COMPANY LAW UNIT - 3 LESSON 2: SHARES

 

UNIVERSITY OF DELHI / SCHOOL OF OPEN LEARNING 

B. Com. (Program) / B. Com. (Hons.)

COMPANY  LAW 

N.O.T.E.S 

UNIT - 3

LESSON 2: SHARES

INTRODUCTION

- Section 2(84) of the Companies Act 2013 provides a basic definition of shares, stating that it refers to shares in the share capital of a company, including stock unless a distinction between stock and shares is specified.

- However, the Supreme Court of India, in the case of CIT Vs. Standard Vacuum Oil Co. (1966), provided a more insightful definition of shares.

- According to the Supreme Court, a share in a company is not simply a sum of money but represents an interest or right measured by a sum of money.

- This interest or right is comprised of various rights granted to shareholders through the company's articles, which form a contractual relationship between the shareholder and the company.

- In essence, a share represents the opportunity to participate in the profits generated by the company as a going concern or in the assets of the company in the event of winding up.

ALLOTMENT OF SHARES

1. Definition: Allotment refers to the allocation of shares by the board of directors from the unappropriated capital of the company to applicants.

2. Creation of Shares: Shares come into existence upon allotment.

3. Proper Authority: The allotment should be made by the company's board of directors or a committee authorized to allot shares.

4. Reasonable Time: Allotment must be made within a reasonable time, as determined on a case-by-case basis. Delayed allotment may allow applicants to refuse the securities.

5. Absolute and Unconditional Allotment: Allotment should be made on the same terms as applied for and stated in the application. It should not be subject to additional conditions. Insufficient allocation cannot be considered absolute allotment.

6. Communication of Allotment: The allotment must be communicated to the applicant, typically through a letter of allotment or allotment advice, which remains valid even if lost in transit.

7. Allotment against Application: Written consent is required for an individual to become a member, as per Section 2(55) of the Act.

Allotment and Statutory Conditions

1. Compliance with Laws: Allotment of securities should not contravene any other law. Allotment to a minor's application is void

2. Minimum Subscription: Section 39 prohibits allotment of securities if the minimum amount has not been subscribed. In such cases, the amount must be refunded to applicants within a specified time.

3. Filing Return of Allotment: Companies with a share capital must file a return of allotment with the Registrar after making securities allotment. Failure to do so may result in fines for the company and its officers.

4. Minimum Application Amount: Shares offered to the public cannot be allotted unless the minimum amount specified in the prospectus has been subscribed and the amount payable on the application has been received by the company.

5. Timeframe for Return of Amount: If the minimum sum has not been subscribed and the application amount is not obtained within a specified period, the amount received must be returned within the prescribed time and manner.

6. Stock Exchange Dealing: Companies making a public offer must apply to recognized stock exchanges for permission to have the securities dealt with. The prospectus should state the name(s) of the stock exchange(s) involved.

7. Handling of Public Application Monies: Monies obtained from public applications for securities must be kept in a separate bank account and used only for specific purposes, such as adjustment against allotment or repayment to applicants as directed by the Securities and Exchange Board.

8. Void Clauses: Any clause requiring applicants to waive compliance with the provisions of these sections is void.

9. Penalties for Non-compliance: Companies failing to comply with these provisions may be subject to fines ranging from five lakh rupees to fifty lakh rupees. Defaulting officers may face imprisonment or fines.

10. Commission for Subscription: Companies can pay commissions to individuals subscribing to their securities, subject to prescribed conditions.

FORFEITURE OF SHARES

1. Provisions for Forfeiture: The articles of association usually contain provisions for the forfeiture of shares if a member fails to pay any call or installment on the specified day.

2. Notice of Payment and Forfeiture: The board may issue a notice requiring payment of the unpaid call or installment, along with any accrued interest. The notice must state another day for payment and the possibility of forfeiture if non-payment occurs.

3. Forfeiture Resolution: If the conditions of the notice are not met, the board can pass a resolution to forfeit the shares before the provided payment is made.

4. Sale or Disposal of Forfeited Shares: Forfeited shares may be sold or disposed of according to the board's discretion. The board can also cancel the forfeiture before the sale or disposal.

5. Shareholder's Ceasing to be a Shareholder: A person whose shares have been forfeited ceases to be a shareholder for the forfeited shares but remains liable to pay all sums currently payable to the company in respect of the shares on the date of forfeiture. The liability ceases upon full reimbursement to the company.

