Unit 3

Chapter 7
PROSPECTUS:

The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus
can be defined as “any document which is described or issued as a prospectus”.
This also includes any notice, circular, advertisement or any other document
acting as an invitation to offers from the public. Such an invitation to offer should
be for the purchase of any securities of a corporate body. Shelf prospectus and
red herring prospectus are also considered as a prospectus.

Essentials for a document to be called as a prospectus

1. The document should invite the subscription to public share or
debentures, or it should invite deposits.
2. Such an invitation should be made to the public.
3. The invitation should be made by the company or on the behalf
company.
4. The invitation should relate to shares, debentures or such other
instruments.

Statement in lieu of prospectus

Every public company either issue a prospectus or file a statement in lieu of
prospectus. This is not mandatory for a private company. But when a private
company converts from private to public company, it must have to either file a
prospectus if earlier issued or it has to file a statement in lieu of prospectus. The
provisions regarding the statement in lieu of prospectus have been stated
under section 70 of the Companies Act 2013.

Misstatements in prospectus
A prospectus is a document that contains information that the public can use to
subscribe to or purchase a company’s securities. If it contains any inaccuracies,
it will have major ramifications. Any statement in the prospectus that is erroneous
or misleading is referred to as misstatements in the prospectus. A
misrepresentation is defined as the inclusion or omission of a fact that is likely to
mislead the public. The prospectus shall be regarded a prospectus with an
erroneous statement if a relevant matter has been omitted from the prospectus and
such omission is likely to mislead the public.

There have been instances when representation for future events has been called
into question. A mere remark that something will be done or happen in the future
is not a statement of fact that could lead to liability for misrepresentation. A
misstatement of an existing fact is required to activate it. If a representation was
true only at the time of prospectus issuance and not at the time of allotment, it
would trigger liability. A statement in a prospectus about the persons who would
be directors is a significant statement, and if it is false, a person who subscribed
on the basis of it is prima facie entitled to cancel their subscription.

Types of the prospectus as follows:-

Shelf Prospectus: Shelf prospectus can be defined as a prospectus that has been
issued by any public financial institution, company or bank for one or more
issues of securities or class of securities as mentioned in the prospectus. When a
shelf prospectus is issued then the issuer does not need to issue a separate
prospectus for each offering, he can offer or sell securities without issuing any
further prospectus. The provisions related to shelf prospectus has been discussed
under section 31 of the Companies Act, 2013.

Shelf prospectus is a prospectus in respect of which the securities or class of

securities included therein are issued for subscription in 1 or more issues
over a certain period without the issues of a further prospectus.

 Sometimes securities are issued in stages

 Spread over a period of time
 Particularly in respect of infrastructure projects
 Where issue size is large
 As huge funds have to be collected
 In such case filing of prospectus each time will be very expensive
 So, a provision of shelf prospectus has been made
 Shelf life=one year

Red herring prospectus: Red herring prospectus section 32 is the prospectus

which lacks the complete particulars about the quantum of the price of the
securities. A company may issue a red herring prospectus prior to the issue of
prospectus when it is proposing to make an offer of securities. This type of
prospectus needs to be filed with the registrar at least three days prior to the
opening of the subscription list or the offer. The obligations carried by a red
herring prospectus are same as a prospectus. If there is any variation between a
red herring prospectus and a prospectus then it should be highlighted in the
prospectus as variations.

 With a view to explore the demand for securities & price at which securities
may be offered
 A public company may before issue prospectus, circulate information
memorandum & red herring prospectus to the public.
 Incomplete information “price” is not mentioned. “Price bands” is
mentioned.
 Use in case of Book building

Abridged Prospectus: The abridged prospectus section 33 is a summary of a

prospectus filed before the registrar. It contains all the features of a prospectus.
An abridged prospectus contains all the information of the prospectus in brief so
that it should be convenient and quick for an investor to know all the useful
information in short.

