CS Executive Company Law Summary Notes

CS Executive Company Law Summary Notes

CS Executive Company Law Summary Notes

CS Executive Company Law Summary Notes are updated for June 2023 and Dec 2023 Exams. These notes are beneficial for CS Executive New Syllabus of ICSI.  

SHARE CAPITAL – CHAPTER 2

PART C: Issue of Securities

Equity Shares with Differential Rights (DVR)

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)

1No 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:-
 aAuthorisation in AOA;
 bOrdinary resolution by shareholders (by postal ballot in case of listed companies);
 cthe 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;
 dNo default in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it is decided to issue such shares;
 e

No subsisting default in the

  • payment of a declared dividend or
  • repayment of its matured deposits or
  • redemption of its preference shares or debentures;
 f

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.

 g

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.
2The explanatory statement to be annexed to the notice of the general meeting in pursuance of section 102 or of a postal ballot in pursuance of section 110 shall contain the following particulars, namely:-
 athe total number of shares to be issued with differential rights;
 bthe details of the differential rights ;
 cthe percentage of the shares with differential rights to the total post issue paid up equity share capital including such shares issued at any point of time;
 dthe reasons or justification for the issue;
 ethe price at which such shares are proposed to be issued either at par or at premium;
 fthe basis on which the price has been arrived at;
 gi

in case of private placement or preferential issue
Details of total number of shares proposed to be allotted to

  • promoters, directors and key managerial personnel;
  • other persons and their relationship with any promoter, director or KMP;
iiin case of public issue
Reservation, if any, for different classes of applicants including promoters, directors or key managerial personnel;
 hthe percentage of voting right which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
 ithe scale or proportion in which the voting rights of such class or type of shares shall vary;
 jthe change in control, if any, in the company that may occur consequent to the issue of equity shares with differential voting rights;
 kthe diluted EPS pursuant to the issue of such shares;
3The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.
4The 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:-
 athe total number of shares allotted with differential rights;
 bthe details of the differential rights relating to voting rights and dividends;
 cthe 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;
 dthe price at which such shares have been issued;
 ethe particulars of promoters, directors or key managerial personnel to whom such shares are issued;
 fthe change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;
 gthe diluted EPS pursuant to the issue of each class of shares;
5The 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.
6Where 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.

CS Executive Company Law Summary Notes

Preference Shares

Issue and redemption of preference shares (Section 55 read with Rule 9 of Share Capital and Debentures Rules, 2014)
Irredeemable preference shares not allowed
No company limited by shares shall issue any preference shares which are irredeemable.

Maximum tenure of preference shares (20 Years)
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.

Note: Issue and redemption of preference shares by company in infrastructural projects (Rule 10)
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.