6. Declaration as Conclusive Evidence: A duly verified declaration by a director, manager, or secretary of the company stating the facts of the share forfeiture is conclusive evidence against any person claiming entitlement to the share. The company can obtain compensation from the sale or disposal of the share and transfer it to the new holder.

7. Application to Fixed Time Payments: The provisions of forfeiture also apply to non-payment of any sum payable at a fixed time under the terms of share issuance, whether it's the nominal value or premium.

8. Legal Requirements: Prior legal notice must be given before the forfeiture of shares, and an intimation is sent to the concerned shareholder after forfeiture. Forfeiture should be exercised in good faith and in the company's interest.

9. Cancellation of Forfeiture: The board may cancel the forfeiture if the defaulting shareholder approaches with the due amount and interest.

10. Re-Issue of Forfeited Shares: Forfeited shares can be either canceled or re-issued at the board's discretion. Reissued shares are typically done at a discount but should not be less than the total amount paid by the original owner. A new share certificate is issued to the new holder upon surrender of the original certificate or through a public notice in a newspaper.

ISSUE OF SWEAT EQUITY SHARES

1. Authorization: A special resolution passed by the company authorizes the issue of sweat equity shares. The resolution specifies the number of shares, current market price, consideration (if any), and the class of directors or employees eligible for such shares.

2. Time Requirement: At least one year must have elapsed since the commencement of the company's business at the time of issuing sweat equity shares.

3. Compliance: If the company's equity shares are listed on a recognized stock exchange, the issuance of sweat equity shares must comply with SEBI regulations. Otherwise, it should follow the rules laid down by the Central Government.

4. Rights and Rank: Sweat equity shares carry the same rights, limitations, and provisions as the existing equity shares. Holders of sweat equity shares rank pari passu with other equity shareholders.

5. Definition: Sweat equity shares are issued at a discount or for consideration other than cash to directors or employees for their know-how, intellectual property rights, or value additions.

6. Employee Definition: The term "employee" includes permanent employees working for at least one year, directors (whole time or otherwise), and employees or directors of subsidiaries or holding companies.

7. Valuation: Sweat equity shares must be valued by a registered valuer to determine a fair price justifying the issuance. Valuation of intellectual property rights or know-how should also be conducted by a registered valuer.

8. Limitations: The total sweat equity shares issued by the company should not exceed 15% of the current paid-up equity capital in one year or five crores of the issuing value (whichever is higher). The issuance should not exceed 25% of the company's paid-up equity capital at any time.

9. Lock-in Period: Sweat equity shares allotted to directors or employees must be locked in for three years from the date of allotment. Share certificates should mention the lock-in period prominently.

10. Treatment of Non-cash Consideration: Non-cash consideration received for sweat equity shares should be dealt with in the company's account books as per applicable accounting standards.

11. Managerial Remuneration: If sweat equity shares are issued to directors or managers for non-cash consideration, they will be treated as part of their managerial remuneration.

12. Board's Report: The Board of Directors must disclose details of the issue of sweat equity shares in the Directors' report, including the class of directors or employees, number of shares, pricing formula, and consideration received.

13. Register Maintenance: A register of sweat equity shares must be maintained in Form No. SH.3, containing the relevant details of the shares issued.

These provisions aim to allow companies to issue sweat equity shares to directors and employees as recognition of their contributions, subject to certain conditions and regulations.

EMPLOYEE STOCK OPTION SCHEME

Employee Stock Option (ESOP) Rules under the Companies Act, 2013:

1. Definition of ESOP:

   - ESOP is the option given to directors, officers, or employees to purchase or subscribe for company shares at a predetermined price.

2. Granting Options:

   - Shares may be issued to employees under an ESOP scheme.

   - Special resolution required for public companies; ordinary resolution for private companies.

3. Separate Resolution for Certain Cases:

   - Separate resolution is needed if options are granted to employees of a subsidiary or holding companies.

   - Separate resolution is required if options granted to identified employees in a year exceed 1% of the issued capital.

4. Varying ESOP Terms:

   - Terms of an ESOP scheme can be varied through a special resolution.

   - Variation should not harm the interests of option holders.

   - Notice for the resolution should explain the variation, rationale, and details of beneficiaries.

5. Minimum Vesting Period:

   - A minimum one-year period between granting and vesting of options.

   - Options held under a merging or amalgamating company's scheme can have the period adjusted.

6. Lock-in Period:

   - The company has the freedom to determine the lock-in period for shares issued upon exercising the option.

