CS Executive Company Law Question Bank

CS Executive Company Law Question Bank for Dec 2021

CS Executive Company Law Question Bank with Answers - ICSI Previous Question Paper of Chapter 2 of New Syllabus (Share Capital)

In this article, we have covered CS Executive Company Law Question Bank with Answers. All questions covered here were asked in the CS Executive Past Papers. We have covered questions from Chapter 2 of CS Executive Company Law New Syllabus i.e. Share Capital.  All answers are updated as per Companies (Amendment) Act, 2020.  These answers are valid for Dec 2021

Part A – Meaning and Type of Share Capital

 

Questions related to meaning and type of Share Capital

Question 1: Distinguish between share and stock. (June 2010) (4 marks)
Answer:

Basis of DistinctionSharesStock
NatureShares in physical form bear distinct numbers (Section 45)Stocks are the consolidated value of share capital. As such they don’t bear any distinct numbers.
ExistenceCompany may issue sharesCompany shall not issue stocks. Only fully paid-up shares can be converted into stocks
Paid-up ValueShares may or may not be fully paid-up.Stock is always fully paid- up.
Nominal ValueShares have a nominal valueStock does not have any nominal value
DenominationAll shares of same class are of equal denominationStocks may have different denominations
Face ValueFace Value of share shall be in whole number.Face Value of stock may be in whole number or may be in fractions

Question 2:
Distinguish between Reserve Capital and Capital Reserve. (December 2009) (June 2012) (December 2012)(4 marks)
Or
‘Reserve Capital’ and ‘Capital Reserve’ are one and the same. (December 2014) (5 marks)
Answer:

 Reserve CapitalCapital Reserve
MeaningIt is that part of the uncalled capital of a company which company has decided by special resolution not to call except in the event and for the purpose of the company being wound up.Capital reserves are created out of capital profit. Capital Reserve may be a statutory capital reserve or non-statutory capital reserve.
Need of CreationThe creation of reserve capital is not mandatory.The creation of capital reserve is mandatory in certain cases.
Balance Sheet DisclosureThere is no need to disclose reserve capital in the balance sheet.Capital reserves are disclosed in the balance sheet under the head “Reserves & Surplus”.
Writing Off Capital LossesReserve Capital cannot be used to write off capital losses.Capital reserves can be used to write off capital losses.
Created out ofShare capitalCapital profits
Specific conditionSpecial Resolution should be passed at AGMNo such conditions
Examples Securities Premium Account, Capital Redemption Reserves

Question 3
Distinguish between nominal capital and subscribed capital. (June 2010) (4 Marks)

Nominal CapitalSubscribed Capital
It is defined under Section 2(8) of Companies Act, 2013It is defined under Section 2(86) of Companies Act, 2013
“Authorised capital” or “nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company;“Subscribed capital” means such part of the capital which is for the time being subscribed by the members of a company;

Question 4
Distinguish between preference share capital and equity share capital. (December 2015) (4 marks)
Answer:

Equity SharesPreference Shares
Equity share capital, with reference to any company limited by shares, means all share capital which is not preference share capital. (Explanation to Section 43)

Preference share capital, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—

(a)    payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
(b)   repayment of capital, in the case of a winding up or otherwise, of the amount of the share capital paid-up or deemed to have been paid-up;

Dividend on Equity Shares are not fixedDividend on Preference Shares are fixed
Every member of a company limited by shares and holding equity share capital therein, shall have a right to vote on every resolution placed before the company (Section 47)

According to Section 47(2), every member of a company limited by shares and holding any preference share capital therein shall, in respect of such capital, have a right to vote

– only on resolutions placed before the company which directly affect the rights attached to his preference shares and,
– on any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital.

Dividend is not fixed, so dividend can’t be cumulativeDividend may be cumulative or non-cumulative, depending upon terms of issue.
No redemption of equity shares except under a scheme involving reduction of capital or buy back of shares by the company or at the time of winding up of companyA company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue.

Question 5
Redeemable preference shares are not preference shares. Comment. (December 2010) (5 marks)
Answer:
Preference share capital, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—

  • payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
  • repayment of capital, in the case of a winding up or otherwise, of the amount of the share capital paid-up or deemed to have been paid-up;

Issue and redemption of preference shares (Section 55)

  • No company limited by shares shall issue any preference shares which are irredeemable.
  • A company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue.

Thus, it is incorrect to say that redeemable preference shares are not preference shares. According to Companies Act, 2013, company must redeem the preference shares according to terms of issue (max. within 20 years)

Question 6.
Preference share are cumulative unless expressly stated to be non-cumulative. Comment (June 2011)(5 Marks)
Answer:
Preference shareholders get fixed dividend out of the profits of company.

Preference shares are called cumulative if dividend on those shares keeps on accumulating year after year until the dividend is fully paid.

Non-cumulative preference shares are those shares that provide the shareholder fixed dividend amount each year from the company’s net profit but in case the company fails to pay the dividend on such preference share to the shareholder in any year then such dividend cannot be claimed by the shareholder in future.

Preference shares are always considered as cumulative until and unless stated otherwise in the terms of issue.

Question 7
In no circumstances a company can issue redeemable preference shares with a redemption period of 20 years. (June 2015) (5 marks)
Answer:
Maximum tenure of preference shares (20 Years)
According to Section 55 of Companies Act, 2013, a company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue.

But as per Rule 10 of Share Capital and Debentures Rules, 2014, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum 10% of such preference shares per year from the 21th year onwards or earlier, on proportionate basis, at the option of the preference shareholders.

Thus, it is incorrect to say that in no circumstances a company can issue redeemable preference shares with a redemption period of 20 years.

Question 8
Distinguish between ‘Free reserves’ and ‘Net worth’ under the provision of Companies Act, 2013. (December 2017) (4 marks)
Answer:
According to Section 2(57) of Companies Act, 2013, “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;

According to Section 2(43) of Companies Act, 2013, “free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:

Provided that—

  • any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or
  • any change in carrying amount of an asset or of a liability recognised in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves;

Thus “Net Worth” is a wider term and “Free Reserve” is part of “Net Worth”.

