show someone has joined or left the company, the affected person, any
company member, or the company itself can ask for this to be fixed. They can do this by applying to
a special court called the Tribunal, or, for foreign members or bondholders, to a court outside India
that the Indian government says is okay to use.

(2) The Tribunal will listen to both sides of the story. It can either refuse the request or order the
company to make the change within ten days of getting the order. The Tribunal can also ask the
company to correct its records and possibly pay compensation to the person who was wronged.

Punishment

Section 59(5) provides that if any default is made in complying with the order of the Tribunal the
company shall be punishable with fine which shall not be less than `1 lakh but which may extend to
`5 lakh. Every officer of the company who is in default shall be punishable with imprisonment for a
term which may extend to one year or with fine which shall not be less than `1 lakh but which may
extend to `3 lakhs, or with both.

Preference share capital

Explanation (ii) to Section 43 defines the expression ‘preference share capital’ with reference to any
company limited by shares, as that part of the issued share capital of the company which carries or
would carry a preferential rights with respect to-

payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which
may either be free of or subject to income tax; and

repayment, in the case of winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have been paid up whether or not, there is a preferential right to the
payment of any fixed premium or premium on any fixed scale, specified in the memorandum or
articles of the company.

Explanation (iii) to Section 43 provides that capital shall be deemed to be preference capital,
notwithstanding that it is entitled to either or both of the following rights, namely:–

a) that in respect of dividends, in addition to the preferential rights, it has a right to participate,
whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;
b) that in respect of capital, in addition to the preferential right to the repayment, on a winding
up, it has a right to participate, whether fully or to a limited extent, with capital not entitled to that
preferential right in any surplus which may remain after the entire capital has been repaid.

Issue of preference shares

Rule 9 of Companies (Share Capital and Debentures) Rules, 2014, provides that a company having a
share capital may, if so authorized by articles, issue preference shares subject to the following
conditions:

the issue should be authorized by passing a special resolution in the general meeting of the
company;

the company, at the time of such issue of preference shares, has no subsisting default in the
redemption of preference shares issued earlier either before or after the commencement of this Act
or in payment of dividend due on any preference shares.

In the resolution, the company shall set out the following:

the priority with respect to payment of dividend or repayment of capital vis-à-vis equity shares;
the participation in surplus fund;

the participation in surplus assets and profits, on winding up which may remain after the entire
capital has been repaid;

the payment of dividend on cumulative or non cumulative basis;

the conversion of preference shares into equity shares;

the voting rights;

the redemption of preference shares.

The explanatory statement to be annexed to the notice of the general meeting shall provide the
complete material facts concerned with and relevant to the issue of such shares, including-

the size of the issue and number of preference shares to be issued and nominal value of each
share;

the nature of such shares i.e., cumulative or non-cumulative, participating or non-participating,

convertible or non-convertible;

the objectives of the issue;

the manner of issue of shares;

the price at which such shares are proposed to be issued;

the basis on which the price has been arrived at;

the terms of issue, including terms and rate of dividend on each share, etc.,

the terms of redemption, including the tenure of redemption, redemption of shares at premium
and if the preference shares are convertible, the terms of conversion;

the manner and modes of redemption;

the current shareholding pattern of the company;

 the expected dilution in equity share capital upon conversion of preference shares.

The particulars of the issue of the preference shares shall be noted in the Register of Members. If a
company wants to list its preference shares on a recognized stock exchange, it shall issue the
preference shares in accordance with the regulations made by SEBI.

Issue and redemption of preference shares

Section 55(1) provides that no company limited by shares shall, after the commencement of this Act,
issue any preference shares which irredeemable.

Section 55(2) provides that a company limited by shares may, if so authorized by its articles, 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 terms and conditions prescribed.

Rule 10 states that a company engaged in the setting up and dealing with of infrastructural projects
may issue preference shares for a period exceeding twenty years but not exceeding 30 years,
subject to the redemption of a minimum 10% of such preference shares per year from the 21st year
onwards or earlier, on proportionate basis, at the option of the preference shareholders.

Period of redemption

Rule 9(6) provides that a company may redeem its preference shares only on the terms on which
they were issued or as varied after due approval of preference shareholders under Section 48 of the
Act. The preference shares may be redeemed-

at a fixed time or on the happening o a particular event;

any time at the company’s option; or

any time at the shareholder’s option.

