VIth SEMESTER

COMPANY LAW
UNIT 4
-Akhila Rani
Assistant Professor, RCL
SOURCES OF FINANCE/ SOURCES OF CORPORATE
FINANCING

a) Equity Financing (through investment)

b) Debt Financing (through debt instrument, loans etc)
Equity Financing

• Equity financing is the process of raising capital through

the sale of shares
• Individual investors, venture capitalists, angel
investors, and IPOs are all different forms of equity
financing
• According to Collins dictionary, Equity is the sum of
assets or investments once debts have been subtracted.
Debt Financing

• Debt financing occurs when a company raises

money through debt instruments to investors.
• Debt financing is the opposite of equity financing,
which entails issuing stock to raise money.
• Debt financing occurs when a firm sells fixed income
products, such as debentures, bonds, bills, or notes.
SHARES
• Meaning and Nature of shares
• Shares are the units of fixed amount formed by dividing
the share capital of the company
• Section 2(84) of the Companies Act 2013 defines Share
as, ‘share is a share in the share capital of the company
and includes stock.’
 CIT V Standard Vacuum oil Co. (1966) S.C
• SC observed “A share in the Company is meant not any
sum of money but an interest measured by a sum of
money and made up of diverge rights conferred on its
holders by the Articles of the Company which constitute
a Contract between him and the Company”
• Bucha F. Guzdar V. Commissioner of Income Tax,
Bombay LR 617 (SC)
• SC defined Share as “ a right to participate in the profits
made by the Company while it is a going Concern and
declares dividend”
• Sri Gopal Jalan &Co. v. Calcutta Stock Exchange
Association Ltd (1963)33 Comp.Cas.862 (SC)
• A Share is a Chose-In –Action
• A Chose-in-action implies the existence of some
persons entitled to the rights, which are rights in
action as distinct from rights in possession, and until
the share is issued no such person exists
• Share is not a sum of money.
• It is an interest of a shareholder in a company, which
carries certain rights & liabilities (a bundle of rights and
obligations)
• Shares also consist of a series of mutual covenants
entered by all the shareholders inter se. [Borland’s
trustees v. Steel Bros &Co.Ltd (1901)1 Ch. 279 (Ch.D)]
• Share is a chose-in-action
• Share is not a negotiable instrument
• Shares are goods under section 2(7) of the Sale of
Goods Act,1930.
• Sec.2(7) defines Goods “Any kind of movable
property ,other than Actionable claims and money and
includes Stocks and Shares”

• According to Section 44 of Companies Act,2013 ,

Shares are Movable property and shall be transferable
in the manner provided by the Articles of the Company
• Share V Share Certificate
• Share represents the movable property and share
certificate is the prima facie evidence of the title of the
holder to such property

• Distinction between ‘Share’ and ‘Share certificate’ was

made out in in the case of Shree Gopal Paper mills ltd. v.
CIT (1967) 37Comp.Cas.240(Cal)
Share V Stock
• Share represents a unit into which the capital of the
company is divided.
• For example, if the Share capital of the company is Rs. 5
lakhs divided into 50,000 units of Rs. 10, each unit of
Rs.10 shall be called a share of the company
• The term Stock, on the other hand may be defined as
the ‘aggregate of fully paid up shares of a holder
merged into one fund of equal value’.
• Stock is a set of shares put together in a bundle
KINDS OF SHARES (Sec.43 Companies act,2013)

a) Equity Share Capital

b) Preference shares/share Capital

Other type
Sweat Equity shares
Equity Share Capital
• Equity shares offer voting rights on every resolution
placed before the company and voting right shall be in
proportion to his share in the paid up equity share
capital in the company
• Dividend rate of equity shares changes year to year.
• The dividend rate generally depends on the amount of
profit made by the company that year.
• If the company makes a profit, shareholder will receive a
portion of the earnings as well. As the profit margin
varies, the dividend amount changes as well.
Types of Equity Shares/ share Capital

1) Equity Shares with voting rights

2) Equity Shares With differential rights as to dividend,
voting right

Equity Shares with voting rights

• Generally one single share denotes one vote concerning
company policies, election of directors etc.
Equity Shares With differential rights as to dividend,
voting right
• The differential rights are in respect of voting power and
dividend.
• Equity shares with less voting rights carry higher rate of
dividend but whereas the equity shares with higher
voting shares carries with lesser rate of dividend
• Equity shares with higher voting rights are generally given
to promoters, key managerial persons, Managing
directors etc
• By issuing shares with differential voting rights, the share
capital will increase but the control and management is
still remains in the hand of promoters
Preference shares/share Capital
• Preference Share Capital is the funds generated by a
company through issuing preference shares (also
known as Preference stock).
• Preference Shareholders have the first preference to
receive dividends even before equity shareholders.
• Preference Shareholders have the first preference to
claim the company’s assets during the winding up of
the company.
• The Preference Shareholders get a fixed rate of
dividend.
• Preference shareholders do not get voting rights in the
selection of the company’s management.
• The preference shareholders can vote only on such
resolutions which directly affect the rights attached to
the preference shares and any resolution for the
winding up of the company or for the repayment or
reduction of its capital.
• However, if the preference dividend is not paid for two
years or more, the preference shareholders also get
voting right on every resolution placed before the
company (Sec.47)
Types of Preference Shares/ share Capital