Question Answers related to Concept of Issue and Allotment

Question Answers related to Prospectus

Question 1:
Write a short note on the golden rule or golden legacy. (December 2008) (4 marks)
Or
A company has issued a prospectus to the public stating that the company has paid dividend regularly and the prospectus is silent relating to the sources of profit that is whether trading profit or capital profits. The fact is that the company has incurred losses for all the last past 5 years, but the dividend is paid out of reliance capital profit (that is secret reserves). Y a shareholder, claim that the prospectus is false. Whether Y’s contention is correct? Discuss (June 2014) (4 marks)

Answer:

  1. It is the duty of those who issue the prospectus to be truthful in all respects.
  2. The one who issues a prospectus must state all the facts and information accurately.
  3. In short, the true nature of the company’s position should be disclosed and there should not be concealment of any material fact.
  4. Even if every specific statement is true, the prospectus said to be false by reason of the suppression of other material facts, it conveys a false impression.
  5. This golden rule was pronounced in New Brunswick and Canada Railway & Land Co. v. Muggeridge (1860).

The facts of the given case are similar to R.V. Kylsant (1932) K.B. 442, wherein it was held that if prospectus states that the company is paying a dividend for the last five years but fails to disclose the source of profit for paying such dividend, such prospectus is false and misleading and the managing director and chairman, who knew that it was false, were held guilty of fraud

Question 2
A deceitful prospectus was issued by the directors on behalf of the company. Pawan received a copy of it, but did not take any shares in the company. The allotment of shares to applicants was completed. Several months later, Pawan bought shares from the stock market. He proceeded with a suit against the directors of the issue of deceitful prospectus. Will he succeed? (December 2013) (4 marks)
Answer:

According to Section 35 of Companies Act, 2013, Where a person has subscribed for securities of a company acting on any statement included, or the inclusion or omission of any matter, in the prospectus which is misleading and has sustained any loss or damage as a consequence thereof, the company and every person who—

  • is a director of the company at the time of the issue of the prospectus;
  • has authorised himself to be named and is named in the prospectus as a director of the company, or has agreed to become such director, either immediately or after an interval of time;
  • is a promoter of the company;
  • has authorised the issue of the prospectus; and

shall be liable to pay compensation to every person who has sustained such loss or damage.

In the given case, Mr. Pavan has purchased the shares from the stock exchange and he has not acquired shares directly from the Company acting on any statement included, or the inclusion or omission of any matter, in the prospectus.

Hence he cannot claim damages from the company for the loss suffered on the ground the prospectus issued by the company contained a false statement.

Question 3.
Shortcut Limited has allotted shares to investors of the company without filing a prospectus with the registrar of companies, Mumbai. Explain the remedies available to the investor in this regard. (December 2014) (4 marks)
Answer:
Section 26 deals with the matters to be stated in Prospectus. According to Section 26, before issuing prospects, company shall deliver a copy of prospectus to the ROC for filing. Such copy shall be signed by every person who is named therein as a director or proposed director of the company or by his duly authorised attorney.

If a prospectus is issued in contravention of the provisions of section 26,

  • the company shall be punishable
  • with fine which shall not be less than Rs. 50,000 but which may extend to 3 lakh rupees and
  • every person who is knowingly a party to the issue of such prospectus shall be punishable
    • with fine which shall not be less than Rs. 50,000 but which may extend to Rs. 3 lakh.

However, such allotment shall remain valid.

If the allotment made in violation of the provisions of Section 39 of the Companies Act, 2013, is irregular allotment but not void allotment.

In such a case, investors don’t get any right against the company. So, there is no remedy available to the investors.

Question 4
Define prospectus.What are the ingredients to constitute a prospectus?

What are the documents required to be attached with the draft red herring prospectus to be filed with the Registrar of Companies.

Registrar of the company can refuse registration of prospectus. Explain. (16 Marks) (December 2009)

Answer:
|What is prospectus?

According to Section 2(70),

  • “Prospectus” means any document described or issued as a prospectus and includes
    • a red herring prospectus referred to in section 32 or
    • shelf prospectus referred to in section 31 or
    • any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate;

Thus, prospectus means any document through which a company invites offers from the public for the subscription or purchase of any securities. It contains all the information about the company and its business which helps an investor in taking intelligent investment decisions.

Documents required to be attached with the draft red-herring prospectus to be filed with the Registrar of Companies:

  • Copy of every contract relating to the appointment or remuneration of a managing director or manager.
  • Consent of the expert mentioned in the prospectus, if his report is included in the prospectus.
  • A written statement relating to the adjustments, if any, in respect of figures of any profits or losses, and assets and liabilities.
  • The consent of the director in respect of new directors, if any, named therein.
  • A copy of the underwriting agreement, if any, should also be filed.
  • A copy of every material contract entered into within two years of the issue of the prospectus (not being a contract entered into in the ordinary course of business of the company).

Can registrar of the company refuse registration of prospectus?
Powers of ROC to refuse the registration of prospectus, if provisions of Section 26 are not complied, were covered under Section 26(7). The provisions of section 26(7) are omitted by The Companies (Amendment) Act, 2019 – Effective From 15th August 2019

Question 5:
Write a short note on cases in which a prospectus is not required to be issued. (December 2010) (4 marks)

Answer:
Section 26 deals with the matters to be stated in Prospectus. According to Section 26(2), requirements w.r.t prospectus shall not apply—

  • to the issue to existing members or debenture-holders of a company (Right Issue); or
  • to the issue of a prospectus or form of application relating to shares or debentures which are, or are to be, in all respects uniform with shares or debentures previously issued and for the time being dealt in or quoted on a recognised stock exchange (Further Issue).

Further, in the following cases company is not required to issue prospectus

  • Where the securities are not offered to the public (like in case of private placement)
  • Where a person is a bona fide invitee to enter into an underwriting agreement with regard to shares or debentures.

Question 6
Write a short note on the red-herring prospectus. (June 2009) (4 marks)
Or
Write a short note on the red-herring prospectus. (December 2014) (4 marks)
Or
Red herring prospectus means a prospectus that has complete particulars on the price of the securities offered and the quantum of securities offered. Comment (June 2010) (5 marks)

Answer
What is Red herring prospectus?
Red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

According to Section 32

  • A company proposing to make an offer of securities may issue a red herring prospectus prior to the issue of a prospectus.
  • A company proposing to issue a red herring prospectus under sub-section (1) shall file it with the Registrar at least 3 days prior to the opening of the subscription list and the offer.
  • A red herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised, whether by way of debt or share capital, and the closing price of the securities and any other details as are not included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.

Question 7.
Public companies can issue shelf prospectus. (June 2014) (5 marks)
Answer:
Shelf prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

According to Section 31
Any class or classes of companies, as the SEBI may provide by regulations in this behalf, may file a shelf prospectus with the Registrar

  • at the stage of the first offer of securities included therein which shall indicate a period not exceeding 1 year as the period of validity of such prospectus which shall commence from the date of opening of the first offer of securities under that prospectus, and
  • in respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required.

