CLAT PG Exam > CLAT PG Notes > Company Law > Cheat Sheet: Share Capital and Financing
Cheat Sheet: Share Capital and Financing
1. Share Capital: Classification and Types
1.1 Types of Share Capital
| Type | Definition |
|---|---|
| Authorized/Nominal Capital | Maximum capital a company can issue as stated in Memorandum of Association; alterable only by altering MOA per Section 61 |
| Issued Capital | Portion of authorized capital actually offered for subscription to the public |
| Subscribed Capital | Portion of issued capital that has been subscribed/applied for by investors |
| Called-up Capital | Amount company has demanded payment on from shareholders on subscribed shares |
| Paid-up Capital | Amount actually paid by shareholders on called-up capital; minimum Rs. 1 lakh for private company, Rs. 5 lakh for public company |
| Uncalled Capital | Portion of subscribed capital not yet called for payment by the company |
| Reserve Capital | Uncalled capital reserved by special resolution to be called only on winding up (Section 99) |
1.2 Classes of Share Capital
| Class | Characteristics |
|---|---|
| Equity Shares | Shares with voting rights; residual claim on assets and profits; dividend not fixed; higher risk and return |
| Preference Shares | Fixed dividend; preferential payment on dividend and capital repayment; no voting rights except on resolutions affecting their rights (Section 47) |
2. Preference Shares: Types and Features
2.1 Classification of Preference Shares (Section 43)
| Type | Features |
|---|---|
| Cumulative | Unpaid dividends accumulate and must be paid before equity dividend; arrears carry forward |
| Non-Cumulative | Dividend not paid in a year lapses; no accumulation of arrears |
| Redeemable | Can be bought back by company after fixed period; must be fully paid-up; redemption from profits or fresh issue proceeds |
| Irredeemable/Perpetual | Cannot be redeemed during company's lifetime; prohibited under Companies Act 2013 |
| Participating | Right to participate in surplus profits after equity dividend distribution; participate in surplus assets on winding up |
| Non-Participating | Limited to fixed dividend only; no participation in surplus profits or assets |
| Convertible | Can be converted into equity shares after specified period as per terms of issue |
| Non-Convertible | Cannot be converted into equity shares; remain preference shares throughout |
2.2 Voting Rights of Preference Shareholders (Section 47)
- No voting rights on ordinary resolutions
- Voting rights only on resolutions directly affecting their rights
- Vote on resolutions for winding up or repayment of capital
- Proportionate voting rights when dividend arrears exceed 2 years
- One vote per share when voting rights available
3. Issue and Allotment of Shares
3.1 Modes of Issue
| Mode | Description |
|---|---|
| Public Issue | Invitation to public to subscribe shares through prospectus; governed by SEBI ICDR Regulations |
| Rights Issue (Section 62) | Offer to existing shareholders in proportion to paid-up share capital; notice period minimum 15 days (not less than 3 days before opening); renouncement allowed |
| Private Placement (Section 42) | Offer to select group up to 200 persons in financial year; through private placement offer letter; record maintained for 10 years |
| Bonus Issue (Section 63) | Free shares issued from free reserves/securities premium/capital redemption reserve; authorized by articles; issued to existing shareholders proportionately |
3.2 Share Allotment Requirements
| Requirement | Details |
|---|---|
| Minimum Subscription | 90% of issued amount must be subscribed; if not received, refund within 15 days; failure attracts 15% interest |
| Application Money | Minimum 5% of nominal value must be paid on application for shares |
| Allotment Time Limit | Within 60 days from date of receipt of application money in public issue |
| Return of Allotment (Section 39) | File PAS-3 with ROC within 30 days of allotment along with complete list of allottees |
| Share Certificates (Section 56) | Issue within 2 months of incorporation (subscribers) or allotment (other members); penalty for default |
3.3 Restrictions on Issue of Shares
- Cannot issue shares at discount except sweat equity shares (Section 53)