a) Participating preference shares or Non-Participating

preference shares
b) Cumulative preference shares or Non-Cumulative
preference shares
c) Redeemable preference shares or Irredeemable
preference shares
d) Convertible Preference Shares or Non-Convertible
Preference Shares
a) Participating Preference Shares
• Participating preference shares help shareholders
demand a part in the company’s surplus profit at the
time of the company’s liquidation after the dividends
have been paid to other shareholders.
• However, these shareholders receive fixed dividends and
get part of the surplus profit of the company along with
equity shareholders
Non-Participating Preference Shares
• These shares do not benefit the shareholders the
additional option of earning dividends from the surplus
profits earned by the company, but they receive fixed
dividends offered by the company.
 b) Cumulative Preference Shares
• In the case of cumulative preference shares, if a
particular company doesn’t declare an annual dividend,
the benefit is carried forward to the next financial year
• Cumulative preference shares are those type of shares
that gives shareholders the right to enjoy cumulative
dividend payout by the company even if they are not
making any profit.
• These dividends will be counted as arrears in years when
the company is not earning profit and will be paid on a
cumulative basis the next year when the business
generates profits.
Non - Cumulative Preference Shares
• Non-cumulative preference shares don't provide for
receiving outstanding dividends benefits.
• In the case of these types of shares, the dividend payout
takes place from the profits made by the company in the
current year.
• So if a company does not make any profit in a single
year, then the shareholders will not receive any
dividends for that year.
• Also they cannot claim dividends in any future profit or
year.
c) Redeemable preference shares (Sec.55 CA 2013)
• Redeemable preference shares are those shares that
can be repurchased or redeemed by the issuing
company at a fixed rate and date.
• A Company limited by shares may if so authorize by its
Articles, issue preference shares which are liable to be
redeemed within a period not exceeding 20 years from
the date of issue subject to the conditions as may be
prescribed

• In India Companies can issue only redeemable

preference shares
Irredeemable preference shares/ Non-Redeemable
Preference Shares
• Non-redeemable preference shares are those shares
that cannot be redeemed or repurchased by the issuing
company at a fixed date.
d) Convertible Preference Shares
• Convertible preference shares are those shares that can
be converted into equity shares after meeting the
requisite stipulations by the company’s Article of
Association (AoA)
Non-Convertible Preference Shares
• Non-Convertible preference shares are those shares that
cannot be converted into equity shares
Other type
Sweat Equity Shares(sec.54)
• Government through an ordinance promulgated on
9-1-1999 allowed the companies to issue a new class of
equity shares called sweat equity
• Sweat equity share is an equity share issued by the
company to employees or directors at a discount or for
consideration other than cash for providing know-how
or making available rights in the nature of Intellectual
Property rights
• Special resolution should be passed
• Sweat equity shares can be issued only after one year of
incorporation
• According to SEBI, sweat equity shares should not be
sold within one year from the date of allotment( Lock-in
period is one year)
Different categories of share capital
1. Authorized Share Capital
2. Issued Share Capital
3. Subscribed Capital
4. Called-Up Capital
5. Paid-Up Capital
1. Authorized Share Capital
• Authorized Share Capital is the total Capital as mentioned
in the MOA of the company.
• According to Section 2(8) of the Companies Act, 2013, the
limit of Authorised Capital should be given under the
Capital Clause in the Memorandum of Association.
• It is also called as Registered Capital or Nominal Capital
because with this Capital a company is registered.
• The company has the discretion to take the required steps
necessary to increase the limit of authorised capital with
the purpose of issuing more shares, but the company is
not allowed to issue shares that are exceeding the limit of
authorised capital in any case.
2. Issued Share Capital
• Issued Share Capital is the part of Authorized Share Capital
issued to the public for subscription.
3.Subscribed Capital
• Subscribed Capital is the part of issued Capital which has
been taken over by the public.
• For example – If a company offers 16000 shares of Rs. One
hundred each and the public applies only for 12000 shares,
then the issued Capital would be Rs 16 lakh, and
Subscribed Capital would be Rs 12 lakh.
• Once the Share has been issued and purchased by
investors, these shares are called Shares Outstanding
4. Called-Up Capital
• Generally, the shareholders pay the price of the shares by
installments, viz., application, allotment, First call, Final
call etc.
• Therefore, the portion of the face value of the shares
which the shareholders will be called upon to pay or the
company has demanded to pay is called Called-up
capital.
• The "called-up" portion of share capital is the unpaid
amount that the company will eventually call upon.
5. Paid-Up Capital
• The part of Capital which is paid by the shareholder in
response of call made by the company is called Paid-up
Capital.
• The amount of capital (out of called-up capital) against
which the company has received the payments from the
shareholders so far.
Different Modes to raise the Share Capital
PUBLIC COMPANY (Sec.23)
1. By Public Offer (through Prospectus)
2.By private Placement
3. By Rights issue or Bonus Issue

