Share Capital & Debentures - Part 1
43. Kinds of share capital.
43(1).
Equity share capital represents the ownership portion of the company.
The holders of equity shares are known as equity shareholders, and they are the real owners who bear the ultimate risk and reward of the business.
Equity share capital can be of two kinds:
(a). Shares with voting rights
These shareholders have full voting power and can participate in all company decisions.
This includes the election of directors and approval of major policies.
(b). Shares with differential rights
These are equity shares that come with different rights in terms of voting power, dividend, or other matters.
For example:
A company may issue shares that give higher dividends but limited voting rights.
Some shares may offer more voting rights but a smaller dividend.
Such shares can only be issued following the rules prescribed by the government.
43(2).
Preference share capital is that part of the company’s issued share capital which provides preferential rights over equity shareholders in two major aspects:
(a). Priority in receiving dividends.
(b). Priority in repayment of capital during winding up.
Dividend Preference
Preference shareholders are entitled to receive a fixed dividend (either a fixed amount or at a fixed rate), before any dividend is paid to equity shareholders.
Repayment Preference
In case the company is wound up, preference shareholders are repaid their capital first, before any amount is distributed to equity shareholders.
Participating Rights
In some cases, preference shareholders may also have:
A right to share in additional profits after equity shareholders receive their dividend.
These shares are called Participating Preference Shares.
A right to share in surplus assets after all capital is repaid, in a winding up.
Nature of Preference Shares:
While they get assured and prior returns, preference shareholders generally do not have voting rights.
They have voting rights only in special situations.
43(3).
The Act ensures that any rights already enjoyed by preference shareholders before the commencement of the Companies Act, 2013 remain protected.
Their priority rights are protected especially during winding up.
Section 44. Nature of shares or debentures.
The law treats a share or debenture as movable property, not as something fixed or attached to land or physical assets.
This means they can be bought, sold, gifted, or transferred just like any other movable asset, such as money or goods.
The ownership can change hands easily through proper legal transfer procedures.
Every shareholder or debenture-holder has a right to transfer their holdings to another person.
However, the process and conditions for such transfer are governed by the articles of association (the internal rules of the company).
The company’s articles may, for example:
Specify the form of transfer (such as a share transfer form)
Lay down any restrictions (common in private companies)
Mention approval requirements from the Board of Directors.
Section 45. Numbering of shares.
Each share issued by a company must have its own unique number so that it can be clearly identified and distinguished from all other shares.
This helps in maintaining accurate ownership records and prevents duplication or confusion over which shares belong to whom.
Example: If a company issues 1,000 shares, they may be numbered 1 to 1,000 and each number represents one specific share.
The proviso states that this rule does not apply to shares held in dematerialised form (demat).
In a depository system, shares are held electronically, and ownership is recorded in the depository’s records and not through distinctive numbers.
These distinctive numbers are printed on physical share certificates.
The depository maintains electronic records showing who holds what number of shares.
Section 46. Certificate of shares
46(1)
Every shareholder must be given a share certificate that specifies the number and details of shares they hold.
The certificate must be:
Issued under the company’s common seal, if the company has one.
Signed by two directors, or by one director and the company secretary (if appointed).
This certificate serves as prima facie evidence & it is accepted as proof that the person named on it is the legal owner of those shares, unless proven otherwise.
46(2).
A company can issue a duplicate share certificate only in the following situations:
If the original is lost or destroyed, and the shareholder proves this to the company’s satisfaction.
If the certificate is defaced, mutilated, or torn, and the damaged certificate is returned to the company.
46(3).
The manner, format, and process for issuing both original and duplicate share certificates, as well as details to be entered in the register of members, are governed by prescribed rules under the Companies (Share Capital and Debentures) Rules.
46(4).
If shares are held in dematerialised form (demat) through a depository, no physical certificate is issued.
Instead, the depository’s electronic record acts as prima facie evidence of ownership.