- Can issue shares at premium credited to Securities Premium Account (Section 52)
- Issue of shares with differential voting rights permitted subject to conditions (Section 43)
- No issue of shares with voting rights disproportionate to equity capital
- Preference shares redeemable within 20 years (infrastructure projects: 30 years)
4. Alteration of Share Capital
4.1 Methods of Alteration (Section 61)
| Method | Requirements |
|---|---|
| Increase in Authorized Capital | Ordinary resolution; alter MOA; file with ROC; pay prescribed fees |
| Consolidation of Shares | Combine smaller denomination shares into larger (e.g., 10 shares of Rs. 10 = 1 share of Rs. 100); ordinary resolution required |
| Sub-division of Shares | Divide shares into smaller denominations (e.g., 1 share of Rs. 100 = 10 shares of Rs. 10); ordinary resolution; paid-up cannot exceed face value |
| Conversion into Stock | Convert fully paid shares into stock; ordinary resolution; stock freely transferable in any amount |
| Cancellation of Unissued Shares | Cancel unsubscribed authorized capital; diminish capital in MOA; not reduction of capital |
4.2 Reduction of Share Capital (Section 66)
4.2.1 Modes of Reduction
- Extinguish or reduce liability on partly paid shares
- Cancel paid-up capital lost or unrepresented by assets
- Pay off excess capital not needed for business
4.2.2 Procedure for Reduction
- Authorized by articles of association
- Special resolution required (Section 66)
- Tribunal approval mandatory through petition
- Tribunal may require debt settlement or consent of creditors
- Confirm reduction only if debt paid/secured or creditor consent obtained
- Register order with ROC; obtain fresh certificate of incorporation
- Notice to Registrar and creditors within 30 days
4.2.3 Creditor Protection
- Tribunal settles list of creditors entitled to object
- Creditors may object within fixed date
- Reduction subject to secured creditor consent or debt repayment
- Word "and reduced" added to company name if required by Tribunal
5. Buy-Back of Shares
5.1 Provisions and Conditions (Section 68)
| Condition | Requirement |
|---|---|
| Authorization | Authorized by articles; special resolution required (unless from free reserves, securities premium, or proceeds of earlier issue) |
| Buy-back Limit | Cannot exceed 25% of total paid-up capital and free reserves in financial year |
| Equity Threshold | Buy-back of equity cannot reduce equity below 25% of total paid-up capital (listed company) or 10% (unlisted company) |
| Share Status | Shares must be fully paid-up; cannot buy-back partly paid shares |
| Debt-Equity Ratio | Debt-equity ratio cannot exceed 2:1 after buy-back (exceptions for public financial institutions) |
| Time Limit | Complete buy-back within 1 year from date of special resolution |
| Default in Repayment | No buy-back if company defaulted in repayment of deposits/debentures/interest or dividend |
5.2 Sources of Buy-back (Section 68)
- Free reserves (reserves available for dividend distribution)
- Securities Premium Account
- Proceeds of any shares or specified securities (excluding borrowed funds)
5.3 Buy-back Procedure
- Board resolution recommending buy-back with justification
- Special resolution in general meeting (unless from permitted sources)
- Public notice in newspapers within 7 days of resolution
- File declaration of solvency with ROC
- Make public announcement within 2 days of board meeting (listed company)
- Extinguish and physically destroy certificates within 7 days of completion
- Transfer amount equal to nominal value to Capital Redemption Reserve Account
- File return with ROC in e-form SH-11 within 30 days of completion
5.4 Restrictions on Buy-back
- No fresh issue for 6 months after buy-back except bonus issue, ESOP, discharge of subsisting obligations
- Cannot buy-back through subsidiary company including nominee arrangement
- No buy-back during 6 months preceding general meeting or reference date for corporate action
- Shares bought back cannot be reissued; must be extinguished
6. Debentures and Debt Financing
6.1 Debentures: Definition and Types
| Type | Features |
|---|---|
| Secured Debentures | Charge created on assets of company; debenture trust deed required; debenture trustee mandatory |
| Unsecured Debentures | No charge on assets; general creditors; higher risk and interest rate |
