CS Executive Company Law Short Notes

CS Executive Company Law Short Notes – Chapter 2 – Part D

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CS Executive Company Law Short Notes

SHARE CAPITAL – CHAPTER 2

Part D: Alteration In Share Capital, Buy-Back and Reduction of Share Capital

Power of limited company to alter its share capital (Section 61)
1.A limited company having a share capital may, if so authorised by its articles, alter its  memorandum in its general meeting (by passing ordinary resolution) to—
aincrease its authorised share capital by such amount as it thinks expedient;
bconsolidate and divide all or any of its share capital into shares of a larger amount than its existing shares:
 Provided that no consolidation and division which results in changes in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner;
cconvert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination;
dsub-divide its shares, or any of them, into shares of smaller amount than is fixed by the memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived;
ecancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount of the shares so cancelled.
2.The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share capital. CS Executive Company Law Short Notes
Notice to be given to Registrar for alteration of share capital (Section 64)

1.

 

Where—
aa company alters its share capital in any manner specified in section 61(1);
ban order made by the Government under section 62(4) has the effect of increasing authorised capital of a company; or
ca company redeems any redeemable preference shares,
the company shall file a notice in the Form No. SH. 7 with the Registrar within a period of 30 days of such alteration or increase or redemption, as the case may be, along with an altered memorandum
2Where any company fails to comply with the provisions of sub-section (1), such company and every officer who is in default shall be liable to a penalty of Rs. 500 for each day during which such default continues, subject to a maximum of Rs. 5 lakh in case of a company and Rs. 1 lakh in case of an officer who is in default.
Under Section 62(4), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company.

Points to Note:

  • Where shares were issued beyond the authorised amount and a resolution was subsequently passed at a general meeting ratifying the issue, it was held that although the original issue was not in accordance with the articles, the ratification was effective and the allottees were bound.
  • Consolidation and sub-division may be effected by the same resolution [North Cheshire Borewery Co. Ltd.]
  • Fee paid to the ROC for registering increase of capital is in the nature of capital expenditure irrespective of the fact whether an increased capital will lead to increase in profits. [Punjab State Industrial Development Corpn. Ltd. v. CIT]
  • In order to alter its capital clause in the Memorandum, the company requires authority in its articles. But if the articles give no power to this effect, the articles must be amended by a special resolution before the power to alter the capital clause can be exercised by the company [Re. Patent Invert Sugar Co. (1885) 31 Ch. D. 166]. CS Executive Company Law Short Notes

Buy Back of Securities

Restrictions on purchase by company or giving of loans by it for purchase of its shares [Section 67]
1.Prohibition on buy back of shares
No company limited by shares or by guarantee and having a share capital shall have power to buy its own shares unless the consequent reduction of share capital is effected under the provisions of this Act.
2.Prohibition on providing financial assistance for buying its/holding company shares
No public company shall give any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made, by any person of or for any shares in the company or in its holding company.
3Exceptions of sub-section (2)
Nothing in sub-section (2) shall apply to—
 a.the lending of money by a banking company in the ordinary course of its business;
 b.

the provision by a company of money in accordance with any scheme approved by company through special resolution (SR) and in accordance with such requirements as may be prescribed, for the purchase of, or subscription for, fully paid-up shares in the company or its holding company, if the purchase of, or the subscription for, the shares

  • held by trustees for the benefit of the employees or
  • held by the employee of the company;
 cthe giving of loans by a company to persons in the employment of the company, other than its directors or key managerial personnel, for an amount not exceeding their salary or wages for a period of 6 months with a view to enabling them to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by them by way of beneficial ownership.
4Non applicability of this section in case of redemption of preference shares
Nothing in this section shall affect the right of a company to redeem any preference shares issued by it under this Act or under any previous company law.
5Fine/punishment for default
If a company contravenes the provisions of this section, it shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

Notification dated 5th june, 2015

In case of Private Companies
Section 67 shall not apply to a private company-

  • in whose share capital no other body corporate has invested any money;
  • if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice its paid up share capital or fifty crore rupees, whichever is lower; and
  • such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.

