CORPORATE LAW

PSDA ACTIVITY

SUBMITTED BY: ANANYA GARG

ENROLLMENT NO.: 03810303817

CLASS: 3-A

GROUP: 3

SUBMITTED TO: EKTAA JHA

 PLEDGING OF SHARES

It is taking loan against the shares one holds. It can be done by both investors and promoters.
This is a way for the promoters of a company to get loans to meet their business or personal
requirements by keeping their shares as collateral to lenders. Pledging of shares can be used
to meet different needs like working capital requirements, funding other ventures, to carry out
new acquisitions, personal obligations and more.

Why do promoters pledge shares?

One of the methods promoters use to raise finance is to take loans against their holding in
their company from banks or non-banking financial companies. For these financial
institutions, these shares are collateral. Promoters can raise funds for various reasons-for
meeting requirements of the business or personal needs.

Can banks sell the shares pledged by promoters?

Banks can sell the pledged shares if the price of the stock falls closer to the value agreed in
the contract between them and the company. Typically, the amount that is lent by banks
NBFCs to promoters is less than the market value of the shares.

This shortfall is the margin is the amount that these lenders retain as security. In case the
stock price falls, lenders ask the promoter to provide more cash or shares to top up this
margin. If the promoters are not able to top up the collateral, the lenders can sell the shares to
maintain this margin. Conversely, revoking of pledged shares by promoters is seen as a
positive sign.

Why is pledging of shares risky for the shareholders?

While pledging of shares, the promoters use their stake as a collateral to get the secured
loans.

During a bull market, pledging of shares may not create many issues as the market is moving
upwards and the investors are optimistic. However, the problem arises in the bear market.
As the price of stocks keeps fluctuating, the value of the collateral (against the secured loan)
also changes with the change in the share price. However, the promoters are required to
maintain the value of that collateral.

If the price of the shares falls, the value of the collateral will also erode. In order to meet up
the difference in the collateral value, the promoters have to cover the shortfall by either
giving additional cash or pledging more shares to the lender.

In the worst case, if the promoters fail to make up for the difference, the lender can sell the
pledged shares in the open market to recover their money. This minimum collateral value is
agreed in the contract between the lenders and the promoters. Hence, it gives the right to the
lender to sell the pledged shares in the if the value falls below the minimum value.

What is the risk for the retail investors?

In general, the stock price can fall heavily on the news that lenders are selling shares in the
open market that are pledged by the company’s promoters. This may result in a further
decline in the collateral value because of the panic selling by the public.

In addition, selling of the pledged shares by the lenders may also result in the change of the
shareholding pattern of the company. This may affect the voting power of the promoters as
they are holding fewer shares now and their ability to make crucial decisions.

Moreover, pledging of shares can create a disaster if the share price continues to fall. This is
because the promoters have to consistently pledge more shares to cover up the difference in
the collateral value.

FORFEITURE OF SHARES

When shares are allotted to an applicant, he and the company enter into a contract automatically.
Then such an applicant is bound to pay the allotment money and all the various call monies till
the shares are fully paid up. But if the shareholder fails to pay any of the calls (one or more) on
the authorization of the board of Directors, the said shares can be forfeited. Forfeiture essentially
means cancellation.
 Before such forfeiture is done a notice must be given to the shareholder. The notice must
provide the shareholder with a minimum of 14 days to make the payment due, or his shares will
be forfeited. Even after such notice if the shareholder does not pay, then the shares will be
cancelled.

When the said shares are forfeited the shareholder ceases to be a member of the company. He
loses all his rights and interests that a shareholder might enjoy. And once his name is removed
from the register of shareholders he also losses all the money he has already paid towards the
share capital. Such money will not be refunded.

Accounting Treatment for Forfeiture

When the shares have forfeited all entries regarding the issue of such shares have to be reversed.
So the following adjustments are made for forfeiture of shares

i. Share Capital – debited with total amounts called up

ii. Unpaid Call A/c (Allotment, First Call etc) – credited with the portion of the amount
called up but unpaid

iii. Share Forfeiture A/c – credited with the amount already paid by the defaulter

Forfeiture of Shares Issued at Premium

If the shares were initially issued at a premium then the forfeiture treatment changes a little. If at
the time of the forfeiture the entire amount of premium has already been received by
the company, then the entries remain the same, i.e. as if the shares were issued at par. Please
note that the Share Premium Account will not be debited in this case.