| Redeemable Debentures | Repayable on specified date or after notice; redemption terms stated in terms of issue |
| Irredeemable/Perpetual | Repayable on winding up or at company's option; no fixed maturity date |
| Convertible Debentures | Convertible into equity shares after specified period; fully or partly convertible |
| Non-Convertible Debentures | Cannot be converted into equity; remain debt instrument throughout tenure |
| Bearer Debentures | Transferable by delivery; no registration required; not common in India |
| Registered Debentures | Name of holder registered with company; transfer by execution of transfer deed |
6.2 Issue of Debentures (Section 71)
6.2.1 Requirements for Secured Debentures
- Create charge on assets in favor of debenture holders
- Appoint debenture trustee before issue
- Execute debenture trust deed within 6 months
- Trustee must hold at least one meeting annually with debenture holders
- Register charge with ROC within 30 days (Section 77)
6.2.2 Redemption Requirements
- Create Debenture Redemption Reserve (DRR) - 25% of value for non-NBFCs
- DRR created out of profits before redemption; maintained till redemption
- Listed companies: invest/deposit 15% of debenture value in specified securities
- Redemption only from profits or fresh issue proceeds, not borrowed funds
6.2.3 Limits on Issue
- Private placement of debentures subject to Section 42 requirements
- Public issue governed by SEBI ICDR Regulations
- Listed company cannot issue debentures with voting rights
6.3 Debenture Trustees (Section 71)
| Aspect | Requirement |
|---|---|
| Appointment | Mandatory for all debenture issues; appointed before or at time of issue |
| Qualification | Scheduled bank, public financial institution, insurance company, body corporate with net worth Rs. 1 crore |
| Disqualification | Cannot be beneficiary under trust deed; director/key managerial personnel disqualified |
| Duties | Ensure creation of security; call debenture holders meeting; represent interests; monitor compliance |
| Rights | Access to books and records; appoint nominee directors (default cases); approach Tribunal |
7. Sweat Equity and ESOP
7.1 Sweat Equity Shares (Section 54)
| Aspect | Details |
|---|---|
| Definition | Equity shares issued at discount or for consideration other than cash to employees/directors for providing know-how or intellectual property rights |
| Authorization | Special resolution required; authorized by articles; valuation by registered valuer |
| Limit | Cannot exceed 15% of existing paid-up equity capital or Rs. 5 crore, whichever higher (per year) |
| Lock-in Period | Minimum 3 years from date of allotment |
| Eligibility | Permanent employees (minimum 1 year service); directors (executive or whole-time) |
| Disclosure | Details disclosed in Board report; filed with ROC in prescribed form |
7.2 Employee Stock Option Plan (Section 62)
7.2.1 Key Features
- Option to purchase shares at predetermined price (exercise price) after vesting period
- Granted to employees and directors to align interests with shareholders
- Special resolution required for issue; authorized by articles
- Governed by SEBI SBEB&SE Regulations for listed companies
7.2.2 ESOP Requirements
- Valuation by registered valuer required
- Lock-in period: minimum 1 year from date of grant
- Exercise price may be equal to or less than market price
- Options non-transferable; lapse on cessation of employment
- Disclose in Directors' Report; separate disclosure for related parties
8. Securities Premium and Capital Reserves
8.1 Securities Premium Account (Section 52)
8.1.1 Nature
- Premium amount received on issue of shares at price above face value
- Credited to separate account called Securities Premium Account
- Treated as capital reserve; restrictions on utilization
8.1.2 Permitted Uses
- Issue of bonus shares to existing shareholders
- Writing off preliminary expenses of the company
- Writing off expenses, commission, discount on issue of shares/debentures
- Providing premium on redemption of preference shares or debentures
- Buy-back of own shares under Section 68
8.2 Capital Redemption Reserve (Section 69)
| Aspect | Details |
|---|---|
| Creation | Created when shares bought back or preference shares redeemed from profits; amount equal to nominal value transferred |