The beneficial owner (the real investor holding the shares electronically) is recognised through the depository’s system.
46(5).
If a company intentionally issues a duplicate share certificate to cheat or defraud, strict punishment applies:
The company may be fined not less than five times the face value of the shares involved, up to ten times the face value or ₹10 crores, whichever is higher.
The officers responsible are also liable for action under Section 447, which deals with fraud and involves imprisonment and fine.
Section 47. Voting rights
47(1).
(a).
Every member of a company limited by shares who holds equity share capital has the right to vote on every resolution placed before the company.
Equity shareholders can vote on all matters discussed in the general meetings whether ordinary or special resolutions.
(b).
The voting right on a poll shall be in proportion to the shareholder’s share in the paid-up equity share capital.
Voting right on poll is when votes are counted based on shares held, not by show of hands)
Voting power depends on how much of the equity capital the shareholder has paid for.
Example: If a shareholder holds 10% of the total paid-up equity shares, they have 10% of the voting power.
47(2)
Every member of a company holding preference share capital shall have limited voting rights.
They can vote only on specific resolutions that directly concern their interests.
(a). Preference shareholders can vote only on resolutions that:
Directly affect the rights attached to their preference shares.
Or relate to the winding up of the company.
Or involve the repayment or reduction of either equity or preference share capital.
Their voting right on a poll shall be in proportion to their share in the paid-up preference share capital of the company.
The proportion of voting rights between equity shareholders and preference shareholders must be the same as the ratio of their respective paid-up capital.
Example:
For instance, if equity paid-up capital is ₹10 lakh and preference paid-up capital is ₹2 lakh, the voting ratio between both classes will be 10:2.
If the dividend on a class of preference shares has not been paid for two years or more, those preference shareholders get an additional right.
They can vote on all resolutions placed before the company, not just those affecting their rights.
This clause protects investors when the company fails to honour their dividend rights.
Section 48. Variation of shareholder’s rights.
48(1)
When a company’s share capital is divided into different classes of shares then:
The rights attached to each class (like voting rights, dividend rights, or redemption rights) can be changed but only under certain conditions.
The rights may be varied in either of the following ways:
With the written consent of holders of not less than three-fourths (75%) of the issued shares of that class; or
By passing a special resolution at a separate meeting of the holders of that class of shares.
However, this variation can only be made only when:
(a).
If the memorandum or articles of association of the company allow such variation.
(b).
If there is no such provision in the memorandum or articles, the variation can still be done as if it is not prohibited by the terms of issue of those shares.
While issuing the shares, the company did not expressly forbid changing their rights later, the company can still vary those rights.
If changing the rights of one class of shareholders also affects the rights of another class, then the consent of three-fourths of that other class must also be obtained.
Example:
If changing the rights of preference shareholders impacts the rights of equity shareholders , then the approval of 75% of equity shareholders is also required.
The same procedure will apply to such other class as well.
48(2)
If at least 10% of the shareholders of that class do not agree with the variation they have the right to object.
They can apply to the National Company Law Tribunal (NCLT) to cancel the variation.
However, this must be done within 21 days from the date the consent was given or the resolution was passed (whichever is applicable).
The application may be filed by one or more shareholders (who together hold at least 10% of that class) if they are authorized in writing by the rest of the dissenting shareholders to do so.
Until the Tribunal decides, the variation does not take effect.
Only if the Tribunal confirms the variation can it be considered valid.
48(3).
The decision of the Tribunal on such an application shall be final and binding on all shareholders including both those who agreed and those who objected.
48(4).
Once the Tribunal has passed its order, the company must file a copy of the order with the ROC within 30 days from the date of the order.
This filing is mandatory to ensure transparency and official record-keeping of changes in shareholders’ rights.
Section 49. Calls on shares of the same class to be made on a uniform basis.
Whenever a company makes a call it must be made on a uniform basis for all shares belonging to the same class.
A call is a demand made by the company asking shareholders to pay further money towards the unpaid amount on their shares.