However, at the time when the shares are forfeited if the entire, or part of the share premium is
unpaid, certain adjustments must be made to Share Premium A/c. In such a case the Share
Premium A/c will be debited by the amount of premium not received. So if none of the premium
is received, the entry will be reversed completely. So both Share Capital account and Share
Premium A/c (for the amount not received) will be debited.
Forfeiture of Shares Issued at Discount

When the shares were initially issued at a discount and then forfeited, such a discount must be
written off. So an adjustment entry will be passed to give this effect.

The effect of forfeiture is as follows

1. The shareholder, on forfeiture of shares, ceases to be a member of the company and any
amounts already received on the shares are not repayable to shareholder

2. The company if it deems fit, may sue the member for recovery on unpaid calls

3. The shares may be disposed of and resold at discount ( the discount must not exceed the
actual amount forfeited on the shares.) The share may also be re-issued at a premium,
par value or discount. Again, the amount of discount on re-issue cannot exceed amount
forfeited on shares.

4. In the event of company liquidation, the shareholder who has not paid calls can be put on
the list of contributors to the company.

A verified Declaration, by the Director, Manager or Secretary of the company that the shares in
the company have been forfeited on a date stated in the Declaration, will be the “ conclusive “
evidence of forfeit of shares, against any claims made on the securities. Once forfeited, shares
become company property the shares forfeited is written back by crediting the Discount on Issue
A/c.

REISSUE OF SHARES FORFEITED

At times the directors of the company may decide to reissue the shares forfeited. The reissue can
be done at par, premium or discount. Generally, the shares will be reissued at a discount. The
maximum discount, however, will be restricted to the amount received on forfeiture of such
shares plus their original discount if any. This discount given will be written off from the Share
Forfeiture A/c.
And if there is any balance left in the Share Forfeiture A/c, such a balance represents a profit and
will be transferred to the Capital Reserve A/c

The process to re-issue is as follows :

The shares, thus forfeited, may either be canceled or re-issued. The forfeiture of shares does
not necessarily reduce the share capital since they may be re-issued. In accordance with
Listing Agreements, the concerned Stock Exchanges where the shares are listed may need to
be notified of the details of the shareholders whose names have been forfeited along with the
appropriate enclosures, including a copy of the announcement in the newspapers.

According to the Articles of Association, Articles 29 to 32, the Board of Directors have the
power to Re-issue the shares, and this power cannot be delegated by the Board of Directors to
any committee.

The Board of Directors may take up the Reissue of shares at the same Board Meeting as a
forfeiture or at a subsequent Board Meeting. The Board may pass an Ordinary Resolution at
the meeting for such forfeited shares to be re-issued to other persons. The shares may be
issued at a discount which does not exceed the amount already paid on such shares such that
the total of the sum paid by the original owner and re-issue price is not less than the par
value. Since this is a reissue of shares and not an allotment, there is no requirement to file an
application for Reissue with Registrar of Companies ( Sri Gopal Jalan V Calcutta Stock
Exchange Ltd (1963 ) 33 COM. Case 862: AIR 1964 SC 250).

The company can receive the consideration given for the share resale to the new shareholder
and issue to the shares to him. The transferee shareholder may then be registered as the
holder of the shares in the register of members and other records. The validity of the shares
held by the transferee will not be affected by any previous irregularity or invalidity in the
proceedings for forfeiture or resale.

It is important to note that, where the shares are being reissued favoring an existing
shareholder, whose name appears on the list of members, no further approvals are required.
However, where the shares are sold and re-issued to members whose names are not on the
existing member list, the Board has to obtain the consent of the appropriate stock exchange
on which shares are listed and the approval of existing shareholders in General Meeting
before such securities may be re-issued.

It is important that the company and the auditors concerned check the following :

1. Ascertain that Articles of Association authorize Board to reissue forfeited shares

2. Check and ensure Board Resolution passed by the Board of Directors at meeting
for forfeiture and re-issue are accurate
3. Ensure correct accounting entries for forfeiting and re-issue
4. Check and certify the Return of Allotment to be filed with Registrar and other
Regulatory Bodies

LAWS APPLICABLE

The law relating to Forfeiture and Reissue of shares in India is covered under the following Acts
and Rules

• Companies Act 2013 – Sections 61 – 68 and amendments 2017, Sections 13 – 18 Table

F of Schedule I and 28 – 36 Table F Schedule I or Provision is to be included in Articles
of Association of the Company.