       The following kinds of companies are eligible to issue a shelf prospectus:

  • Public Financial Institutions (PFIs) (PFIs are companies whose paid-up share capital is held by the Central Government to the extent of more than 51 per cent. Examples are the Life Insurance Corporation of India, Infrastructure Development Finance Company Limited, Industrial Credit and Investment Corporation of India Limited, Industrial Finance Corporation of India, and Industrial Development Bank of India.)
  • Public sector banks
  • Non-banking Finance Companies
  • Listed companies [A listed company has its securities listed with the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) or Calcutta Stock Exchange (CSE)]

 Thus every public company is not allowed to issue Shelf Prospectus.

Question 8.
Distinguish between shelf prospectus and Red herring prospectus. (December 2009) (4 marks)
Answer:
 

 

Shelf Prospectus

Red-herring Prospectus

Sections

It is defined under Section 31 of Companies Act, 2013

It is defined under Section 32 of Companies Act, 2013

Definitions

Shelf prospectus means a prospectus in respect of which the securities or class of securities included therein are issued for subscription in one or more issues over a certain period without the issue of a further prospectus.

Red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

Who can issue?

Any class or classes of companies, as the SEBI may provide by regulations in this behalf.
The following kinds of companies are eligible to issue a shelf prospectus:

–          Public Financial Institutions (PFIs) Public sector banks

–          Non-banking Finance Companies

–          Listed companies

Provisions of the red-herring prospectus are applicable to all companies except those are covered under the shelf prospectus. The provision is mainly applicable for book building.

Time limit for filing

A company filing a shelf prospectus shall be required to file an information memorandum between the previous offer of securities and the succeeding offer of securities.

A company proposing to issue a red-herring prospectus shall file it with the ROC at least 3 days prior to the opening of the subscription list and the offer.

Question 9. Distinguish between Red herring prospectus and abridged prospectus. (December 2015) and (December 2017) [4 Marks]

Answer:

 

Abridged Prospectus

Red-herring Prospectus

Sections

It is defined under Section 2(1) of Companies Act, 2013

It is defined under Section 32 of Companies Act, 2013

Definitions

Abridged Prospectus means a memorandum containing such salient features of a prospectus as may be specified by the Securities and Exchange Board by making regulations on this behalf

Red herring prospectus means a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

Scope

According to Section 33 of the Companies Act, 2013, no form of application for the purchase of any of the securities of the Company shall be issued unless such form is accompanied by an abridged prospectus.

A copy of the prospectus shall, on a request being made by any person before the closing of the subscription list and the offer, be furnished to him.

A red-herring prospectus shall carry the same obligations as are applicable to a prospectus and any variation between the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

Question Answers related to Concept of Issue and Allotment

Question 1.

Securities premium shall be utilised only for certain specific purposes only. Comment (December 2013) (4 Marks)

Or

In view of provisions of Companies Act, 2013 relating to ‘securities premium’, state whether the amount lying in securities premium account of a company can be used:

  • For issuance of Bonus shares; and
  • For payment of dividend declared by the company at its General Meeting. (December 2015) (4 Marks)

 Answer:
According to Section 52(1), where a company issues shares at a premium, whether for cash or otherwise,

  • a sum equal to the aggregate amount of the premium received on those shares
    • shall be transferred to a “securities premium account”.

The provisions of this Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.

Use of Securities Premium Account

According to Section 52(2) of the Act, the securities premium can be utilised only for:

  • issuing fully paid bonus shares to members;
  • writing off the balance of the preliminary expenses of the company;
  • writing off commission paid or discount allowed, or the expenses incurred on issue of shares or debentures of the company;
  • for providing for the premium payable on redemption of any redeemable preference shares or debentures of the company; or
  • for the purchase of its own shares or other securities under section 68.

As discussed above, in relation to given case answer the following:

  • Company can use the amount lying in securities premium for issuance of bonus shares.
  • Company cannot use the amount lying in securities premium for payment of dividend declared by the company at its general meeting.

Question 2.
Radhika Textile Limited has utilised the securities premium during the financial year 2021-2022 as follows:
(i) Rs. 15 lakhs against expense of foreign travelling of directors.
(ii) Rs. 5 lakhs for writing-off the balance of preliminary expenses of the company.
(iii) Rs. 10 lakhs distributed as dividend for the financial year ending 31st March, 2022.
You, being the secretarial Auditor of the company, referring to the provision of Companies Act, 2013 relating to securities premium account, examine the validity of the above. (June 2017) (8 marks)

Answer:
Same as above.
As discussed above:|
(i) Securities Premium cannot be utilised against expense of foreign travelling of directors.
(ii) Securities Premium can be utilised for writing-off the balance of preliminary expenses of the company.
(iii) Securities Premium cannot be distributed as dividend.

Question 3.
Distinguish between: Letter of Allotment & Letter of Renunciation. (December 2012) (4 Marks)
Answer:

 

Letter of Allotment

Letter of Renunciation

Applicability

Letter of allotment is applicable in all cases where shares are allotted to persons.

Letter of renunciation is applicable in case of right issue under Section 62 of the Companies Act, 2013.

Option

Letter of allotment do not contain any option

Letter of renunciation contains an option to renounce the shares in favour of any other person

Transfer of Shares

Shares can be transferred with the help of letter of allotment if share certificate do not exists

Shares cannot be transferred with the help of letter of renunciation.
But right shares can be subscribed by the persons in whose favour the right has been renounced

Surrender

Letter of allotment is required to be surrendered to company for issue of share certificate

Letter of renunciation is not required to be surrendered to company. In fact it is right to transfer to subscribe the right shares of the Company

 

Question 4

On receipt of 85% of the minimum subscription stated in the prospectus, Little Stars Limited allotted 200 shares to Ranjit and the money was deposited in a scheduled bank. Later on, it was revealed that 40% of the amount withdrawn was for acquisition of fixed assets for the company. Ranjit, knowing these facts, refused to accept the allotment contending that the allotment was irregular under the provisions of the Companies Act, 2013.

As an expert on company law advice Ranjit. (December 2014) (4 marks)
Or
If a company does not receive a minimum subscription, it should refund money received from applicants within such time as may be prescribed. Explain the above statement with suitable Comments. (June 2019) (3 marks)
Answer:

Section 39 deals with the allotment of Securities by Company. According to Section 39, no allotment of any securities of a company offered to the public for subscription shall be made unless the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument.