7. No Dividend or Voting Rights:

   - Employees do not have the right to receive dividends, vote, or enjoy other shareholder benefits until shares are issued upon exercising the option.

8. Forfeiture/Refund:

   - Amount paid by employees at the time of granting options may be forfeited if options are not exercised within the exercise period.

   - Amount may be refunded to employees if options do not vest due to non-fulfillment of conditions.

9. Conditions:

   - Options granted to employees are non-transferable.

   - Options cannot be pledged, hypothecated, mortgaged, or encumbered in any manner.

   - Only employees to whom options are granted can exercise them.

10. Death/Disability/Resignation:

    - In the event of an employee's death, rights apply to the legal heirs or nominees.

    - Permanent incapacity results in vested options being granted.

    - Resignation or termination causes expiration of non-vested options.

11. Maintenance of Register:

    - A register of employee stock options (Form No SH.6) must be maintained by the company.

    - Register is kept at the registered office or another location decided by the Board.

    - Entries in the register are authenticated by the company secretary or an authorized person.

12. Compliance for Listed Companies:

    - Listed companies must comply with SEBI guidelines regarding ESOP schemes.

Note: This detailed summary provides an overview of the key points in the Employee Stock Option (ESOP) rules under the Companies Act, 2013. For precise information and complete understanding, it is advisable to refer to the original legislation and seek professional advice if required.

Procedure for Issue of Securities to Employees through Employees Stock Option Scheme:

1. Board Meeting and Approval:

   - Convene a board meeting to approve the notice of the general meeting with the special resolution.

   - For private companies, an ordinary resolution is sufficient.

2. Disclosures in Explanatory Statement:

   - Ensure necessary disclosures in the explanatory statement attached to the resolution.

   - File the special resolution with the Registrar of Companies (ROC) in Form MGT 14 within 30 days.

3. Exercise Price Determination:

   - Companies can determine the exercise price for the Employees Stock Option Scheme according to applicable accounting policies.

4. Special Resolution for Certain Cases:

   - Obtain shareholder consent through a special resolution for options granted to subsidiary employees or holding companies.

   - Special resolution required if options granted to identified employees in a year exceed 1% of the issued capital.

5. Variation of ESOP Terms:

   - Variation of terms of the scheme that employees have not yet exercised can be done through a special resolution.

   - Notice for the special resolution should explain the variation, rationale, and details of beneficiaries.

6. Vesting Period and Lock-in:

   - Minimum one-year period between granting options and vesting.

   - Adjust the vesting period if options are granted instead of options held in a merging or amalgamating company.

   - The company has the right to specify the lock-in period for shares issued upon exercising the option.

   - Employees cannot receive dividends, vote, or enjoy shareholder benefits until shares are issued upon exercise.

7. Forfeiture of Options:

   - Options may be forfeited if not exercised within the exercise period.

8. Transferability and Rights:

   - Options cannot be transferred to any other person.

   - Options cannot be pledged, hypothecated, mortgaged, or encumbered.

   - Only employees to whom the options are granted can exercise them.

   - In the event of an employee's death, options extend to legal heirs or nominees.

   - Permanent incapacity results in immediate vesting of options.

   - Options expire upon resignation or termination, except for vested options exercisable within the specified period.

9. Maintenance of Employee Stock Options Register:

   - Maintain a register (Form No. SH.6) at the company's registered office or a designated location.

   - Entries in the register should be authenticated by the company secretary or an authorized person.

10. Filing with the Registrar:

    - File Form PAS.3 with the Registrar within 30 days of the allocation of shares, along with the applicable fee.

11. Delivery of Share Certificates:

    - Share certificates for allotted shares should be delivered within 2 months from the date of allotment.

12. Intimation of the Depository:

    - Immediately inform the details of the share allotment to the depository.

13. Compliance for Listed Companies:

    - Listed companies must comply with the regulations set by the Securities and Exchange Board of India (SEBI) for the Employees Stock Option Scheme.

Note: This detailed summary provides an overview of the procedure for issuing securities to employees through an Employees Stock Option Scheme. It is advisable to refer to the original legislation and seek professional advice for complete understanding and precise information.

BONUS ISSUE

Issue of Bonus Shares:

1. Introduction:

   - Bonus shares are fully paid-up shares issued to existing shareholders free of charge.

   - Companies issue bonus shares instead of distributing large undistributed profits as dividends.

   - Bonus shares increase the company's issued capital without affecting its assets.

2. Capitalization of Undistributed Profits:

   - Bonus shares represent the "capitalization of undistributed profits" of the company.