PRIVATE COMPANY
1.By private Placement
2. By Rights issue or Bonus Issue
Public Offer

• An issue of shares made by a public company to the

public at large by means of a prospectus is referred to as
public offer.
• A public offer may be in form of Initial Public Offer (IPO),
further public offer (FPO) or an offer for sale of securities
to the public through the issue of the prospectus.
• Provisions regarding public offers are covered under
Chapter III Part I of the Companies Act, 2013, SEBI(ICDR)
Regulations 2018, Securities Contracts (Regulation) Act
1956
• Initial Public Offer (IPO)
• companies offer IPO to raise money and get access to
liquidity by offering their stocks/shares to the public.
• Companies have to abide by the IPO process in India - as
stipulated by stock exchanges - before its shares are
eligible to be publicly traded
• Book Building
• A process by which demand for the securities proposed
to be issued by a company elicited and built up and the
price for such securities is assessed for the
determination of quantum of such securities to be issue
by means of a Red-herring prospectus notice, circular or
advertisement
Private Placement
• ▪ Offer or invitation to subscribe or issue of securities to
a select group of persons by a company.- Explanation I to
Section 42 of Companies Act, 2013
• Conditions
• 1. Special Resolution for each offer or invitation
• 2. Identification the select group by Board
• - Number should be below 200 (excluding QIB and
Employees stock option scheme)
• 3. Issue of application form (Offer by company)
4. Filing of duly filled application along with the subscription
money in Cheque/ DD or other Banking channel but not by
cash
5. The application money shall be kept in a separate Bank
account
6. Allotment shall be made to the applicant within 60 days
from the date of the receipt of the application money.
7. Company shall not use the money unless the allotment is
made and return of allotment is filled with the registrar.
8. Default: the company shall repay the application money
to the subscriber within 15 days from the expiry of 60
days from the date of receipt of application money
9. Penalty: Company shall repay the application money
with interest at the rate of 12% per annum from the
expiry of the sixtieth day.
10. Return has to be filed with ROC within 15 days from
the date of the allotment
11. Default: Company/promoter/ directors shall be liable to
pay a penalty of Rs.1000 for each day during which such
default continues but not exceeding 25 lakh rupees
12. Company shall not release any public advertisement/
utilize any media, marketing or distribution channels or
agents to inform the public at large about such an issue.
• 12. Penalty: the Company/promoter/ directors shall be
made liable for a penalty which may extend to the
amount raised through the Private Placement or
2 crores, whichever is lower and shall also refund all the
application money with interest of 12% P.A. within 30 days
of order.
14. Any offer made in contravention will also be deemed
to be a public offer
 Rights issue (Section 62)
• A rights issue is an offering of rights to the existing equity
shareholders of a company that gives them an opportunity
to buy additional shares directly from the company at a
discounted price.
• The number of additional shares that can be bought
depends on the existing holdings of the shareowners.
• When a company is planning an expansion of its
operations, it may require a huge amount of capital.
Instead of opting for debt, they may like to go for equity to
avoid fixed payments of interest. To raise equity capital, a
rights issue may be a faster way to achieve the objective.
• Bonus issue (Sec.63)
• Bonus issue is an issue of shares by the company to its
existing shareholders free of cost.
• It is issued in relation to the number of shares held by
the shareholders
• Only Listed Company can issue bonus shares
• It must be authorized by AOA. If its not mentioned in
AOA, it must alter AOA to include such provisions
before the allotment.
• A bonus issue of shares is issued by a company in lieu of
cash dividends.
• Bonus shares are always fully paid
• Bonus shares increase a company's share capital but
not its net assets.
Allotment of Shares
• General principles regarding allotment
• 1. Proper Authority
• The allotment should be made by proper authority
i.e.,BOD
• 2. Allotment against the application only
• No valid allotment can be made on an oral request
• Rahul Subodh Windoors Ltd. V. A. K. Menon (1999)
• There was no application in writing for allotment of
shares and allotment was made in blank. Court directed
the company to return money paid for shares
• 3. Allotment not to be in contravention of any other law
• Re Trans Atlantic Life Assurance Co.Ltd [1979]3All ER 352
• Court held that “if the shares are issued in a manner
prohibited by Foreign Exchange Regulations, the issue
would be invalid and void and confer on the allottee no
title whatsoever to the shares”
• 4. Reasonable time
• Allotment must be made within a reasonable time,
otherwise the application lapses
5. Communication
• The allotment must be communicated to the applicant
• A contract of allotment is like any other contract