Conditions for redemption of Preference Shares

Proviso to Section 55(2) states that

a) no such shares shall be redeemed except out of the profits of the company which would
otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the
purposes of such redemption;

b) no such shares shall be redeemed unless they are fully paid;

c) where such shares are proposed to be redeemed out of the profits of the company, there
shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be
redeemed, to a reserve, to be called the Capital Redemption Reserve Account,

d) i) in case of such class of companies, as may be prescribed and whose financial statement
comply with the accounting standards prescribed for such class of companies under section 133, the
premium, if any, payable on redemption shall be provided for out of the profits of the company,
before the shares are redeemed. Premium, if any, payable on redemption of any preference shares
issued on or before the commencement of this Act by any such company shall be provided for out of
the profits of the company or out of the company’s securities premium account, before such shares
are redeemed.

ii) in a case not falling under sub-clause (i) above, the premium, if any, payable on redemption shall
be provided for out of the profits of the company or out of the company’s securities premium
account, before such shares are redeemed.

Further issue of redeemable preference shares

Section 55(3) provides that where a company is not in a position to redeem any preference shares
or to pay dividend, if any, on such preference shares in accordance with the terms of the issue, it
may, with the consent of the shareholders of three fourths in value of such preference shares and
with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable
preference shares equal to the amount due, including the dividend thereon, in respect of the
unredeemed preference shares, and on the issue of such further redeemable preference shares, the
unredeemed preference share shall be deemed to have been redeemed.

The Tribunal shall, while giving the approval, order the redemption forthwith of preference shares
held by such persons who have not consented to the issue of further redeemable preference
shares.

Increase or reduction of capital

The issue of further redeemable preference shares or the redemption of preference shares under
this section shall not be deemed to be an increase or a reduction, in the share capital of the
company.

Buy back of Shares

Section 68(2) provides that a company shall purchase is own shares or other specified securities if-

the buy-back is authorized by its articles;

a special resolution has been passed at a general meeting of the company authorizing the buy
back. This shall not apply to a case where-

 the buy-back is, 10% or less of the total paid up equity capital and free reserves of the
company; and

 such buy-back has been authorized by the Board by means of a resolution passed at its
meeting.

the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the
company.

In respect of the buy-back of equity shares in any financial year, the reference to25% shall be
construed with respect to its total paid-up equity capital in that financial year.

the ratio of the aggregate of secured and unsecured debts owed by the company after buy- back
is not more than twice the paid up capital and free reserves. The Central Government may, by order,
notify a higher ratio of the debt to capital and free reserves for a class or classes of companies;

all the shares or other specified securities for buy-back are fully paid up;

the buy-back of shares or other specified securities in a listed company is done in accordance
with the regulations made by SEBI; and

the buy-back in respect of shares or other specified securities of a unlisted company is to be in

accordance with the rules as may be prescribed.
Time gap

No offer of buy-back shall be made within a period of 1 year reckoned from the date of closure of
the preceding offer of buy back, if any.

Special Resolution

Section 68(3) provides that the notice of the meeting at which the special resolution is proposed to
be passed shall be accompanied by an explanatory statement stating-

a full and complete disclosure of all material facts;

the necessity for buy-back;

the class of shares or securities intended to be purchased under the buy-back;

the amount to be invested under the buy-back; and

the time limit for completion of buy-back.

Buy back by private and unlisted companies

Rule 17 of the Companies (Share Capital and Debentures) Rules, 2014 provides that unless stated
otherwise, the explanatory statement annexed to the notice for general meeting, in respect of
private companies and unlisted companies for buy-back of their securities, shall contain the following
disclosures-

the date of the board meeting at which the proposal for buy-back was approved by the board of
directors of the company;

the objective of the buy-back;

the class of shares or other securities intended to be purchased under the buy-back;

the number of securities that the company proposes to buy-back;

the method to be adopted for the buy-back;

the price at which the buy-back of shares or other securities shall be made;

the basis for arriving at the buy-back price;

the maximum amount to be paid for the buy-back and the sources of funds from which the
buy- back would be financed;

the time limit for the completion of buy-back;

the aggregate shareholding of the promoters and of the directors of the promoter, where
promoter is a company and of the directors and KMP as on the date of notice convening the general
meeting;

a confirmation that there is no default subsisting in repayment of deposits, interest payment,