   - This allows the company's issued capital to reflect the true worth of its undertakings.

   - It prevents profits from appearing disproportionately high compared to paid-up share capital.

3. Pre-Companies Act, 2013:

   - Before the Companies Act, of 2013, regulations for bonus issues were governed by the company's articles and SEBI guidelines.

4. Section 63 of the Companies Act, 2013:

   - Section 63 introduced by the Companies Act, 2013, provides conditions and procedures for issuing fully paid-up bonus shares.

   - Bonus shares can be issued from free reserves, securities premium accounts, or capital redemption reserve accounts.

   - Reserves created by the revaluation of assets cannot be used for bonus issues.

   - Applies to all companies, both listed and unlisted.

5. Conditions for Bonus Issue:

   - Articles of association must permit the issue of bonus shares.

   - Board resolution recommending the bonus issue must be passed.

   - Shareholder approval through a resolution in a general meeting is required.

   - The company should not have defaulted on payment of interest or principal amount of fixed deposits or debt securities.

   - The company should not have defaulted on payment of statutory dues to employees (e.g., provident fund, gratuity, bonus).

   - All partly paid-up shares must be made fully paid up before the bonus issue.

   - Compliance with other prescribed conditions.

6. Rule 14 of Companies (Share Capital and Debentures) Rules, 2014:

   - Once a company announces the board's decision to recommend a bonus issue, it cannot withdraw the decision.

Note: This detailed summary provides an overview of the procedure and conditions for issuing bonus shares. It is important to refer to the relevant legislation and seek professional advice for complete understanding and accurate information.

RIGHT ISSUE

Difference between Right Shares and Bonus Shares:

1. Meaning:

   - Right Shares: Issued against payment, and shareholders are required to pay for these additional shares.

   - Bonus Shares: Issued free of charge to existing shareholders, without any payment required.

2. Fully Paid-up:

   - Right Shares: May be partly paid up, meaning shareholders need to make additional payments in the future.

   - Bonus Shares: Always fully paid up, meaning no further payment is required.

3. Cash:

   - Right Shares: Bring cash to the company as shareholders need to pay for the additional shares.

   - Bonus Shares: Do not contribute to the company's cash reserves as they are issued free of charge.

4. Separate Bank Account:

   - Right Shares: The money received from shareholders for right shares must be kept in a separate bank account until allotment is approved by the stock exchange.

   - Bonus Shares: Not relevant as no money is received for bonus shares.

5. Right of Renunciation:

   - Right Shares: Shareholders have the right to renounce their entitlement to the additional shares in favor of their nominee.

   - Bonus Shares: No such facility is available for renunciation.

6. Guidelines:

   - Right Shares: Regulated by the provisions of section 62 of the Companies Act.

   - Bonus Shares: Regulated by the provisions of section 63 of the Companies Act and SEBI guidelines.

7. Company's Articles/Table A:

   - Right Shares: The issue of right shares is governed by the company's Articles of Association or Table A.

   - Bonus Shares: The issue of bonus shares is governed by the detailed SEBI guidelines and the company's Articles of Association.

BUY BACK OF SECURITIES (SECTION 68)

1. Definition and Funding:

- Buyback of securities refers to a company purchasing its own shares or specified securities using funds from free reserves, securities premium account, or proceeds from the issuance of shares or securities.

- Buyback cannot be funded from the proceeds of earlier offerings of the same shares or securities.

2. Authorization:

- The company's articles of association must permit buyback, and if not, the articles need to be amended.

- Buyback can be approved by the board of directors or through a special resolution passed by shareholders, depending on the amount.

3. Quantum:

- The board can approve a buyback of up to 10% of the paid-up capital and free reserves.

- Shareholders' approval through a special resolution is required for buyback exceeding 10% but not exceeding 25% of the company's paid-up capital and free reserves in a financial year.

4. Explanatory Statement:

- A special resolution for buyback must be accompanied by an explanatory statement disclosing material facts, the need for buyback, the class of shares/securities to be acquired, the amount to be invested, and the timeframe for completion.

5. Filing and Dispatch:

- The company needs to file a letter of offer with the Registrar of Companies (ROC) in Form No. SH.8, along with the prescribed fee.

- The letter of offer must be sent to shareholders or security holders within 21 days of filing with the ROC.

6. Offer Period:

- The buyback offer must remain open for a minimum of 15 days and a maximum of 30 days from the dispatch date of the letter of offer.