| Purpose | Maintain capital base for creditor protection; compensate for reduction in paid-up capital |
| Utilization | Can be used only for issue of bonus shares; cannot be distributed as dividend |
| Nature | Capital reserve; part of free reserves but restricted use |
9. Charges and Registration
9.1 Types of Charges (Section 2(16))
| Type | Description |
|---|---|
| Fixed Charge | Charge on specific immovable property identified at time of creation; company cannot deal with asset without consent |
| Floating Charge | Charge on class of assets (present and future); company can deal with assets in ordinary course; crystallizes on default or winding up |
| Pledge | Delivery of goods as security; possession transferred to creditor; goods returned on debt discharge |
| Hypothecation | Charge without delivery of possession; debtor retains possession; used for movable property |
| Mortgage | Transfer of interest in immovable property as security; registered under Transfer of Property Act |
9.2 Registration of Charges (Section 77-87)
9.2.1 Compulsory Registration
- Charge on immovable property wherever situated
- Charge on movable property (except pledge)
- Charge on book debts, calls unpaid, goodwill, intellectual property
- Floating charge on undertaking or property of company
- Registration mandatory within 30 days of creation with ROC
9.2.2 Registration Procedure
- File e-form CHG-1 with ROC within 30 days of charge creation
- Submit instrument creating charge with prescribed fees
- ROC issues certificate of registration in e-form CHG-2
- Certificate is conclusive evidence of compliance
- Charge also registered in register of charges maintained at registered office
9.2.3 Consequences of Non-Registration
- Charge becomes void against liquidator and creditors
- Debt remains valid and becomes immediately payable
- Company and officers liable for penalty
- Late registration possible with additional fees within 300 days
9.3 Modification and Satisfaction of Charges
- Modification requires filing e-form CHG-9 within 30 days
- Satisfaction/discharge filed in e-form CHG-4 by company or charge holder
- ROC enters satisfaction on register after verification
- Rectification of register possible by Registrar or Tribunal order (Section 87)
10. Dividend Distribution
10.1 Provisions for Dividend (Section 123)
| Requirement | Details |
|---|---|
| Source of Dividend | Paid only out of current year profits after depreciation or past profits or both; cannot be paid from capital |
| Transfer to Reserves | No mandatory transfer to reserves required under Companies Act 2013 (earlier 10% for dividends exceeding 10%) |
| Depreciation | Provide for depreciation as per Schedule II before declaring dividend |
| Set-off of Losses | Current year losses set off against previous years' profits before declaring dividend |
| Declaration | Board recommends; shareholders declare in general meeting; cannot exceed amount recommended by Board |
10.2 Interim Dividend
- Declared by Board of Directors during financial year
- Paid out of surplus in profit and loss account or profits of current year
- Declare before finalization of accounts; no shareholder approval required
- Subject to same rules as final dividend regarding adequacy of profits
10.3 Dividend Payment Time Limits
- Deposit dividend amount in separate bank account within 5 days of declaration
- Disburse dividend within 30 days of declaration
- Transfer unpaid/unclaimed dividend to Investor Education and Protection Fund (IEPF) after 7 years
- Shares on which dividend unpaid for 7 consecutive years transferred to IEPF (Section 124)
10.4 Unpaid Dividend Account (Section 123-124)
| Aspect | Requirement |
|---|---|
| Separate Account | Open "Unpaid Dividend Account" within 5 days of dividend declaration in scheduled bank |
| Period | Amount remaining unclaimed for 7 years transferred to IEPF |
| Investor Education Fund | IEPF administered by Central Government; used for investor awareness and protection |
| Claim Procedure | Shareholders can claim unpaid dividend from IEPF by filing application in prescribed form |
10.5 Restrictions on Dividend
- No dividend if company fails to comply with deposit repayment or interest payment
- Preference shareholders entitled to dividend before equity shareholders