 Short version of prospectus

 Limited information
 15 to 20 pages only

Deemed Prospectus: A deemed prospectus has been stated under section 25(1)
of the Companies Act, 2013. When any company to offer securities for sale to
the public, allots or agrees to allot securities, the document will be considered as
a deemed prospectus through which the offer is made to the public for sale. The
document is deemed to be a prospectus of a company for all purposes and all the
provision of content and liabilities of a prospectus will be applied upon it.

 Notice, advertisement, circular and other document.

 90 days (first prospectus)

Process for filing and issuing a prospectus

Application forms: As stated under section 33, the application form for the
securities is issued only when they are accompanied by a memorandum with all
the features of prospectus referred to as an abridged prospectus. The exceptions
to this rule are:
When an application form is issued as an invitation to a person to enter into
underwriting agreement regarding securities.
Application issued for the securities not offered to the public.

Contents:-For filing and issuing the prospectus of a public company, it must be
signed and dated and contain all the necessary information as stated under section
26 of the Companies Act, 2013:-

1. Name and registered address of the office, its secretary, auditor, legal
advisor, bankers, trustees, etc.
2. Date of the opening and closing of the issue.
3. Statements of the Board of Directors about separate bank accounts where
receipts of issues are to be kept.
4. Statement of the Board of Directors about the details of utilization and
non-utilisation of receipts of previous issues.
5. Consent of the directors, auditors, bankers to the issue, expert opinions.
6. Authority for the issue and details of the resolution passed for it.
7. Procedure and time scheduled for the allotment and issue of securities.
8. The capital structure of the in the manner which may be prescribed.
9. The objective of a public offer.
10. The objective of the business and its location.
11. Particulars related to risk factors of the specific project, gestation period
of the project, any pending legal action and other important details
related to the project.
12. Minimum subscription and what amount is payable on the premium.
13. Details of directors, their remuneration and extent of their interest in the
company.
14. Reports for the purpose of financial information such as auditor’s report,
report of profit and loss of the five financial years, business and
transaction reports, statement of compliance with the provisions of the
Act and any other report.
Chapter 8
Issue and Allotment of Shares
Introduction of Shares
Section 2 (84) of the Companies Act, 2013 defines Share. Share means a share
in the share capital of a company and includes stock. It can also be said that share
is just part of securities.

 Capital of a company divided is to share

 Each share forms a unit of ownership of a company and is offered for sale
so as to raise capital for the company.

Why is Shares Issued? Shares are issued by companies to raise money from
investors who tend to invest their money. This money is then used by companies
for the development and growth of their business.

What is Stock? Stock is set of same categories of shares put together which have
same value. It is an aggregate of fully paid-up shares.

Kinds of Share Capital

The share capital of a company limited by shares shall be of two kinds, namely:

Equity Share Capital:-Equity share capital with reference to any company

limited by shares means all share capital which is not preference share capital. It
refers to the portion of the company’s money which is raised in exchange for a
share of ownership in the company. For example, voting rights to AGM, power
of earning/profits.

Preference Share Capital:-Preference shares are one of the special types of

share capital having fixed rate of dividend and they carry preferential rights over
ordinary equity shares in sharing of profits and also claims over assets of the firm
People who buy preferential share capital gets priority in dividend declaration
and at the time of winding up they are the first people to receive money. They
have right to vote only when the matter directly or indirectly affects
them. Preference share capital with reference to any company limited by shares,
means that part of the issued share capital of the company which carries or would
carry a preferential right with respect to:
1. Payment of dividend, either as a fixed amount or an amount calculated
at a fixed rate, which may either be free of or subject to income-tax; and
2. Repayment, in the case of a winding up or repayment of capital, of the
amount of the share capital paid-up or deemed to have been paid-up,
whether or not, there is a preferential right to the payment of any fixed
premium or premium on any fixed scale, specified in the memorandum
or articles of the company.