7. Post-Buyback Debt-Equity Ratio:

- The company's post-buyback secured and unsecured debts should not exceed twice the paid-up capital and free reserves unless a higher ratio is notified by the central government.

8. Fully Paid-Up Shares/Securities:

- Shares or securities bought back must be fully paid up.

9. Time Gap between Buybacks:

- No offer of buyback can be made within one year from the closing date of the previous buyback.

10. Time Limit for Completion:

- Buyback must be completed within one year from the date of passing a special resolution or board resolution.

11. Methods of Buyback:

- Buyback can be done on a proportionate basis from existing shareholders, from the open market, or by purchasing shares issued under stock options or sweat equity plans.

12. Declaration of Solvency:

- A declaration of solvency in Form No. SH.9 must be filed with the ROC and SEBI (for listed companies), stating that the company can fulfill its obligations and will not become insolvent within one year.

13. Extinguishment of Securities:

- Shares or securities bought back must be physically destroyed within seven days of the last buyback date.

14. Prohibition on Further Issue:

- After completing the buyback, the company cannot issue the same kind of shares or securities within six months, except for bonus issues or the discharge of subsisting obligations.

15. Register and Return:

- The company must maintain a register of bought-back shares or securities and file a return with the ROC and SEBI (for listed companies) within 30 days of completion, along with a certificate certifying compliance with the provisions of the Act and rules.

16. Punishments:

- Non-compliance with buyback provisions can result in fines and imprisonment for the company and its officers.

17. Transfer to Capital Redemption Reserve:

- An amount equal to the nominal value of the bought-back shares must be transferred to the capital redemption reserve account, which can be utilized for issuing fully-paid bonus shares.

18. Prohibited Circumstances

A company cannot buy its own shares directly or indirectly through subsidiaries or investment companies.

Buyback is prohibited if the company has failed to repay deposits, interest, redemption of debentures, payment of dividends, or repayment to financial institutions.

Exceptions apply if the default is rectified, and three years have passed since the default ceased to exist.

Non-compliance with Key Sections:

Buyback is not allowed if a company has not complied with provisions related to the annual return, declaration of dividends, punishment for failure to pay dividends, and financial statements.

MEMBERSHIP OF COMPANY

1. Definition of a member: Under Section 2(55) of the Companies Act, 2013, a member of a company refers to individuals who have agreed to become members and have their names registered in the company's register of members.

2. Conditions for becoming a member: Two conditions must be met for someone to become a member of a company: (i) agreement to become a member, and (ii) entry of the person's name in the company's register of members.

3. Legal capacity: According to the Indian Contract Act, of 1972, a person must have the legal capacity to enter into an agreement. This includes being of the age of majority, of sound mind, and not disqualified from contracting by any applicable law.

4. Difference between member and shareholder: In the Companies Act, the terms "member" and "shareholder" are used interchangeably. A member is a person whose name is listed in the register of members, while a shareholder is someone whose name appears on the register of members and holds shares in the company.

5. Register of members: Section 88 of the Companies Act, 2013 requires companies to maintain various registers, including a register of members for each class of equity and preference shares. The register should include an index of the names. The beneficial owners' register maintained by a depository is considered the corresponding register for the Act.

6. Consequences of not maintaining registers: If a company fails to maintain registers of shareholders, debenture holders, or other security owners, it and its officers may face penalties, including fines.

Modalities of Maintaining the Register of Members:

1. Form and particulars: Every company limited by shares must maintain a register of its members in Form No. MGT.1. The register should include various particulars for each member, such as name, address, email address, Permanent Account Number (PAN) or Corporate Identification Number (CIN), Unique Identification Number (if any), father's/mother's/spouse's name, occupation, status, nationality, details of guardianship for minor members, and nominee information.

2. Date of becoming a member: The register should include the date on which a person becomes a member of the company.

3. Date of cessation: The date of cessation should be recorded in the register when a person ceases to be a member.

4. Amount of guarantee: If applicable, the register should mention the amount of guarantee provided by the member.

5. Other interests and instructions: Any other interests of the member and instructions given regarding the sending of notices should be recorded in the register.

Maintenance of the Register:

1. Timely entries: Entries in the register should be made within seven days after the allotment of shares, debentures, or any other approved securities by the Board of Directors or its committee.

2. Location of the register: The register should be maintained at the company's registered office. However, a special resolution passed at a general meeting can allow the register to be held at another place in the same city, town, or village where the registered office is located or any other place in India where more than one-tenth of the total registered members reside.

