Share Capital & Debenture Rules (Rule 2-9)
Rule 2. Definitions.
(1).
In these rules, unless the context otherwise requires:
(a). Act means the Companies Act, 2013.
(b). Annexure means the Annexure to these rules.
(c). Fees means the fees as specified in the Companies (Registration offices and fees) Rules, 2014.
(d). Form or E-form means a form set forth in Annexure to these rules which shall be used for the matter to which it relates.
(e). Regional Director means the person appointed by the Central Government in the Ministry of Corporate Affairs as a Regional Director.
(f). Section means the section of the Act.
(2).
Words and expressions used in these rules that are not defined here, will have the same meaning as given in as defined in the Act or in the Companies (Specification of Definitions Details) Rules, 2014.
Rule 3. Application.The provisions of these rules shall apply to:
(a). All unlisted public companies.
(b). All private companies.
(c). Listed companies.
With respect to listed companies , they apply so far as they do not contradict or conflict with any other regulation framed in this regard by SEBI.
Rule 4. Equity shares with differential rights.
(1).
A company can issue equity shares with special or different rights only if it follows the conditions listed below.
(a).
The articles of association of the company needs to authorize the issue of shares with differential rights.
(b).
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.
The approval by shareholders should be obtained by a postal ballot.
(c).
The total voting power given to all differential-rights shares in a company cannot be more than 74% of the company’s overall voting power.
(d). Omitted.
(e).
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.D
(f).
The company must not have any ongoing default in paying:
Declared dividends.
Matured deposits.
Preference shares or debentures that are due for redemption.
interest on those deposits or debentures.
Any dividend payment.
(g).
The company must not have defaulted in paying dividends on preference shares.
The company must also not have defaulted in repaying any term loan taken from:
A public financial institution,
A State-level financial institution.
A scheduled bank, when such repayment has become due.
There must be no default in payment of interest on any such term loan.
The company must have no outstanding dues relating to statutory payments of its employees to any authority.
There must be no default in crediting amounts to the Investor Education and Protection Fund (IEPF) that must be transferred to the Central Government.
If a company has previously defaulted in any of the required payments, it cannot issue equity shares with differential rights immediately.
However, once the company corrects the default, it must then wait for five years from the end of the financial year in which the default was remedied.
After this five-year period has passed, the company is allowed to issue equity shares with differential rights.
(h).
The company must not have been penalised by any Court or Tribunal in the last three years.
This requirement applies to offences committed under the following laws:
The Reserve Bank of India Act, 1934.
The Securities and Exchange Board of India Act, 1992.
The Securities Contracts (Regulation) Act, 1956.
The Foreign Exchange Management Act, 1999.
Any other special Act under which companies may be regulated by a sectoral regulator (for example, IRDAI, TRAI, PFRDA).
(2).
The explanatory statement that must be attached to:
The notice of a general meeting (as required under Section 102), or
A postal ballot notice (as required under Section 110), must include the following particulars:
A detailed explanation of the matter for which approval is sought.
The reasons why the proposed resolution is necessary.
Any relevant information that helps shareholders understand the nature and impact of what is being proposed.
All material facts concerning the business to be transacted.
(a).
The total number of shares to be issued with differential rights.
(b).
The details of the differential rights.
(c).
When a company issues equity shares with differential rights, it must disclose certain details in the explanatory statement.
One required disclosure is the percentage of all DVR (Differential Voting Rights) shares relative to the total post-issue paid-up equity share capital.
This percentage must include:
The new DVR shares being proposed for issue now.
All DVR shares already issued by the company in the past.
(d).
The reasons or justification for the issue.
(e).
The price at which such shares are proposed to be issued either at par or at premium.
(f).
The basis on which the price has been arrived at.
(g).
(i). In case of private placement or preferential issue:
(a).
The company must disclose the total number of shares proposed to be allotted to:
Promoters.
Directors.
Key managerial personnel (KMP)
(b).
The company must disclose the total number of shares proposed to be allotted to other persons.
It must also state whether these persons have any relationship with a promoter, director, or KMP.