6. Absolute and Unconditional

• The acceptance must be absolute and unconditional
• The acceptance must be made on the same terms as
stated in the application
• For example, Where a person applied for 500 shares , he
is not bound to accept 600 shares
Statutory Provisions regarding allotment
1. Registration of Prospectus (Sec.26(4))
A copy of prospectus signed by every person who is
named therein as a director or proposed director or
his duly authorized attorney shall be duly filed with
the Registrar on or before the date of its publication
2. Application money (Sec.39(2))
• Not less than 5% of the nominal value of the share
(Sec.39(2) of CA 2013)
• Not less than 25% of the nominal value of
shares( Regulation 47(4) of SEBI (ICDR) 2018
3. Minimum Subscription (sec.39(3)& (1) CA 2013)
• Securities can be allotted only after obtaining “minimum
subscription” as stated in the prospectus and application
money of the minimum subscription has been received by
the company by cheque or other instrument
• If the minimum subscription has not been received by the
company within 30 days from the date of issue, then the
application money shall be returned within a period of 15
days from the closure of issue.
• Default
• In case of failure to repay, directors and officers in default
shall be jointly and severally liable to repay money with an
interest rate of 15% per annum
4. Closing of the subscription list
• Companies Act 2013 is silent as to the time for which
the subscription list must be kept open
• SEBI (Issue of Capital and Disclosure Regulations) 2018
provide that the subscription list for public issue must be
kept open for at least 3 working days and not more than
10 working days.
• In case of Rights issue, the issue shall remain open for 15
days and not more than 30 days
5. Permission to deal on a stock exchange (Sec.40)
• Every Company making Public offer shall, before making
such offer , make an application to one or more
recognized stock exchanges and must obtain permission
for the securities to be dealt in such stock exchange

6. Over subscription
• As per SEBI(ICDR)2018, no allotment shall be made by
the issuer in excess of the specified securities offered
through offer document
7.Return of Allotment shall be filed with the ROC (Sec. 39(4))