According to Rule 11 of Prospectus & Allotment of Securities Rules, 2014, if the stated minimum amount has not been subscribed and the sum payable on application is not received within the period specified therein, then the application money shall be repaid within a period of 15 days from the closure of the issue and if any such money is not so repaid within such period, the directors of the company who are officers in default shall jointly and severally be liable to repay that money with interest at the rate of 15% per annum.

Thus, where company has allotted shares without receiving minimum subscription amount, such allotment is void. In the above case, Ranjit has right to refuse the allotment.

Question 5.
Confident Limited has forfeited 50,000 equity shares of the company @ INR 10 each and same were re-issued. After the filing of the annual return, of the Registrar of Company (ROC) has issued Show Cause Notice to the company for default of provision of section 39 of the Companies Act, 2013. Is the action of the ROC tenable under the provision of Companies Act, 2013? Discuss with relevant case law, if any. (June 2018) (4 marks)

Answer:
Section 39 deals with the allotment of Securities by Company. According to Section 39, whenever a company having a share capital makes any allotment of securities, it shall file with the Registrar a return of allotment in such manner as may be prescribed.

According to Rule 12 of Prospectus & Allotment of Securities Rules, 2014, whenever a company having a share capital makes any allotment of its securities, the company shall, within 30 days thereafter, file with the Registrar a return of allotment in Form PAS-3, along with the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014.

Allotment means allocation of unallocated share capital. But, in a case law Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd., it was established that re-issuance of forfeited shares cannot be termed as allotment for it is not the allocation of unallocated share capital. In fact, re-issuance of forfeited shares means reallocation of already allocated share capital.

Thus, in case of re-issuance of forfeited shares, company is not required to file return of allotment.

Question 6
State the time limit within which certificate of securities as provided in Companies Act, 2013 to be issued in case of:
(i) Any allotment of shares.
(ii) Any allotment of debentures.
What is the punishment in case of default committed in the above cases? (June 2019) (3 marks)

Answer:
According to Section 56(4), every company, (unless prohibited by any provision of law or any order of any Court, Tribunal or other authority) must deliver the certificates of all securities allotted, transferred or transmitted:-

  • within a period of 2 months from the date of allotment, in the case of any allotment of any of its shares;
  • within a period of 6 months from the date of allotment in the case of any allotment of debenture.

Where the securities are dealt with in a depository, the company shall intimate the details of allotment of securities to depository immediately on allotment of such securities.

Fine for default [Section 56(6)]

Where any default is made in complying with the above provisions,

  • the company and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees [Substituted by the Companies (Amendment) Act, 2020. Effective from 21st December 2020]

Question 7.
If a company has appointed a Company Secretary then his signature is mandatory on the share certificate issued by the company. Analyze with reference to the provisions of the Companies Act, 2013. (December 2018) (3 marks)

Answer:

According to Section 46(1), a certificate, issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares.

According to Rule 5 of Share Capital and Debentures Rules, 2014, every certificate shall specify the shares to which it relates and the amount paid-up thereon and shall be signed by

  • 2 directors or
  • a director and the company secretary,

wherever the company has appointed company secretary.

Provided that in case the company has a common seal it shall be affixed in the presence of persons required to sign the certificate.

Thus, signature of Company Secretary is mandatory on the share certificate issued by the company, even if company is having whole time Company Secretary.

Part-C : Issue of Securities

Question Answers related to Bonus Share

Question 1:

Referring to the provisions of Companies Act, 2013, state that conditions required to be fulfilled before a company can issue bonus shares to the shareholders of the company. (June 2015) (4 Marks)

Answer:
A company may issue fully paid-up bonus shares to its members, in any manner whatsoever, out of—
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account:

Condition for issue of Bonus Shares

  • Authorisation in articles;
  • Recommendation of the Board,
  • Authorised in the general meeting of the company;
  • Company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities;
  • Company has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
  • the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up;
  • it complies with such conditions as may be prescribed.

Note:

  • No issue of bonus shares shall be made by capitalising reserves created by the revaluation of assets.
  • The bonus shares shall not be issued in lieu of dividend
  • The company which has once announced the decision of its Board recommending a bonus issue, shall not subsequently withdraw the sam

Question 2

Bonus issue may be viewed as a ‘right issue’ except that money is paid by the company on behalf of the investing shareholders from its reserves. Comment (December 2008) (5 Marks)

Or

Distinguish between bonus shares and right shares. (Dec. 2010) (June 2011)(4 marks)

 Answer:

Right IssueBonus Issue
Rights Issue is an issue of capital to be offered to the existing shareholders of the company through a letter of offer.When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements.
Subscribers to shares in case of right issue shall have to pay issue price for the shares.Members do not have to pay any amount for such shares. A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares
Section dealing with right issue is Section 62(1)(a)Section dealing with bonus issue is Section 63

Thus in both cases, shares are given to only existing members of the company. In case of Right Issue subscribers have to pay. In case of Bonus issue shareholders need not pay anything.

But in case of right issue, offeree has right to renounce his ‘right to subscribe’. Further, in case of right issue, the existing member may or may not accept the offer. This is not available in the bonus issue.

So, the statement given in the question cannot be considered as completely correct.

Question 3.

The Board of directors of Deep Gyan Limited, a listed company, at its meeting held on 1st April, 2021 announced a proposal for issue of Bonus shares to all equity shareholders of the company at 1:1 ratio. On 1st May, 2021, the directors at another meeting passed a resolution to reverse the proposal of bonus issue announced on 1st April, 2021. Discuss the validity of proposal and the reversal. (June 2012) (4 Marks)

Answer:
In terms of the Provisions of the Rule 14 of the Companies (Shares & Debentures) Rules, 2014, the company which has once announced the decision of its board recommending a bonus issue shall not subsequently withdraw the same.
A resolution passed by the director to reverse the bonus issue announced is not valid.

The Board of directors of the Deep Gyan Ltd. must issue of Bonus shares to all equity shareholders of the company at 1:1 ratio. Thus, once proposed cannot be reversed such proposal of bonus issue.