(ii). In case of a public issue
The company must disclose any reservation of shares for different categories of applicants, which may include:
Promoters.
Directors.
Key managerial personnel
(h)
The percentage of voting rights carried by DVR shares must be disclosed.
So the voting power the DVR shares will have to be compared to the total voting power of all equity shares.
(i)
The scale or proportion of voting rights attached to DVR shares must be disclosed.
This means the company must specify how the voting rights of DVR shares differ from ordinary equity shares.
1 DVR share = 1/10th vote of a normal equity share, OR 1 DVR share = 2 votes per share.
(j).
Any change in control resulting from the DVR issue must be disclosed.
This requires the company to explain:
Whether issuing DVR shares will shift control to a different person or group.
Whether promoters control will increase, reduce, or remain unchanged.
Whether new investors will gain any controlling influence.
(k)
The company must disclose the diluted Earnings Per Share (EPS) after the DVR issue.
EPS must be calculated using the applicable accounting standards.
This is important to understand how issuing DVR shares affects existing shareholders’ earnings per share.
Diluted EPS typically drops when more shares are issued.
(l)
The company must disclose the pre-issue and post-issue shareholding pattern, including voting rights.
This must be shown in the format required under Clause 35 of SEBI’s listing agreement.
It must specify:
Who holds how many shares before the DVR issue.
Who holds how many shares after the DVR issue.
Voting rights distribution before and after the issue.
(3).
The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.
(4).
(a)
The Board must disclose the total number of equity shares with differential rights (DVRs) that were allotted during the year.
(b)
The Board must explain the specific differential rights attached to these shares, including:
How their voting rights differ from ordinary shares.
Whether their dividend rights are higher, lower, or different in any way.
(c)
The Board must disclose:
What percentage the DVR shares represent of the total post-issue equity share capital.
The percentage of total voting rights that the DVR equity share capital carries.
This percentage must consider all DVR shares ever issued.
(d)
The Board must state the price at which each DVR share was issued.
(e)
The Board must give details of promoters, directors, or key managerial personnel (KMP) who received DVR shares.
(f)
The Board must disclose whether the issuance of DVR shares resulted in any change in control of the company.
(g)
The Board must report the diluted Earnings Per Share (EPS) after issuing DVR shares.
This must be calculated as per the applicable accounting standards.
(h)
The Board must provide the pre-issue and post-issue shareholding pattern, along with the voting rights of each category of shareholders, in the format specified under Rule 4(2).
(5).
Shareholders who hold equity shares with differential rights (DVRs) are entitled to all the other benefits that regular equity shareholders receive.
These benefits include: Bonus shares, rights shares, and any other rights or benefits normally given to equity shareholders.
However, these rights are enjoyed subject to the differential rights attached to their DVR shares.
(6).
When a company issues equity shares with differential rights (DVRs), it must properly record them.
The details must be entered in the Register of Members, which is required to be maintained under section 88 of the Companies Act.
The Register must include:
All relevant particulars of the DVR shares issued, and the details of the shareholders who hold those DVR shares.
Explanation:
This rule provides a clarification about equity shares with differential rights (DVRs) issued in the past.
If a company issued DVR shares under the Companies Act, 1956 and the rules made under that Act, then:
Those shares will continue to be governed by the old Act and old rules.
Rule 5. Certificate of shares (where shares are not in demat form).
(1).
When a company issues share capital, it cannot issue a share certificate unless:
(a). The Board of Directors has passed a resolution authorising the issue of the share certificate.
(b). The shareholder surrenders to the company either:
The letter of allotment, or the fractional coupons of the required value, except in cases where shares are issued:
As against letters of acceptance.
As against letters of renunciation.
As against bonus shares.
If the letter of allotment is lost or destroyed, then:
The Board may allow the issue of the share certificate, but may impose reasonable conditions, such as:
Asking for supporting evidence of loss.
Requiring an indemnity bond from the shareholder.
Asking the shareholder to pay any out-of-pocket expenses the company incurs while investigating the claim.
(2).
Every share certificate issued by a company must be in Form SH.1, or in a format that is as close to SH.1 as possible.