• SEBI ( Disclosure and Investor Protection ) Guidelines, 2000.

• Stock Exchange – Listing Agreements

Forfeiture of Shares is the policy and process by which a members name is struck off the register
of shareholders by virtue of non-payment of sums payable on calls on shares or any other reason
as may be prescribed in the Articles of Association. Please note that forfeiture is penal in nature.

In accordance with Sections 28 – 30, if a member fails to pay any call or installment of a call, on
the day appointed for such payment, the board may at any time thereafter, subject to being
authorised by the Articles of Association, by resolution, send a notice to the shareholder stating
as follows :
 1. A future date, not more than 14 days from the date of the notice, by which time payment
must be made, including any interest thereon,

2. In the event of non-payment of calls as per notice, the shares may be forfeited

Where the requirement of the notice of payment are not complied with, by defaulting
shareholders, the Board of Directors may, thereafter, take next steps to arrange for forfeiture and
subsequent cancellation and forfeiture of shares or by notice. The Board is also empowered, by
resolution, to give further time where necessary. The notice to the shareholder should
unequivocally state that the effect of failure to pay by share-holder would result in forfeiture of
the share. Any irregularity, either in the content or service of the notice would invalidate
forfeiture of shares – Bhagwandas Garg Vs. Canara Bank Ltd (1981) 51. Comp.Cas. 38
A.P. Forfeiture should also be for a Bonafide purpose and not to relieve the shareholder from
liability Abdul Karim Vs Sirpur Paper Mills (1969 ) 1 Comp LJ 144 39 Comp. Cas. 33 A.P. It
is advisable to state in the notice clearly that shares will stand forfeited in the event of no
payment. All appropriate details should be included.

It is also a common practice for Companies to publish the information in a prominent newspaper
with all details of payment to be made by the shareholder ( Notice of Forfeiture ). Further, by
way of caution, once forfeiture is decided on, the company can also give all details of forfeited
shares in the newspaper as a final announcement. SEBI disclosure rules require that all calls
should be structured in such a way that the entire subscription money is called within a
maximum of 12 months of allotment.

SURRENDER OF SHARES

Surrender of shares means the return of shares by the shareholder to the company for
cancellation. Holder in this case voluntarily abandons all his shares in favour of the company.
A mere refusal to take up newly issued shares, to which a shareholder is entitled to, is not a
surrender of shares. The power to accept surrender of shares cannot be exercised by a
company unless expressly given by the Articles of Association.
But no shares can, in any case, be surrendered to the company in consideration of the
payment of money or money’s worth by the company. Such a surrender shall be ultra-vires
the company since it would amount to purchase by the company of its own shares. There are
only two cases where surrender of shares will be valid provided its acceptance by the
company is authorised by the Articles of Association—

1. When shares are surrendered in exchange of the new shares of the same nominal value.
There would be no reduction of share capital in such a case; and

2. When shares are surrendered as a short cut to forfeiture of shares when all the
circumstances for forfeiture have arisen. Reduction of capital in such a case shall be valid.

Provisions in the articles, for the acceptance of surrender of shares in all other cases except
the above two, will be void.

A member validly surrendering his shares to the company can nevertheless be held liable as a
list B contributory in the event of winding up of the company within twelve months of his
surrender of shares. Court may order for the restoration of the plaintiff’s name in the Register
of Members after lapse of any number of years if the surrender of shares is proved to be
illegal and provided that the shares have not been reissued in the meantime or otherwise dealt
with by the company.

LIEN OF SHARES
A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a
company lien on a share means that the member would not be permitted to transfer his shares
unless he pays his debt to the company. The articles generally provide that the company shall
have a first lien on the shares of each member for his debts and liabilities to the company.
The right of lien is not inherent but must be clearly provided for in the articles. The articles
may give the right of lien over share either for unpaid calls or for any other debt due by the
member of the company. The company may have lien on fully paid-up shares. The lien also
extends to the dividends payable on the shares.
The death of a shareholder does not destroy the lien. The right of lien can be exercised even
through the claim has become barred by law of limitation. Where the liability of the
shareholder towards the company is disputed by him, it does not deprive the company of its
right of lien on the shares. But a company will not be able to exercise its right of lien where
the shareholder has mortgaged his shares before he has incurred any liability to the company
and the company has notice of it. Similarly, a company will loose its lien if registers a
transfer of shares subject to the lien
AUDIT COMMITTEE

Section 177 of the Companies Act,2013 and Rule 6 and 7 of Companies (Meetings of Board
and its Powers) Rules,2014 deals with the Audit Committee.