Conditions for issue of preference shares
1A company having a share capital may, if so authorised by its articles, issue preference shares subject to the following conditions, namely:-
athe issue of such shares has been authorized by passing a special resolution in the general meeting of the company
bthe company, at the time of such issue of preference shares, has no subsisting default in the redemption of preference shares issued or in payment of dividend due on any preference shares.
2A company issuing preference shares shall set out in the resolution, particulars in respect of the following matters relating to such shares, namely:-
athe priority with respect to payment of dividend or repayment of capital vis-a-vis equity shares;
bthe participation in surplus fund;
cthe participation in surplus assets and profits, on winding-up which may remain after the entire capital has been repaid;
dthe payment of dividend on cumulative or non-cumulative basis.
ethe conversion of preference shares into equity shares.
fthe voting rights;
gthe redemption of preference shares.
3The explanatory statement to be annexed to the notice of the general meeting pursuant to section 102 shall, inter-alia, provide the complete material facts concerned with and relevant to the issue of such shares, including-
athe size of the issue and number of preference shares to be issued and nominal value of each share;
bthe nature of such shares i.e. cumulative or non-cumulative, participating or non-participating , convertible or non-convertible
cthe objectives of the issue;
dthe manner of issue of shares;
ethe price at which such shares are proposed to be issued;
fthe basis on which the price has been arrived at;
gthe terms of issue, including terms and rate of dividend on each share, etc.;
hthe terms of redemption, including the tenure of redemption, redemption of shares at premium and if the preference shares are convertible, the terms of conversion;
ithe manner and modes of redemption;
jthe current shareholding pattern of the company;
kthe expected dilution in equity share capital upon conversion of preference shares.
4Where a company issues preference shares, the Register of Members maintained under section 88 shall contain the particulars in respect of such preference share holder(s).
Conditions related to redemption of preference shares
1 Source of funds
No preference shares shall be redeemed except
a. out of the profits of the company which would otherwise be available for dividend or
b. out of the proceeds of a fresh issue of shares made for the purposes of such redemption
2 Only fully paid preference shares shall be redeemed No such shares shall be redeemed unless they are fully paid
3 If preference shares are redeemed out of the profits – Capital Redemption Reserve Account Where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account, and 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 Capital Redemption Reserve Account were paid-up share capital of the company. Company may use CRR paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
4 Premium payable on redemption The premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company’s securities premium account, before such shares are redeemed
5 Issue of further redeemable preference shares in respect of unredeemed preference shares Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue, it may,
with the consent of the holders of three-fourths in value of such preference shares and,
with the approval of the Tribunal on a petition made by it in this behalf
 issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.
6 A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act and the preference shares may be redeemed:-
a at a fixed time or on the happening of a particular event;
b any time at the company’s option; or
c any time at the shareholder’s option.

Notice of redemption of preference shares
The notice of redemption of preference shares shall be filed by the company with the Registrar in Form SH-7 along with altered MOA with the fee as specified in Companies (Registration of Offices and Fees), Rules, 2014 within 30 days of redemption of preference shares. CS Executive Company Law Summary Notes

Further Issue of Shares (Section 62)

According Section 62(1), where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered as

  • Right Shares
  • Shares under a scheme of employees’ stock option to employees
  • Shares on preferential basis
  • Bonus Shares

Right Shares [Section 62(1)(a)]
Right shares means shares to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

  • Minimum and maximum subscription period: The offer shall be made by notice specifying the number of shares offered and limiting a time not being less than 15 days or such lesser number of days as may be prescribed and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined. The notice shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.
  • Renunciation option: Unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice of right issue shall contain a statement of this right
  • Powers of Board of Directors to dispose of the shares: After the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company

Rule Period for notice under sub-clause (i) of clause (a) of sub-section (1) of section 62 [Rule 12A of Share Capital and Debentures Rules, 2014]
For the purposes of sub-clause (i) of clause (a) of sub-section (1) of section 62, the time period within which the offer shall be made for acceptance shall be not less than 7 days from the date of offer.

Exceptions/ Modifications/ Adaptations

  1. In case of private company- In Sub-clause (i) of clause (a) of Sub-section (1) and Sub-section (2) of section 62 the following proviso shall be inserted “Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case 90%, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply. – Inserted by Notification dated 5th june, 2015.
  2. The provisions of section 62 are applicable to all types of companies except the Nidhi companiesCS Executive Company Law Summary Notes

Shares under employees’ stock option scheme [Section 62(1)(b) read with Rule 12 of Share Capital and Debentures Rules, 2014]
Company can issue shares to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed.

