Share Capital and Debentures | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


                           
   
 
 
SHARE CAPITAL AND DEBENTURES 
 
PART A: SHARE CAPITAL 
• CLASSIFICATION OF SHARE CAPITAL 
The share capital of a company can be classified as : 
Nominal, Authorised or Registered Capital 
 
Issued Capital  
 
Subscribed Capital 
 
 
           Called Up Capital Uncalled Capital 
 
 
Paid-up Capital Unpaid Capital 
 
• SHARE  

 Definition and Meaning of Share: Section 2(84) of the Companies Act, 2013 
defines the term "share". As per this, share means a share in the share capital of 
a company and includes stock.  

 By its nature, a share is not a sum of money but a bundle of rights and 
liabilities. A share is a right to participate in the profits of a company, while it is a 
going concern and declares dividend; and a right to participate in the assets of 
the company, when it is wound up.  

 The shares or debentures or other interests of any member in a company shall 
be movable property transferable in the manner provided by the articles of the 
company [Section 44 of the Companies Act, 2013]. Every share in a company 
having a share capital, shall be distinguished by its distinctive number [Section 
45]. This shall not apply to a share held by a person whose name is entered as 
holder of beneficial interest in such share in the records of a depository. 

 Basic requirement (Section 45 and 46): Physical entitlement to a particular 
portion of share capital is prima facie evidenced by way of a share certificate 
which has to be 
1.   Distinctively numbered; & 
2.   To be issued under common seal of the company or signed by two directors 
or by a director and the Company Secretary, wherever the company has 
appointed a Company Secretary. 

 Demat—Now-a-days most of the listed shares are held in electronic format. Even 
banks and financial institutions now insist for demat of securities for charge 
creation to facility corroboration with central registry for loans and mortgages. 
Physical securities are mostly limited to private limited companies and closely 
held companies.  
At present there are two depositories in India: NSDL and CDSL with various 
depository participants (DPs) linked to them. Dematerialised securities are held 
by investors in their respective accounts with the DP. The DP keeps a track of 
transfer, transmission, charge creation etc. There are necessary enabling legal 
enactments to facilitate all these procedures. 
Page 2


                           
   
 
 
SHARE CAPITAL AND DEBENTURES 
 
PART A: SHARE CAPITAL 
• CLASSIFICATION OF SHARE CAPITAL 
The share capital of a company can be classified as : 
Nominal, Authorised or Registered Capital 
 
Issued Capital  
 
Subscribed Capital 
 
 
           Called Up Capital Uncalled Capital 
 
 
Paid-up Capital Unpaid Capital 
 
• SHARE  

 Definition and Meaning of Share: Section 2(84) of the Companies Act, 2013 
defines the term "share". As per this, share means a share in the share capital of 
a company and includes stock.  

 By its nature, a share is not a sum of money but a bundle of rights and 
liabilities. A share is a right to participate in the profits of a company, while it is a 
going concern and declares dividend; and a right to participate in the assets of 
the company, when it is wound up.  

 The shares or debentures or other interests of any member in a company shall 
be movable property transferable in the manner provided by the articles of the 
company [Section 44 of the Companies Act, 2013]. Every share in a company 
having a share capital, shall be distinguished by its distinctive number [Section 
45]. This shall not apply to a share held by a person whose name is entered as 
holder of beneficial interest in such share in the records of a depository. 

 Basic requirement (Section 45 and 46): Physical entitlement to a particular 
portion of share capital is prima facie evidenced by way of a share certificate 
which has to be 
1.   Distinctively numbered; & 
2.   To be issued under common seal of the company or signed by two directors 
or by a director and the Company Secretary, wherever the company has 
appointed a Company Secretary. 

 Demat—Now-a-days most of the listed shares are held in electronic format. Even 
banks and financial institutions now insist for demat of securities for charge 
creation to facility corroboration with central registry for loans and mortgages. 
Physical securities are mostly limited to private limited companies and closely 
held companies.  
At present there are two depositories in India: NSDL and CDSL with various 
depository participants (DPs) linked to them. Dematerialised securities are held 
by investors in their respective accounts with the DP. The DP keeps a track of 
transfer, transmission, charge creation etc. There are necessary enabling legal 
enactments to facilitate all these procedures. 
                           