• Whenever Company makes an allotment, company shall file

‘Return of Allotment’ with ROC
• Default :- In case of any default, company and officer in
default shall be liable to a penalty , Rs.1000 for each day
during such default continues or Rs.1 lakh whichever is less
 Underwriting
• According to Palmer, ‘Underwriting’ is an expression
used in company matters signifying a contract by which
a person (known as the Underwriter) agrees (usually
for a Commission) that if the shares or debentures
about to be offered for subscription or some specified
proportion thereof are not within a specified time,
taken up by the public, he will himself take them up
and pay for what the public do not take up
• According to SEBI(ICDR) 2018, Underwriting is an
agreement to subscribe securities of a body corporate
with or without conditions when the existing
shareholders of that body corporate or public do not
subscribe the securities offered
• Underwriting is thus in the nature of an insurance
against the possibility of inadequate subscription
(Nani Gopal Lahiri v. State of UP (1965))
Call on shares
• When shares are issued, the terms of issue may specify
the instalments by which issue price shall be payable
• Instalments other than those payable by way of
application money and allotment money are generally
referred to as Calls.
• A call means a demand by the company for payment of
part of the issue price of shares or debentures which has
not been paid .
• Call can be made by the BOD or the liquidator at the
time of winding up of the company.
Requisites of a valid call
1. Resolution at a meeting of the board
2. Call on shares of same class must be made on uniform
basis (Sec.49)
• Shares of the same nominal value on which different
amounts have been paid-up shall not be deemed to fall
under the SAME CLASS
3. Call to be made bona fide in the interest of the company
• Directors are the trustees of the capital of the company
• Accordingly ,the amount called up has to be used for the
benefit of the company
4. Time within which shares are to be made fully paid up
• Any company offering shares to the public must ensure
the shares issued are made fully paid up within 12
months of date of allotment where the size of issue is
upto Rs.500 crores
5. Notice of call
• A formal notice must be served to the shareholders
• Notice must specify exact amount and time of payment
 Forfeiture of Shares
• Confiscation of shares is permissible under the
Companies Act, 2013
• Articles (Schedule 1,Table F Regulations 13-
18,Companies act 2013) contain a provision of
Company’s power to forfeit the shares of a member who
fails to pay calls or instalments of issue price of his shares
within a certain time after the call fall due
Rules for Forfeiture for shares
1. Forfeiture must be in accordance with the provisions
contained in AOA
2. Proper Notice:-Before the shares of members are
forfeited , a proper notice for that effect must have been
served
3. Resolution for forfeiture
• If the defaulting shareholder does not pay the amount
within the specified time as required by the notice, the
directors may pass a resolution forfeiting the shares.
• In absence of such resolution the forfeiture shall be
invalid
4. Power for forfeiture must be exercised bona fide and in
good faith
Effect of Forfeiture
1)Cessation of membership
2)Cessation of liability
3)Liability as past member
The former holder shall remain liable as a past member to
pay calls if liquidation takes place within 1 year of the
forfeiture.
4) On forfeiture, the forfeited shares become the
property of the Company
Surrender of shares
• Surrender of shares means the voluntary return of
shares by the shareholder to the company for
cancellation.
• There is no provision for surrender of shares in
Companies Act
• However, the articles of some companies may allow
surrender of shares as a short cut to the long procedure
of forfeiture
• Mere handing over of share certificates cannot constitute
surrender of shares (Vasant Investment Corp. Ltd, In re
(1982) 52 Comp.Cas.139
Transfer of shares
• Shares are transferable in the manner specified under
the Articles & in accordance with the provisions of law-
(sec 44)
• However, certain restrictions (pre-emption clause)are
placed on the private company in matters relating to the
members’ right to transfer shares.
• Pre-emption clause states that the intending transferor
must offer his shares to the existing members of the
company, before offering them to non-member so long
as a member can be found to purchase them at a fair
price to be determined in accordance with the articles
Power of BOD to refuse to the registration of transfer of
shares
• If the Articles of Company gives power to the Board to
refuse the registration of a transfer of shares, such
power must be exercised by the resolution of the Board
• The Board may refuse to register the transfer as long as
they are acting in the interests of the company.
• If they exercise their discretion to refuse malafide ie.,
they act oppressively or corruptly, Tribunal will
interfere and order registration
 Procedure of Transfer (Sec 56)
• Instrument of transfer must be duly stamped, dated and
executed by transferor and transferee
• Name, address and occupation ,if any, of the transferee
has been delivered to the company by the transferor or
the transferee
• Instrument of transfer must have been delivered to the
company within 60 days from the date of execution
• The instrument of transfer must be accompanied by the
‘certificate of securities’ and if there is no certificate
attach ‘Letter of Allotment of securities’
• The Company shall deliver the certificates within a
period of one month from the date of receipt by the
company of the instrument transfer.
• Appeal against the refusal to register transfer (Sec 58)
• If the company refuses to register the transfer of shares
without sufficient cause, the transferee can appeal to the
Tribunal
• Transfer of partly paid shares (Sec.56(3))
• Application made by transferor alone
• Company must send a notice of application to transferee
and transferee must give “No Objection” to the transfer
within 2 weeks from the receipt of notice
• Then only transfer shall be registered.
Transfer of shares held in joint names (Sec.56(3))
• The transfer form must be signed by all of them
Transmission of Shares
• Devolution of title to the shares otherwise than by
transfer to the legal representative or to the liquidator
or official assignee
• Transmission of shares takes place
• 1. when the registered shareholder dies or
• 2. when he is adjudicated as an insolvent or
• 3. where the shareholder is a company & it goes into
liquidation
• The company shall register the transmission of share
within one month from the receipt of an intimation of
transmission.
Lien on shares
• A lien is the right to retain the possession of a thing
until a claim is satisfied.
• In the case of company, lien on shares means that the
member would not be permitted to transfer his shares
unless he pays debt to the Company.
• A lien is a form of security.
• AOA of the company may authorize the company to
exercise lien on the shares of the member for a money
owed by him to the company.
• Right of lien of the company can extend to dividend as
well.
Enforcement of Lien
• A company may exercise the lien on shares by selling
those shares in case the member defaults in payment of
the amount due against him
• In the absence of express power of sale in the Articles,
the company needs to obtain the permission from the
court
• Company must issue a notice to the shareholder
requiring him to pay the debts within a specified time.
• On sale, any amount in excess of amount due must be
payable to the former shareholder
Rights & Privileges of Shareholders
1. Contractual & other rights
A member by virtue of the contract with the company
and other members via MOA and AOA
• Entitled to have his name in the Register of members
• Right to vote at the meeting of members
• Right to receive dividend
• Right of pre-emption (Pre-emptive right to purchase
new shares)
• Return of capital on winding up
2. Statutory Rights
a) Right to vote at all meetings (Sec.47)
b) Right to receive the notice of the meeting (Sec.101)
c) Right to appoint proxy & inspect proxy register
(Sec.105)
d) Right to appoint a representative to attend a general
meeting (Sec.113)
e) Right to require the company to circulate the
resolution (Sec.111)
f) Right to receive the share certificate within 2 months
from the date of allotment (Sec.56)
g) Right to transfer the shares (sec.44)
h) Right to inspect the register of members and
debenture-holders, and also t get the extract there from
(Sec.94)
i) Right to obtain the minutes of meeting and right to
inspect the same (Sec119)
j) Right of appeal to Tribunal ( Sec.48)
k) Right to participate in the removal of directors
(Sec.169)
3. Other rights
Certain other rights of a member spelt out by the SC in LIC
v. Escorts Ltd (1986) are
• To elect the directors
• To enjoy the profits of the company
• To apply to the court in case of Oppression
• To apply to the court in case of mismanagement
• To share in the surplus of the company
BUYBACK OF SHARES AND SECURITIES (Sec.68)
• Buy-back is the process by which Company buy-back it’s
Shares from the existing Shareholders or from Open
market through book building process or stock
exchange, usually at a price higher than the market
price.
• The theory behind share buybacks is that they reduce
the number of shares available in the market and
increase EPS on the remaining shares, benefiting
shareholders
• Earnings per share (EPS) is a company's net profit
divided by the number of shares outstanding.
Sources of Buy-back
• A Company can purchase its own shares and other
specified securities out of –
• its free reserve; or
• the securities premium account; or
• the proceeds of the issue of any shares or other
specified securities.
Conditions of Buy-back
• As per Section 68 of the Companies Act, 2013 the
conditions for Buy-back of shares are-
• Articles must authorise otherwise Amend the Article
by passing Special Resolution in General Meeting.
• For buy-back we need to pass Special Resolution in
General Meeting, but if the buy-back is upto 10%, then
a Resolution at Board Meeting need to be passed .
• Buyback should not be more than twenty-five percent
of its paid up share capital and free reserves of the
company
• Post buy-back debt-equity ratio cannot exceed 2:1.
• In the case of buyback of Equity shares in any financial
year, buyback cannot exceed 25% of its total paid up
equity capital in that financial year. However there
cannot be more than one such buyback within a period
of one year reckoned from the date of closure of the
proceeding offer of the buyback.
• Only fully paid up shares can be brought back in a
financial year.
The notice of the meeting for which the Special
Resolution is proposed to be passed shall be
accompanied by a explanatory statement stating
1. a full and complete disclosure of all the material facts;
2. the necessity of buy-back;
3. the class of shares intended to be bought back;
4. the amount invested under the buyback;
5. the time limit for completion of buyback;
• The Company must maintain a Register of buy-back in
Form SH-10.
• Submit Return of buy-back in Form SH-11 Annexed with
Compliance Certificate in Form SH-15, Signed by 2
Directors out of which One must be a Managing Director,
if any to ROC and in case listed company to Registrar and
SEBI
• Observe 6 months cooling period i.e. no fresh issue of
share is allowed.
• No offer of buy-back should be made by a company
within a period of one year from the date of the closure
of the preceding offer of buy-back
Restrictions on Buy-back of Securities in certain
circumstances
• According to section 70 of the Companies Act, 2013, A
Company should not buy-back its securities or other
specified securities , directly or indirectly –
• Through any subsidiary including its own subsidiaries;
• Through investment company or group of investment
Companies;
• When Company has defaulted in filing of Annual
Return, declaration of dividend & financial statement
 Dividend
Meaning of dividend (section 2(35) of CA, 2013)
• Dividend to include any ‘interim dividend’-

