UNIT 4
CAPITAL OF THE COMPANY
Q1) EXPLAIN THE MODES FOR RAISING OF SHARE CAPITAL
A1) Under Law, there are different modes of raising finance available to the company which may be through borrowings made up of Public/Private Financial Institutions, Public/Private Bodies, and Secured/Unsecured borrowings, issuance of shares through private placements, rights issue, and further issue of capital
According to Section 185 of the businesses Act, 2013 no company can directly or indirectly advance any loan to anybody corporate, the board of directors, managing director or manager, whereof is familiar with act in accordance with the directions or instructions of the board, or of any director or directors, of the lending company.
Further as per Rule 10 of Companies (meetings of Board and its Powers) Rules 2014 any loan made by a company to its wholly owned subsidiary is exempted from the wants of section 185 of the companies Act, 2013. However, a loan by holding company to its other subsidiaries (other than WOS) falls within the ambit of section 185.
In addition to the above, Section 186 of Companies Act, 2013provides the provisions for Loan and Investment made by the company. As per Section 186 a company can directly or indirectly (a) give any loan to any person or other body corporate (b) give any guarantee or provide security in reference to a loan to the other body corporate or person; and (c) acquire by way of subscription, purchase or otherwise, the securities of the other body corporate, up to sixty per cent of its paid-up share capital, free reserves and securities premium account or 100 per cent. of its free reserves and securities premium account, whichever is more. And just in case such a transaction exceeds the limits specified, prior approval by means of a special resolution passed at a general meeting shall be necessary.
The company shall confide in the members within the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and therefore the purpose that the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security.
Such investment shall be made or loan or guarantee or security given by the corporate only upon the resolution of Board of directors sanctioning it's passed at a gathering of the Board with the consent of all the directors present at the meeting and therefore the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained.
Prior approval of a public financial institution shall not be required where the mixture of the loans and investments thus far made, the quantity that guarantee or security thus far provided to or altogether other bodies corporate, along side the investments, loans, guarantee or security proposed to be made or given doesn't exceed the limit and there's no default in repayment of loan installments or payment of interest thereon as per the terms and conditions of such loan to the public financial institution.
No loan shall tend under this section at a rate of interest less than the prevailing yield of 1 year, three year, five year or ten year government security closest to the tenor of the loan. No company which is in default within the repayment of any deposits accepted before or after the commencement of latest Act or in payment of interest thereon shall give any loan or give any guarantee or provide any security or make an acquisition till such default is subsisting.
This provision of this section (except sub-section 1) shall not apply to any acquisition of shares allotted in pursuance of clause (a) of sub-section (1) of section 62 (right issue). Where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary or a venture company, or acquisition is formed by a holding company, by way of subscription, purchase or otherwise of securities of its WOS the need of special resolution (in case of exceeding the limit) isn't required.
In the light of aforesaid we affect the methods available with the corporate for availing funds:
1) Methods of issue of shares:
A) Private Placement (Section 42 of the companies Act, 2013, Rule 14)
B) Issue of Shares on Preferential Basis
C) Rights issue of Shares
D) Conversion of Loans or Debentures into Shares
E) Bonus issue
Q2) EXPLAIN THE PRIVATE PLACEMENT OF SECURITIES (OTHER THAN PUBLIC ISSUE)
A2) A company willing to boost funds through private placement of securities must suit the provisions of Section 42, the companies Act 2013. Here, securities include – shares, scripts, stocks, bond, debenture, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate1 etc. To pursue this rote for raising finance, the company shall adhere to the following:
• Company to form private placement through issue of 'private placement offer letter'(form PAS- 4).
• Offer or invitation to be made to such number of person not exceeding two hundred during a fiscal year.
• Fresh offer or invitation to be made only after allotments with reference to any offer or invitation made earlier are completed, withdrawn or abandoned.
• Money payable towards subscription of securities be paid through cheque/DD or other banking channels but not by cash.
• Allotment of securities to be made within 60 days from the date of receipt of application money.
• If company fails to allot the shares within 60 days application money must be repaid within 15 days from the date of completion of 60 days. Failure to such refund within 15 days shall make company liable to repay that cash with interest @ 12 p.a.
• The application money received shall be kept during a separate bank account during a scheduled bank and shall not be utilized for any purpose aside from for adjustment against allotment of securities or for the repayment of monies where company is unable to allot securities.
• Private placement offer/invitation shall only be made to such persons whose name is recorded by the company before invitation to subscribe the securities.
• Company to maintain record of private placement in form No. PAS -5.
• Complete information about such offer to be filed with ROC within 30 days of circulation of relevant private placement offer.