If the company asks shareholders to pay, say, ₹10 per share on partly paid shares, then every shareholder holding shares of that class must be asked the same.
The company cannot favour or burden one shareholder more than another within the same class of shares.
If shares have the same nominal value but different amounts have been paid-up then:
Such shares will not be considered as belonging to the same class for the purpose of making calls.
The company can make a separate call on shares depending on how much has already been paid on them.
Only those shares that are identical in both nominal value and paid-up status are treated as belonging to the same class for making uniform calls.
Section 50. Company to accept unpaid share capital, although not called up.A company may, if its Articles of Association permit, accept from any member:
The whole or
A part of the amount remaining unpaid on the shares held by that member, even though the company has not yet called for (demanded) that amount.
If a shareholder owns partly paid shares (Face value - ₹10 / ₹6 - paid and ₹4 - Unpaid), the shareholder can voluntarily pay the remaining ₹4 in advance.
This amount is called Advance payment of uncalled capital.
The company can accept such payment, but it is not required to do so unless it is permitted by its own Articles.
Even though the member has paid the uncalled amount in advance, he does not gain additional voting rights for the portion paid in advance.
He will be entitled to voting rights only up to the amount actually called up by the company.
Section 51. Payment of dividend in proportion to the amount paid-up.
When shareholders hold partly paid shares, some may have paid the full amount due on their shares, while others may have paid only part of it.
A company has to pay dividends in proportion to the amount actually paid-up on each share, but only if the company’s AOA specifically allow this.
So, shareholders who have fully paid for their shares may receive a larger dividend than those who have only partly paid.
This reflects their greater financial contribution to the company.
The decision to apply this method is at the discretion of the Board of Directors and it is not automatic or mandatory.
If the Articles do not mention this, the company must distribute dividends equally per share, regardless of how much has been paid-up by each shareholder
52. Application of premiums received on issue of shares.
52(1).
When a company issues its shares at a premium.
If a share with a face value of ₹100 is issued at ₹120, the ₹20 is premium.
In that case, the company must transfer the total premium amount received to a Securities Premium Account.
This account is treated like paid-up share capital for certain legal purposes especially when applying provisions related to reduction of share capital.
However, it cannot be freely used or distributed as profit unless permitted by this section.
52(2).
Despite the general restriction above, the company can use the amount in the securities premium account for specific purposes only:
(a). To issue fully paid bonus shares to existing shareholders (Convert the premium into shares given free of cost).
(b). To write off preliminary expenses the costs incurred in forming or incorporating the company.
(c). To write off expenses, commission, or discount related to the issue of shares or debentures.
(d). To pay the premium payable on redemption of redeemable preference shares or debentures.
(e). To buy back its own shares or other securities under Section 68 of the Companies Act.
52(3).
For certain prescribed classes of companies the Securities Premium Account may also be used for:
(a). Paying up unissued equity shares to be given as fully paid bonus shares to members.
(b). Writing off expenses, commission, or discount on the issue of equity shares.
(c). Buying back its own shares or securities under Section 68.
The prescribed classes of companies are those whose financial statements follow specific accounting standards under Section 133.
Section 53. Prohibition on issue of shares at discount.
53(1).
As a general principle, no company is allowed to issue shares at a discount. (Below their face value.)
For example, if the face value of a share is ₹100, it cannot be issued for ₹90.
The only exception to this rule is provided under Section 54, which allows shares to be issued at a discount only when issuing sweat equity shares.
Sweat Equity Shares are shares given to employees or directors for their contribution or know-how.
53(2).
If a company still issues shares at a discount in violation of this rule, such shares are void.
The company cannot treat such an issue as valid or regularise it later.
53(2A).
Despite the above prohibition, a company may issue shares at a discount to its creditors in one special situation:
When the company’s debt is converted into shares as part of a statutory resolution plan or debt restructuring scheme approved under RBI regulations.
If a financially stressed company is restructuring its loans under RBI guidelines.