In case of Nidhi Companies
Sub-section (1) of section 67 shall not apply , when shares are purchased by the company from a member on his ceasing to be a depositor or borrower and it shall not be considered as reduction of capital under section 66 of the Companies Act, 2013. CS Executive Company Law Short Notes

Power of company to purchase its own securities (Section 68)

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.

Types of buy-back

  1. Buy-back by passing Board’s Resolution
  2. Buy-back by passing Special Resolution

Conditions related to buy-back [Section 68(2)]
No company shall buy-back its securities, unless—

  • the buy-back is authorised by its articles;
  • a special resolution has been passed by the company in this regard
  • the buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the company (but in respect of the buy-back of equity shares in any financial year, the reference to 25% in this clause shall be construed with respect to its total paid-up equity capital in that 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;

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)

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.

Matter of explanatory statement accompanied by the notice of special resolution [Section 68(3)]
Explanatory statement shall state —

  • a full and complete disclosure of all material facts;
  • the necessity for the buy-back;
  • the class of shares or securities intended to be purchased under the buy-back;
  • the amount to be invested under the buy-back; and
  • the time-limit for completion of buy-back.

Further, Rule 17(1) of Companies (Share Capital and Debentures) Rules, 2014 states other matters to be prescribed in the Explanatory statement. CS Executive Company Law Short Notes

Time limit for completion of buyback (Section 68(4))
Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board.

Letter of Offer of buy-back

  • Letter of Offer to ROC in Form No. SH 8 (Rule 17(2))
    The company which has been authorized by a special resolution shall, before the buy-back of shares, file with the Registrar of Companies a letter of offer in Form No. SH 8. Such letter of offer shall be dated and signed on behalf of the Board of directors of the company by not less than two directors of the company, one of whom shall be the managing director, where there is one.
  • Letter of Offer to Shareholders (Rule 17(4))
    The letter of offer shall be dispatched to the shareholders or security holders immediately after filing the same with the Registrar of Companies but not later than 21 days from its filing with the Registrar of Companies.
  • Period of Offer to Shareholders (Rule 17(5))
    The offer for buy-back shall remain open for a period of not less than 15 days and not exceeding 30 days from the date of dispatch of the letter of offer.

    Provided that where all members of a company agree, the offer for buy-back may remain open for a period less than fifteen days

Declaration of Solvency with SEBI/ROC in Form No. SH 9 [Section 68(6) read with Rule 17(3)]
Where a company proposes to buy-back its own shares or other specified securities under this section, it shall, before making such buy-back, file with

  • the Registrar aand
  • the Securities and  Exchange Board (only in case of listed company),

a declaration of solvency signed by at least two directors of the company, one of whom shall be the managing director, if any, in Form No. SH 9 and verified by an affidavit to the effect that

  • the Board of Directors of the company has made a full inquiry into the affairs of the company
    as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the Board.

Time limit for verifications of the offers [Rule 17(7)]
The company shall complete the verifications of the offers received within 15 days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within 21 days from the date of closure of the offer.

Time limit for making payment of consideration or return of share certificate [Rule 17(9)]
The company shall within seven days of the time specified in sub-rule (7) (21 days from the date of closure) –

  • make payment of consideration in cash to those shareholders or security holders whose securities have been accepted; or
  • return the share certificates to the shareholders or security holders whose securities have not been accepted at all or the balance of securities in case of part acceptance .

Extinguishment and physical destruction of the shares or securities so bought back [Section 68(7)]
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.

Prohibition of further issue of shares or securities [Section 68(8)]
Where a company completes a buy-back of its shares or other specified securities under this section, it shall not make a further issue of the same kind of shares or other securities within a period of 6 months except by way of

  • a bonus issue or
  • in the discharge of subsisting obligations such as
    • conversion of warrants, stock option schemes, sweat equity shares or
    • conversion of preference shares or debentures into equity shares.