- Cumulative preference arrears must be cleared before equity dividend
- Dividend paid only to registered shareholders as on record date/book closure
- Penalty for declaration/payment of dividend not in compliance with provisions
11. Deposits from Public
11.1 Acceptance of Deposits (Section 73-76)
| Company Type | Deposit Limit and Conditions |
|---|---|
| Public Company | Can accept deposits up to 25% of aggregate of paid-up capital and free reserves; maximum 35% with prior approval of shareholders by special resolution |
| Private Company | Can accept deposits from members up to 100% of aggregate of paid-up capital and free reserves; special resolution required |
| Deposit Tenure | Minimum 6 months; maximum 36 months; cannot be renewed beyond 36 months from date of acceptance |
| Credit Rating | Obtain credit rating from recognized agency; minimum investment grade rating required |
11.2 Deposit Insurance and Security
- Provide security for deposits accepted or to be accepted
- Create charge on assets in favor of deposit holders
- Deposit insurance from Insurance Regulatory and Development Authority approved insurer
- Appoint deposit trustee for secured deposits
11.3 Procedural Requirements
- File circular/advertisement with ROC before inviting deposits
- Provide deposit insurance details in circular
- Maintain Deposit Repayment Reserve - 20% of deposits maturing during financial year
- Invest DRR in specified securities with scheduled bank
- File return of deposits (e-form DPT-3) with ROC annually by 30th June
11.4 Exempted Deposits
- Amounts received from directors with approval recorded in Board meeting
- Amounts received from government or banking company or other specified entities
- Amount raised by issue of commercial paper/bonds/debentures subscribed by scheduled bank
- Loan from public financial institutions, foreign governments under approval
11.5 Repayment and Default
- Repay deposit on due date; extension requires depositor consent
- Default in repayment: company cannot invite fresh deposits
- File details of default with ROC within 30 days
- Penalty on company and officers for accepting deposits in violation
- Tribunal may order attachment and sale of property for deposit repayment
12. Financial Assistance and Loans
12.1 Loans to Directors (Section 185)
| Prohibition | Details |
|---|---|
| General Rule | Company cannot give loan to directors, firms/companies in which director is partner/member/director; guarantee/security also prohibited |
| Penalty | Company liable for fine up to Rs. 5 lakh; director liable for imprisonment up to 6 months and fine up to Rs. 5 lakh |
| Recovery | Loan immediately becomes repayable; company recovers with interest |
12.1.1 Exemptions from Section 185
- Loan/guarantee to managing/whole-time director as per remuneration terms approved by shareholders; maximum limit not exceeding annual remuneration
- Loan to managing/whole-time director for company business purpose with disinterested directors' approval
- Company engaged in banking/insurance/housing finance business in ordinary course
- Loan to independent director for company business; interest-free up to Rs. 20 lakh
12.2 Inter-Corporate Loans and Investments (Section 186)
12.2.1 Limits on Loans/Guarantees/Securities
- Company can give loan/guarantee/security up to 60% of paid-up capital, free reserves, and securities premium or 100% of free reserves and securities premium, whichever higher
- Exceeding limit requires special resolution
- Aggregate limit applicable for loans, guarantees, securities, and investments combined
12.2.2 Requirements
- Board approval through resolution; state purpose and usage
- Disclosure in financial statements with details of loans, investments, guarantees
- Register of loans maintained at registered office
- Rate of interest not less than prevailing yield of one-year, three-year, five-year or ten-year Government Security closest to loan tenor
12.2.3 Exemptions
- Banking companies, insurance companies, housing finance companies in ordinary course
- Guarantee by holding company for subsidiary's obligations in ordinary course
- Loan/guarantee to wholly owned subsidiary; guarantee to bank for subsidiary loans
- Investment in securities by NBFC registered with RBI
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