• Upon allotment Return of allotment shall be filed with ROC along side list of security holder (Form PAS-3).
• Failure to comply with the provisions of section 42 shall make the corporate , its promoters and directors responsible for penalty which can reach the quantity involved within the offer or invitation or two crore rupees whichever is higher.
• Each offer or invitations must be previously approved by the shareholders of the company by a special resolution and explanatory statement to the notice of the overall meeting shall contain the idea or justifications for the worth at which supply or invitation is being made.
• In case of invitation for Non-Convertible Debenture (NCD) it shall be sufficient if company passes a previous special resolution only once during a year for all the offers or invitation for such debenture during the year.
Q3) EXPLAIN THE RIGHT ISSUE
A3) Right Issue [Section 62 (1) (a) the businesses Act 2014] : Where at any time, a company having a share capital proposes to extend 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 conditions:-
Q4) EXPLAIN THE BONUS ISSUE
A4) Conditions
1) Must be authorized by the articles otherwise the articles got to be amended.
2) Resolution within the general meeting must be passed.
3) The company has not defaulted in repayment of the statutory dues, Fixed deposits or debt securities.
4) All shares must be made fully paid up before making bonus issues.
5) Bonus issue are often made out of:
• Free reserves
• Securities premium Account
• Capital Redemption Reserve
Note: Once a Bonus issue is announced, it can't be withdrawn.
Q5) EXPLAIN THE ESOS, SWEAT EQUITY SHARES
A5) Sweat equity shares refers to equity shares given to the company’s employees on favorable terms, in recognition of their work. Sweat equity shares is one among the modes of creating share, based payments to employees of the company. the issue of sweat equity shares allows the corporate to retain the employees by rewarding them for his or her services. Sweat equity shares rewards the beneficiaries by giving them incentives in lieu of their contribution towards the event of the company. Further, sweat equity shares enables greater employee stake and interest within the growth of an organization because it encourages the employees to contribute more towards the company during which they feel they need a stake.
DEFINITIONS
(1) Sweat Equity Shares
As per Section 2(88) of the companies Act, 2013 “sweat equity shares” means such equity shares as are issued by a corporation to its directors or employees at a reduction or for consideration, aside from cash, for providing their know-how or making available rights within the nature of property rights or value additions, by whatever name called;
(2) Employee
As per Explanation (i) to Rule 8(1) of the companies (Share Capital and Debentures) Rules, 2014, “Employee” means‑
(a) A permanent employee of the company who has been working in India or outside India, for a minimum of last one year; or
(b) A director of the company, whether a whole time director or not; or
(c) An employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a company of the company;
(3) Value additions
As per Explanation (ii) to Rule 8(1) of the companies (Share Capital and Debentures) Rules, 2014, “Employee” means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights within the nature of intellectual property rights, by such person to whom equity is being issued that the consideration isn't paid or included within the normal remuneration payable under the contract of employment, within the case of an employee.
Conditions to be fulfilled
1) Not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business;
2) The issue is authorized by a special resolution passed by the company;
3) The resolution specifies the number of shares, the current market value, consideration, if any, and therefore the class or classes of directors or employees to whom such equity shares are to be issued;
4) The special resolution authorizing the issue of equity shares shall be valid for making the allotment within a period of less than twelve months from the date of passing of the special resolution.
5) The sweat equity shares issued to directors or employees shall be locked in/nontransferable for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in the other prominent manner on the share certificate.
6) Where the equity shares of the company are listed on a recognized stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board during this behalf and if they're not so listed, the sweat equity shares are issued in accordance with the companies (Share Capital and Debentures) Rules, 2014.
Quantum of sweat equity share
The company shall not issue sweat equity shares for more than fifteen percent of the prevailing paid up equity share capital during a year or shares of the difficulty value of rupees five crores, whichever is higher.
Provided that the issuance of sweat equity shares within the Company shall not exceed twenty five percent, of the paid up equity capital of the company at any time
Provided further that a startup company, as defined in notification number GSR 180(E) dated 17th February, 2016 issued by the Department of industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, may issue sweat equity shares not exceeding one-half of its paid up capital upto five years from the date of its incorporation or registration.
Pricing of sweat equity share
1) The sweat equity shares to be issued shall be valued at a price determined by a registered value because the fair price giving justification for such valuation.
2) The valuation of property rights or of skills or value additions that sweat equity shares are to be issued shall be administered by a registered value, who shall provide a correct report addressed to the Board of directors with justification for such valuation.
3) A replica of gist alongside critical elements of the valuation report obtained under clause (1) and clause (2) shall be sent to the shareholders with the notice of the overall meeting.