The share certificate must clearly state:
The name(s) of the person(s) to whom the certificate is issued.
The specific shares that the certificate represents, and the amount paid-up on those shares.
(3).
Every share certificate must clearly state the specific shares it refers to, and the amount paid-up on those shares.
Each share certificate must be signed either by two directors, or one director and the company secretary (if the company has appointed a secretary).
If the company has a common seal, then the seal must be affixed to the certificate.
The seal must be affixed in the presence of the persons who are required to sign the certificate.
Explanation:
(a).
In the case of a One Person Company (OPC):
It is sufficient if the share certificate is signed by one director, and the company secretary, or any other person authorised by the Board for this purpose.
(b).
A director or company secretary is considered to have signed the share certificate even if the signature appears as a facsimile, that is:
Printed by a machine, engraved in metal, lithographed, or digitally signed.
However, the signature cannot be affixed by rubber stamp.
The director or company secretary whose facsimile signature is used must take personal responsibility for:
Allowing the use of his/her facsimile signature, and the safe custody of the machine, equipment, or materials used to print that signature.
(4).
Whenever a company issues a share certificate it must record the details in the Register of Members.
The Register of Members is maintained as required under section 88 of the Companies Act.
The register must include:
The particulars of the share certificate.
The name(s) of the person(s) to whom the certificate is issued, and the date on which the certificate was issued.
Rule 6. Issue of renewed or duplicate share certificate.
(1).
(a).
A company cannot issue a new share certificate unless the old certificate is surrendered, if the old certificate is:
Sub-divided or consolidated.
Defaced.
Mutilated.
Torn, old, decrepit, or worn out.
Fully used on the reverse side for recording transfers.
The company may charge a fee for issuing the new certificate.
The fee must be decided by the Board.
But the fee cannot exceed ₹50 per certificate.
This applies when issuing certificates due to splitting, consolidation, or replacing damaged/old certificates.
(b)
If a certificate is issued in any of the circumstances mentioned above, then:
The new certificate must explicitly state on its face:
“Issued in lieu of share certificate No. ____ — sub-divided / replaced / on consolidation.”
A record of this must also be made in the appropriate Register.
No fee shall be charged when the new certificate is issued pursuant to a scheme of arrangement sanctioned by the High Court, or the Central Government.
(c)
A company may replace all existing certificates with new ones in cases of:
Sub-division of shares.
Consolidation of shares.
Merger, Demerger, or any form of reconstitution.
In such cases:
The company can issue new certificates without requiring surrender of old certificates.
But this is allowed only if the company complies with:
Clause (a) of Rule 5(1).
Rule 5(2) & Rule 5(3)
(2).
(a).
A duplicate share certificate cannot be issued unless:
The Board gives prior consent.
The shareholder pays the fee decided by the Board (maximum ₹50 per certificate).
The shareholder provides reasonable supporting evidence of loss or destruction.
The shareholder provides an indemnity (a legal guarantee to protect the company from claims).
The shareholder reimburses any out-of-pocket expenses the company incurs in verifying the evidence.
(b).
When a duplicate certificate is issued , it must be clearly stated on the face of the certificate that it is:
“Duplicate issued in lieu of share certificate No. ____.”
The word “DUPLICATE” must be stamped or printed prominently on the certificate.
The issuance must be recorded in the relevant Register maintained by the company.
(c).
The time limit to issue duplicate share certificates differs for unlisted and listed companies:
For unlisted companies , Duplicate share certificates must be issued within 3 months from the date the complete documents are submitted.
For listed companies , Duplicate share certificates must be issued within 45 days from the date the complete documents are submitted.
(3).
(a).
Every renewed or duplicate share certificate issued under Rule 6(1) & 6(2) must be recorded immediately in the Register of Renewed and Duplicate Share Certificates (Form SH-2).
The register must show:
The name(s) of the person(s) to whom the new certificate is issued.
The number and date of the new certificate.
The details of the original certificate for which it is being issued in lieu.
The corresponding changes in the Register of Members, with proper cross-references in the Remarks column.