ALLOTMENT OF SHARES
Allotment is the acceptance of a Company to give Shares to the Investor in
response to an offer for purchase of Shares made by him for a consideration.
Allotment has not been defined Companies Act 2013. It is construed to mean the
act of allotting. The investing public makes its offer to subscribe for Shares in
Application Forms [prospectus] supplied by the Company. When the Company
accepts an application, it amounts to allotment by the company. Some definitions
by judicial decisions are given below:

1. Allotment is "The appropriation out of the previously unappropriated Capital

of the Company, of a certain number of Shares to a person --- Sri Gopal Jalan &
Co. vs Calcutta Stock Exchange Association Ltd." (1964) Re-issue of forfeited
Shares does not constitute appropriation out of the Unappropriated Capital of the
Company, hence it is not allotment.

The procedure involved in Allotment: The procedure of Allotment of Shares

1. Resolution by Board of Directors/Committee should be passed.
2. Allotment Letter: Upon allotment, the Company should send/post an
[Link] Mukherjee Allotment Letter to each of the allottees mentioning
therein the details of Shares allotted to them.
3. Return of Allotment: The Company should file a Return of Allotment in FORM
PAS -3, with the ROC along with fee, within 30 days from the date of allotment.
The time limit can be extended by the ROC on an application made by the
Company.
4. Register of members: The Company should prepare Register of members in
accordance with section 88.
5. Share Certificate: instead of Share Certificate now the person who has been
allotted can see his holding in the demat account.

Kinds of Raising Capital

There are shares which are used to raise the capital of the company. Those shares
are:
 Sweat Equity Shares;
 Employees Stock Option Scheme;
 Bonus Issue;
 Rights Issue.

 Sweat Equity Shares: Section 2(88) & Section 54

These are the shares issued by company to the directors (except independent
directors) or employees of the company at discount for consideration other than
cash in order to encourage them to work better. It is issued for the purpose of:

Issued either by way of discount or consideration other than cash

Equity shares offered to select employee and directors of a company.
For the technical know-how of the company.
Contribution to intellect of the company.
Value
addition to the employees.
Extraordinary contribution and hardwork
Or making available intellectual property rights(IPR)
Compliances to be made by the company to issue those shares:

 Class of shares already issued.

 Special resolution should be passed by the members and the proposal of
issuing such shares comes from Board of Directors.
 Class of shares/ Number of shares/ to whom such shares would be issued.
 Price would be decided by Board of Directors.
 For issuing such shares the company should have at least commenced
business for 1 year.
 Maximum of 15% of paid up share capital or 5crore whichever is higher.
 Only sweat equity shares can be issued.
 Notice to share holders before the issuing of sweat equity shares.

 Employees Stock Option Scheme: Section 2(37) &

Section 62(1)(b)
These shares are available to Employee and Directors of the company. They have
an option/right to purchase these shares at a predetermined price. These are for
the advantage of employees and directors. These shares cannot be equated for
remuneration of the employee or directors. Requirements:
Company Amendment Act, 2000, Sec2(15a)
For a permanent employee
Option given to full time directors, officers, employees,
Contract between company & employees
Compensate and attract the employees
Predetermined price less that price offer to general public
Special Resolution by the members.
Not entitled to voting rights and dividends until one buy these shares.

 Bonus Issue: Section 63

It is a fully paid-up share capital. It is the additional shares given to current
shareholder. No money is charged from the shareholders as these shares are
provided as bonus. It is issued when company has a lot of accumulated profits
and they want to capitalize their reserve & surplus cash. It is determined by the
debt-equity ratio which should not go below 2:1 because the debt should never
be twice than the assets of the company. There should be no liabilities on the
company. Bonus share is considered a good sign for the company because that
way company is able to serve a large equity base and at the same time the net
worth of the company stays intact.

 Bonus Issue: capitalization of profits and allot free share to the current
employees.