Procedure for issue of sweat equity share
For issue of equity shares, the subsequent broad procedure must be followed:
1) Convene and hold a board meeting to think about the proposal of issue of sweat equity shares and to repair up the date, time, place and agenda for general meeting and to pass a special resolution for an equivalent .
2) Issue notices in writing to Shareholders for general meeting alongwith explanatory statement. The explanatory statement to be annexed to the notice for the overall meeting pursuant to section 102 of the Act must contain the subsequent particulars:
(a) The date of the board meeting at which the proposal for issue of sweat equity shares was approved;
(b) The explanations or justification for the issue;
(c) The category of shares under which sweat equity shares are intended to be issued;
(d) The total number of shares to be issued as sweat equity;
(e) The category or classes of directors or employees to whom such equity shares are to be issued;
(f) The principal terms and conditions on which sweat equity shares are to be issued, including basis of valuation;
(g) The period of time of association of such person with the company;
(h) The names of the administrators or employees to whom the sweat equity shares are going to be issued and their relationship with the promoter or/and Key Managerial Personnel;
(i) The worth at which the sweat equity shares are proposed to be issued;
(j) The consideration including consideration aside from cash, if any to be received for the sweat equity;
(k) The ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and the way it's proposed to be dealt with;
(l) A statement to the effect that the company shall conform to the applicable accounting standards; and
(m) Diluted Earnings Per Share pursuant to the issue of sweat equity shares , calculated in accordance with the applicable accounting standards.
3) Convene the overall Meeting and Pass a special resolution
4) File the resolution with MCA in Form No. MGT-14 within 30 days of passing the same;
5) Call the board meeting and Allot sweat equity shares within the meeting.
6) File Form No. PAS-3 within 30 days of passing of the Board resolution for allotting equity shares;
7) The company shall maintain a Register of sweat equity Shares in Form No. SH-3 and shall forthwith enter therein the particulars of sweat equity Shares issued.
8) The Register of sweat equity Shares shall be maintained at the registered office of the company or such other place because the Board may decide.
9) The entries within the register shall be authenticated by the company Secretary of the company or by the other person authorized by the Board for the purpose.
Q6) EXPLAIN THE BUY BACK OF SHARES
A6) Buy-back of shares may be a method of financial engineering. It are often described as a procedure which enables a company to go back to the holders of its shares and offer to get the shares held by them.
Buy-back helps a company by giving a far better use for its funds than reinvesting these funds within the same business at below average rates or getting into for unnecessary diversification or buying growth through costly acquisitions.
When a company has substantial cash resources, it's going to wish to buy its own shares from the market particularly when the prevailing rate of its shares within the market is far less than the value or what the company perceives to be its true value.
This mode of purchase is additionally called ‘Shares Repurchase’. a company can utilize its reserves to buy-back equity shares for the aim of extinguishing these or treasure operations. the previous option leads to reduction of the paid up capital, and consequently higher earnings and value per share. Naturally, the market value of equity goes up.
The reduction in share capital strengthens the promoter’s control and enhances the equity value for shareholders. within the latter option, companies buy their shares from open market and keep these as ‘treasury stock’.
This enables the promoters to strengthen their control over the shares bought back, with none investment of their own. just in case of treasure operations, there's a diversion of company’s funds to buy shares and reduction within the value of equity for the shareholders.
The main aim of shares repurchase could be reduce the amount of shares in circulation so as to enhance the share price, or just to return to the shareholders resources not needed by the company.
The shares repurchase could also be by way of purchase from the open market or by general offer to all or any shareholders made by the company to repurchase a fixed amount of its securities at pre-stated price.
Reasons for buy-back:
There are reasons why a company would choose buy-back:
1. To enhance shareholder value, since buy-back provides a way for utilizing the businesses surplus funds which have unattractive alternative investment options, and since a reduction within the capital base arising from buy-back would generally leads to higher earnings per share (EPS).
2. It's used as a defense mechanism, in an environment where the threat of corporate takeovers has become real. Buy-back provides a safeguard against hostile take-over by increasing promoter’s holdings.
3. It might enable corporate to shrink their equity base thereby injecting much needed flexibility.
4. It improves the intrinsic value of the shares by virtue of the reduced level of floating stock.
5. It might enable corporate to form use of the buy-back shares for subsequent use within the process of mergers and acquisitions without enlarging their capital base.
6. Buy-back of shares is used as a way of financial engineering.
7. It's used for signaling the effects of buy-back on the share price.
Financing aspects of buy-back:
Finance is the nerve center for the business activities and success is more depending on the higher and efficient management of funds and finance. so as to buy-back of shares and securities in large numbers, the company needs huge amounts of capital and funds which can be mobilized through one or more of the sources viz.