3. Updates due to various events: Entries should be made in the register within seven days for events like forfeiture, buy-back, reduction, sub-division, consolidation, cancellation of shares, issue of sweat equity shares, the transmission of shares, shares issued under schemes, mergers, reconstitution, employee stock option schemes, issue of duplicate or new share certificates, debenture certificates, or other security certificates.

4. Changes in member status: Any alterations in the status of a member, debenture holder, or another security holder due to death, insolvency, change of names, transfer to Investor Education Protection Fund, or any other reason should be recorded in the respective register.

5. Corrections and orders: Corrective actions ordered by competent authorities under the Companies Act should be reflected in the register. References to orders issued by judicial, revenue, or regulatory authorities should also be indicated.

6. Pledge, charge, or lien: For listed companies, details of any pledge, charge, lien, or hypothecation created by the promoters on securities of the company, including the names of the pledgee/pawnee, should be entered in the register within fifteen days.

7. Joint ventures: If promoters of a listed company establish a joint venture and create pledges, hypothecations, charges, or liens on the listed company's securities, the details of such actions should be entered into the register within fifteen days.

Authentication of the Register:

1. Authentication: Entries in the registers maintained under Section 88 should be authenticated by the company secretary or any other person approved by the board. The date of the board resolution authorizing the authentication should be specified.

2. Foreign Register: A company may maintain a part of the register of members, debenture holders, or other security holders in a foreign country, known as the "foreign register." The foreign register should be maintained in the same format as the principal register.

Index of Members:

1. Inclusion of Index: Every register maintained under Section 88 should include an index of names. The index should allow easy identification of entries relevant to each folio in the register.

2. Exception for Fewer than Fifty Members: If the number of members is less than fifty, maintaining an index is not necessary.

3. Entries in Index: Necessary entries should be made in the index simultaneously with the entry for allotment or transfer of any security in the register.

Foreign Register:

1. Maintenance of Foreign Register: A company may keep a foreign register in any country outside India for members, debenture holders, or other security holders. The foreign register should be considered part of the principal register.

2. Notice to Registrar: The company should file a notice with the Registrar within thirty days of opening a foreign register, specifying its location. Any changes or discontinuation of the foreign register should also be notified to the Registrar.

3. Inspection and Closure: The foreign register should be available for inspection, and extracts and copies may be taken from it. Closure of the foreign register should be accompanied by advertisements in local newspapers.

4. Rectification: If a foreign register is maintained, the competent authority's decision to rectify the register is binding.

5. Entries in Foreign Register: Entries in the foreign register should be made concurrently after the allotment or transfer of shares, debentures, or other securities has been authorized by the Board of Directors or its committee.

6. Copy and Duplicate Record: A copy of each entry in the foreign register should be sent to the company's registered office in India within fifteen days. A duplicate record of the foreign register should also be maintained at the registered office.

7. Discontinuation of Foreign Register: The company may discontinue a foreign register, and all entries should be transferred to another foreign register or the principal register.

Differentiation of Entries: Shares, debentures, or other securities registered in the foreign register should be differentiated from those in the principal register and any other foreign register. No transaction should be distinguished from those registered.

IN-TEXT QUESTIONS

1. What is a share's 'nominal value?'

a. The maximum value that the share can be sold for.

b. A fixed amount that represents the notional value of the share's worth.

c. The current market value of the share.

d. The maximum value that can be paid for a share.

2. The allotment of shares refers to the process whereby a person's name is entered into the register of members. True or False?

3. Which of the following can be used for buying back shares?

a. Free Reserves

b. Securities Premium

c. Proceed of fresh issue of shares.

d. All of the above.

4 Who cannot become a member of a company?

a. LLP (Limited liability partnership)

b. HUF (Hindu Undivided Family)

c. Foreigner as a member

d. Minor

5. Which of the following details of the issue of sweat equity shares shall be disclosed by the Board of Directors in the Director’s report for the year.

a. the class of director or employee to who sweat equity shares were

issued.

b. the class of shares issued as Sweat Equity Shares.

c. the reasons or justification for the issue.

d. the principal terms and conditions for the issue of sweat equity shares,

including the pricing formula.

e. All of the Above.

ANSWER :

1. b. A fixed amount that represents the notional value of the share's worth.

2. False.

3. d. All of the above.

4. d. Minor.

5. e. All of the above.

MODES OF ACQUIRING MEMBERSHIP

Membership Acquisition in a Company:

1. Subscription to the Memorandum: By subscribing to the memorandum of association, a person becomes a member of the company upon its incorporation. They are liable for the shares they have subscribed.