And its lenders (banks or financial institutions) agree to convert part of their debt into equity shares,
Then those shares can be issued at a discount to the creditors.
53(3).
If a company issues shares at a discount in violation of this section:
The company and every officer in default are liable for a penalty up to the amount raised through the discounted shares or ₹5,00,000, whichever is less.
Additionally, the company must refund all the money received from such an issue with interest at 12% per annum from the date of issue to the investors.
Section 54. Issues of sweat equity shares.
54(1).
Despite the general prohibition on issuing shares at a discount under Section 53, a company may issue sweat equity shares (which may be at a discount or for consideration other than cash) if the following conditions are satisfied:
The company must pass a special resolution in a general meeting to authorize the issue.
The resolution should clearly mention:
The number of shares to be issued.
The current market price.
The consideration (if any).
The class or classes of directors or employees eligible to receive these shares.
Compliance with SEBI or Prescribed Rules
If the company’s shares are listed on a recognized stock exchange, it must follow the regulations made by SEBI for issuing sweat equity shares.
If the company’s shares are not listed, then it must comply with the rules prescribed by the Central Government for unlisted companies.
54(2).
Sweat equity shares carry the same rights, restrictions, and conditions as ordinary equity shares, unless specified otherwise.
Holders of sweat equity shares will therefore enjoy the same voting rights, dividend rights, and status as other equity shareholders.
The term “pari passu” means they rank equally with other equity shareholders in all respects.
Section 55. Issue and redemption of preference shares
55(1).
After the commencement of the Companies Act, 2013, no company limited by shares can issue irredeemable preference shares.
Every preference share issued must be capable of redemption (repayment) after a fixed period.
This ensures that preference shareholders are guaranteed repayment and that companies do not keep such liabilities indefinitely.
55(2).
A company may issue redeemable preference shares, but only if its Articles of Association allow it.
The redemption period cannot exceed 20 years from the date of issue.
Exception:
A company engaged in infrastructure projects may issue preference shares for a period exceeding 20 years.
However, it must redeem a certain percentage of those shares every year (as prescribed) at the option of the preference shareholders.
This allows long-term projects (which may take decades to generate revenue) to access stable capital without breaching the 20-year limit.
A company can redeem preference shares only under the following strict financial conditions:
(a). Source of Redemption
Prefe.rence shares can be redeemed only out of:
Profits of the company that would otherwise be available for paying dividends.
Proceeds of a fresh issue of shares made for the purpose of redemption.
(b). Fully Paid Shares
No preference share can be redeemed unless it is fully paid up.
Partly paid shares cannot be redeemed to avoid disputes or loss of company capital.
(c). Capital Redemption Reserve
If shares are redeemed out of profits, an amount equal to the nominal (face) value of the shares redeemed must be transferred to a separate account.
This separate account will be called the Capital Redemption Reserve Account (CRR).
This CRR is treated like paid-up share capital and cannot be used for regular business expenses.
It ensures that the company’s capital base remains intact even after redemption.
(d). Provision for Premium on Redemption
If the preference shares are to be redeemed at a premium (For more than their nominal value):
For certain classes of companies (Those following prescribed accounting standards under Section 133):
The premium must be provided out of the company’s profits, before redemption.
For other companies (not covered above):
The premium may be provided either out of profits or from the securities premium account, before redemption.
For old preference shares (issued before this Act commenced):
The premium must be provided either out of profits or from the securities premium account, as applicable.
55(3).
If a company cannot redeem its preference shares or pay the dividend on them as per the terms of issue:
Such shares are called Unredeemed preference shares.
The company may, with the consent of at least three-fourths (¾) in value of such shareholders and with the approval of the Tribunal, issue new redeemable preference shares equal to the total amount due (including dividends).
Upon such issue, the old unredeemed shares are deemed to be redeemed.
The Tribunal may order that preference shareholders who did not consent to the issue of new shares be paid back immediately.