1. Internal sources
2. Sufficient cash position
3. Selling of temporary investment with the least possible loss
4. Raising of working capital needs
5. Raising cash by issuing fixed deposits
6. Raising by issue of debentures and loan bonds
7. Cash credit from commercial banks
8. Overdraft from commercial banks etc.
Benefits of buy back:
The benefits derived from share repurchase program are as follows:
1. Firms whose profitability was below their industry average enjoy greater share price growth after shares are repurchased than firms whose profitability was above their industry average.
2. Firms whose sales growth was below their industry average enjoy greater share price growth after shares are repurchased than firms whose sales growth was above their industry average.
3. Profitable and growth firms that repurchase shares provide a clear indication to the investors about the strengths of the company.
4. Repurchasing firms with debt ratios below but sales growth rates above their industry average experience substantially higher share price growth after repurchasing than firms with debt ratios above but sales growth below their industry average.
5. Repurchasing firms with profitability and debt ratios below their industry average demonstrate higher share price growth after repurchasing than firms with profitability and debt ratios above their industry average.
Drawbacks of buy back:
The shares repurchase is criticized for the following reasons:
1. This could enable unscrupulous promoters to use company’s money to boost their personal stakes.
2. It opens up possibilities for share price manipulation.
3. It could divert away the company’s funds from productive investments.
Legal provision on buy-back:
Buy-back enables the corporate to travel back to its shareholders and offers to get from them the share they held. With the introduction of sections 77A, 77A A and 77B within the Companies Act, 1956 through the companies (Amendment) Act, 1999, now the companies allowed buy-back shares.
Q7) EXPLAIN THE ALLOTMENT OF SHARES
A7) Sub-section 84 of Section 2 of the companies Act 2013, defines “Shares” as, “Share” means a share within the share capital of a company including stocks. Shares are considered as a kind of security. Securities is defined within the Sub-section 80 of Section 2 of the said Act, which refers to the definition of the securities as defined in clause (h) of section 2 of the Securities Contracts Act, 1956.
According to Section 44 of the said Act, the shares of any member during a company shall be movable property. It’s considered to be transferable within the manner provided by the articles of the company.
According to Section 45 of the said Act, it mandates on all companies having a share capital to make sure that the shares of the company shall be distinguished by a particular number. This requirement doesn't apply where a share is held by an individual whose name is entered as holder of beneficial interest within the records of depository.
Allotment of Securities
Offers for shares are basically made when application forms are supplied by the company. It's considered an allotment when an application is accepted. it's considered as an appropriation out of the previously un-appropriated capital of a company. Consequently where forfeited shares are re-issued, it's not an equivalent thing as an allotment.
For an allotment to be considered valid it shall suits the wants of the and principles of the law of contract that's regarding acceptance of offers.
Statutory restrictions on allotment
1. Minimum subscription and application money
According to Section 49 of Companies Act, 2013 the primary requisite of a legitimate allotment is that of minimum subscription. within the given prospectus of the company the amount of minimum subscription shall be stated when shares are offered to the public. No shares shall be allotted unless a specified amount has been subscribed and therefore the application money, which shall not be but the appeal that was held to achieve success, the decision of stock market was put aside and therefore the listing would be granted. The allotment would be saved.
2. Over-subscribed Prospectus
An allotment is valid when the permission of a stock exchange has been granted and therefore the prospectus being considered as over-subscribed portion of the cash received shall be sent back to the applicants within the given time frame.
Principles of allotment of shares
1. Allotment of shares by proper authority
Allotment is usually made by a resolution that consists of the Board of directors. But where the articles so provided, an allotment made by secretaries and treasures was held to be regular.
2. in the reasonable time
Allotment is basically made within a reasonable or specified period of time otherwise the application shall lapse. the required time-frame of six months between application and allotment is held to be not reasonable.
3. Shall be communicated
It is primary that there must be communication of the allotment to the applicant. Posting of a properly addressed and stamped letter of allotment is taken into account as a sufficient communication even if the letter were to be delayed or lost.
4. Absolute and unconditional
As per the terms and conditions of the applicant the allotment must be absolute and unconditional. Thus where a person applied for 400 shares on the condition that he would be appointed cashier of a replacement branch of the company, the Bombay high court held that he wasn't bound by any allotment unless he was so appointed.
Consequences of irregular allotment
1. Contract voidable:
An irregular allotment of shares is voidable at the option of the allottee. this feature is to be exercised by the allottee latest within 2 months after the holding of the statutory meeting by the company or where the company isn't required to carry a statutory meeting or where the allotment is made after the holding of the statutory meeting, within 2 months after the date of such allotment except when the shareholder has either expressly or impliedly agreed to the allotment [Sec. 71 (1)].