2. Agreement in Writing:

   a. By Application and Allotment: A person becomes a member when shares are allocated to them, and their name is entered in the register of members.

   b. By Transfer of Shares: An individual can become a member by purchasing shares from an existing member and having the transfer recorded in the company's books.

   c. By Transmission of Shares: If a member passes away, their shares can be transferred to their legal representative or chosen person without the need for a transfer instrument.

   d. By Acquiescence or Estoppel: If a person allows their name to be on the register of members or holds themselves out as a member without sufficient cause, they are deemed to be a member and cannot deny their membership.

3. Holding Shares as Beneficial Owner in the Records of Depository: Any person holding the company's shares and whose name is entered as a beneficial owner in the depository's records is considered a member of the company.

Important Points:

- Subscribers to the Memorandum become members upon incorporation.

- Application and allotment of shares create a membership.

- Transfer of shares from an existing member can result in membership.

- Transmission of shares occurs when a member passes away.

- Acquiescence or estoppel can lead to membership.

- Holding shares as a beneficial owner in a depository makes a person a member.

WHO MAY BECOME A MEMBER

Eligibility and Restrictions

1. Company as a Member:

- A company can become a member of another company, provided it is allowed to invest in securities by its Memorandum of Association.

- A subsidiary company cannot be a member of its holding company, except in certain exceptional circumstances.

- These exceptional circumstances include being a legal representative of a deceased member, holding shares as a trustee, or being a shareholder before becoming a subsidiary.

2. Partnership Firm as a Member:

- A partnership firm, being a non-legal person, cannot become a member of a company unless it is registered under Section 8 of the Companies Act, 2013.

3. Limited Liability Partnership (LLP) as a Member:

- An LLP can become a member of a company as an incorporated entity.

4. Hindu Undivided Family (HUF) as a Member:

- HUF can become a member of a company, and shares can be held in the name of the Karta (head) of the HUF.

5. Non-profit Making Company as a Member:

- A non-profit-making company registered under Section 8 of the Act can become a member of another company if permitted by its Memorandum of Association.

6. Foreigners as Members:

- Foreign nationals can become members of an Indian company, subject to compliance with the Foreign Exchange Management Act, 1999.

- During a war with a foreign national's country, their voting power and notification rights may be suspended.

7. Minors as Members:

- Minors, being incapable of entering into contracts, cannot become members of a company.

- However, a written agreement signed by the minor's legal guardian may be accepted, and shares can be registered in the minor's name.

8. Insolvents as Members:

- Insolvents can be members of a company as long as their names are on the register of members.

- They retain voting rights but lose their beneficial interest in the shares, and dividends are paid to the Official Assignee or Receiver.

9. Public Offices as Members:

- Public offices that are not legal entities cannot own shares in a company.

- Shares cannot be registered in the name of a public office that does not meet the definition of a company under the law.

Important Points:

- Companies can become members of other companies, but self-membership is not allowed.

- Partnership firms, HUFs, LLPs, and non-profit companies have specific provisions for membership.

- Foreigners, minors, insolvents, and public offices have restrictions on membership, with some exceptions and conditions

IN-TEXT QUESTIONS

6. As per section 63(1), a company can issue fully paid-up bonus shares to its members,

out of: -

a. its free reserves.

b. the securities premium account; or

c. the capital redemption reserve account.

d. All of the above.

7. Bonus shares are always: -

a. Always partially paid up.

b. Always fully paid up.

c. May be partially paid up.

d. None of the above.

8. For Buy back of securities an explanatory note shall be annexed to the notice of the

meeting at which the special resolution is expected to be passed, stating: -

a. complete and full disclosure of all material facts.

b. the necessity for the buy-back.

c. the class of stock or securities to be acquired after the purchase.

d. the sum to be invested under the buy-back.

e. the timeframe for completing the buy-back.

f. All of the above.

9. Which of the principle is not validly related to the allotment?

a. The allotment should be made by proper authority.

b. Allotment for securities must be made within a reasonable time.

c. Allotment should be conditional.

d. Allotment must be communicated.