redemption of debentures or payment of interest or redemption of preference shares or payment of
dividend due to any shareholder or any term loans or interest payable to any financial institution or
banking company;

a confirmation that the Board of Directors have made a full enquiry into the affairs and
prospects of the company and that they have formed the opinion-
 there shall be no grounds that the company could be found unable to pay its debts;

 the company shall able to meet its liabilities as and when they fall due and shall not be
rendered insolvent within a period of 1 year from the date an which the general meeting is
convened and ;

 the directors have taken into account the liabilities (including prospective and contingent
liabilities), as if the company were being wound up;

a report addressed to the Board of directors by the company’s auditors stating that-

 they have inquired into the company’s state of affairs;

 the amount of the permissible capital payment for the securities in question is in their view
properly determined;

 that the audited accounts on the basis of which calculation with reference to buy-back is
done is not more than six months old from the date of offer documents;

 the Board of Directors have formed the opinion on reasonable grounds and that the
company, having regard to its state of affairs, shallnot be rendered insolvent within a period of 1
year from that date.

Letter of offer

Rule 17(2) provides that the company which has been authorized by a special resolution shall,
before the buyback of shares, file with the Registrar of Companies a letter of offer in Form No. SH-8
along with the fee. Such letter of offer shall be dated and signed on behalf of the Board of directors
of the company by not less than two directors, one of whom shall be the Managing Director, where
there is one.

The letter of offer shall be dispatched to the shareholders or security holders immediately after
filing the same with the Registrar of Companies but not later than 20 days from its filing with the
Registrar of Companies. Rule 17(5) provides that the offer for buy-back shall remain open for a
period of not less than 15 days and not exceeding 30 days from the date of dispatch of offer letter
provided that where all members of a company agree, the offer for buy-back may remain open for a
period less than 15 days.

Rule 17(6) provides that in case the number of shares or other specified securities offered by the
shareholders or security holders is more than the total number of shares or securities to be bought
back by the company, the acceptance per shareholder shall be on proportionate basis out of the
total shares offered for being bought back.

Verification of offer

Rule 17(7) provides that the company shall complete the verifications of the offer received within 15
days from the date of closure of the offer and the shares or other securities lodged shall be deemed
to be accepted unless a communication of rejection is made within 21 days from the date of closure
of the offer.

Bank account

Rule 17(8) provides that the company shall immediately after the date of closure of the offer, open a
separate bank account and deposit therein, such sum, as would make up the entire sum due and
payable as consideration for the shares tendered for buy back in terms of these rules.

Rule 17(9) provides that the company shall within seven days from 21 days from the date of closure
of the offer-

make payment of consideration in cash to those shareholders or security holders whose

securities have been accepted; or

return the share certificates to the shareholders or security holders whose securities have not
been accepted at all or the balance of securities in case of part acceptance.

Time limit

Section 68(4) provides that 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

Source

Section 68(5) provides that the buy-back may be-

from the existing shareholders or security holders on a proportionate basis;

from the open market;

by purchasing the securities issued to employees of the company pursuant to a scheme of stock
option or sweat equity.

Solvency certificate

Section 68 (6) provides that a listed company before making a buy back, shall file with the Registrar
and SEBI, a declaration of solvency in From No. SH-9. This has to be signed by at least two directors
of the company, one of whom shall be the Managing Director, if any, and verified by an affidavit to
the effect that the Board of Directors of the company has made a full inquiry into the affairs of the
company as a result of which they have formed an opinion that it is capable of meeting its liabilities
and will not be rendered insolvent within a period of one year from the date of declaration
adopted by the Board. An unlisted company is not required to file the declaration of solvency with
SEBI.

Destroying physical certificates

Section 68(7) provides that 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 buy back.

Prohibition

Section 68(8) provides that where a company completes a buy-back of its shares or other specified
securities, it shall not make a further issue of the same kind of shares or other securities, including
allotment of new shares or other specified securities within a period of 6 months except by way of a
bonus share or in the discharge of subsisting obligations such as conversion of warrants, stock option
schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Register

Section 68(9) provides that where a company buys back its shares or other specified securities, it
shall maintain a register of the shares so bought, the consideration paid for the shares or securities
bought back, the date of cancellation of shares or securities, the date of extinguishing and physically
destroying the shares or securities and such other particulars as may be prescribed. The Register
shall be in Form No. SH-10. The register shall be maintained at the registered office of the company
and shall be kept in the custody of the secretary of the company or any other person authorized by
the Board in this behalf. The entries in the register shall be authenticated by the secretary of the
company or by any other person authorized by the Board for the purpose.