The option to avoid the allotment of shares is often exercised even after the company has gone into liquidation and is within the course of liquidation. it's not necessary that the allottee should commence actual legal proceedings within two months. it's enough for him to offer a notice to the company of his intention to revoke the allotment.
2. Directors’ liability:
Every director of the company, who is an officer in default, shall be liable to compensate the company and therefore the allottees for any loss, damages or costs which they'll sustain thereby, as long as proceedings for this purpose are started within 2 years from the date of allotment. [Sec. 71 (3)]
3. Fine:
In case of irregular allotment of shares, penalty is prescribed by the companies Act which can be imposed on the company and each director of the company liable for the default. These are:
(a) within the event of any contravention of the provisions [Sec. 69(2), (3) and (4)] regarding raising of minimum subscription; receiving 5% of par value of share application money; or keeping of application money during a schedule bank, every promoter, director or other one that is knowingly liable for such contravention shall be punishable with fine which can extend to? 50,000.
(b) If a company acts in contravention of provision [Sec. 70 (1) or (2)] regarding filing of statement in lieu of prospectus, the company, and each director of the company who willfully authorizes or permits the contravention, shall be punishable with fine which can reach Rs. 10,000.
Q8) WRITE A NOTE ON CALLS ON SHARES
A8) Reputed companies require the applicants to send the full value of the shares alongside the applications. this is often because, the companies Act doesn't prohibit companies to gather the whole amount at the time of issue itself. But the usual practice of the companies is to gather a particular percentage of the face value of the shares on application and allotment and therefore the balance in one or more installments referred to as calls.
Meaning and Definition of Calls on Shares
A call could also be defined as a demand made by the company on its shareholders to pay a part or the entire of the unpaid balance within a specified time. Lord Lindley says that the expression “Call” denotes both the demand for money and also the sum demanded.
The following points should be noted, during this context, in order that the reader can understand what a call really means.
1. Time for making the Call: The decisions are often made at any time during the life time of the company or during the course of winding up. During the life time, the call should be made by the Board of Directors and through the course of winding up, it should be made by the liquidator.
2. Obligatory: Each shareholder is obliged to pay the amount of call as and when the decision is formed. But, this liability arises only the decision is formed and not before.
3. Debt Due: As soon as a call is formed, the decision amount shall become a debt due from the shareholders to the company.
4. Consequences of Default: If a shareholder fails to pay the decision amount, the company can enforce payment of the quantity alongside interest or can forfeit the shares.
5. Calls and Other Payments: A call is different from other payments made by a shareholder. the quantity s paid on application and allotment aren't calls. Similarly, if a company requires the shareholders to pay the whole amount either on application or on allotment, it's not a call under this Act.
REQUISITIES OF A VALID CALL
Demand made by a company towards the payment useful of shares in pursuance of resolution of the Board and therefore the terms of the Articles is termed as call. However, money payable on application and allotment isn’t calls.
Payment made by a shareholder by installments isn't calls. A call is often made only after the minimum subscription is allotted and therefore the company is entitled to commence business. Call can also be made by a liquidator within the course of the winding up. Articles usually provide the rules regarding making of calls and these are to be strictly followed.
Section 36(2) of the companies Act provides that each one money payable by any member to the company under memorandum or articles shall be a debt due from him to the company. But this is often when a valid call has been made. Following are the essentials of a valid call:
1. Resolution at board’s meeting:
A call must be made under a resolution of the board of directors. The resolution must be passed by a competent board of directors, at a properly called and convened board’s meeting. so as to prevent trifling irregularities from invalidating a call, the articles usually contain a clause that some defect within the appointment or qualifications of the directors, won't render the decision invalid. If such a clause exists within the articles, calls made by the directors are going to be valid even if a number of them could also be subsequently found to be disqualified.
2. In accordance with the Articles:
A call must be made in accordance with the provisions of the Articles of Association of the corporate. If the articles are silent, Table A would apply which has the subsequent rules regarding the making of calls:
(i) The Board may, from time to time, make calls upon the members in respect of any moneys unpaid on their shares.
(ii) No call shall exceed one-fourth of the par value of the share.
(iii) No call shall be payable a minimum of but one month from the date fixed for the payment of the last preceding call.
(iv) Each member shall, subject to receiving a minimum of 14 days’ notice specifying the time and place of payment shall pay the amount called on his shares.
(v) A call could also be revoked or postponed at the discretion of the Board.
3. The amount, place and time of payment:
The resolution must state the amount, time and therefore the place of payment. If this is often not done, the resolution is defective and therefore the call made thereon shall be invalid.