Question Answers related to DVRs

Question 1 Board of directors of Progressive Limited decides to issue equity shares of a company with differential voting rights. Examining the provision of Companies Act, 2013, state the conditions to be complied with the company in this regard. (December 2016) (8 Marks) Answer: Issue of equity shares with differential rights as to dividend, voting or otherwise (Section 43 read with Rule 4 of Share Capital and Debentures Rules, 2014)
  1. No company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions, namely:-
    1. Authorisation in AOA;
    2. Ordinary resolution by shareholders (by postal ballot in case of listed companies);
    3. the voting power in respect of shares with differential rights of the company shall not exceed 74% of total voting power including voting power in respect of equity shares with differential rights issued at any point of time;
    4. No default in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
    5. No subsisting default in the
      • payment of a declared dividend or
      • repayment of its matured deposits or
      • redemption of its preference shares or debentures;
    6. No default in
      • payment of the dividend on preference shares or
      • repayment of any term loan/interest from a public financial institution or State level financial institution or scheduled Bank or
      • dues with respect to statutory payments relating to its employees to any authority or
      • crediting the amount in Investor Education and Protection Fund
      • Provided that a company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial year in which such default was made good.
    7. Not penalized by Court or Tribunal during the last three years of any offence under
      • the Reserve Bank of India Act, 1934 ,
      • the Securities and Exchange Board of India Act, 1992,
      • the Securities Contracts Regulation Act, 1956,
      • the Foreign Exchange Management Act, 1999 or
      • any other special Act, under which such companies being regulated.
  2. The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.
  3. The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.
  4. Where a company issues equity shares with differential rights, the Register of Members maintained under section 88 shall contain all the relevant particulars of the shares so issued along with details of the shareholders.

Question 2.

As a practising Company Secretary, advise your client company regarding the matter relating to issue of shares with differential rights, to be included in the Board of Directors Report. (June 2017) (4 Marks)

 Answer:
According to Section 43 of Companies Act, 2013 read with Rule 4 of Share Capital and Debentures Rules, 2014), the Board of Directors shall, inter alia, disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the following details, namely:-

  • the total number of shares allotted with differential rights;
  • the details of the differential rights relating to voting rights and dividends;
  • the percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time and percentage of voting rights which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
  • the price at which such shares have been issued;
  • the particulars of promoters, directors or key managerial personnel to whom such shares are issued;
  • the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;
  • the diluted EPS pursuant to the issue of each class of shares;

Other Questions

Question 1
Write a short note on sweat equity shares. (December 2014) (4 Marks)

Answer:
According to section 2(88), sweat equity shares mean equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

 Conditions for Issue of Sweat Equity Shares
Section 54(1) provides that notwithstanding anything contained in Section 53, a company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:

  1. the issue has been authorised by a special resolution passed by the company in the general meeting.
  2. the following are clearly specified in the resolution:
    (a) number of shares;
    (b) current market price;
    (c) consideration, if any; and
    (d) class or classes of directors or employees to whom such equity shares are to be issued.
  3. a company whose shares are listed on a recognized stock exchange issuing sweat equity shares should comply with the regulations made in this behalf by SEBI.
  4. a company whose shares are not so listed should issue sweat equity shares in compliance with

    the rules made in this behalf by the Central Government (i.e., Companies (Share Capital and Debentures) Rules, 2014)

Question 2.
Every employee of the company is eligible to participate in Employee Stock Option Scheme (ESOS). Comment (December 2012) (5 marks)
Answer:
According to Section 62(1)(b) read with Rule 12 of Share Capital and Debentures Rules, 2014, following employees can participate in Employee Stock Option Scheme (ESOS):

  • a permanent employee of the company who has been working in India or outside India; or
  • a director of the company, whether a whole time director or not but excluding an independent director; or
  • an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company or of an associate company

but following employees can’t participate in ESOS-

  1. an employee who is a promoter or a person belonging to the promoter group; or
  2. a director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

Hence, it is not correct to say that “Every employee of the company is eligible to participate in Employee Stock Option Scheme” (ESOS)

Question 3.
Distinguish between sweat equity and the issue of capital on a preferential basis. (December 2009) (4 marks)
Answer

Sweat Equity Issue of capital on a preferential basis
According to section 2(88), sweat equity shares mean equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Preferential Offer means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include

-shares or other securities offered through a public issue,
– rights issue,
–  employee stock option scheme,
– employee stock purchase scheme or
– an issue of sweat equity shares or
– bonus shares or
– depository receipts issued in a country outside India or
– foreign securities;

Company can issue Sweat Equity Shares to –

(a)    a permanent employee of the company who has been working in India or outside India; 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;

A company can issue shares to any persons on preferential basis, if it is authorised by a special resolution, whether or not those persons include shareholders and employees of the company, either for cash or for a consideration other than cash
Motive behind Sweat Equity is to remunerate the hard work of employeesMotive behind Preferential Offer is raise money by issuing shares.

Question 4

Distinguish between: ESOS and ESOP. (December 2009) (4 Marks)

 

ESOS

ESOP

Meaning

“Employee stock option scheme or ESOS” means a scheme under which a company grants employee stock options directly or through a trust.

“Employee stock purchase scheme or ESPS” means a scheme under which a company offers shares to employees, as part of a public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.

Purchase of Shares

Under ESOS employees are given an option to purchase shares at a later date i.e. after the vesting period.

Under ESPS employees are given an option to purchase shares on the spot at a discounted price.

Lock-in

The company may specify the lock-in period for the shares issued pursuant to the exercise of the option.

Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment.

Public Issue

ESOS has to be approved separately by the company in a general meeting by passing a special resolution. It cannot be part of a public issue.

Shares under ESPS can be issued as a part of a public issue.

Vesting Period

The minimum vesting period for ESOS is one year.

No vesting periods for ESPS as shares are offered on the spot.

Question 5.

Distinguish between sweat equity shares and employees stock option scheme. (December 2010) (June 2015) (4 marks)

 

ESOS

Sweat Equity Shares

Meaning

“Employee stock option scheme or ESOS” means a scheme under which a company grants employee stock options directly or through a trust.

According to section 2(88), sweat equity shares mean equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Motive

Motive behind the ESOS to retain the employee for a minimum period. Under ESOS employees are given an option to purchase shares at a later date i.e. after the vesting period.

Motive behind Sweat Equity is to remunerate the hard work of employees in form of Shares

Lock-in

The company may specify the lock-in period for the shares issued pursuant to the exercise of the option.

Sweat equity shares have a compulsory lock-in period of 3 years.

Consideration

Cash

Cash (discounted) or Value Addition to the company

Vesting Period

The minimum vesting period for ESOS is one year.

No vesting period

 

Question Answers related to Buy Back of Shares -Part-D

Question 1.
Piyush Limited decided to buy-back its shares with the approval of Board of directors. As the company secretary of the company, advise the board about the conditions and limitations in this regard. (December 2009) (10 Marks)
Answer:
Section 68 of Companies Act, 2013 deals with the buy-back of shares. According to Section 68, a company may buy-back its own securities either by passing special resolution or board resolution.