• Dividend means the Profit that is divided amongst the

shareholders of the Company on the basis of the Shares
held by them
• CIT v. Girdhar Das & Co. (P) Ltd. (1967)21Comp L.J.
• The SC defined dividend as follows “ As applied to a
Company which is a going concern, it ordinarily means
the portion of the profits of the Company which is
allocated to the holders of Shares in the Company”
Profits V. Divisible Profits
• All the profits of the company cannot be said to be
divisible.
• Only those profits which can be legally distributed to the
shareholders of the company in the form of dividend are
called divisible profits.
• However specific definition of “divisible profits’ has not
been laid down even by the Companies Act
Sources out of which the dividend may be paid (Sec 123)
1. Out of Current Profits
2. Out of past reserves
3. Out of monies paid by the central government or a
state government
Who can declare Dividend
• As per the provisions contained in the Companies Act,
2013, all companies can declare dividends except for
those who are registered under section 8.
• Dividend is to be declared by the company at its Annual
General meeting on such rate as may be recommended
by board
• company has no power to declare dividend exceeding
the amount recommended by the board.
Types of dividend
• Final dividend
• Interim dividend

Final dividend
• The final dividend is paid at the end of the closure
of financial year on Annual General Meeting
• It doesn’t require any special provision in AOA
INTERIM DIVIDEND Section 123(3)
• Board of directors of a company may declare interim
dividend
• during any financial year or
• at any time during the period from closure of financial
year till holding of the annual general meeting,
• out of the profits made by the company during such
financial year or out of previous year’s undistributed
profits (subject to Companies (Declaration and
Payment of Dividend) Rules, 2014).
• It can be made only if AOA authorizes to declare
Dividend on Preference shares
• Preference shareholders are entitled to a dividend of a
fixed amount, before the dividend is paid on the Equity
shares

Dividend on Equity shares

• Equity shareholders are entitled to be paid a dividend on
their shares only after all the preference dividends have
been paid
Dividend Declaration
Declaring dividend out of current year’s profit
• Company has to meet the following requirements for
declaring dividend out of its profit:
• Depreciation: Depreciation shall be provided on all
depreciable assets as per the prescribed rate or its useful
life before declaring the dividend.
• Reserve: Company cannot declare or pay a dividend
unless it transfers a certain percentage of profit to
reserve.
• Set off previous year loss: Company must set off the
carried forward previous year’s loss from the current
year’s profit before declaring the dividend.
• Free Reserve: Company shall not declare its dividend out
of any reserve other than Free Reserve
conditions for the declaration of dividend out of free
reserves (Rule 3, Companies (Declaration and
Payment of Dividend) Rules, 2014)

• Rate of dividend
• The rate of dividend declared shall be equal to or less
than the average of the rates at which the company
declared dividend in the three (3) financial years
immediately preceding the current financial year
2)Total amount of withdrawal
• The total amount to be drawn from such accumulated
and unutilized profits shall be equal to or less than one-
tenth (1/10th) of the sum of its paid-up share capital
and free reserves as it appears in the latest audited
financial statement of the company.
3) Utilization of amount withdrawn
• The amount that is so drawn from the accumulated and
unutilized profits shall be first employed to settle the
losses incurred by the company in the financial year in
which dividend is declared before declaring any
dividend concerning equity shares
4)Balance amount of reserves
• The amount in the free reserves after such withdrawal
must be equal to or more than fifteen percent (15%)
of its paid-up capital as it appears in the company’s
latest audited financial statement.
Payment of Dividend (Sec.123(5)Companies Act 2013)
• No dividend shall be payable except by way of cash,
where dividend payable in cash can also be paid through
cheque, warrant or in any electronic mode, to the
shareholder who is entitled to the dividend.