• KINDS OF SHARE CAPITAL (Section 43) 
 
Preference Share    Equity Share 
 
With voting rights   With differential rights as 
to dividend, voting or 
otherwise 
 
 
Cumulative Convertible Redeemable 
Non-Cumulative (mandatorily/ 
Participatory Optional/  Irredeemable      
Non-participatory Partially/fully) 
     - Non-convertible         
• PREFERENCE SHARE  

 Meaning: A preference share is a share which fulfils the following two conditions: 
   It carries preferential right in respect of payment of dividend; and  
   It also carries preferential right in regard to repayment of capital.  
In simple terms, preference share capital must have priority both regards to 
dividend as well as capital.  

 Issue of preference shares: Section 55 of the Companies Act, 2013 read with 
Companies (Share Capital and Debentures) Rules, 2014 provides that a 
company, if so authorized by its articles of association, may issue 
redeemable preference shares, subject to the following conditions :  
(a)  The issue of such shares has been authorized by passing a special 
resolution in the general meeting of the company;  
(b) The company, at the time of such issue of preference shares, has no 
subsisting default in the redemption of preference shares issued either 
before or after the commencement of this Act or in payment of dividend due 
on any preference shares; and  
(c)  The company cannot issue preference shares which is redeemable after the 
expiry of 20 years from the date of its issue. However, a company engaged 
in the setting up and dealing with of infrastructural projects, as defined in 
Schedule VI to this Act, may issue preference shares for a period exceeding 
20 years but not exceeding 30 years, subject to the redemption of a 
minimum ten percent of such preference shares per year from the twenty 
first year onwards or earlier, on proportionate basis, at the option of the 
preference shareholders.  
   It may be noted that a company cannot issue irredeemable preference 
shares.  

 Redemption of preference shares: A company can redeem its redeemable 
preference shares subject to the following conditions:-  
1.   Shares are fully paid-up;  
2.   Share may be redeemed only out of the profits available for distribution as 
dividend or out of proceeds of a fresh issue of shares made for the purpose 
of redemption;  
3.   Where the shares are redeemed out of the profits available for distribution 
as dividend, a sum equal to the nominal amount of the shares redeemed 
shall be transferred out of profits to the Capital Redemption Reserve 
Account, which can be utilized only for the purpose of issuing fully-paid 
On the basis of 
convertibility of 
shares 
On the 
basis of 
dividend 
payout 
On the basis 
of 
redeemability
Page 3


                           
   
 
 
SHARE CAPITAL AND DEBENTURES 
 
PART A: SHARE CAPITAL 
• CLASSIFICATION OF SHARE CAPITAL 
The share capital of a company can be classified as : 
Nominal, Authorised or Registered Capital 
 
Issued Capital  
 
Subscribed Capital 
 
 
           Called Up Capital Uncalled Capital 
 
 
Paid-up Capital Unpaid Capital 
 
• SHARE  

 Definition and Meaning of Share: Section 2(84) of the Companies Act, 2013 
defines the term "share". As per this, share means a share in the share capital of 
a company and includes stock.  

 By its nature, a share is not a sum of money but a bundle of rights and 
liabilities. A share is a right to participate in the profits of a company, while it is a 
going concern and declares dividend; and a right to participate in the assets of 
the company, when it is wound up.  

 The shares or debentures or other interests of any member in a company shall 
be movable property transferable in the manner provided by the articles of the 
company [Section 44 of the Companies Act, 2013]. Every share in a company 
having a share capital, shall be distinguished by its distinctive number [Section 
45]. This shall not apply to a share held by a person whose name is entered as 
holder of beneficial interest in such share in the records of a depository. 

 Basic requirement (Section 45 and 46): Physical entitlement to a particular 
portion of share capital is prima facie evidenced by way of a share certificate 
which has to be 
1.   Distinctively numbered; & 
2.   To be issued under common seal of the company or signed by two directors 
or by a director and the Company Secretary, wherever the company has 
appointed a Company Secretary. 

 Demat—Now-a-days most of the listed shares are held in electronic format. Even 
banks and financial institutions now insist for demat of securities for charge 
creation to facility corroboration with central registry for loans and mortgages. 
Physical securities are mostly limited to private limited companies and closely 
held companies.  
At present there are two depositories in India: NSDL and CDSL with various 
depository participants (DPs) linked to them. Dematerialised securities are held 
by investors in their respective accounts with the DP. The DP keeps a track of 
transfer, transmission, charge creation etc. There are necessary enabling legal 
enactments to facilitate all these procedures. 
                           