Meaning of Employee
Employee means-
aa permanent employee of the company who has been working in India or outside India; or
ba director of the company, whether a whole time director or not but excluding an independent director; or
can employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a holding company of the company but does not include-
 an employee who is a promoter or a person belonging to the promoter group; or
 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.
Provided that in case of a startup company, the conditions mentioned in sub-clause (i) and (ii) shall not apply upto 10 years from the date of its incorporation or registration.
Condition under Rule 12 – Applicable for unlisted companies
1Special Resolution (ordinary resolution in case of Private Company as per Notification dated 5th june, 2015)
2Disclosures in the explanatory statement annexed to the notice for passing of the special resolution-
athe total number of stock options to be granted;
bidentification of classes of employees entitled to participate in the Employees Stock Option Scheme;
cthe appraisal process for determining the eligibility of employees to the Employees Stock Option Scheme;
dthe requirements of vesting and period of vesting;
ethe maximum period within which the options shall be vested;
fthe exercise price or the formula for arriving at the same;
gthe exercise period and process of exercise;
hthe Lock-in period, if any;
ithe maximum number of options to be granted per employee and in aggregate;
jthe method which the company shall use to value its options;
kthe conditions under which option vested in employees may lapse;
lthe specified time period within which the employee shall exercise the vested options in the event of a proposed termination of employment or resignation of employee; and
ma statement to the effect that the company shall comply with the applicable accounting standards.
3Companies are free to determine the exercise price.
4The approval of shareholders by way of separate resolution shall be obtained by the company in case of-
 agrant of option to employees of subsidiary or holding company; or
 bgrant of option to identified employees, during any one year, equal to or exceeding one percent (1%) of the issued capital of the company at the time of grant of option
5aThere shall be a minimum period of one year between the grant of options and vesting of option
 bCompany is free to specify the lock-in period for the shares issued pursuant to exercise of option.
 cNo shareholder’s benefits till shares are issued on exercise of option.
6The amount, if any, payable by the employees, at the time of grant of option-
 amay be forfeited if the option is not exercised by the employees within the exercise period; or
 bthe amount may be refunded to the employees if the options are not vested due to non-fulfilment of conditions relating to vesting of option as per the Employees Stock Option Scheme.
7aThe option granted to employees shall not be transferable to any other person
 bThe option granted to the employees shall not be pledged, hypothecated, mortgaged or otherwise encumbered or alienated in any other manner.
 cSubject to clause (d), no person other than the employees to whom the option is granted shall be entitled to exercise the option
 dIn the event of the death of employee while in employment, all the options granted to him till such date shall vest in the legal heirs or nominees of the deceased employee.
 eIn case the employee suffers a permanent incapacity while in employment, all the options granted to him as on the date of permanent incapacitation, shall vest in him on that day.
 fIn the event of resignation or termination of employment, all options not vested in the employee as on that day shall expire. However, the employee can exercise the options granted to him which are vested within the period specified in this behalf, subject to the terms and conditions under the scheme granting such options as approved by the Board.

Maintenance of Register
Company shall maintain a Register of Employee Stock Options in Form No. SH.6 and shall forthwith enter therein the particulars of option granted under clause (b) of sub-section (1) of section 62.

The Register of Employee Stock Options shall be maintained at the registered office of the company or such other place as the Board may decide. The entries in the register shall be authenticated by the company secretary of the company or by any other person authorized by the Board for the purpose. CS Executive Company Law Summary Notes

Shares on preferential basis

Section 62(1)(c) read with Rule 13 of Share Capital and Debentures Rules, 2014]

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;

    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, if the price of such shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.

Conditions with regard to issue of shares on preferential basis – Unlisted Companies
aAuthorisation in AOA;
bSpecial Resolution;
cDisclosures in the explanatory statement to be annexed to the notice of the general meeting:
 the objects of the issue;
the total number of shares or other securities to be issued;
the price or price band at/within which the allotment is proposed;
basis on which the price has been arrived at along with report of the registered valuer;
relevant date with reference to which the price has been arrived at;
the class or classes of persons to whom the allotment is proposed to be made;
intention of promoters, directors or key managerial personnel to subscribe to the offer;
the proposed time within which the allotment shall be completed;
the names of the proposed allottees and the % of post preferential offer capital that may be held by them;
the change in control, if any, in the company that would occur consequent to the preferential offer;
the number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities as well as price;
dthe allotment shall be completed within a period of 12 months of passing the special resolution otherwise another special resolution shall be passed for the company to complete such allotment.
ethe price shall be determined on the basis of valuation report of a registered valuer. The price of shares or other securities to be issued on preferential basis shall not be less than the price determined on the basis of valuation report of a registered valuer.