Dividend Warrant (Sec.123(5)(b)

• Company pays dividend to its shareholder in a document
form known as dividend warrant.
• It is an order issued by a company and drawn upon its
banker in favour of its shareholders for payment of
dividend due to them
• Procedure for declaration of dividend
• Issuance of minimum 7 days’ notice period under Section
173 of the Companies act, 2013 for the meeting of the
board of directors
• Listed company must Notify the stock exchange where
company’s securities are placed atleast 2 working days
prior to the Board meeting
• The resolution needs to be passed in an annual board
meeting for dividend division and issuance
• Prepare a statement of dividend
• A separate bank account must be opened with a scheduled
bank. The bank account must be credited with the dividend
payable within five (5) days of the declaration of dividend,
according to Section 123 (4)
• The company must pay the dividend within thirty (30)
days from the date of declaration of dividend.
• For joint shareholders, a dividend must be paid to the
first named shareholder. [Section123 (5)⦐
Unpaid Dividend Account (Sec- 124)
There are some cases wherein, dividend declared by the
company has not been paid or claimed and in case where
such dividend remained unpaid or unclaimed within 30
days from the date of declaration; company shall take the
following necessary steps-
(a) Open a special bank account with a scheduled bank to
be called “ Unpaid dividend account”
(b) Transfer the unpaid or unclaimed amount of dividend
within a period of 7 days from the expiry of such 30 days,
to the special account “Unpaid dividend Account”
• In case of default
• If the company committed any default, in transferring
such amount to the special account with in the specified
time, company shall be liable to pay interest @ 12% p.a.
from the date of such default.
Can dividends be paid out of capital
• According to Sec.123 of Companies Act 2013, Dividends
can be paid out of
1. Out of Current Profits
2. Out of past reserves
3. Out of monies paid by the central government or a
state government
• Accordingly Dividends are not allowed to be declared
out of Capital.
Verner v. General & Commercial Investment Trust Ltd
(1894) 2 Ch.239
• It was held that if the MOA and AOA give power to the
company to pay dividend out of capital, such power
shall be invalid.

Consequences of paying dividends out of capital

1) Directors knowingly paid - Personally liable
2) Members, if knowingly accepted, must indemnify the
Directors
Charge on assets
• A charge is a right created by any person including a
company referred to as “the borrower” on its assets and
properties, present and future, in favour of a financial
institution or a bank, referred to as “the lender”, which
has agreed to extend financial assistance.
• Section 2(16) of the Companies Act, 2014 defines charges
so as to mean an interest or lien created on the
property or assets of a company or any of its
undertakings or both as security and includes a
mortgage.
 TYPES OF CHARGES
1) Fixed Charge
• A charge which is identifiable with specific and clear
asset/property (Fixed Assest)at the time of creation of
charge.
• The Company cannot transfer such identified and defined
property unless the charge holder (creditor) is paid off its
dues.
• For example, if a company creates mortgage on a
building, the mortgage is a fixed charge, and the company
cannot sell, transfer or dispose of the underlying
asset(the building)until it repays the loan or meets other
conditions outlined in the mortgage contract
• 2) Floating Charge
• It covers the floating and circulating nature of properties
of Company like stock, shares etc.
• The nature of the property charged may change from time
to time
• A floating charge on assets provides Company with much
more freedom than a fixed charge because the Company
doesn't need to seek approval from the lender before
transferring, selling, or disposing of the assets.
• Example is Stocks. If a company creates charges upon the
stocks, the company can trade the assets and the value
keeps changing. Thus the charge created upon the stocks
would be a floating charge.
 Crystallisation of Floating Charge
• This conversion of floating charge into a fixed charge is
called Crystallisation of floating charge.
Such an event happens under the following
circumstances:-
• The debtor is unable to pay off the debts.
( The business couldn’t be carried out when the
creditor/debenture Holder takes action against the debtor
for not repaying the debt).
• Company goes into liquidation
• Company cease to carry on its business on the happening
of any event as specified in deed of agreement.
Duty to register the Charge
• It shall be the duty of every company creating a charge
to register the particulars of the charge signed by the
company and the charge-holder together with the
instruments in the prescribed form
Time limit for registration of charge
Charge is created on or before commencement of the
Companies (Amendment) Ordinance, 2018 i.e 02
November 2018 (Companies Amendment Act,2019)
Within 300 days of such creation of charge and in case
charge is not registered within this time, within 6
months from the date of commencement of ordinance
Charge is created after the commencement of the
Companies (Amendment) Ordinance, 2018 i.e 02
November 2018(Companies Amendment Act,2019)