If company buy-back it securities by passing board resolution, following are the conditions and limitations in this regard:

Limit on buy-back by passing Board’s Resolution [Proviso to Section 68(2)(a)]

Where the buy-back has been authorised by the Board by means of a resolution passed at its meeting (not by special resolution passed by company)

  • company shall not buy-back more than 10% of the total paid-up equity capital and free reserves of the company
  • company is not required to pass special resolution in this case (Board’s resolution is sufficient)
  • Source of funds [Section 68(1)]
    A company may buy-back its securities out of—
    its free reserves;
  • the securities premium account; or
  • the proceeds of the issue of any shares or other specified securities
    No buy-back out of the proceeds of an earlier issue of the same kind

No buy-back of any kind of securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

 

Mode of buy-back [Section 68(5)]

The buy-back under sub-section (1) may be—

  • from the existing shareholders or security holders on a proportionate basis;
  • from the open market;
  • by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

 

Conditions related to buy-back [Section 68(2)]

No company shall buy-back its securities, unless—

  • the buy-back is authorised by its articles;
  • Company cannot buy-back more than 25% of its total paid-up equity capital in a financial year
  • the ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves. (Debt-equity ratio shall not be more than 2:1)
  • all the shares or other specified securities for buy-back are fully paid-up;

 

Time gap between 2 buy-back [Proviso to Section 68(2)]

No offer of buy-back shall be made by company within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

Question 2
The Board of directors of Pious Limited gives you the following information extracted from the company’s financial statements as of 31st March 2015:
Authorized share capital (1 crore share of rupees 10 each)                          10 Crores
Paid-up equity share capital                                                                                          5 Crores
General reserve                                                                                                                  5 Crores
Debenture redemption reserve                                                                                  2 Crores

 Board of directors by the resolution passed at its meeting decides to go for buy-back of shares to the extent of 20% of companies paid-up share capital and free reserves.
Examine the validity of Board’s Resolution with reference to the provisions of the Companies Act, 2013. (December 2015) (4 marks)
Answer:
Section 68 of Companies Act, 2013 deals with the buy-back of shares. According to Section 68, a company may buy-back its own securities either by passing special resolution or board resolution.

Where the buy-back has been authorised by the Board by means of a resolution passed at its meeting (not by special resolution passed by company)

  • company shall not buy-back more than 10% of the total paid-up equity capital and free reserves of the company
  • company is not required to pass special resolution in this case (Board’s resolution is sufficient)

But company may buy-back upto 25% of the aggregate of paid-up capital and free reserves of the company by passing Special Resolution.

Thus, Board Resolution of the company to go for buy-back of shares to the extent of 20% of companies paid-up share capital and free reserves is not valid if such board resolution is not supported by Special Resolution passed in the general meeting of company.

Question 3.
Enkebee Limited wants to purchase its own 1,00,000 equity share @ Rs. 10 each out of the following:
(a) Unsecured loan Rs. 5 lakhs
(b) Balance of depreciation reserve for Rs. 3 lakhs
(c) Securities premium account Rs. 4 lakhs.

Examine the legality of the above transactions for the buy-back of securities of the company under the provision of the Companies Act, 2013. (June 2018) (4 marks)
Answer:
Section 68 of Companies Act, 2013 deals with the buy-back of shares. According to Section 68, a company may buy-back its securities out of-

  • its free reserves;
  • the securities premium account; or
  • the proceeds of the issue of any shares or other specified securities

Thus company cannot use unsecured loans and balance of depreciation reserve for the purpose of buy back. In the case stated in the question, company can use only Securities premium account for the purpose of buy-back.

Question 4.
The concept of treasury shares in the United Kingdom is the same as the buy-back of shares in India. Examine (December 2018) (3 marks)
Answer:

Treasury shares in United Kingdom

Treasury shares are the company’s own shares that it has bought back from an existing shareholder where those shares have not been immediately cancelled.  This means that these shares still exist and, therefore, the company’s share capital has not been changed.

Thus in U.K., companies are allowed to hold the ‘bought back’ shares in treasury. They are not required to be extinguished. Company may resell those shares to new investors.

Buy Back of Shares in India

In India, a company may buy back its shares as per the terms and conditions of Section 68 of Companies Act, 2013. According to Section 68, company shall extinguish and physically destroy the shares or securities so bought back within 7 days of the last date of completion of buy-back.

Thus in India, companies are not allowed to hold the ‘bought back’ shares in treasury. Company cannot resell those shares to new investors.

So, the statement given in the question is not completely correct.

Question 5.
Premium Ltd. is considering buy-back of its shares without using any proceeds of shares or other specified securities. The balance sheet of Premium Ltd. shows the following status as of 31st March 2021:

Assets/LiabilitiesAmount (INR)
Share Capital: 1,00,000 equity Shares of INR 10 each (Fully paid)10,00,000
Free Reserve5,00,000
Unsecured Debt7,00,000
Secured Debt15,00,000

Determine the maximum Quantum of buy-back of shares with the shareholder’s approval as of 1st April 2021. (December 2018) (5 marks)

Answer:
While calculating the maximum numbers of shares which a company can buy-back, following conditions must be complied with:

  1. allowed buy-back
    • 25% or less of the aggregate of paid-up capital and free reserves of the company is case of Special Resolution
    • 10% or less of the aggregate of paid-up capital and free reserves of the company is case of Board Resolution
  2. Debt Equity Ratio The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves. (Debt-equity ratio shall not be more than 2:1)
  1. Source of Funds

A company may buy-back its securities out of—

  • its free reserves;
  • the securities premium account; or
  • the proceeds of the issue of any shares or other specified securities
  • Aggregate of paid-up capital and free reserves:                 Rs 15,00,000    25% of Rs. 15,00,000      :    Rs. 3,75,000                    ………………………..  Limit 1

The only source of fund is Free Reserve, which is: Rs. 5,00,000    ……………………… Limit 2
Secured + Unsecured Debt     < or = 2 Paid up Capital + Free Reserves

Let the nominal of amount shares to be buy-back be ‘X’ (equal amount will be transferred to CRR), than

         7,00,000 + 15,00,000          = 2    =>                      X = Rs. 2,00,000            …………………………… Limit 3

(10,00,000 – x) + (5,00,000 – x)

Minimum of the above limits shall be maximum amount of buy-back allowed i.e. Rs. 2,00,000.

Question Answers related to Reduction of Share Capital - Part-E

Question 1.