4. Real and within the interest of the company:
The power to form calls is within the nature of a trust and must be exercised real by the administrators for the advantage of the company. If the decision is formed by the directors for his or her own personal advantage, the decision shall be taken to possess been improperly made. Shareholders, in such a case, can either prevent its enforcement by an injunction of the court, or compel the directors, by an order of the court, handy over the benefit received by them to the company.
5. Uniformly:
As per section 91, calls on shares must be made on a consistent basis, on all shares falling under an equivalent class. Hence, a call can't be made on some members only unless they constitute a separate class. If the directors make a turn the shareholders and pay nothing on their own shares in respect of such call, they're guilty of breach of trust.
If a call is invalidly made, a shareholder isn't sure to pay it. He can restrain the directors by injunction from forfeiting his shares for the non-payment of such a call or defend an action brought against him by the administrators to recover such call.
The joint holders of a share are jointly and severally susceptible to pay calls. Articles usually provide for charging from shareholders interest on calls behind . consistent with Article 16 of Table A, the speed of interest shall be 5% p.a. or such lower rate because the Board may determine.
Money payable on allotment isn't deemed to be a call but the articles may provide that the provisions concerning payment of calls also will apply to such cases.
Q9) EXPLAIN THE CALL IN ADVANCE
A9) It means demand by the company on its shareholders to pay the whole or a part of the balance remaining unpaid on each share. When shares are issued to the public, a part of the amount is paid with application and a part on the allotment of shares. the quantity paid on application and allotment isn't calls unless the Articles expressly recognize them as call. The unpaid amount on each share is named by the company in one or two installments. These installments are referred to as calls.
According to section 49 of the companies Act, 2013, states Calls on shares of same class are often made on uniform basis. Here the shares of an equivalent par value on which different amounts are paid-up shall not be deemed to fall into an equivalent class.
Whereas section 50 of the companies Act, 2013 says that a company may collect calls in advance if authorized by its articles. Detailed discussion for the same is done below.
(a) Rules for making calls: The Board of Directors alone is empowered to form a call. the facility can't be delegated to a director or to a committee of directors or to the other officer of the company (Section 179 of the businesses Act, 2013). A turn the shares falling under an equivalent class must be made on a consistent basis. The facility to form calls must be exercised real for the advantage of the company. Shares of an equivalent par value, on which different amounts are paid up, aren't deemed to fall into the ‘same class’. The Board’s resolution making the decision must specify the quantity of call per share and therefore the time allowed for its payment.
(b) Payment of calls in advance: We shall also skills payment in advance of calls is treated by a company. a company may, if so authorized by the articles, accept from any member the entire or a neighborhood of the amount remaining unpaid of any shares by him although no a part of that quantity has been called up [Section 50, the companies Act, 2013]. the quantity so received or accepted is described as payment in advance of calls. When a company receives payment in advance of calls, the results are going to be as follows:
If a company accepts the amount against the decision or calls which aren't made yet, the amount so received in advance is named Calls-In-Advance.
It may also happen just in case of partial or pro-rata allotment of shares when the company retains excess amount received on the appliance of shares beyond the allotment money.
We show the Calls-In-Advance within the Equity and Liabilities a part of the record under the top Current Liabilities and sub-head Other Current Liabilities.
Q10) WRITE A NOTE ON SHARE CERTIFICATES
A10) A share Certificate refers to a document which is issued by a company evidencing that a person named in such certificate is that the owner of the shares of Company as stated within the share certificate. The Indian Companies Act mandates companies for issuing share certificates post their incorporation.
Details to be provided in a share certificate
THE TIME FRAME FOR ISSUING SHARE CERTIFICATES
EVERY SHARE CERTIFICATE ISSUED IN INDIA SHOULD CONTAIN THE BELOW MENTIONED:
THE TIMEFRAME FOR ISSUING SHARE CERTIFICATES
After the incorporation of the company, the company must issue the share certificates within two months from incorporation date. Where additional shares are allotted to the new or existing shareholders, the share certificates should be issued within two months from allotment date.
In a case related to the share transfers, the share certificates should be issued to transferees within a period of 1 month of receipt of the instrument of transfer by such Company.
PROCEDURES FOR ISSUING SHARE CERTIFICATES
Board Meeting & Allotment of shares
A committee meeting is named for deciding about allotment of shares. The board of directors assigns a committee of directors referred to as allotment committee. The allotment committee would then decide about allotment of shares.
Once allotment committee provides its report with reference to allotment of shares, the Board then approves such report then passes the resolution for allotting shares to the respective applicants.
Once shares are allotted by the allotment committee, the company secretary sends the letters of allotment to the respective members. The allotment letter refers to a letter that notifies the applicant that the company has allotted a certain number of shares to him. This letter of allotment is taken into account because the share certificate till issuance of the final certificate.