Applicability of Audit Committee:

The Board of directors of every listed companies and the following classes of companies, as
prescribed under Rule 6 of Companies (Meetings of Board and its powers) Rules,2014 shall
constitute an Audit Committee.

(i) all public companies with a paid up capital of Rs.10 Crores or more;

(ii) all public companies having turnover of Rs.100 Crores or more;

(iii) all public companies, having in aggregate, outstanding loans or borrowings or

debentures or deposits exceeding Rs.50 Crores or more.

The paid up share capital or turnover or outstanding loans, or borrowings or debentures or

deposits, as the case may be, as existing on the date of last audited Financial Statements
shall be taken into account for the purposes of this rule.

Composition:

The Audit Committee shall consist of a minimum of 3 directors with independent

directors forming a majority.

The majority of members of Audit Committee including its Chairperson shall be persons
with ability to read and understand, the financial statement.

The Board’s report under section 134(3) shall disclose the composition of an Audit
committee and where the Board had not accepted any recommendation of the Audit
Committee, the same shall be disclosed in such report along with the reasons there for.

Reconstitution:

Every Audit Committee of a company existing immediately before the commencement of this
Act shall be reconstituted within one year of such commencement.(i,e., on or before
31st March 2015)

Functions of Audit Committee:

 Every Audit Committee shall act in accordance with the terms of reference specified

in writing by the Board which shall, inter alia, include,—

(i) the recommendation for appointment, remuneration and terms of appointment of auditors
of the company;

(ii) review and monitor the auditor’s independence and performance, and effectiveness of
audit process;

(iii) examination of the financial statement and the auditors’ report thereon;

(iv) approval or any subsequent modification of transactions of the company with related
parties;

(v) scrutiny of inter-corporate loans and investments;

(vi) valuation of undertakings or assets of the company, wherever it is necessary;

(vii) evaluation of internal financial controls and risk management systems;

(viii) monitoring the end use of funds raised through public offers and related matters.

Powers of Audit Committee:

The Audit committee shall have the authority –

• To call for the comments of the auditors about internal control systems, the scope of audit,
including the observations of the auditors and review of financial statement before their
submission to the Board
• To discuss any related issues with the internal and statutory auditors and the management of
the company.
• To investigate into any matter in relation to the items or referred to it by the Board
• To obtain professional advice from external sources
• To have full access to information contained in the records of the company.
The auditors of a company and the KMP shall have a right to be heard in the meetings of
the Audit Committee when it considers the auditor’s report but shall not have the right to
vote.

Establishment of Vigil Mechanism:

 Every listed company and the companies belonging to the following class or classes, as
prescribed under Rule 7 of Companies (Meetings of Board and its powers) Rules,2014 shall
establish a vigil mechanism for their directors and employees to report their genuine concerns
or grievances-

• Companies which accept deposits from the public

• Companies which have borrowed money from Banks and PFI in excess of Rs.50 Crores.
• The existence of the mechanism may be appropriately communicated within the
organization. The details of establishment of Vigil mechanism shall be disclosed by
the company in the website, if any, and in the Board’s Report.
• Safeguard to employees & Directors:
• The vigil mechanism shall provide adequate safeguards against victimization of
employees and directors who avail of the Vigil mechanism and also provide for
direct access to the chairperson of the Audit committee or the director nominated to
play the role of audit committee, as the case may be, in exceptional cases.
• Action against Frivolous complaints:
• In case of repeated frivolous complaints being filed by a director or an employee, the
audit committee or the director nominated to play the role of audit committee may
take suitable action against the concerned director or employee including reprimand.

REDUCTION OF SHARE CAPITAL

A share capital reduction is an allowed way for limited companies to reduce their share
capital without the need to meet the requirements for a redemption or purchase of own shares
out of capital. There are a number of ways that the reduction of share capital can be
achieved.