(b).
The register must be kept either at the registered office of the company, or at the place where the Register of Members is maintained.
This register must be preserved permanently.
It must be kept in the custody of the company secretary, or any other person authorised by the Board.
(c).
All entries in the Register of Renewed and Duplicate Share Certificates must be authenticated (signed/verified) by:
The company secretary, or any person authorised by the Board for sealing and signing share certificates under Rule 5(3).
Rule 7. Maintenance of share certificate forms and related books and documents.
(1).
All blank forms that will be used to issue share certificates must be printed.
Printing of these blank forms can be done only with Board approval, given through a Board resolution.
Each blank share certificate form must be machine numbered in consecutive order.
There should be no gap or duplication.
All related materials such as printing blocks, engravings, facsimiles, and hues used for printing must be kept in safe custody.
These materials must be kept by the company secretary or another person specifically authorised by the Board.
The company secretary or the authorised person is responsible for maintaining and reporting the account of all printed forms to the Board.
(2).
The following persons are responsible for maintaining, preserving, and safely keeping all books and documents related to the issue of share certificates.
The same persons would be responsible even for the blank forms.
(a). The committee of the Board, if the Board has authorised such a committee.
If the company has a company secretary, then the company secretary will be responsible.
(b). If the company does not have a company secretary, then a Director specifically authorised by the Board will take responsibility.
(3).
All books mentioned in 7(2) must be kept in good condition for at least 30 years.
If any of these books relate to a disputed case, they must be preserved permanently (never destroyed).
When any share certificates are surrendered to the company:
They must be immediately defaced by stamping or printing the word “CANCELLED” in bold letters.
These cancelled certificates may be destroyed after 3 years from the date of surrender.
Destruction can happen only:
After the Board passes a resolution approving it.
The board should approve it in the presence of a person appointed by the Board specifically for supervising the destruction.
This rule does not apply to the cancellation of security certificates:
Under section 6(2) of the Depositories Act, 1996, when such cancellation is done according to regulation 54(5) of the SEBI (Depositories and Participants) Regulations, 1996.
Rule 8. Issue of Sweat Equity shares.
(1).
This rule applies to Unlisted companies that are not required to follow SEBI's sweat equity regulations.
Such companies are not allowed to issue sweat equity shares to their directors or employees unless certain conditions are met.
Sweat equity shares may be issued:
At a discount, or for consideration other than cash.
They are issued in return for providing know-how, intellectual property rights, or other value additions.
However, the company can issue such sweat equity shares only if the issue has been authorised by a special resolution passed in a general meeting.
Explanation
(i).
Employee includes:
(a). A permanent employee of the company who has worked in India or outside India for at least one year.
(b). A director of the company (whether whole-time or part-time).
(c). An employee or director covered under (a) or (b) of a subsidiary (in India or abroad) or of the holding company.
(ii).
Value additions refers to:
The economic benefits either actual or expected that the company receives or will receive.
These benefits come from an expert or professional who provides:
Know-how.
Intellectual property rights.
Similar rights or contributions.
These benefits must be provided by the person to whom sweat equity shares are being issued.
The key condition is that this contribution is not paid for or not included in the normal salary or remuneration under the employee’s contract.
(2).
An explanatory statement is required under Section 102
The explanatory statement attached to the notice of the general meeting (as required under section 102) must include the following w.r.t sweat equity shares are proposed to be issued:
(a). The date on which the Board approved the proposal for issuing sweat equity shares.
(b). The reasons or justification for issuing the sweat equity shares.
(c). The class of shares under which the sweat equity shares will be issued.
(d). The total number of shares proposed to be issued as sweat equity.
(e). The class or classes of directors or employees who will receive these sweat equity shares.
(f). The principal terms and conditions of the sweat equity issue, including the basis of valuation.
(g). The length of time that the concerned person has been associated with the company.
(h). The names of the directors or employees who will receive the sweat equity shares, along with their relationship (if any) with promoters or KMP.
(i). The price at which the sweat equity shares will be issued.
(j). The consideration to be received for the sweat equity shares, including any non-cash consideration.