Conditions:

It should be mentioned in the AOA (Articles of Association) of the

company that bonus be allowed to shareholders if in case it is not
mentioned in the AOA (Article of Association), it is altered by special
majority.
Special resolution is passed by B.O.D (Board of Directors), Managers are
& top-level management where they see if there is profit made by the
company. If there is lot of accumulated profit in that case the resolution
is passed and bonus is issued to all shareholders.
There should be no previous defaults in the payments of interest to the
debenture holder and of dividend.
There should be no pending salaries or Provident funds of any employee,
etc.
Sources of Bonus Issue:

Capital Reserve Redemption Accounts (CRRA): When the money of

redeemable preference shares is to be redeemed, it can be redeemed
through CRRA (the amount which is invested).
SecuritiesPremium Account (SPA): it is an account in which the premium
number of shares is deposited. (Premium amount- it is the higher amount
at which the shares are issued)
 Free reserves: The accounts in which the dividend is saved.
 Revaluation reserve of realized in cash.
Restriction on Issuing Bonus Share:

As mentioned in sweat equity share there is a class of shares. A company can’t

issue bonus shares if they have outstanding fully or partly convertible debt
instrument at the time of issuing bonus share. Unless there is reservation made of
equity shares of the same class in favor of such holders of convertible debt
instrument on the same terms and proportion to the convertible part. The equity
shares reserved for the holder of the fully or partly convertible debt instrument
shall be issued at the time of conversion of such convertible debt instrument on
the same term or proportion on which the bonus shares were issued.

 Rights Issue: Section 62(1)

When the company thinks of increasing the capital it issues these shares which
are first offered to existing shareholders on priority. The existing shareholders
have right of pre-emption. Although it helps in raising the capital it is not
mandatory to issue rights issue.

 First preference (right) to existing shareholders/investors

 Second preference Initial Public Offers (IPOs), invitation to public

 At discounted price

Compliance of Rights Issue:

It has to be mentioned in the articles of association of the company.

A notice to the shareholders regarding the same has to be sent.
This offer should be available for 15-30 days.
The existing shareholders may renounce or accept this offer.
Number of shares and price of such share has to be mentioned.
Nature of Shares:

Part of share capital.

Exploited by the shareholder (ownership of shares by shareholders).
Definesshares as right to participate i.e., through profit when it is a going
concern and through assets when company goes into winding up.

Buy Back of Shares

Meaning: Buy-Back is a corporate action in which a company buys back its
shares from the existing shareholders usually at a price higher than market price.
When it buys back, the number of shares outstanding in the market reduces. A
buyback allows companies to invest in themselves. By reducing the number of
shares outstanding on the market, buybacks increase the proportion of shares a
company owns. The reduction in share capital due to buy back also strengthens
the promoter’s control and enhances the equity value for shareholders. Buybacks
can be carried out in two ways:

 Shareholders may be presented with a tender offer whereby they have the
option to submit (or tender) a portion or all of their shares within a certain
time frame and at a premium to the current market price. This premium
compensates investors for tendering their shares rather than holding on to
them.
 Companies buy back shares on the open market over an extended period of
time.

Reasons/Advantages for Buy-Back:

 To improve earnings per share;
 To improve return on capital, return on net worth and to enhance the
long-term shareholder value;
 To provide an additional exit route to shareholders when shares are
undervalued or are thinly traded;
 To enhance consolidation of stake in the company;
 To prevent unwelcome takeover bids;
 To return surplus cash to shareholders;
 To achieve optimum capital structure;
 To support share price during periods of sluggish market conditions;
 To service the equity more efficiently.
 It is an alternative mode of reduction in capital without requiring
approval of the Court/CLB (NCLT).

Provision of Buyback under Companies Act 2013

Section 68 of Companies Act deals with Buyback of Shares by company. This
section corresponds to section 77A (Power of company to purchase its own
securities) of the 1956 Act with no changes except that the definition of free
reserve has been modified and the penalty provisions has been enhanced. Unlike
the provisions of section 67 which prohibits a company to buy-back its own
shares unless reduction of capital is affected, this section dilutes this general
prohibition and allows a company whether public or private, to purchase its own
shares or other specified securities out of following sources according to section
68(1) of Companies Act 2013:

a) Its free reserves; or

b) The securities premium account; or

c) The proceeds of any shares or other specified securities.