• KINDS OF SHARE CAPITAL (Section 43) 
 
Preference Share    Equity Share 
 
With voting rights   With differential rights as 
to dividend, voting or 
otherwise 
 
 
Cumulative Convertible Redeemable 
Non-Cumulative (mandatorily/ 
Participatory Optional/  Irredeemable      
Non-participatory Partially/fully) 
     - Non-convertible         
• PREFERENCE SHARE  

 Meaning: A preference share is a share which fulfils the following two conditions: 
   It carries preferential right in respect of payment of dividend; and  
   It also carries preferential right in regard to repayment of capital.  
In simple terms, preference share capital must have priority both regards to 
dividend as well as capital.  

 Issue of preference shares: Section 55 of the Companies Act, 2013 read with 
Companies (Share Capital and Debentures) Rules, 2014 provides that a 
company, if so authorized by its articles of association, may issue 
redeemable preference shares, subject to the following conditions :  
(a)  The issue of such shares has been authorized by passing a special 
resolution in the general meeting of the company;  
(b) The company, at the time of such issue of preference shares, has no 
subsisting default in the redemption of preference shares issued either 
before or after the commencement of this Act or in payment of dividend due 
on any preference shares; and  
(c)  The company cannot issue preference shares which is redeemable after the 
expiry of 20 years from the date of its issue. However, a company engaged 
in the setting up and dealing with of infrastructural projects, as defined in 
Schedule VI to this Act, may issue preference shares for a period exceeding 
20 years but not exceeding 30 years, subject to the redemption of a 
minimum ten percent of such preference shares per year from the twenty 
first year onwards or earlier, on proportionate basis, at the option of the 
preference shareholders.  
   It may be noted that a company cannot issue irredeemable preference 
shares.  

 Redemption of preference shares: A company can redeem its redeemable 
preference shares subject to the following conditions:-  
1.   Shares are fully paid-up;  
2.   Share may be redeemed only out of the profits available for distribution as 
dividend or out of proceeds of a fresh issue of shares made for the purpose 
of redemption;  
3.   Where the shares are redeemed out of the profits available for distribution 
as dividend, a sum equal to the nominal amount of the shares redeemed 
shall be transferred out of profits to the Capital Redemption Reserve 
Account, which can be utilized only for the purpose of issuing fully-paid 
On the basis of 
convertibility of 
shares 
On the 
basis of 
dividend 
payout 
On the basis 
of 
redeemability
                           
bonus shares, otherwise it shall be deemed to be reduction of share capital; 
and  
4.   If premium is payable on redemption, it must have been provided for out of 
profits or out of company's security premium account. However, such class 
of companies as may be prescribed whose financial statements comply with 
Accounting Standards prescribed for such class of companies cannot utilize 
securities premium account for providing premium payable on redemption 
of preference shares or debentures.  
 
• VARIATIONS OF SHAREHOLDERS‘ RIGHTS [SECTION 48] 
1. Where a share capital of the company is divided into different classes of shares, 
the rights attached to the shares of any class may be varied with the consent 
in writing of the holders of not less than three-fourths of the issued shares 
of that class or by means of a special resolution passed at a separate 
meeting of the holders of the issued shares of that class,  
2. Provided that if variation by one class of shareholders affects the rights of any 
other class of shareholders, the consent of three-fourths of such other class 
of shareholders shall also be obtained and the provisions of this section shall 
apply to such variation. 
3.  Where the holders of not less than 10 % of the issued shares of a class did not 
consent to such variation or vote in favour of the special resolution for the 
variation, they may apply to the Tribunal to have the variation cancelled, and 
where any such application is made, the variation shall not have effect unless 
and until it is confirmed by the Tribunal:  
4. The decision of the Tribunal on any application shall be binding on the 
shareholders. 
 
• ISSUE OF SHARES AT A PREMIUM [SECTION 52]  

 A company may issue shares at a premium when it is able to sell them at a price 
above par or nominal value, irrespective of the fact whether the shares are listed 
on Stock Exchange or not. The rate of premium will be decided by the Board of 
Directors of a Company. Section 52 of the Companies Act, 2013 deals with the 
concept of share or securities premium.  

 The premium cannot be treated as profit and as such the amount of premium is 
not available for distribution as dividend. 

 The amount of premium, whether received in cash or in kind, must be kept in a 
separate account, known as the "Securities Premium Account".  

 The amount of share premium is to be maintained with the same sanctity as the 
share capital.  

 The securities premium account cannot be treated as free reserves at it is in the 
nature of capital reserve. [Section 52(1)]. 
 