(k). Whether issuing sweat equity will cause the company to exceed any managerial remuneration limits, and if so, how the company plans to address it.
(l). A statement confirming that the company will comply with the applicable accounting standards.
(m). The diluted Earnings Per Share (EPS) after the issue of sweat equity shares, calculated according to applicable accounting standards.
(3).
A company must pass a special resolution to issue sweat equity shares.
This special resolution is valid only for 12 months from the date it is passed.
The company must complete the allotment of sweat equity shares within these 12 months.
After 12 months, the resolution expires, and the company would need a fresh special resolution to issue sweat equity shares again.
(4).
A company cannot issue sweat equity shares exceeding 15% of its existing paid-up equity share capital in a single year.
Alternatively, it may issue sweat equity shares up to a total issue value of ₹5 crores, whichever is higher.
So , the company can choose between the 2 limits.
At any point in time, the total sweat equity issued by the company must not exceed 25% of the company’s overall paid-up equity capital.
So the lifetime limit on sweat equity is 25% of paid-up equity, irrespective of year-wise limits.
A start up company (as defined in Notification G.S.R. 127(E) dated 19 February 2019, DPIIT) gets a higher limit.
A start up may issue sweat equity shares up to 50% of its paid-up capital.
This relaxation applies up to 10 years (now 5 years) from the date of incorporation or registration, as per the updated rules.
(5).
Sweat equity shares issued to directors or employees must be locked in for three years from the date they are allotted.
Locked in means that the shares cannot be transferred.
During this three-year lock-in period, the holder is not allowed to sell, transfer, or otherwise dispose of the sweat equity shares.
The share certificate must clearly show that the shares are under lock-in.
The expiry date of the lock-in period must be stamped in bold or displayed in some other clearly visible and prominent manner on the share certificate.
(6).
The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation.
(7).
When a company issues sweat equity shares in exchange for intellectual property rights, know-how, or value additions.
The value of those contributions must be properly determined.
This valuation must be done by a registered valuer.
The valuer must prepare a detailed valuation report.
The report must be addressed to the Board of Directors.
The report must also include a clear justification explaining how the valuer arrived at the valuation.
(8).
When a valuation report is obtained under clauses (6) and (7):
The company must prepare a gist of that report.
This gist must include the critical elements of the valuation.
The company must send this gist along with the notice of the general meeting in which the sweat equity issue will be considered.
(9).
When sweat equity shares are issued for non-cash consideration the company must account for that non-cash consideration as follows:
(a).
If the non-cash consideration is a depreciable or amortizable asset then:
The asset must be recorded in the company’s balance sheet.
It must be accounted for in accordance with the applicable accounting standards.
(b).
If the non-cash consideration is not a depreciable or amortizable asset
Then it must be expensed in line with the applicable accounting standards.
(10).
The value of sweat equity shares issued will be counted as managerial remuneration under sections 197 and 198 only if both of the following conditions are met:
(a). The sweat equity shares are issued to a director or a manager of the company.
(b). The shares are issued for non-cash consideration.
This consideration cannot be recorded as an asset in the company’s balance sheet under the applicable accounting standards.
(11).
When sweat equity shares are issued during an accounting period the following applies:
If the sweat equity shares are not issued in exchange for an asset, then their accounting value must be treated differently.
In such cases, the accounting value of the sweat equity shares must be recorded as a form of compensation to the employee or director who receives them.
This compensation must be shown appropriately in the company’s financial statements.
(12).
This rule applies when sweat equity shares are issued in exchange for acquiring an asset.
The asset must be valued by a registered valuer, and the value assigned in that valuation report must be recorded in the balance sheet.
This process has to be done in accordance with the Accounting Standards.
If the accounting value (fair value) of the sweat equity shares issued is more than the value of the asset acquired, then:
The excess amount must be treated as compensation to the employee or director.
This compensation must be shown appropriately in the financial statements of the company.
Explanation:
The term “Accounting value” refers to the fair value of the sweat equity shares.
This fair value must be determined by a registered valuer, as required under(6).
(13).