Return

Section 68(10) provides that a listed company shall, after the completion of the buy back, file with
the Registrar and SEBI a return in Form No. SH-11, along with the fee, containing such particulars
relating to the buy back within 30 days of such completion, as may be prescribed. No such return is
required to be filed with SEBI by an unlisted company. There shall be annexed to the return filed
with the Registrar in Form No. SH-11, a certificate in Form No. SH-15 signed by two directors of the
company including the managing director, if any,certifying that the buy-back of securities has been
made in compliance with the provisions of this Act and the rules made there under.

Punishment

Section 68(11) provides that if a company makes any default in complying with the provisions of this
section or any regulation made by SEBI, the company shall be punishable with fine which shall not be
less than `1 lakh but which may extend to `3 lakhs. Every Officer of the company, who is in default,
shall be punishable with imprisonment for a term which may extend to 3 years or with fine which
shall not be less than `1 lakh but which may extend to `3 lakhs or with both.

Obligations of Company

Rule 17(10) provides that the company shall ensure that-

the letter of offer shall contain true, factual and material information and shall not contain any
misleading information and must state that the directors of the company accept the responsibility
for the information contained in such document.

the company shall not issue any new shares including by way of bonus shares from the date of
passing of special resolution authorizing the buy-back till the date of closure of the offer under
these rules, except those arising out of any outstanding convertible instruments;

the company shall confirm in its offer the opening of a separate bank account adequately
funded for this purpose and to pay the consideration by way of cash;

the company shall not withdraw the offer once it has announced the offer to the shareholders;

the company shall not utilize any money borrowed from banks or financial institutions for the
purpose of buying the company shall not utilize the proceeds of an earlier issue of the same kind of
shares or same kind of other specified securities for the buy-back.

Prohibition of buy back in certain circumstances

Section 70 provides that 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 default, is made by the company, in the repayment of deposits accepted either before or
after the commencement of this Act, interest payment thereon, redemption of debentures or
preference shares or payment of dividend to any shareholder, orrepayment of any term loan or
interest payable thereon to any financial institution or banking company. The buy back is not
prohibited if the default is remedied and a period of three years has lapsed after such default
ceased to subsist.

Debentures
Section 2(30) of the Act defines the term ‘debentures’ as including debenture, stock, bonds or any
other instrument of a company evidencing a debt, whether constituting a charge on the assets of a
company or not. Section 44 provides that the debentures shall be the movable property transferable
in the manner provided in the articles of the company.

Section 71(1) of the Act provides that a company may issue debentures with an option to convert
such debentures into shares, either wholly or partly at the time of redemption. The issue of
debentures with an option to convert such debentures into shares, wholly or partly, shall be
approved by a special resolution passed at a general meeting.

Section 71(2) provides that no company shall issue any debentures carrying any voting rights.

Secured debentures

Section 71(3) provides that secured debentures may be issued by a company subject to such terms
and conditions as may be prescribed. Rule 18(1) of Companies (Share Capital and Debentures) Rules,
2014 provides the conditions for the issue of secured debentures. The conditions are as follows:

The date of redemption of secured debentures shall not exceed 10 years;

The following classes of companies may issue secured debentures for a period exceeding 10
years but not exceeding 30 years:

 Companies engaged in infrastructure projects;

 Infrastructure Finance Companies

 Infrastructure Debt Fund Non Banking Financial Companies;

The issue shall be secured by the creation of charge, on the properties or assets of the company,
having a value which is sufficient for the due repayment of the amount of debentures and interest
thereon;

The company shall appoint a debenture trustee before the issue of prospectus or letter of offer
for subscription of its debentures and not later than 60 days after the allotment of debentures;

A debenture deed shall be executed to protect the interest of debenture holders; and

The security for the debentures by way of a charge or mortgage shall be created in favor of the
debenture trustee on-

 any specific movable property of the company; and

 any specific immovable property wherever situate, or any interest therein.

In case of a non banking financial company, the charge or mortgage may be created on any movable
property.

In case any issue of debentures by a Government company which is fully secured by the guarantee
given by the Central Government or one or more State Government or by both, the requirement of
creation of charge shall not apply.