Explain the procedure of reduction of share capital. (June 2014) (4 Marks)
Answer:
Section 66 deals with the reduction of Share Capital

Procedure of Reduction of Share Capital

  • Convene a Board Meeting
    • To approve the reduction of share capital;
    • To fix the date of general meeting of the company to get approval of members.
  • Hold the general meeting and pass Special Resolution approving reduction of share capital.
    • File e-form MGT-14 with ROC within 30 days of passing the Special Resolution.
  • Apply to NCLT by filing an application in Form RSC-1 to confirm reduction of share capital of a company along with prescribed fees.
  • The NCLT shall within 15 days of submission of the application give a notice to Central Government, ROC and SEBI in Form RSC-2 and to every creditors of the company in Form RSC-3 seeking their representations and objections, if any.
  • The notice shall be sent, within 7 days of the direction or such other period as may be directed by the Tribunal, to each creditor whose name is entered in the list of creditors.
  • The NCLT shall also give direction for the notice to be published in Form RSC-4 within 7 days of such direction in a leading English and vernacular language newspaper, both having wide circulation in the State in which the registered office of the company is situated, or such newspapers as may be directed by the Tribunal and for uploading on the website of the company (if any) seeking objections from the creditors and intimating about the date of hearing
  • The Company shall file an affidavit in Form RSC-5 confirming the dispatch and publication of the notice within 7 days from the date of issue of such notice.
  • The NCLT may dispense with the requirement of giving notice to the creditors or publication of notice, if every creditor has been discharged or secured or given his consent in writing.
  • Representation by Central Government, ROC, SEBI and creditors shall be sent to the NCLT within 3 months of receipt of notice and copy of which shall also be sent to the company. If no such representation has been received by NCLT within the said period, it shall be presumed that they have no objection to the reduction.
  • Company shall send the representation or objections so received along with responses of the company thereto to the NCLT within 7 days of expiry of period upto which objections were sought.
  • The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company has been discharged or determined or has been secured or his consent is obtained, make an order confirming the reduction of share capital on such terms and conditions as it deems fit.
  • The order confirming the reduction of share capital shall be in Form RSC-6.
  • The company shall deliver a certified copy of the order of the NCLT and of minute approved by the Tribunal to the ROC showing and file E-form INC-28 within 30 days of the receipt of order.
  • The ROC shall issue a certificate to that effect in Form RSC-7.

 

Question 2
A Company incorporated under the Companies Act, 2013 does not have the right to reduce its share capital on selective basis. (December 2015) (5 marks)

 Answer:
In a case law SIEL Ltd., In re. [(2008) 144 Com Cases 469 (Del)], it was held that reduction of the share capital of a company is a domestic concern of the company and the decision of the majority would prevail. If the majority by special resolution decides to reduce the share capital of the company, it has the right to decide to reduce the share capital of the company and it has the right to decide how this reduction should be effected.

While reducing the share capital, the company can decide to extinguish some of its shares without dealing in the same manner with all other shares of the same class. A selective reduction is permissible within the frame work of law for any company limited by shares.

Question 3
Whether equity shares already issued can be converted into redeemable preference shares? (December 2012) (4 marks)

Answer:
As per Chowgule & Co. (P.) Ltd. 1972 Tax LR 2163, St. James Court Estates Ltd. [1944] Ch. 6, it was held that where the equity shares are to be converted into redeemable preference shares it was necessary to adopt the process of Reduction of Capital under Section 66 of the Companies Act, 2013.
So we can say that equity shares already issued can be converted into redeemable preference shares only when procedure of Reduction of Capital under Section 66 of the Companies Act, 2013 is complied with.

Question Answers related to Transferability of Share - Part-F

Question 1.

Distinguish between “Transfer of Shares” and “Transmission of Shares”. (December 2016) (4 marks)
Answer

Points

Transfer of Shares

Transmission of Shares

Nature

The transfer is a normal course of transferring shares from one person to another. It takes place due to the act of parties (contract b/w parties)

Transmission takes place on the death or insolvency of a shareholder. It the transfer of shares from one person to another due to the operation of law.

Consideration

Transfer of shares generally takes place for some consideration

Transmission of shares generally takes place without any consideration.

Stamp duty

Stamp duty is payable on the transfer of shares by a member.

No stamp duty is payable on the transmission of shares.

Instrument of Transfer

An instrument of transfer (transfer deed) is required in case of transfer.

No instrument of transfer is required in case of transmission.

Ways to do

It takes place due to the act of parties (contract b/w parties)

Transmission is the result of the operation of law.

Question 2
What do you understand by the transmission of shares? (December 2009) (2 marks)
Transmission takes place on the death or insolvency of a shareholder. It the transfer of shares from one person to another due to the operation of law.
According to Section 56(2), a company shall have power to register on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

Question 3
Write a short note on Fungibility. (June 2013) (4 marks)
Answer:
The securities held in dematerialized form do not bear any notable feature like distinctive number, folio number or certificate number. Once shares get dematerialized, they lose their identity in terms of share certificate, distinctive numbers and folio numbers. Thus all securities in the same class are identical and interchangeable. For example, all equity shares in the class of fully paid up shares are interchangeable.
Section 9 of Depositories Act, 1996 states that securities in depositories shall be in fungible form.
The Act envisages that all securities held in depository shall be fungible i.e. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Question 4
What are the benefits of a depository system? (December 2010) (8 marks)
Or
Question: What are the benefits of a depository system of stock holding? (December 2012) (4 marks)
Answer:
Benefits of Depository System
In the depository system, the ownership and transfer of securities takes place by means of electronic book entries. At the outset, this system rids the capital market of the dangers related to handling of paper. The system provides numerous direct and indirect benefits, like:

  • Elimination of bad deliveries – In the physical environment, buyer of shares was required to take the risk of transfer and face uncertainty of the quality of assets purchased.
  • Elimination of all risks associated with physical certificates – Dealing in physical securities have associated security risks of theft of stocks, mutilation of certificates, loss of certificates during movements This problem does not arise in the depository environment.
  • Immediate transfer and registration of securities
  • Faster disbursement of non-cash corporate benefits like rights, bonus, etc.
  • Reduction in brokerage by many brokers for trading in dematerialized securities –
  • Reduction in handling of huge volumes of paper and periodic status reports to investors on their holdings and transactions, leading to better controls.
  • Elimination of problems related to change of address of investor, transmission, etc.
  • Elimination of problems related to selling securities on behalf of a minor – A natural guardian is not required to take court approval for selling demat securities on behalf of a minor.