In accordance with the provisions of Section 52(2) of the Act, the securities 
premium can be utilized only for the following purposes :- 
(a)  Issuing fully — paid bonus shares to members;  
(b)  Writing off the balance of the preliminary expenses of the company;  
(c)  Writing off commission paid or discount allowed, or the expenses 
incurred on issue of shares or debentures of the company;  
(d)  For providing for the premium payable on redemption of any 
redeemable preference shares or debentures of the Company; and  
(e)  For the purchase of its own shares or other specified securities u/s 68.  
 
Page 4


                           
   
 
 
SHARE CAPITAL AND DEBENTURES 
 
PART A: SHARE CAPITAL 
• CLASSIFICATION OF SHARE CAPITAL 
The share capital of a company can be classified as : 
Nominal, Authorised or Registered Capital 
 
Issued Capital  
 
Subscribed Capital 
 
 
           Called Up Capital Uncalled Capital 
 
 
Paid-up Capital Unpaid Capital 
 
• SHARE  

 Definition and Meaning of Share: Section 2(84) of the Companies Act, 2013 
defines the term "share". As per this, share means a share in the share capital of 
a company and includes stock.  

 By its nature, a share is not a sum of money but a bundle of rights and 
liabilities. A share is a right to participate in the profits of a company, while it is a 
going concern and declares dividend; and a right to participate in the assets of 
the company, when it is wound up.  

 The shares or debentures or other interests of any member in a company shall 
be movable property transferable in the manner provided by the articles of the 
company [Section 44 of the Companies Act, 2013]. Every share in a company 
having a share capital, shall be distinguished by its distinctive number [Section 
45]. This shall not apply to a share held by a person whose name is entered as 
holder of beneficial interest in such share in the records of a depository. 

 Basic requirement (Section 45 and 46): Physical entitlement to a particular 
portion of share capital is prima facie evidenced by way of a share certificate 
which has to be 
1.   Distinctively numbered; & 
2.   To be issued under common seal of the company or signed by two directors 
or by a director and the Company Secretary, wherever the company has 
appointed a Company Secretary. 

 Demat—Now-a-days most of the listed shares are held in electronic format. Even 
banks and financial institutions now insist for demat of securities for charge 
creation to facility corroboration with central registry for loans and mortgages. 
Physical securities are mostly limited to private limited companies and closely 
held companies.  
At present there are two depositories in India: NSDL and CDSL with various 
depository participants (DPs) linked to them. Dematerialised securities are held 
by investors in their respective accounts with the DP. The DP keeps a track of 
transfer, transmission, charge creation etc. There are necessary enabling legal 
enactments to facilitate all these procedures. 
                           
• KINDS OF SHARE CAPITAL (Section 43) 
 
Preference Share    Equity Share 
 
With voting rights   With differential rights as 
to dividend, voting or 
otherwise 
 
 
Cumulative Convertible Redeemable 
Non-Cumulative (mandatorily/ 
Participatory Optional/  Irredeemable      
Non-participatory Partially/fully) 
     - Non-convertible         
• PREFERENCE SHARE  

 Meaning: A preference share is a share which fulfils the following two conditions: 
   It carries preferential right in respect of payment of dividend; and  
   It also carries preferential right in regard to repayment of capital.  
In simple terms, preference share capital must have priority both regards to 
dividend as well as capital.  

 Issue of preference shares: Section 55 of the Companies Act, 2013 read with 
Companies (Share Capital and Debentures) Rules, 2014 provides that a 
company, if so authorized by its articles of association, may issue 
redeemable preference shares, subject to the following conditions :  
(a)  The issue of such shares has been authorized by passing a special 
resolution in the general meeting of the company;  
(b) The company, at the time of such issue of preference shares, has no 
subsisting default in the redemption of preference shares issued either 
before or after the commencement of this Act or in payment of dividend due 
on any preference shares; and  
(c)  The company cannot issue preference shares which is redeemable after the 
expiry of 20 years from the date of its issue. However, a company engaged 
in the setting up and dealing with of infrastructural projects, as defined in 
Schedule VI to this Act, may issue preference shares for a period exceeding 
20 years but not exceeding 30 years, subject to the redemption of a 
minimum ten percent of such preference shares per year from the twenty 
first year onwards or earlier, on proportionate basis, at the option of the 
preference shareholders.  
   It may be noted that a company cannot issue irredeemable preference 
shares.  