Where consideration is not received by Company in Cash
Where the preferential offer of shares is made for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company-

  1. where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or
  2. where clause (i) is not applicable, it shall be expensed as provided in the accounting standards.

Note:

  • Till a registered valuer is appointed in accordance with the provisions of the Act, the valuation report shall be made by an independent merchant banker who is registered with the Securities and Exchange Board of India or an independent Chartered Accountant in practice having a minimum experience of 10 years. CS Executive Company Law Summary Notes
Provisions related to Private Placement

(Section 42 read with Rule 14 of Prospectus & Allotment of Securities Rules)

What is private placement?
Private Placement means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter in Form No. PAS-4.

All such offers shall be made only to such persons whose names are recorded by the company max. 30 days prior to the invitation to subscribe.

A private placement offer letter shall be accompanied by an application form serially numbered and addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in electronic mode, within 30 days of recording the names of such persons.

No person other than the person so addressed in the application form shall be allowed to apply through such application form and any application not conforming to this condition shall be treated as invalid.

A company shall issue private placement offer cum application letter only after the relevant special resolution or Board resolution has been filed in the Registry.

Maximum number of allotees in a financial year through private placement [Section 42(2)]

The offer of securities or invitation to subscribe securities, shall be made to such number of persons not exceeding 50 or such higher number as may be prescribed in a financial year, otherwise such offer shall be considered as public offer.

According to Rule 14(2),

  • such offer or invitation shall be made to not more than 200 persons in the aggregate in a financial year.
  • any offer or invitation made to qualified institutional buyers, or to employees of the company under a scheme of employees stock option shall not be considered while calculating the limit of 200 persons.

Note:

  • This restrictions would be reckoned individually for each kind of security that is equity share, preference share or debenture;
  • If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public.

The provisions of sub-rule (2) shall not be applicable to –

  • non-banking financial companies which are registered with the Reserve Bank of India under the Reserve Bank of India Act,1934 (2 of 1934) and
  • housing finance companies which are registered with the National Housing Bank under the National Housing Bank Act, 1987 (53 of 1987),

 if they are complying with regulations made by the Reserve Bank of India or the National Housing Bank in respect of offer or invitation to be issued on private placement basis:

Provided that such companies shall comply with sub-rule (2) in case the Reserve Bank of India or the National Housing Bank have not specified similar regulations.

Special Resolution for making a private placement of securities [Rule 14(1)]

A company shall not make a private placement of its securities unless

  • the proposed offer of securities or invitation to subscribe securities has been previously approved by the shareholders of the company, by a Special Resolution, for each of the Offers or Invitations

In case of offer or invitation for non-convertible debentures (where the proposed amount to be raised through such offer or invitation exceeds the limit as specified in clause (c) of sub-section (1) of section 180),

  • it shall be sufficient if the company passes a previous special resolution only once in a year for all the offers or invitation for such debentures during the year.

Further, in case of offer or invitation for non-convertible debentures (where the proposed amount to be raised through such offer or invitation does not exceeds the limit as specified in clause (c) of sub-section (1) of section 180),

  • Board resolution under clause (c) of subsection (3) of section 179 would be adequate (no need to pass Special Resolution)

Also, in case of offer or invitation of any securities to qualified institutional buyers,

  • it shall be sufficient if the company passes a previous special resolution only in a year for all the allotments to such buyers during the year.

No fresh offer or invitation till completion or withdrawal of previous offer

No fresh offer or invitation to subscribe securities under private placement shall be made unless

  • the allotments with respect to any offer or invitation made earlier have been completed or

such previous offer or invitation has been withdrawn or abandoned by the company.

Subscription money
Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person alongwith subscription money paid either by cheque or demand draft or other banking channel and not by cash:

Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar.