ANSWER:

6. Answer: d. All of the above.

7. Answer: b. Always fully paid up.

8. Answer: f. All of the above.

9. Answer: c. Allotment should be conditional.

RIGHTS AND LIABILITIES OF MEMBERS

Rights of Shareholders:

- Right to vote at all meetings, either in person or by proxy

- Right to requisition an extraordinary general meeting of the company or be a party to joint requisition

- Right to receive notice of a general meeting

- Right to elect directors

- Right to receive dividends and bonus shares

- Right to apply to the 'Tribunal' for various matters such as prevention of oppression and mismanagement, investigation of company affairs, and refusal of registration of shares by a private company

- Right to apply to the Central Government in case of default in holding annual general meetings by the company

- Right to transfer shares subject to the provisions of the Companies Act and Articles of Association

- Right to obtain copies of the Memorandum and Articles of Association, Annual Accounts of the company, resolutions, and agreements, and minutes of general meeting proceedings.

Liabilities of Members:

- Obligation to pay calls on shares

- Liability to contribute as a contributory if the company goes into liquidation (for partly paid shares)

- Requirement to pay the whole dues in cash if shares were allotted for consideration other than cash

- Unlimited liability for members, if the statutory membership of a company falls below the statutory limit and business, is carried on for more than six months

- Obligation for members of Guarantee Companies to contribute to the extent of the guarantee amount at the time of winding up.

TRANSFER AND TRANSMISSION OF SHARES

Transfer of Shares:

- Transfer of shares is a voluntary act between the transferor and transferee.

- It is usually documented in a transfer deed, which transfers the title of the shares from one party to another.

- The transferor's liability ceases once the shares have been transferred.

- Shares of a public company can be easily transferred unless specifically mentioned as non-transferable.

- The transfer of shares requires a proper instrument of transfer, duly stamped, dated, and executed by the transferor or transferee.

- The instrument must be delivered to the company within 60 days and accompanied by the certificate of shares or letter of allotment.

- For partly paid shares, the SH-5 form needs to be filled.

Transmission of Shares:

- Transmission of shares occurs by the law, not by the will of the shareholder.

- It happens when the shareholder is deceased, declared insolvent, or lunatic.

- Transmission is initiated by the legal heir or legal representative of the deceased holder.

- Unlike transfer, no transfer deed is required for transmission.

- Liability continues in the case of transmission.

Differences between the Transfer and Transmission of Shares:

- Choice: Transfer is a voluntary act, while the transmission is operational by law.

- Initiation: Transfer is initiated by the transferee or transferor, whereas transmission is initiated by the legal representative.

- Result: Transfer is a deliberate act, whereas transmission occurs due to death or insolvency.

- Adequate consideration: Transfer involves an agreed-upon consideration, while transmission does not require consideration.

- Transfer deed: Transfer requires a transfer deed, but the transmission does not.

- Stamp duty: Transfer requires stamp duty, while transmission is not applicable for stamp duty.

- Liability: Transferor's liability ends with the transfer, but liability continues to exist in the case of transmission.

DEMAT SYSTEM

Dematerialization:

- Dematerialization (Demat) is the conversion of physical certificates of securities into electronic form.

- It provides accessibility and convenience for investors by eliminating the need for physical certificates.

- The process involves submitting a Dematerialized Request Form (DRF) to the Depository Participant (DP) along with the physical share certificates.

- The DP renunciates the DRF and share certificates with the company, which updates the Register of Members and informs the Depository.

- The Depository credits the investor's demat account with the equivalent number of electronic shares.

- Dematerialization is optional, and investors can choose to hold securities in physical or electronic form.

- Securities in the dematerialized form are fungible and do not have distinct numbers like physical certificates.

- Transfer of dematerialized securities is not restricted and can be freely transferred.

Procedure for Selling and Buying Dematerialized Shares:

- Investors can transact with other individuals who have a demat account.

- Transactions do not require payment of stamp duty.

- Selling securities requires submitting a Delivery Instruction Slip (DIS) to the DP while purchasing securities requires a Receipt Instruction Slip (RIS).

- The DP updates the accounts and electronically informs the depository about the transactions.

- The depository registers the securities in the transferee's name and debits the transferor's account.

- The DP updates the investor's statement of accounts and sends it at regular intervals.

- Investors can approach the DP, depository, or SEBI for complaints or queries.

Rematerialization:

- Rematerialization is the conversion of electronic securities back into physical certificates.

- Investors can choose to rematerialize their dematerialized securities.

- The process involves submitting a request to the DP, who intimates the depository.

- The depository confirms the rematerialization request to the company's Share Transfer Agents.

- Share Transfer Agents update accounts, print certificates, and confirm to the depository.

- The depository updates accounts and downloads details to the DP.

- Share Transfer Agents dispatch physical certificates to the holder, and the DP sends an intimation of rematerialization to the client.