 Redemption of preference shares: A company can redeem its redeemable 
preference shares subject to the following conditions:-  
1.   Shares are fully paid-up;  
2.   Share may be redeemed only out of the profits available for distribution as 
dividend or out of proceeds of a fresh issue of shares made for the purpose 
of redemption;  
3.   Where the shares are redeemed out of the profits available for distribution 
as dividend, a sum equal to the nominal amount of the shares redeemed 
shall be transferred out of profits to the Capital Redemption Reserve 
Account, which can be utilized only for the purpose of issuing fully-paid 
On the basis of 
convertibility of 
shares 
On the 
basis of 
dividend 
payout 
On the basis 
of 
redeemability
                           
bonus shares, otherwise it shall be deemed to be reduction of share capital; 
and  
4.   If premium is payable on redemption, it must have been provided for out of 
profits or out of company's security premium account. However, such class 
of companies as may be prescribed whose financial statements comply with 
Accounting Standards prescribed for such class of companies cannot utilize 
securities premium account for providing premium payable on redemption 
of preference shares or debentures.  
 
• VARIATIONS OF SHAREHOLDERS‘ RIGHTS [SECTION 48] 
1. Where a share capital of the company is divided into different classes of shares, 
the rights attached to the shares of any class may be varied with the consent 
in writing of the holders of not less than three-fourths of the issued shares 
of that class or by means of a special resolution passed at a separate 
meeting of the holders of the issued shares of that class,  
2. Provided that if variation by one class of shareholders affects the rights of any 
other class of shareholders, the consent of three-fourths of such other class 
of shareholders shall also be obtained and the provisions of this section shall 
apply to such variation. 
3.  Where the holders of not less than 10 % of the issued shares of a class did not 
consent to such variation or vote in favour of the special resolution for the 
variation, they may apply to the Tribunal to have the variation cancelled, and 
where any such application is made, the variation shall not have effect unless 
and until it is confirmed by the Tribunal:  
4. The decision of the Tribunal on any application shall be binding on the 
shareholders. 
 
• ISSUE OF SHARES AT A PREMIUM [SECTION 52]  

 A company may issue shares at a premium when it is able to sell them at a price 
above par or nominal value, irrespective of the fact whether the shares are listed 
on Stock Exchange or not. The rate of premium will be decided by the Board of 
Directors of a Company. Section 52 of the Companies Act, 2013 deals with the 
concept of share or securities premium.  

 The premium cannot be treated as profit and as such the amount of premium is 
not available for distribution as dividend. 

 The amount of premium, whether received in cash or in kind, must be kept in a 
separate account, known as the "Securities Premium Account".  

 The amount of share premium is to be maintained with the same sanctity as the 
share capital.  

 The securities premium account cannot be treated as free reserves at it is in the 
nature of capital reserve. [Section 52(1)]. 
 
In accordance with the provisions of Section 52(2) of the Act, the securities 
premium can be utilized only for the following purposes :- 
(a)  Issuing fully — paid bonus shares to members;  
(b)  Writing off the balance of the preliminary expenses of the company;  
(c)  Writing off commission paid or discount allowed, or the expenses 
incurred on issue of shares or debentures of the company;  
(d)  For providing for the premium payable on redemption of any 
redeemable preference shares or debentures of the Company; and  
(e)  For the purchase of its own shares or other specified securities u/s 68.  
 
                           

 However, certain class of companies, as may be prescribed and whose 
financial statement comply with the accounting standards prescribed for 
such class of companies, can utilize the share premium account only for 
the purposes stated below :  
(a)  Issuing fully — paid bonus shares to members;  
(b)  Writing off commission paid or discount allowed, or the expenses incurred 
on issue of equity shares of the company;  
(c)  For the purchase of its own shares or other specified securities u/s 68.  

 It may be noted that if a company proposes to apply share premium for any 
purpose other than those mentioned above, it must then comply with the 
requirements of the Act with respect to reduction of share capital.  
 
• ISSUE OF SHARES AT A DISCOUNT [SECTION 53] 

 Section 53 prohibits a company to issue shares at discount except in the case of 
issue of sweat equity shares. Any share issued by a company at a discount shall 
be void. 

 However, a company may issue shares at a discount to its creditors when its 
debt is converted into shares in pursuance of any statutory resolution plan or 
debt restructuring scheme in accordance with any guidelines or directions or 
regulations specified by the Reserve Bank of India under the Reserve Bank of 
India Act, 1934 or the Banking (Regulation) Act, 1949 (Notification dated 3
rd
 
Jan, 2018) 

 In case of default, the company shall be punishable with fine which shall not be 
less than one lakh rupees but which may extend to five lakh rupees and every 
officer of the company who is in default shall be punishable with imprisonment for 
a term which may extend to six months or with fine which shall not be less than 
one lakh rupees but which may extend to five lakh rupees, or with both.  
 