Explanation
Issuing new redeemable preference shares or redeeming old ones does not count as an increase or reduction in the company’s share capital.
This prevents technical violations of share capital maintenance rules.
55(4).
The Capital Redemption Reserve Account (CRR) created under this section can later be used to issue fully paid bonus shares to the company’s members.
This allows the company to convert that reserve into share capital when appropriate, maintaining balance sheet stability.
Explanation
For 55(2), Iinfrastructure projects refers to those specifically listed in Schedule VI of the Companies Act, 2013.
These typically include large-scale public utility projects like roads, railways, power generation, telecommunications, etc.
Section 56. Transfer and transmission of securities
56(1).
A company cannot register a transfer of securities (like shares or debentures) unless certain formalities are fulfilled.
The company can register a transfer of securities only if:
A proper instrument of transfer is submitted in the prescribed format.
The instrument is duly stamped, dated, and signed by or on behalf of both the transferor (seller) and transferee (buyer).
It must include the name, address, and occupation of the transferee.
The instrument must be delivered to the company (by either party) within 60 days from the date of execution.
The instrument must be accompanied by:
The share certificate relating to the securities being transferred.
If no share certificate exists, the letter of allotment of those securities.
Exception:
If the instrument of transfer is lost or not delivered within the prescribed period, the Board of Directors may still register the transfer.
However, this can only be done on such terms of indemnity (protection against possible loss) as the Board deems appropriate.
To transfer shares, both parties must sign and submit a stamped, dated transfer deed with the share certificate within 60 days.
56(2).
This clause clarifies that automatic legal transfers (transmissions) are not affected by the above procedural requirements.
The company still has the power to register transfers by transmission that is, transfers that happen automatically by law, not by sale or agreement.
Examples include:
Death of a shareholder (transfer to legal heir).
Insolvency or succession by operation of law.
56(3).
If a transferor alone applies for the registration of transfer (without the transferee) and the shares are partly paid, special care is required.
The company must notify the transferee (buyer) of the proposed transfer.
The notice must be given in the prescribed manner.
The transferee then has two weeks from receiving the notice to object.
If no objection is received within two weeks, the transfer can be registered.
56(4).
Every company must deliver the share or debenture certificates within specified time limits, unless prohibited by law or a court/tribunal order.
Time Limit for Delivery of Certificates
(a). To subscribers of the Memorandum (initial shareholders at incorporation) - Within 2 months from the date of incorporation
(b). For any allotment of shares - Within 2 months from the date of allotment
(c). For any transfer or transmission of securities - Within 1 month from the date of receipt of the instrument of transfer (or intimation of transmission
(d). For allotment of debentures - Within 6 months from the date of allotment
Where the securities are held in demat form, the company must immediately intimate the details of allotment to the depository after such allotment.
56(5).
If a shareholder passes away, their legal representative (like an heir or executor) may transfer the shares:
Even if the representative’s name has not been entered in the company’s register of members.
Such a transfer will still be valid as if the representative was the registered shareholder at the time of transfer.
56(6).
If a company fails to comply with any of the provisions of 56(1) - 56(5):
The company and every officer in default will each be liable to a penalty of ₹50,000.
56(7).
If any depository or depository participant (who handles electronic shareholding) transfers shares with intent to defraud someone.
They will be liable under Section 447, which deals with fraud and carries severe punishment including imprisonment and fine.
Section 57. Punishment for personation of a shareholder
If any person deceitfully personates (Pretends to be someone else) as the owner of any of the following:
Any security (like shares or debentures) or interest in a company.
Any share warrant or coupon issued under the Companies Act.
and by doing so, either:
Obtains or tries to obtain such a security, share warrant, or coupon; or
Receives or tries to receive any money due to the real owner, then that person has committed a punishable offence.
Such a person shall be:
Imprisoned for a minimum period of one year, which may extend up to three years, and
Fined not less than ₹1,00,000 (one lakh rupees), which may extend up to ₹5,00,000 (five lakh rupees).