Allotment of Securities [Section 42(6)]

A company making an offer or invitation under private placement shall allot its securities within 60 days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within 15 days from the date of completion of 60 days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of 12% per annum from the expiry of the 60th day.

No advertisement [Section 42(7)]

No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.

Record of private placement offers [Rule 14(4)]
The company shall maintain a complete record of private placement offers in Form PAS-5.

Return of Allotment [Subsection 8/Rule 6]
A return of allotment of securities under section 42 shall be filed with the Registrar within fifteen days of allotment in Form PAS-3 and with the fee as provided in the Companies (Registration offices and Fees) Rules, 2014 along with a complete list of all the allottees containing-

  • the full name, address, permanent Account Number and E-mail ID of such security holder;
  • the class of security held;
  • the date of allotment of security ;
  • the number of securities herd, nominal value and amount paid on such securities; and particulars of consideration received if tire securities were issued for consideration other than cash.

Penalty for default [Subsection 9/10]
If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of Rs. 1000 for each day during which such default continues but not exceeding 25 lakh rupees.

If a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest @ 12% p.a to subscribers within a period of 30 days of the order imposing the penalty. CS Executive Company Law Summary Notes

Bonus Shares

[Section 63 read with Rule 14 of Share Capital and Debentures Rules, 2014]

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 same. CS Executive Company Law Summary Notes
Sweat Equity Shares

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.

Meaning of Employee
According to Explanation to Rule 8(1) of Companies (Share Capital and Debentures) Rules, 2014.

Employee means-

  • 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; or
  • 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;

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

Conditions 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:

the issue has been authorised by a special resolution passed by the company in the general meeting.
the following are clearly specified in the resolution:
anumber of shares
bcurrent market price;
cconsideration, if any; and
dclass or classes of directors or employees to whom such equity shares are to be issued.
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.
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)

Holders of Sweat Equity Shares to be ranked pari passu with other Equity share holders

Section 54(2) provides that the rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

Rule 8 of Companies (Share Capital and Debentures) Rules, 2014
1Unlisted Company – Special Resolution (SR).
2The explanatory statement shall contain the following particulars, namely:-
 athe date of the Board meeting at which the proposal for issue of SES was approved;
bthe reasons or justification for the issue;
cthe class of shares under which sweat equity shares are intended to be issued;
dthe total number of shares to be issued as sweat equity;
ethe class of directors or employees to whom such equity shares are to be issued;
fterms and conditions of issue, including basis of valuation;
gthe time period of association of such person with the company;
hthe names of the directors or employees to whom the SES will be issued and their relationship with the promoter or/and KMP;
ithe price at which the sweat equity shares are proposed to be issued;
jthe consideration, if any to be received for the sweat equity;
kthe ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how it is proposed to be dealt with;
ldiluted EPS pursuant to the issue of SES
3Validity of special resolution for making the allotment – 12 months from passing of SR.
4Max. number of sweat equity shares in a year
 15% of the existing paid up equity share capital in a year or
shares of the issue value of rupees five crores,
 

whichever is higher.

But the issuance of sweat equity shares in the Company shall not exceed 25%, of the paid up equity capital of the company at any time.

It should be noted that a start-up company may issue sweat equity shares not exceeding 50% of its paid up capital upto 10 years from the date of its incorporation or registration.

5Lock in for sweat equity shares issued to directors or employees – 3 Years from allotment.
6The valuation of
 intellectual property rights or
know how or
value additions
 for which sweat equity shares are to be issued, shall be carried out by a registered valuer, who shall provide a proper report addressed to the BOD with justification.
7A copy of gist along with critical elements of the valuation report obtained shall be sent to the shareholders with the notice of the general meeting.
8Where sweat equity shares are issued for a non-cash consideration on the basis of a valuation report in respect thereof obtained from the registered valuer, such non-cash consideration shall be treated in the following manner in the books of account of the company-
 awhere the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the accounting standards; or
bwhere clause (a) is not applicable, it shall be expensed as provided in the accounting standards.

CS Executive Company Law Summary Notes

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