Question 5
Grace Limited, a public limited company has received an application from Rosy for transmission of certain shares in her name. Rosy, being a widow of a shareholder, applies for transmission of the shares standing in the name of her deceased husband without producing a succession certificate. Can the company transfer the shares of the deceased member? Discuss. (December 2009) (4 marks)
Answer:
Transmission of shares to widow

If a widow applies for transmission of the shares standing in the name of her deceased husband without producing a succession certificate and if the articles of association of the company so authorises, the directors may dispense with the production of succession certificate, probate or letter of administration upon such terms as to indemnity as the directors may consider necessary, and transmit the shares to the widow of the deceased by obtaining an indemnity bond.

Thus company may transmit the shares in the name of Rosy, being a widow of a shareholder upon such terms as to indemnity as the directors may consider necessary.

Question 6
In the case where the shares of a company are held in joint names of two persons Arpit and Rakshit and one of these joint-holders requests the company to split the shares equally between them by issuing fresh share certificates, what should the company do? (June 2010) (4 marks)
Answer:
In a case Dr. Rajiv Das v. The United Press Ltd. (2001) (CLB). It was held that, where the shares of a company were held in joint names and one of these joint holders requested the company to split the shares equally between the joint holders by issuing fresh certificates, the company shall not be legally bound to do so unless the share transfer deeds executed by both the joint holders duly completed and stamped were lodged with the company together with the relevant share certificates, in terms of the provisions of Section 108 of the Companies Act, 1956 [Corresponds to section 56 of the Companies Act, 2013].

Thus, company shall take share transfer deed duly stamped from Arpit and Rakshit.

Question 7
Layman is a holder of a share warrant in Ontime Fliers Limited, a public limited company. Unfortunately, the layman is unaware of any of the formalities to be compiled for transferring the said share warrant. Advise him about the formalities to be completed in this regard. (June 2010) (4 marks)
Answer:
A share warrant is transferable by mere delivery of the warrants without execution of any written instrument of transfer being registered by the company.

The bearer of a share warrant is not a member of the company unless otherwise so provided in the articles of the company.

Thus, Layman may transfer the share warrant by mere delivery. No transfer deed is required to be executed. There is no need of informing company w.r.t transfer of Share Warrant.

Question 8
1000 shares of Astro Limited are registered in the name of the three person P, O, and R jointly. Interestingly, the articles of the company provide that the survivors shall be the person to be recognized by the company as having any title to the shares of the company. Unfortunately, P, and O died in an air crash. In these circumstances, R claims to be the full owner of the said shares. However, the legal heirs of P and O are also making counterclaims. Who will succeed? Explain (December 2012) (4 marks)
Answer:
Where shares are held in joint names, and one of the joint shareholder dies the survivor alone will be recognized as the holder of the said shares. It would be sufficient for the company to delete the name of the deceased shareholder after obtaining satisfactory evidence of his death. This of course does not prevent a third person from calling on the company to register his name as holder of the shares after obtaining evidence such as probate of a will for the purpose of proving his title to the shares as against the surviving joint holders.

Thus, legal heirs of P and O may call the company to register their name as holder of the shares by producing evidence such as probate of a will for the purpose of proving his title to the shares as against the surviving joint holders.

If they fail to provide such evidence, company may delete the name of the deceased shareholder, and R shall be considered as the complete owner of the shares.

Question 9
A, B and C are joint-holders of shares of Carehead Limited. The joint holders now ask the company for altering or rearranging the serial order of their names in the register of members of the company. In reply, the company intends to ask the joint-holders to execute a transfer deed for the transposition of names in the register of members. Advise the company on the course of action. (December 2012) (4 marks)

Answer:
In the case of joint-shareholders, one or more of them may require the company to alter or rearrange the serial order of their names in the register of members of the company. In this process, there will be need for effecting consequential changes in the share certificates issued to them.

Since no transfer of any interest in the shares take place on such transposition, the question of insisting on filling transfer deed with the company, may not arise. Transposition does not also require stamp duty.

The Stock Exchange Division of the Department of Economic Affairs has clarified that there is no need of execution of transfer deed for transposition of names if the request for change in the order of names was made in writing, by all the joint-holders. If transposition is required in respect of a part of the holding, execution of transfer deed will be required.

Question 10
Aniket has fraudulently sold his shares to two different transferees. Who will be entitled to the shares in priority? (June 2018) (4 marks)

Answer
Priority among Transferees

It was held in Society General De Paris v. Jonet Walker and other (1886) 11 Ac 20 that where a shareholder has fraudulently sold his shares to two different transferees, the first purchaser will, on the ground of time alone, be entitled to the shares in priority to the second.
For example, a person assigned his property, including some shares, for the benefit of his creditor. The assignee failed to get the share certificates registered in his name, but gave notice of assignment to the company. The assignor sold the shares to another who applied for registration. It was held that the assignee’s claim was prior in time and therefore, entitled to registration. [Peat v. Clayton, (1906) 1 Ch. 659].

Question 10
The Board of directors of XYZ Ltd. wants to delegate all or any of their powers to any of the directors of the company or any person even not in the employment of the Company for the transfer of securities. Referring to the provisions of the Companies Act, 2013 advise in the matter. (December 2018)(5 marks)
Answer:
Delegation of Powers for Transfer
It is the articles of the company which authorise the Board of directors to accept or refuse transfer of securities, at their discretion. The Board further have the power to delegate all or any of their powers to any of the directors of the company or any person even not in the employment of the company. Therefore, the articles of association should authorise the Board of directors to delegate the powers suitably.

Thus, in accordance with the above-discussed provisions, the board of directors of XYZ Limited can delegate all or any of their powers to any directors of the company or any person even not in the employment of the company for the transfer of securities.

Question 11
The Articles of Association of a company cannot impose a blanket ban prohibiting the transfer of shares in favor of a minor. Such a restriction is unreasonable and not sustainable. Comment (June 2019) (5 marks)
Answer:
The articles of association of a company cannot impose a blanket ban prohibiting transfer of shares in favour of a minor, as such a restriction is unreasonable and not sustainable. Section 44 of the Companies Act, 2013 provides that shares in a company are movable property and are transferable in the manner provided by the Articles. The expression ‘in the manner provided by the articles of association of the company’ can only be interpreted to mean the procedure to be adopted for transfer and impose restrictions, which are meaningful and reasonable.

In case, the restriction imposed on transfer to a minor is accepted, it would mean that the shares of a deceased member can never be inherited by the legal heir who might be a minor. This would lead to a highly unjust situation and cannot be accepted as tenable. Accordingly, if the shares can be transmitted in favour of a minor, there is no reason why the shares which are fully paid-up and in respect of which no financial liability devolves on the minor are to be held as not transferable merely because of the ban imposed in the articles of association.

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