Register of members
The company secretary then prepares a Register of members from the lists of application received and allotment sheets. Register of member provides information about the shareholders and details of the shares which are allotted to them.
Preparing and Printing Share Certificates
The company secretary must arrange the form of the share certificate according to the form suggested by the Articles of Association. The secretary must get the form printed along, side all the specified details as per the provisions of the governing law. The secretary must fill all the small print in share certificate with help of the application register and allotment sheets.
The secretary also must make sure that the share certificate is signed by two directors of the company. The secretary must sign the share certificate. The secretary also must make sure that the company’s seal and revenue stamp is affixed on each of the share certificates. Once certificates are so as , a board meeting is named for passing the resolution for issuing share certificates.
Intimation and dispatch of share certificate
The company secretary must inform all the shareholders that share certificates are ready and would be delivered in exchange of allotment letters and bankers receipt confirming payment of the allotment money. A public notice should be issued for the overall information of the members.
Members who surrender their allotment letters, share certificate are dispatched by the registered mail to them. The local shareholders as per their preference also can collect the share certificates personally from company’s registered office or from agency appointed for dispatching the share certificates.
Penalty for breach
Where a corporation makes any default in complying with provisions concerning issue of share certificates, such company would be punishable with a fine that wouldn’t be but INR 25,000 but could reach INR 5,00,000 and each defaulting officer of such company would be punishable with a fine that wouldn’t be but INR 10,000 but could reach INR 1,00,000.
PROVISIONS RELATINGTO ISSUE OF SHARE CERTIFICATES UNDER COMPANIES ACT 2013
Share Certificates which are duly issued and held in compliance with provisions of law are deemed to be evidence of title of the person to the shares contained therein. It’s for this reason that share certificates assume significant importance. Within the present write up, we've put forth the provisions concerning issue of Share Certificates as contained within the Companies Act, 2013(Act) read with the relevant draft rules.
SHARE CERTIFICATEAS EVIDENCE OF TITLE
Section 46 of the Act contains that a certificate, issued under the common seal of the company, specifying the shares held by any person, shall be clear evidence of the title of the person to such shares. Further, where a share is held in depository form, the record of the depository is that the clear evidence of the interest of the beneficial owner.
MANNER OF ISSUANCE OF SHARE CERTIFICATES
Notwithstanding anything contained within the Articles of Association of the company, share certificates need to be issued within the manner prescribed below:
• Checks before issue of Share Certificates
Share Certificates should be issued only pursuant to a resolution of the Board of Directors.
Letter of allotment must be surrendered to the company except in cases of issues against letters of acceptance or of renunciation, or in cases of issue of bonus shares.
just in case the letter of allotment is lost or destroyed, the Board may impose such reasonable terms, if any, on seek supporting evidence and indemnity and therefore the payment of out-of-pocket expenses incurred by the company in investigating evidence, as it may think fit.
• Format of share certificate
Every certificate of share or shares shall be in Form No. 4.1 or as near thereto as possible and shall specify the name(s) of the person(s) in whose favor the certificate is issued, the shares to which it relates and therefore the amount paid-up thereon.
Every Share Certificate has got to be issued under the common seal of the company, which shall be affixed in presence of and signed by directors/authorized representatives within the manner prescribed below:
Share certificates are often digitally signed by a director by electronic means or the signature of the director maybe printed on the share certificate as a facsimile signature by means of any machine, equipment or other mechanical means like engraving in metal or lithography, but not by means of a rubber stamp. However, the director concerned shall be personally responsible for permitting the affixation of his signature as aforesaid and therefore the safe custody of any machine, equipment or other material used for the purpose.
• Entry in register of members
Particulars of each share certificate issued as above shall be entered within the Register of Members maintained in accordance with section 88 alongside the name(s) of person(s) to whom it's been issued, indicating the date of issue.
ISSUANCE OFRENEWED/DUPLICATE SHARE CERTIFICATES
A shareholder shall carefully preserve and store his certificate as he shall not be issued a replica unless and until it he shows that the first certificate is lost, damaged or destroyed by any means and is surrendered to the company.
CIRCUMSTANCES INWHICH DUPLICATE SHARE CERTIFICATE MAY BE ISSUED
A duplicate certificate of shares may be issued, if—
1. Share certificate is proved to have been lost or destroyed; or
2. Has been defaced, mutilated or torn or old, decrepit, worn out, or
3. Where shares are sub-divided or consolidated, or
4. Where the cages on the reverse for recording transfers are duly utilized
MANNER OF ISSUANCE OF DUPLICATE SHARE CERTIFICATES
1. Where original certificate is lost or destroyed –
• Prior consent of Board to be obtained for issuance of duplicate share certificate.