Whilst public limited companies can carry out a share capital reduction they have to obtain a
court order. Private limited companies, however, do not need to do so and can, instead of
obtaining a court order, complete a reduction of share capital supported by a solvency
statement.
 However a reduction of share capital is to be achieved there are a number of legal
requirements that companies need to complete. Then once these and the reduction of share
capital have been completed the reduction must be reported to Companies House using form
SH19 together with copies of the shareholders resolution and directors’ solvency and
compliance statements.

Why carry out a share capital reduction?

There are a number of reasons why a company may want to carry out a reduction of share
capital, including:

• returning to shareholders the capital not needed for the company’s ongoing operations.

• cancelling capital that is no longer supported by the assets of the company, this is where the
share capital is more than the net assets of the company.

• extinguishing or reducing the liability of shareholders on shares that are not fully paid where the
unpaid capital is not expected to be needed by the company.

A reduction of share capital can, therefore, be used where a shareholder wants to retire from a
company provided that the amount being paid to the retiring shareholder is not needed for the
company’s ongoing operations.

Before deciding on making a share capital reduction you should obtain suitable legal and
taxation advice.

Requirements for a share capital reduction

The rules for share capital reductions are set out in Chapter 10 of Part 17 of the Companies
Act 2006.’

To complete a share capital reduction, the directors need to ensure that the following are met:

• The articles of association do not prohibit share capital reductions – these can be amended by
passing a special resolution ;

• There will be at least one non-redeemable share in issue after the reduction of share capital.

If the company is a private limited company then the share capital reduction can be
completed by the passing of a special resolution supported by a solvency statement given by
the directors.
 If the company is a PLC then the share capital reduction must be done by passing a special
resolution confirmed by the court. A private limited company may also have the reduction
confirmed by the court rather than supported by a solvency statement.

In either case the following needs to be completed:

• Board approval to propose the share capital reduction

• Passing of a special resolution approving the share capital reduction

Where the reduction needs to be confirmed by the court the directors then need to obtain the
necessary court order.

Where the reduction is to be supported by a solvency statement the directors need to provide
the solvency statement in accordance with sections 642 to 643 of the Companies Act 2006.

The remainder of this article mainly concerns private companies carrying out share capital
reductions supported by a solvency statement.

Directors’ solvency statement

The directors’ solvency statement should state:

• if they intend to commence the winding up of the company within twelve months of the date of
the solvency statement, that the company will be able to pay its debts in full within twelve
months of the commencement of the winding-up; or

• in any other case, that the company will be able to pay or otherwise discharge its debts as they
fall due during the year immediately following the date of the solvency statement.

In making the solvency statement the directors will need to have made a full review of the
company’s financial status, current operations and future projections.

For this they should have prepared and considered:

• the current accounts showing the company’s net assets; and

either

• if it is planned to wind the company up in the next twelve months:

o a plan of how the company is to be wound up; and

o a plan of how the company will pay or otherwise discharge its liabilities within twelve months
of the commencement of the winding up;

or

• if it is planned for the company to continue:

o business plans for the next 12 months;

o a projected cashflow, including capital expenditure, for the next 12 months; and

o projected net assets for the following year.

Shareholder approval

Once the directors have made the solvency statement the shareholders’ special resolution
must then be passed within the next 15 days.

The shareholders must have the directors’ solvency statement available for inspection at the
meeting called to approve the share capital reduction. If the resolution is not being approved
at a meeting of the shareholders the directors’ statement of solvency will need to be sent with
the notice of the written special resolution.

Inform Direct produces tailored board and shareholders resolutions for a reduction of share
capital as well as the directors’ solvency and compliance statements and form SH19.

What happens if the company is wound up within one year?

If the company is wound up within one year of a payment for shares out of capital and the
assets are insufficient to meet the company’s liabilities, the directors that made the solvency
statement will, unless there where reasonable grounds for making the solvency statement, be
guilty of an offence and if found guilty may be:

• imprisoned for a term not exceeding, if convicted on indictment, two years or, on summary
conviction, twelve months in England and Wales or six months in Scotland or Northern Ireland;
and/or

• fined.

The liability of the shareholders is the same as normal so that generally they will just have to
pay any amounts unpaid on the shares.