• Register within 30 days of such creation

(With the permission of ROC, can register within 60 Days)
• If not registered within 60 days, within a period of
further 60 days if ROC allows on application with
prescribed fees
SATISFACTION OF CHARGE
• When company repays its secured loan fully to the lender
or when property or asset charged has been released from
charge then it is known as satisfaction of charges.
• A company shall within a period of thirty days from the
date of the payment or satisfaction in full of any charge
registered, give intimation of the same to the Registrar in
Form No. CHG-4 along with the fee.
• Where the Registrar enters a memorandum of satisfaction
of charge in full in pursuance of section 82 or 83, he shall
issue a certificate of registration of satisfaction of charge
in Form No. CHG-5.
 DEBENTURES
Debentures (Section 2(30) Companies Act, 2013)
• Debenture includes debenture stock, bonds or any other
instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company or not

• A debenture is an instrument of debt executed by the

company acknowledging its obligation to repay the sum at
a specified rate and also carrying an interest
• Debenture is a debt instrument
• The money collected by debentures become the part of
Company’s capital , but it does not become share capital
Characteristic features of a Debenture

• It is a movable property
• It is issued by the Company in the form of a certificate
of indebtedness
• It usually specifies the date of redemption.
• It also provides for the repayment of Principal and
Interest at Specified date
• It generally creates a charge on the undertakings of the
company
Classification of Debentures
• There are several kinds of debentures, and they can be
categorised according to the following particulars –
1)Redemption or Tenure
• Under this category, debentures can be subdivided into 2
types:
a)Redeemable Debentures
• Such debentures hold a particular date of redemption
which is mentioned on the certificate.
• An organization is legally entitled to repay the principal
amount to their debenture holders before the redemption
date.
b) Irredeemable Debentures
• This type of debentures do not carry any specific time
of redemption on their repayment terms.
• These debentures are also called as Perpetual
Debentures
• For irredeemable debentures, redemption is made
possible by the liquidation of the issuing body or as per
any agreements between the concerned parties.
2)Convertibility
a)Convertible Debentures: Debentures which are
changeable to equity shares or in any other security
either at the choice of the enterprise or the debenture
holders are called convertible debentures. These
debentures are either Fully convertible or partly
convertible.
b)Non-Convertible Debentures: The debentures which
can’t be changed into shares or in other securities are
called Non-Convertible Debentures. Most debentures
circulated by enterprises fall in this class
3) Registration or Transferability
a)Registered Debentures:
• These debentures are such debentures within which all
details comprising addresses, names and particulars of
holding of the debenture holders are entered in a register
kept by the Issuing body corporate. Such debentures can
be moved only by performing a normal transfer deed.
b)Bearer Debentures: These debentures are debentures
which can be transferred by way of delivery and the
company does not keep any record of the debenture
holders Interest on debentures is paid to a person who
produces the interest coupon attached to such debentures.
4) Coupon Rate
a)Specific Coupon Rate Debentures
• Such debentures are circulated with a mentioned rate of
interest, and it is known as the coupon rate.
b) Zero-Coupon Rate Debentures:
• These debentures don’t normally carry a particular rate
of interest.
• In order to restore the investors, such type of debentures
are circulated at a considerable discount and the
difference between the nominal value and the circulated
price is treated as the amount of interest associated to
the duration of the debentures.
5)Security
a)Secured Debentures
• Secured debentures are that kind of debentures where a
charge is being established on the properties or assets of
the company for the purpose of any payment.
• The charge might be either floating or fixed.
• Fixed charge is established on a particular asset whereas
a floating charge is on the general assets of the
enterprise.
b)Unsecured Debentures
• They do not have a particular charge on the assets of
the enterprise.
• Usually, these types of debentures are not circulated
Debenture trustee
• Debenture Trustee is appointed by way of Debenture
Trust Deed to safeguard debenture holders’ interests
and to address their grievances
• Debenture trustee is appointed before prospectus or
letter of allotment is issued or within 60 days after the
allotment of debentures.
• A company can have more than one debenture trustee.
• The debenture trustee should not be in any way
associated with the company.
• Debenture holders do not get any voting rights in the
company so to ensure that their money is not misused
by the company, a debenture trustee is appointed to
look after their interests.

• The appointment of debenture trustee is made

compulsory under Section 71(5) of the Companies Act,
2013 when the issuer company is making an offer or an
invitation to the public or more than 500 members, to
subscribe to its debentures.
SHARE CERTIFICATE
• A share certificate is the registered document of title to
the shares, issued by the company under its common
seal.
• It is not a negotiable instrument
SHARE WARRANT
• A share warrant is a document issued under a common
seal of a public company stating that the bearer of
instrument has the title of the shares mentioned there
in.
• It is a negotiable instrument
Conditions for the issue of share warrants
• The shares must be fully paid up.
• The Articles of the company must authorized to do so.
• The company must obtain the permission of the central
Government.
• The share Warrants must be issued under the common
seal of the company.
• Only public companies limited by shares can issue share
warrants and a private limited company cannot issue
share warrants
THANK YOU