However, buy-back of any kind of shares or securities shall not be made out of
the proceeds of an earlier issue of the same kind of shares or same kind of other
specified securities.

Section 68(2) conditions for Buy-back:

No company shall purchase its own shares or other specified securities unless the
following conditions are fulfilled [sub-section (2)].

a) Its articles permit the buy-back;

b) A special resolution has been passed at a general meeting of the company

authorizing the buy-back where the buy-back is25% or less of the aggregate of
paid-up capital and free reserves of the company. Board resolution would
authorize the buyback where the buy-back is10% or less of the total paid-up
equity capital and free reserves of the company, a Board resolution would
authorize such buy-back;
c) the buyback is 25% or less of the aggregate of paid-up capital and free reserves
of the company; Provided that in respect of the buy-back of equity shares in any
financial year, the reference to 25% in this clause shall be construed with respect
to its total paid-up equity capital in that financial year;

d) Debt-Equity ratio [Link] the ratio of the aggregate of secured and unsecured debts
owed by the company after buy-back is not more than twice the paid-up capital
and its free reserves.

e) Fully paid-up shares: all the shares or other specified securities for buy-back
are fully paid-up;

f) The buy-back of the shares or other specified securities listed on any recognized
stock exchange is in accordance with the regulations made by SEBI.

g) The buyback in respect of shares or other specified securities not listed on any
recognized stock exchange is in accordance Companies (Share Capital and
Debentures) Rules, 2014.

DEMAT SYSTEM
The Demat system (short for Dematerialized system) is a system used to hold
financial securities, like stocks and bonds, in electronic form rather than in paper
form. It makes buying, selling, and transferring securities much easier, faster, and
safer. Before demat accounts were introduced, investors had physical share
certificates. These certificates were susceptible to loss, damage, or theft, and
transactions could take days to complete. With the demat system, securities are
stored electronically, allowing transactions to happen almost instantly.

1. Demat Account: Investors need to open a demat account with a

Depository Participant (DP), who is associated with a central depository
(such as NSDL or CDSL in India).
2. Electronic Records: Once the account is open, securities are credited or
debited in electronic form, removing the need for physical certificates.
3. Convenience: The system allows easy transfer of securities between
accounts, quick settlement of transactions, and a reduction in paperwork.

The Depository System is a system that holds securities (like stocks, bonds, etc.)
in electronic form, facilitating the efficient transfer and settlement of these
securities in the financial markets. The idea is similar to how a bank holds your
money in an account: instead of keeping physical certificates of shares, they are
stored electronically, making it easier for investors to buy, sell, and manage their
holdings. In the depository system, there are two key components:
1. Depository: This is the central institution that holds the securities in
electronic form. In India, there are two major depositories:
o National Securities Depository Limited (NSDL)
o Central Depository Services Limited (CDSL)
2. Depository Participants (DP): These are intermediaries that act as agents
of the depositories, like banks or brokerage firms. They facilitate the
opening and maintenance of demat accounts for investors. A depository
participant is where you open a demat account, which is necessary to hold
and trade securities electronically.

Key features of the depository system:

 Paperless trading: Eliminates the need for physical certificates.

 Safety: Reduces the risk of loss, theft, or damage to physical certificates.
 Ease of transfer: Securities can be transferred easily and quickly between
buyers and sellers.
 Efficiency: The system ensures that transactions are settled faster and with
minimal paperwork.

Process:

1. Depositing Securities: If you want to hold your securities electronically,

you deposit physical shares into your demat account via your DP.
2. Transfer: Securities can be transferred electronically between accounts
when you sell or buy.
3. Settlement: The depository system helps in ensuring that the bought
securities are credited to the buyer's account and the sold securities are
debited from the seller's account.