Further, according to Rule 10,

  • the company shall not issue any new shares including by way of bonus shares from the date of passing of special resolution authorizing the buy-back till the date of the closure of the offer under these rules, except those arising out of any outstanding convertible instruments;
  • company shall pay the consideration only by way of cash;
  • the company shall not withdraw the offer once it has announced the offer to the shareholders;
  • the company shall not utilize any money borrowed from banks or financial institutions for the purpose of buying back its shares; and
  • the company shall not utilize the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities for the buy-back.

Register of shares/securities bought back [Section 68 (9) read with Rule 17(12)]
Company shall maintain at its registered office a register (in Form No. SH 10) having following particular: 

  • the shares or securities so bought,
  • the consideration paid for the shares or securities bought back,
  • the date of cancellation of shares or securities,
  • the date of extinguishing and physically destroying the shares or securities and
  • such other particulars as may be prescribed.

The entries in the register shall be authenticated by the secretary of the company or by any other person authorized by the Board for the purpose.

Filing particulars of buy-back with ROC [Section 68(10) read with Rule 17(13)
Company shall, after the completion of the buy-back under this section, file with the

  • Registrar and
  • the SEBI (only in case of listed company)
    a return relating to the buy-back in Form No. SH 11 within 30 days of completion of buy-back.

Affidavit of completion of buy-back as the provisions of Company Laws [Rule 17(14)]
There shall be annexed to the return filed with the Registrar in Form No. SH.11, a certificate in Form No. SH.15 signed by two directors of the company including the managing director, if any, certifying that the buy-back of securities has been made in compliance with the provisions of the Act and the rules made thereunder. CS Executive Company Law Short Notes

Fine and punishment in case of default [Section 68(11)]
If a company makes any default in complying with the provisions of this section or any regulation made by the SEBI,

  • the company shall be punishable with fine
    • which shall not be less than one lakh rupees
    • but which may extend to three lakh rupees and
  • every officer of the company who is in default shall be punishable
    • with fine
      • which shall not be less than one lakh rupees but
      • which may extend to three lakh rupees

Reduction of Share Capital

Reduction of share capital (Section 66 Companies Act, 2013)

Special resolution and approval of NCLT for reduction of share capital [Sub-Section 1]
Subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital in any manner and in particular, may-
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
(b) either with or without extinguishing or reducing liability on any of its shares,—

    1. cancel any paid-up share capital which is lost or is unrepresented by available assets; or
    2. pay off any paid-up share capital which is in excess of the wants of the company,

alter its memorandum by reducing the amount of its share capital and of its shares accordingly:

Note: No reduction if deposit related default is subsisting
No such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.

Notice of reduction application by NCLT to CG, ROC, SEBI & Creditors [Sub-Section 2]
The Tribunal shall give notice of every application made to it under sub-section (1) to the

  • Central Government,
  • Registrar and
  • to the Securities and Exchange Board, in the case of listed companies, and
  • the creditors of the company

and shall take into consideration the representations, if any, made to it by that Government, Registrar, the Securities and Exchange Board and the creditors within a period of 3 months from the date of receipt of the notice:

Where no representation has been received from the Central Government, Registrar, the Securities and Exchange Board or the creditors within the said period, it shall be presumed that they have no objection to the reduction. CS Executive Company Law Short Notes

Confirmation of reduction of capital by NCLT [Sub-Section 3]
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:

But no application for reduction of share capital shall be sanctioned by the Tribunal unless

  • the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards or
  • any other provision of this Act

and a certificate to that effect by the company’s auditor has been filed with the Tribunal.

Publication of Order of NCLT [Sub-Section 4]
The order of confirmation of the reduction of share capital by the Tribunal under sub-section (3) shall be published by the company in such manner as the Tribunal may direct.

Deliver a copy of order of NCLT to ROC within 30 days [Sub-Section 5]
The company shall deliver a certified copy of the order of the Tribunal under subsection (3) and of a minute approved by the Tribunal showing—

  • the amount of share capital;
  • the number of shares into which it is to be divided;
  • the amount of each share; and
  • the amount, if any, at the date of registration deemed to be paid-up on each share,

to the Registrar within 30 days of the receipt of the copy of the order, who shall register the same and issue a certificate to that effect.