Debenture Trustee

Rule 18(2) provides that the company shall appoint the debenture trustees after complying with the
following conditions:

the names of the debenture trustees shall be stated in letter of offer inviting subscription for
debentures and also in all the subsequent notices or other communications sent to the debenture
holders;

a written consent shall be obtained from such debenture trustee or trustees proposed to be
appointed;

a statement to the effect of obtaining consent letter shall appear in the letter of offer issued for
inviting the subscription of the debentures;

Who may not be appointed as debenture trustee?

Rule 18 (2) (c) provides that a person shall not be appointed as a debenture trustee, if he-

beneficially holds shares in the company;

is a promoter, director or key managerial personnel or any other officer or an employee of the
company or its holding, subsidiary or associate company;

is beneficially entitled to moneys which are to be paid by the company otherwise than as
remuneration payable to the debenture trustee;

is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary
of such holding company;

has any pecuniary relationship with the company amounting to 2% or more of its gross turnover
or total income or `50 lakh or such higher amount as may be prescribed, whichever is lower, during
the two immediately preceding financial years or during the current financial year;

is relative of any promoter or any person who is in the employment of the company as a
director or key managerial personnel.

Vacancy

The board may fill any casual vacancy in the office of the trustee but while any such vacancy
continues, the remaining trustee or trustees, if any, may act. If the vacancy is caused by the
resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the
majority of the debenture holders.

Removal of debenture trustee

Any debenture trustee may be removed from office before the expiry of his term only if it is
approved by the holders of not less than three fourth in value of the debentures outstanding at
their meeting
Duties of Debenture trustee

Rule 18(3) prescribes the duties of debenture trustee. The debenture trustee is to-

satisfy himself that the letter of offer does not contain any matter which is inconsistent with
the terms of the issue of debentures or with the trust deed;

satisfy himself that the covenants in the trust deed are not prejudicial to the interest of
debenture holders;

call for periodical status or performance reports from the company;

communicate promptly to the debenture holders defaults, if any, with regard to payment of
interest or redemption of debentures and action taken by the trustee therefor;

appoint a nominee director on the Board of the company in the event of-

 two consecutive defaults in payment of interest to the debenture holders; or

 default in creation of security for debentures; or

 default in redemption of debentures.

ensure that the company does not commit any breach of the terms of issue of debentures or
covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such
breach;

inform the debenture holders immediately of any breach of the terms of the issue of
debentures or covenants of the trust deed;

ensure the implementation of the conditions regarding creation of security for debentures, if
any, and debenture redemption reserve;

ensure that the assets of the company issuing debentures and of the guarantors, if any, are
sufficient to discharge the interest and principal amount at all times and that such assets are free
from any other encumbrances except those which are specifically agreed to by the debenture
holders;

do such acts as are necessary in the event the security becomes enforceable;

call for reports on the utilization of funds raised by the raised by the issue of debentures;

take steps to convene a meeting of the holders of debentures as and when such meeting is
required to be held;

ensure that the debentures have been converted or redeemed in accordance with the terms of
issue of debentures;

perform such acts as are necessary for the protection of the interest of the debenture holders
and do all other acts as are necessary in order to resolve the grievances of the debenture holders.

Meeting of debenture holders

Rule 18(4) provides that the meeting of all the debenture holders shall be convened by the
debenture trustees on-

requisition in writing signed by debenture holders holding at least one tenth in value of the
debentures for the time being outstanding;

the happening of any event, which constitutes a breach, default or which in the opinion of the
debenture trustees affects the interest of the debenture holders.

Debenture Redemption Reserve

Section 71(4) provides that where the debentures are issued by a company, the company shall create
a debenture redemption reserve account. This reserve should be formed out of the profits of the
company available for the payment of dividend. The amount credited to such amount shall not be
utilized by the company except for the redemption of debentures.