Key Points About the Demat System in Company Law:

1. Mandatory Dematerialization of Shares:

o Under the Companies Act, 2013 in India, companies are required to
issue shares in dematerialized form if requested by investors. This
applies to publicly listed companies and encourages investors to
hold their shares electronically.
o In 1996, the Securities and Exchange Board of India (SEBI)
mandated that all listed companies offer an option for shares to be
held in dematerialized form, gradually making physical certificates
less common.
2. Role of Depositories:
o As per company law, listed companies are required to have their
shares admitted to depositories (such as NSDL or CDSL in India).
o The depository is responsible for holding securities in electronic
form on behalf of investors, ensuring efficient transfers of
ownership.
o Companies must ensure their shares are registered with these
depositories.
3. Transfer of Shares:
o Before the Demat system, transferring shares required the physical
transfer of paper certificates. Under the Demat system, transfers are
done electronically via electronic delivery instruction slips.
o This is far faster and eliminates the need for stamp duties and other
paperwork, ensuring smooth transactions.
4. Role of Company Secretary:
o The Company Secretary of a company plays an important role in
ensuring compliance with regulations related to the issuance of
shares, share transfers, and dematerialization. They ensure the
company complies with requirements around shareholding,
reporting, and any corporate actions (like dividends, bonus shares,
etc.).
5. Benefits for Companies:
o The demat system reduces the administrative burden of managing
physical share certificates.
o It also reduces the risk of errors, fraud, and theft.
o It simplifies the process of issuing and transferring shares, which can
enhance liquidity and increase market participation.
6. Statutory Provisions:
o Under the Companies Act, 2013, Section 56 outlines the process
for the transfer of securities, and Rule 9 of the Companies
(Prospectus and Allotment of Securities) Rules, 2014 mandates that
all securities of a public company be in dematerialized form.
o SEBI’s regulations (specifically the SEBI (Depositories and
Participants) Regulations, 1996) also lay down the framework for
the demat system in securities trading.

Demat and Corporate Governance:

 The demat system has also improved corporate governance, as electronic

records provide greater transparency and ease in tracking shareholder
transactions.
 It has enabled a more effective process for dividend payments, rights
issues, and bonus shares, as the shares are now held electronically, making
it easier to identify eligible shareholders.

Advantages of the Depository System:

1. Efficiency and Convenience:
o Faster Transactions: Securities are transferred electronically,
which reduces the time taken for buying, selling, and settlement of
trades. This helps in faster market movements and quicker
transactions.
o Ease of Access: Investors can manage their securities easily through
depository participants (DPs) without the need for physical
paperwork.
2. Safety and Security:
o Reduced Risk of Loss, Theft, and Fraud: Since securities are held
electronically, there's no risk of losing, damaging, or stealing
physical certificates. The chances of fraud, such as counterfeit share
certificates, are significantly reduced.
o Improved Investor Protection: The depository system provides
safeguards such as account lock-in features, ensuring that
unauthorized transfers or activities cannot occur easily.
3. Lower Costs:
o No Stamp Duty: Unlike physical share transfers, the electronic
transfer of securities in the depository system does not require stamp
duty.
o Reduced Administrative Costs: Companies and investors save on
handling, storing, and maintaining physical share certificates.
4. Improved Liquidity:
o Since securities are stored electronically and transactions are
processed quickly, liquidity in the market increases. It’s easier for
investors to buy and sell securities, as everything is processed
digitally.
5. Transparency:
o The depository system ensures transparent tracking of securities
ownership and transactions, which enhances the integrity of the
financial markets.
o It also facilitates better regulatory oversight and reduces the chances
of market manipulation.
6. Corporate Actions Management:
o Corporate actions such as dividend payments, rights issues, bonus
shares, and other shareholder benefits are efficiently managed
through the depository system, as it provides accurate shareholder
data.
o This results in fewer errors and quicker distribution of benefits to
investors.
7. Globalization and Market Reach:
o The depository system facilitates international investments by
allowing global investors to hold and trade securities electronically,
thereby broadening market participation.