The Board of Directors must include the following details in the Directors’ Report for the year in which sweat equity shares are issued:
(a). The class of directors or employees who received the sweat equity shares.
(b). The class of shares that were issued as sweat equity shares.
(c). The total number of sweat equity shares issued to directors, key managerial personnel, or other employees:
Showing separately how many were issued for non-cash consideration.
Mentioning the names of all allottees who now hold 1% or more of the company’s issued share capital.
(d). The reasons or justification for issuing the sweat equity shares.
(e). The main terms and conditions of the issue, including the pricing formula used.
(f). The total number of new shares created as a result of the sweat equity issue.
(g). The percentage that the sweat equity shares represent of the company’s post-issue paid-up share capital.
(h). The consideration received by the company including non-cash consideration or the benefit that accrued due to issuing sweat equity shares.
(i). The diluted Earnings Per Share (EPS) after issuing the sweat equity shares.
(14).
(a).
The company must maintain a Register of Sweat Equity Shares in Form SH-3.
It must immediately record all details of sweat equity shares issued under section 54.
(b).
This Register must be kept at the registered office of the company, or at any other place decided by the Board of Directors.
(c).
Each entry in the Register must be authenticated (signed/verified) by:
The company secretary, or any other person specifically authorised by the Board for this purpose.
Rule 9. Issue and redemption of preference shares.
(1).
A company with share capital may issue preference shares only if its articles allow it and the following conditions are met:
(a). The issue of preference shares must be approved by the shareholders through a special resolution passed in a general meeting.
(b). At the time of issuing the preference shares, the company must not have any existing default in:
Redeeming preference shares issued earlier.
Paying dividends that are due on any preference shares.
(2).
When a company issues preference shares, the resolution approving the issue must include details about the following matters:
(a). The priority that preference shareholders will have over equity shareholders in receiving dividends and repayment of capital.
(b). Whether preference shareholders will participate in the company’s surplus funds.
(c). Whether preference shareholders will participate in surplus assets and profits, if the company is wound up, after all capital has been fully repaid/
(d). Whether dividends on the preference shares will be paid on a cumulative or non-cumulative basis.
(e). Whether the preference shares can be converted into equity shares, and if so, the terms of conversion.
(f). The voting rights, if any, attached to the preference shares.
(g). The terms related to redemption of the preference shares.
(3).
An explanatory statement must be attached to the notice of the general meeting under section 102.
The explanatory statement include all important facts related to the issue of preference shares, including:
(a).
The size of the issue.
The total number of preference shares to be issued.
Nominal value of each share.
(b).
The nature of the preference shares.
Whether they are cumulative or non-cumulative, participating or non-participating, convertible or non-convertible.
(c).
The objectives or purpose of issuing these preference shares.
(d).
The manner in which the shares will be issued.
(e).
The price at which the preference shares will be issued.
(f).
The basis or method used to determine the issue price.
(g).
The terms of issue.
The rate and terms of dividend on each share, and other related conditions.
(h).
The terms of redemption.
Period of redemption.
Whether redemption will be at a premium.
If the shares are convertible.
The terms of conversion.
(i).
The manner and modes through which redemption will take place.
(j).
The current shareholding pattern of the company.
(k).
The expected dilution in equity share capital if the preference shares are converted into equity shares.
(4).
When a company issues preference shares, it must record the details of the preference shareholders.
These details must be entered in the Register of Members maintained under section 88 of the Companies Act.
(5).
If a company wants to list its preference shares on a recognised stock exchange, it must follow specific rules.
Such preference shares must be issued in accordance with SEBI regulations.
SEBI prescribes the rules and procedures for issuing preference shares that are intended to be listed.
(6).
A company can redeem its preference shares only according to the terms stated at the time of issue.
If the terms are changed later, this can be done only with the approval of preference shareholders as required under section 48 of the Companies Act.
Preference shares may be redeemed in any of the following ways:
(a). At a fixed time or when a specific event occurs.
(b). At any time at the company’s option (if the terms allow it).
(c). At any time at the shareholder’s option (if the terms allow it).