Rule 18(7) provides that the debenture reserve account shall be created in accordance with the
conditions given below:

a) the Debenture Redemption Reserve shall be created out of the profits of the company
available for payment of dividend;

b) the company shall create Debenture Redemption Reserve;

c) every company required to create Debenture Redemption Reserve shall on or before the
30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less
than fifteen percent, of the amount of its debentures maturing during the year ending on the 31st
day of March of the next year, in any one or more of the following methods, namely:-

i) in deposits with any scheduled bank, free from any charge or lien;

ii) in unencumbered securities of the Central Government or of any State Government.

iii) in unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of the
Indian Trusts Act, 1882;

iv) in unencumbered bonds issued by any other company which is notified under sub-clause (f)
of section 20 of the Indian Trusts Act, 1882;

v) the amount invested or deposited as above shall not be used for any purpose other than for
redemption of debentures maturing during the year referred above:

d) in case of partly convertible debentures, Debenture Redemption Reserve shall be created in

respect of non- convertible portion of debenture issue in accordance with this sub-rule.

e) the amount credited to the Debenture Redemption Reserve shall not be utilised by the
company except for the purpose of redemption of debentures

Trust deed

A trust deed in Form No. SH-12 shall be executed by the company issuing debenture in favor of the
debenture trustees within three months of closure of the issue or offer. A trust deed for securing
any issue of debentures shall be open for inspection to any member of debenture holder of the
company, in the same manner, to the same extent and on the payment of the same fees, as if it were
the register of members of the company. A copy of the trust deed shall be forwarded to any member
or debenture holder of the company, at his request, within 7 days of the making, on payment of fee.

Liability of debenture trustee

Section 71(7) provides that any provision contained in a trust deed or in any contract with the
debenture holders secured by a trust deed, shall be void in so far as it would have the effect of
exempting a trustee from or indemnifying him against any liability for breach of trust, where he fails
to show the degree of care and due diligence required of him as a trustee, having regard to the
provisions of the trust deed conferring on him any power, authority or discretion.

The liability of the debenture trustee shall be subject to such exemptions as may be agreed upon by
a majority of debenture holders holding not less than three fourths in value of the total debentures
at a meeting held for this purpose.

Redemption of debentures

Section 71(8) provides that a company shall pay interest and redeem the debentures in accordance
with the terms and conditions of their issue.

Section 71(9) provides that where at any time the debenture trustee comes to a conclusion that the
assets of the company are insufficient or are likely to become insufficient to discharge the principal
amount as and when it becomes due, the debenture trustee may file a petition before the Tribunal.
The Tribunal may, after hearing the company and any other person interested in the matter, by order,
impose such restrictions on the incurring of any further liabilities by the company as the Tribunal
may consider necessary in the interests of debenture holders.

Failure to redeem

Section 71(10) provides that where a company fails to redeem the debentures on the date of their
maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the
application of any or all of the debenture holders, or debenture trustee and, after hearing the parties
concerned, direct, by order, the company to redeem the debentures forthwith on payment of
principal and interest due thereon.

Default in complying with the order of Tribunal

Section 71 (11) provides that if any default is made in complying with the order of the Tribunal, every
officer of the company who is in default shall be punishable with imprisonment for a term which
may extend to 3 years or with fine which shall not be less than `2 lakhs but which may extend to `5
lakh or with both.

Further issue of share capital

The increase of the subscribed capital of a company caused by the exercise of an option as a term
attached to the debentures issued or loan raised by the company to convert such debentures or
loans into the shares of the company would not amount to further issue of share capital.

This shall be subject to the condition that the terms of issue of such debentures or loan containing
such an option have been approved before the issue of such debentures or the raising of loan by a
special resolution passed by the company in general meeting.

Conversion

Where any debentures have been issued, or loan has been obtained from any Government by a
company, and if that Government considers it necessary in the public interest so to do, it may, by
order, direct that such debentures or loans or any part thereof shall be converted into shares in the
company on such terms and conditions as appear to the Government to be reasonable in the
circumstances of the case even if terms of the issue of such debentures or the raising of such loans
do not include a term for providing for an option for such conversion.
If the terms and conditions of such conversion are not acceptable to the company, it may, within 60
days from the date of communication of such order, appeal to the Tribunal which shall after
hearing the company and the Government pass such order as it deems fit.

In determining the terms and conditions of conversion, the Government shall have due regard to the
financial position of the company, the terms of issue of debentures or loans, as the case may be, the
rate of interest payable on such debentures or loans and such other matters as it may consider
necessary.

Where the Government has, by an order directed that any debenture or loan or any part thereof
shall be converted into shares in a company and where no appeal has been preferred to the Tribunal
or where such appeal has been dismissed, the memorandum of such company shall, where such
order has the effect of increasing the authorised share capital of the company, stand altered and the
authorised share capital of such company shall stand increased by an amount equal to the amount
of the value of shares which such debentures or loans or part thereof has been converted into.