• SWEAT EQUITY SHARES [SECTION 54]  

 The concept of 'sweat equity shares' is defined in Section 2(88) of the 
Companies Act, 2013. As per this, 'Sweat Equity Shares' means such equity 
shares as are issued by a company to its directors or employees at a discount or 
for consideration other than cash, for providing their know — how or making 
available rights in the nature of intellectual property rights, or value addition, by 
whatever name called. 

 Here the term ''Employee'' means: 
(a)    a permanent employee of the company who has been working in India or 
outside India, for at least 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 holding company of the company; 

 The expression 'Value additions' means actual or anticipated economic benefits 
derived or to be derived by the company from an expert or a professional for 
providing knowhow or making available rights in the nature of intellectual property 
rights, by such person to whom sweat equity is being issued for which the 
consideration is not paid or included in the normal remuneration payable under 
the contract of employment, in the case of an employee. 
 

 Conditions: 
1.  The shares must be of class already issued;  
2.  At least one year must have elapsed since the Company had commenced 
business;  
Page 5


                           
   
 
 
SHARE CAPITAL AND DEBENTURES 
 
PART A: SHARE CAPITAL 
• CLASSIFICATION OF SHARE CAPITAL 
The share capital of a company can be classified as : 
Nominal, Authorised or Registered Capital 
 
Issued Capital  
 
Subscribed Capital 
 
 
           Called Up Capital Uncalled Capital 
 
 
Paid-up Capital Unpaid Capital 
 
• SHARE  

 Definition and Meaning of Share: Section 2(84) of the Companies Act, 2013 
defines the term "share". As per this, share means a share in the share capital of 
a company and includes stock.  

 By its nature, a share is not a sum of money but a bundle of rights and 
liabilities. A share is a right to participate in the profits of a company, while it is a 
going concern and declares dividend; and a right to participate in the assets of 
the company, when it is wound up.  

 The shares or debentures or other interests of any member in a company shall 
be movable property transferable in the manner provided by the articles of the 
company [Section 44 of the Companies Act, 2013]. Every share in a company 
having a share capital, shall be distinguished by its distinctive number [Section 
45]. This shall not apply to a share held by a person whose name is entered as 
holder of beneficial interest in such share in the records of a depository. 

 Basic requirement (Section 45 and 46): Physical entitlement to a particular 
portion of share capital is prima facie evidenced by way of a share certificate 
which has to be 
1.   Distinctively numbered; & 
2.   To be issued under common seal of the company or signed by two directors 
or by a director and the Company Secretary, wherever the company has 
appointed a Company Secretary. 

 Demat—Now-a-days most of the listed shares are held in electronic format. Even 
banks and financial institutions now insist for demat of securities for charge 
creation to facility corroboration with central registry for loans and mortgages. 
Physical securities are mostly limited to private limited companies and closely 
held companies.  
At present there are two depositories in India: NSDL and CDSL with various 
depository participants (DPs) linked to them. Dematerialised securities are held 
by investors in their respective accounts with the DP. The DP keeps a track of 
transfer, transmission, charge creation etc. There are necessary enabling legal 
enactments to facilitate all these procedures. 
                           
• KINDS OF SHARE CAPITAL (Section 43) 
 
Preference Share    Equity Share 
 
With voting rights   With differential rights as 
to dividend, voting or 
otherwise 
 
 
Cumulative Convertible Redeemable 
Non-Cumulative (mandatorily/ 
Participatory Optional/  Irredeemable      
Non-participatory Partially/fully) 
     - Non-convertible         
• PREFERENCE SHARE  

 Meaning: A preference share is a share which fulfils the following two conditions: 
   It carries preferential right in respect of payment of dividend; and  
   It also carries preferential right in regard to repayment of capital.  
In simple terms, preference share capital must have priority both regards to 
dividend as well as capital.  