Note:

  • Where the Registrar had issued his certificate confirming the reduction, the same was held to be conclusive although it was discovered later that the company had no authority under its articles to reduce capital.
  • In a case the special resolution for reduction was an invalid one, but the company had gone through with the reduction. It was held that the reduction was not allowed to be upset.
Difference in Alteration of share capital and reduction of share capital
Alteration of share capital Reduction of share capital
Applicable Sections Alteration of share capital is governed by the provisions of section 61 of the Companies Act, 2013. Reduction of share capital is governed by the provisions of Section 66 of Companies Act, 2013.
Kind of resolution Alteration of share capital is required to be done by ordinary resolution. Reduction of share capital is required to be done by special resolution.
confirmed by the court Alteration of share capital is not required to be confirmed by the NCLT Reduction of share capital is to be confirmed by the NCLT
Kind/Type Alteration of share capital may be done in the following manner 1.      Increasing its nominal capital by issuing new shares 2.      Consolidating and dividing all or any of its share capital into shares of large denomination 3.      Converting fully paid up shares into stock or vice versa 4.       Sub dividing its shares or any of them into shares of smaller amount 5.      Canceling shares which have not been taken up and diminishing the amount of share capital by the amount of the shares so cancelled. Reduction of share capital may be done in the following manner 1.      Extinguishing or reducing the liability of members in respect of the capital not paid up 2.      Writing off or canceling any paid up capital which is in excess of the needs of the company 3.      Paying off any paid up share capital which is in excess of the needs of the company
Cases where diminution of share capital is not to be treated as reduction of the capital
  • Where the company cancels shares which have not been taken or agreed to be taken by any person [Section 61(1)(e) Companies Act, 2013];
  • Where redeemable preference shares are redeemed in accordance with the provisions of Section 55 [Explanation to section 55(3) Companies Act, 2013];
  • Where any shares are forfeited for non-payment of calls and such forfeiture amounts to reduction of capital;
  • Where the company buys-back its own shares under Section 68 of the Act [Section 66(6)];
  • Where the reduction of share capital is effected in pursuance of the order of the Tribunal sanctioning any compromise or arrangement under section 230. CS Executive Company Law Short Notes
Surrender and Forfeiture of Shares shall not amount to reduction of Share Capital

Surrender of shares
“Surrender of shares” means the surrender to the company on the part of the registered holder of shares already issued. The Companies Act contains no provision for surrender of shares. Thus, surrender of shares is valid only is authorised by Articles of Association.

Effect of Surrender of Shares

  • It will have the same effect as a transfer in favour of the company and amount to a reduction of capital.
  • But if, under any arrangement, such shares, instead of being surrendered to the company, are transferred to a nominee of the company then there will be no reduction of capital.

Forfeiture of shares
A company may if authorised by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the Tribunal. Where power is given in the articles, it must be exercised strictly in accordance with the regulations regarding notice, procedure and manner stated therein, otherwise the forfeiture will be void

Effect of Forfeiture
When the shares have been forfeited, the defaulting shareholder ceases to be member of the company and he loses all rights or interests in his shares. But notwithstanding the forfeiture he remains liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the share

Is selective reduction of Share Capital is permissible?

What is Selective Reduction of Share Capital?
When company decide to reduce the capital of some of its shares without dealing in the same manner with all other shares of the same class, it is known as Selective Reduction of Share Capital.

In a case of SIEL Ltd., it was held that a selective reduction is permissible within the frame work of law for any company limited by shares.  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.

In a case of Elpro International Ltd., company proposed to extinguish and cancel 8, 89, 169 shares held by shareholders constituting 25 per cent of the issued and paid up share capital and return capital to such shareholders at Rs. 183 per equity share of Rs. 10 each so cancelled and extinguished.

According to the scheme as approved by the shareholders, the reducing of 25 percent of the issued and paid up capital was to take place from amongst 3,835 shareholders which included 112 shareholders who voted for the resolution, and 3,723 shareholders who did not object to the resolution. It was held that a selective reduction of share capital is legally permissible. CS Executive Company Law Short Notes

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