Section 58. Refusal of registration and appeal against refusal
58(1).
If a private company limited by shares refuses to register:
A transfer of shares or securities.
A transmission of rights (transfer by operation of law, such as inheritance on death), then it must:
Send a notice of refusal to both the transferor and the transferee or the person giving intimation of transmission
Within 30 days from the date when the transfer instrument or intimation was delivered to the company,
Giving valid reasons for such refusal.
58(2).
For public companies, the shares and securities are freely transferable.
Therefore, anyone can buy or sell shares without requiring prior approval from the company.
However, a private agreement or contract between shareholders will still be enforceable as a private contract, though not binding on the company itself.
This private agreement includes a shareholder agreement restricting sale of shares.
58(3).
If a transferee (the person receiving the shares) feels that the refusal is unjustified, they may appeal to the Tribunal (NCLT):
Within 30 days from receiving the refusal notice.
If no notice was sent, within 60 days from the date the transfer instrument or transmission intimation was delivered to the company.
58(4).
If a public company refuses to register the transfer of securities without sufficient cause within 30 days of receiving the instrument,
the transferee may:Appeal to the Tribunal within 60 days of such refusal.
If no response is received from the company, within 90 days of delivery of the transfer instrument.
58(5).
When the Tribunal hears an appeal under 58(3) and 58(4) it may :
(a). Dismiss the appeal, if the refusal is justified.
(b). Allow the appeal and issue orders to:
Direct the company to register the transfer or transmission within 10 days of receiving the order.
Rectify the register of members.
Award damages to the aggrieved party if they suffered any loss.
58(6).
If any person or company disobeys the Tribunal’s order under this section, they will be punished with:
Imprisonment of not less than one year, which may extend to three years, and
Fine of not less than ₹1,00,000, which may extend to ₹5,00,000.
Section 59. Rectification of register of members
59(1).
When someone’s name has been wrongly entered, wrongly omitted, or when there is a delay or mistake in recording the membership details.
This can happen in 3 cases:
Wrong Entry - If someone’s name is entered in the register without sufficient cause.
Omission - If someone’s name is removed from the register without reason.
Delay or Default – If the company delays or fails to enter the fact that a person has become or ceased to be a member.
In such cases, the following persons can file an appeal:
The person aggrieved (whose name was wrongly added, removed, or delayed),
Any member of the company, or
The company itself.
The appeal can be made:
To the Tribunal (NCLT) in India.
To a competent court outside India (if the issue involves foreign members or debenture holders), as may be notified by the Central Government.
59(2).
After hearing both sides (the person appealing and the company), the Tribunal may:
Dismiss the appeal, if it finds no error or wrongdoing.
Allow the appeal, and issue one or more of the following orders:
Direct registration of the transfer or transmission of shares within 10 days of receiving the order.
Direct rectification of the company’s register of members or the records of the depository.
Order compensation (damages) to be paid by the company if the aggrieved person has suffered any loss.
59(3).
The right of a security holder (like a shareholder) to transfer their securities is not restricted by this section.
Even if a rectification case is pending, shareholders can still sell or transfer their shares, unless a Tribunal order says otherwise.
Any person who legally acquires securities will automatically get voting rights, unless the Tribunal has specifically ordered that such rights be suspended.
59(4).
If a transfer of securities (shares, debentures, etc.) violates any law or regulation, the Tribunal can intervene to correct it.
Examples of such contraventions include:
Breach of the Securities Contracts (Regulation) Act, 1956.
Breach of the SEBI Act, 1992.
Violation of the Companies Act, 2013.
Violation of any other law currently in force.
In such cases, an application can be made to the Tribunal by:
The depository.
The company.
The depository participant.
The holder of securities.
The Securities and Exchange Board of India (SEBI).
The Tribunal may then:
Direct the company or depository to correct the mistake.
Rectify the register or records.
Ensure that the illegal transaction or contravention is set right.