 Issue of preference shares: Section 55 of the Companies Act, 2013 read with 
Companies (Share Capital and Debentures) Rules, 2014 provides that a 
company, if so authorized by its articles of association, may issue 
redeemable preference shares, subject to the following conditions :  
(a)  The issue of such shares has been authorized by passing a special 
resolution in the general meeting of the company;  
(b) The company, at the time of such issue of preference shares, has no 
subsisting default in the redemption of preference shares issued either 
before or after the commencement of this Act or in payment of dividend due 
on any preference shares; and  
(c)  The company cannot issue preference shares which is redeemable after the 
expiry of 20 years from the date of its issue. However, a company engaged 
in the setting up and dealing with of infrastructural projects, as defined in 
Schedule VI to this Act, may issue preference shares for a period exceeding 
20 years but not exceeding 30 years, subject to the redemption of a 
minimum ten percent of such preference shares per year from the twenty 
first year onwards or earlier, on proportionate basis, at the option of the 
preference shareholders.  
   It may be noted that a company cannot issue irredeemable preference 
shares.  

 Redemption of preference shares: A company can redeem its redeemable 
preference shares subject to the following conditions:-  
1.   Shares are fully paid-up;  
2.   Share may be redeemed only out of the profits available for distribution as 
dividend or out of proceeds of a fresh issue of shares made for the purpose 
of redemption;  
3.   Where the shares are redeemed out of the profits available for distribution 
as dividend, a sum equal to the nominal amount of the shares redeemed 
shall be transferred out of profits to the Capital Redemption Reserve 
Account, which can be utilized only for the purpose of issuing fully-paid 
On the basis of 
convertibility of 
shares 
On the 
basis of 
dividend 
payout 
On the basis 
of 
redeemability
                           
bonus shares, otherwise it shall be deemed to be reduction of share capital; 
and  
4.   If premium is payable on redemption, it must have been provided for out of 
profits or out of company's security premium account. However, such class 
of companies as may be prescribed whose financial statements comply with 
Accounting Standards prescribed for such class of companies cannot utilize 
securities premium account for providing premium payable on redemption 
of preference shares or debentures.  
 
• VARIATIONS OF SHAREHOLDERS‘ RIGHTS [SECTION 48] 
1. Where a share capital of the company is divided into different classes of shares, 
the rights attached to the shares of any class may be varied with the consent 
in writing of the holders of not less than three-fourths of the issued shares 
of that class or by means of a special resolution passed at a separate 
meeting of the holders of the issued shares of that class,  
2. Provided that if variation by one class of shareholders affects the rights of any 
other class of shareholders, the consent of three-fourths of such other class 
of shareholders shall also be obtained and the provisions of this section shall 
apply to such variation. 
3.  Where the holders of not less than 10 % of the issued shares of a class did not 
consent to such variation or vote in favour of the special resolution for the 
variation, they may apply to the Tribunal to have the variation cancelled, and 
where any such application is made, the variation shall not have effect unless 
and until it is confirmed by the Tribunal:  
4. The decision of the Tribunal on any application shall be binding on the 
shareholders. 
 
• ISSUE OF SHARES AT A PREMIUM [SECTION 52]  

 A company may issue shares at a premium when it is able to sell them at a price 
above par or nominal value, irrespective of the fact whether the shares are listed 
on Stock Exchange or not. The rate of premium will be decided by the Board of 
Directors of a Company. Section 52 of the Companies Act, 2013 deals with the 
concept of share or securities premium.  

 The premium cannot be treated as profit and as such the amount of premium is 
not available for distribution as dividend. 

 The amount of premium, whether received in cash or in kind, must be kept in a 
separate account, known as the "Securities Premium Account".  

 The amount of share premium is to be maintained with the same sanctity as the 
share capital.  

 The securities premium account cannot be treated as free reserves at it is in the 
nature of capital reserve. [Section 52(1)]. 
 
In accordance with the provisions of Section 52(2) of the Act, the securities 
premium can be utilized only for the following purposes :- 
(a)  Issuing fully — paid bonus shares to members;  
(b)  Writing off the balance of the preliminary expenses of the company;  
(c)  Writing off commission paid or discount allowed, or the expenses 
incurred on issue of shares or debentures of the company;  
(d)  For providing for the premium payable on redemption of any 
redeemable preference shares or debentures of the Company; and  
(e)  For the purchase of its own shares or other specified securities u/s 68.  
 
                           

 However, certain class of companies, as may be prescribed and whose 
financial statement comply with the accounting standards prescribed for 
such class of companies, can utilize the share premium account only for 
the purposes stated below :  
(a)  Issuing fully — paid bonus shares to members;  
(b)  Writing off commission paid or discount allowed, or the expenses incurred 
on issue of equity shares of the company;  
(c)  For the purchase of its own shares or other specified securities u/s 68.  