• Company to collect fees not exceeding rupees fifty per certificate and impose such reasonable terms, as the Board thinks fit, like furnishing supporting evidence and indemnity and therefore the payment of out-of-pocket expenses incurred by the company in investigating the evidence produced.
• The words “Duplicate” and “duplicate issued in lieu of share certificate No......” to be stated prominently on the face of the share certificate and also recorded within the Register maintained for the aim.
Altogether other cases -
The certificate in lieu of which a replica is required to be issued should be surrendered to the company.
the company may charge such fee because the Board thinks fit, not exceeding Rs. 20/- per certificate, issued on splitting or consolidation of share certificates or in replacement of share certificates that are defaced, mutilated, torn or old, decrepit or worn out.
The words ““Issued in lieu of share certificate No..... sub-divided/replaced/on consolidation” shall be stated on the face of the duplicate share certificate and also recorded within the Register maintained for the aim.
a company may replace all the prevailing certificates by new certificates upon sub-division or consolidation of shares or merger or demerger or any reconstitution without requiring old certificates to be surrendered subject to compliance with other rules discussed above.
REGISTER OF RENEWED AND DUPLICATE SHARE CERTIFICATES
Register of renewed and duplicate share certificates to be maintained in Form No. 4.2, mentioning therein following details:
• 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
• Necessary changes indicated within the Register of Members by suitable cross-references within the “Remarks” column.
• Such register shall be kept at the registered office of the company or at such other place where the Register of Members is kept.
• The register shall be preserved permanently and shall be kept within the custody of the secretary of the company or any other person authorized by the Board for the purpose.
• All entries made within the Register of Renewed and Duplicate Share Certificates shall be authenticated by the secretary or such other person as could also be authorized by the Board for purposes of sealing and signing the share certificates.
Q11) EXPLAIN THE SHARE CAPITAL IN DETAIL
A11) The term capital usually means a specific amount of cash with which a business is started. In Indian Companies Act, it's been used in different senses in various parts of the Act, but generally it means the money subscribed pursuant to Memorandum of Association of the company. Capital, in fact, represents the assets with which the undertaking is carried on.
The sum total of nominal value of shares of a company is understood as its share capital. in case of companies, the terms ‘capital’ and ‘share capital’ are held to be synonymous. Capital to be stated within the Memorandum of Association and Articles of Association of the company.
Structure of Share Capital:
The share capital of company could also be of the subsequent types:
1. Registered, Authorized or Nominal Capital:
The Memorandum of Association of each company has got to specify the amount of capital with which it wants to be registered. The capital so stated is named Registered, Authorized or Nominal Capital. The Registered Capital is the maximum amount of share capital which a company can raise by way of public subscription.
2. Issued Capital:
The company may not issue the whole authorized capital at once. It goes on raising the capital as and when the need for extra fund is felt. So, issued capital is that a part of Authorized/Registered or Nominal Capital which is obtainable to the public for subscription within the form of shares.
3. Unissued Capital:
The balance of nominal capital remaining to be issued is named Unissued Capital.
4. Subscribed Capital:
It is that part of “issued capital” that applications are received from the public. The subscribed capital is allotted to the respective subscribers as per resolution passed by the directors of the company.
5. Called up Capital:
It is that a part of subscribed capital which has been called up by the company. a company doesn't out in once the full amount on each of the shares it's allotted and thus , calls up only such amount as it needs.
6. Uncalled up Capital:
It is the uncalled portion of the allotted capital and represents contingent liability of the shareholders on the shares.
7. Paid up Capital:
It is that a part of called up capital against which payment has been received from the members on their respective shares in response to the calls made by the company.
8. Reserve Capital or Reserve Liability:
By Reserve Capital we mean that amount which isn't callable by the company except within the event of the company being wound up. the company cannot demand the payment of cash on the shares thereto extent during its life time. Reserve capital could also be created by means of a special resolution gone by the company in its General Meeting by three-fourths majority of those voting on it.
When once the Reserve Capital has been so created the company cannot alter its Articles of Association so on make the reserve liability available at any time. The Reserve Capital can't be charged as security for loans by the directors. It can't be became ordinary capital without the order of the court. It can't be cancelled at the time of reduction of capital.
9. Fixed Capital:
The fixed capital of a company is what the company retains within the shape of fixed assets like land and buildings, plant and machinery, furniture, etc.
10. Circulating Capital:
The circulating capital may be a a part of subscribed capital which is circulated in business in the form of using goods or other assets like book debts, bill receivables, cash, bank balance, etc.