 It may be noted that if a company proposes to apply share premium for any 
purpose other than those mentioned above, it must then comply with the 
requirements of the Act with respect to reduction of share capital.  
 
• ISSUE OF SHARES AT A DISCOUNT [SECTION 53] 

 Section 53 prohibits a company to issue shares at discount except in the case of 
issue of sweat equity shares. Any share issued by a company at a discount shall 
be void. 

 However, a company may issue shares at a discount to its creditors when its 
debt is converted into shares in pursuance of any statutory resolution plan or 
debt restructuring scheme in accordance with any guidelines or directions or 
regulations specified by the Reserve Bank of India under the Reserve Bank of 
India Act, 1934 or the Banking (Regulation) Act, 1949 (Notification dated 3
rd
 
Jan, 2018) 

 In case of default, the company shall be punishable with fine which shall not be 
less than one lakh rupees but which may extend to five lakh rupees and every 
officer of the company who is in default shall be punishable with imprisonment for 
a term which may extend to six months or with fine which shall not be less than 
one lakh rupees but which may extend to five lakh rupees, or with both.  
 
• SWEAT EQUITY SHARES [SECTION 54]  

 The concept of 'sweat equity shares' is defined in Section 2(88) of the 
Companies Act, 2013. As per this, 'Sweat Equity Shares' means such equity 
shares as are issued by a company to its directors or employees at a discount or 
for consideration other than cash, for providing their know — how or making 
available rights in the nature of intellectual property rights, or value addition, by 
whatever name called. 

 Here the term ''Employee'' means: 
(a)    a permanent employee of the company who has been working in India or 
outside India, for at least 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 holding company of the company; 

 The expression 'Value additions' means actual or anticipated economic benefits 
derived or to be derived by the company from an expert or a professional for 
providing knowhow or making available rights in the nature of intellectual property 
rights, by such person to whom sweat equity is being issued for which the 
consideration is not paid or included in the normal remuneration payable under 
the contract of employment, in the case of an employee. 
 

 Conditions: 
1.  The shares must be of class already issued;  
2.  At least one year must have elapsed since the Company had commenced 
business;  
                           
3.  The issue must be authorized by a special resolution passed by the 
Company in general meeting;  
4.  The resolution must specify number of shares; their current market price; 
consideration (if any); and the class or classes of directors or employees to 
whom they are to be issued;  
5.  The shares must be issued in accordance with SEBI Regulations, in the 
case of listed companies; and in accordance with Central Govt. Rules, in 
the case of unlisted companies.  
It may be noted that the rights, limitations, restrictions and provisions applicable 
to equity shares shall be applicable to sweat equity share and holders of such 
shares shall rank pari passu with other equity shareholders.  
 
• FURTHER ISSUE OF SHARE CAPITAL [SECTION 62] 

 As per the section 62 of the Companies Act, 2013, where at any time, a company 
having a share capital proposes to increase its subscribed capital by the issue of 
further shares, such shares shall be offered— 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
• BONUS SHARES/ CAPITALISATION OF RESERVES [SECTION 63]  

 A company may issue fully paid-up bonus shares to its members, in any 
manner whatsoever, out of its: 
1. Free reserves  
2. Securities premium account 
3. Capital redemption reserve account.  
However, no issue of bonus shares shall be made by capitalizing reserves 
created by the revaluation of assets. Further, the bonus shares shall not be 
issued in lieu of dividend.  
 
 
(a) To persons who, at 
the date of the offer, are 
holders of equity 
shares of the company 
in proportion, to the paid-
up share capital on 
those shares by sending 
a letter of offer subject to 
the conditions (rights 
issue), 
 
(b)To employees 
under a scheme of 
employees' stock 
option, subject to 
special resolution 
passed by company 
and subject to the 
conditions as may be 
prescribed 
(c)To any persons, if it 
is authorised by a 
special resolution, 
whether or not those 
persons include the 
persons referred to in 
clause (a) or clause (b), 
either for cash or for a 
consideration other than 
cash, if the price of such 
shares is determined by 
the valuation report of a 
registered valuer, subject 
to the compliance with 
the applicable provisions 
of Chapter III and any 
other conditions as may 
be prescribed 
 
As per Section 2 (37) employees’ stock 
option means the option given to the 
directors, officers or employees of a 
company or of its holding company or 
subsidiary company or companies, if any, 
which gives such directors, officers or 
employees, the benefit or right to 
purchase, or to subscribe for, the shares 
of the company at a future date at a pre-
determined price.