Disadvantages of the Depository System:

1. Dependency on Technology:
o System Risks: The depository system depends on technology and
infrastructure. Any technical glitches, server failures, cyberattacks,
or software issues could lead to delays in transactions or, in rare
cases, data breaches.
o Internet Access: The system requires reliable internet access, which
could be a challenge in some regions or for people not familiar with
digital platforms.
2. Charges and Fees:
o Annual Maintenance Charges: Depository participants charge
maintenance fees for holding and managing securities in demat
accounts. These charges can add up, especially for smaller investors.
o Transaction Fees: Some DPs also charge fees for executing
transactions, transferring securities, or for account services, though
these charges tend to be minimal.
3. Cybersecurity Concerns:
o Hacking Risks: Although the depository system is secure, it is still
susceptible to cyberattacks, hacking, or fraud if security measures
are not robust. Investors need to use strong passwords, two-factor
authentication, and be cautious of phishing schemes.
o Data Privacy: Electronic records mean that personal and financial
data is stored online, raising privacy concerns. Breaches in security
could expose sensitive information.
4. Lack of Awareness:
o Investor Education: Not all investors, especially older generations
or those unfamiliar with technology, are comfortable using the
depository system. They may face challenges when transitioning
from physical shares to electronic systems.
o Complexity for New Users: Some first-time investors may find it
difficult to understand how the depository system works, especially
the processes of opening demat accounts or managing securities
through depository participants.
5. Regulatory and Compliance Risks:
o Regulatory Changes: The depository system is subject to
regulations from authorities like the Securities and Exchange Board
of India (SEBI) or other governing bodies. Changes in these
regulations can sometimes create challenges for market participants
to keep up with.
o Account Freeze: In cases of non-compliance or discrepancies (e.g.,
if an investor violates regulations), a demat account could be frozen
temporarily, preventing the transfer or sale of securities.
6. Limited to Eligible Securities:
o Not all securities or financial products are eligible to be held in
demat form. For instance, some unlisted shares, government bonds,
or certain niche securities may not be part of the depository system.
7. Complex for Some Types of Investors:
o For Retail Investors: Retail investors who prefer dealing with
physical share certificates might find it difficult to adapt to the
electronic system, especially when transferring assets from one
demat account to another.
Chapter 9

Calls, Forfeiture and Transfer of Shares

A call is a demand made by the company on its members for payment of part of
the issue price of share. As per Sec. 10(2), all monies payable by any member to
the company under the Memorandum or Articles shall be a debt due from him to
the company.

REQUISITES OF A VALID CALL

1. Resolution of Board of Directors [Sec. 179(3)]: The board of directors of a

company shall exercise the power to make calls on shareholders in respect of
money unpaid on their shares by means of resolution passed at meeting of the
Board.
2. Notice of Call [Sec. 20(2)]: A document may be served on any member by
sending it to him by post or by registered post or by speed post or by courier or
by delivering at his office or address, or by such electronic or other mode as may
be prescribed.
3. Calls on Shares of Same Class to be made on Uniform Basis (Sec. 49):
Where any calls for further share capital are made on the basis of a class, such
calls shall be made on a uniform basis on all shares falling under that class. For
the purposes of this sec., shares of the same nominal value on which different
amounts have been paid-up shall not be deemed to fall under the same class.
4. In Accordance with the Provisions of the Articles: Calls to be made in
accordance with the provisions of the articles. If articles of association are silent
then reference shall be made to Regulation 13 of Table F.
5. Call must be made bona fide in the interest of the company and not in the
personal interest of directors (Alexander v. Automatic Telephone Co.).

PROVISIONS REGARDING CALLS ON SHARES

1. The Board may, from time to time, make calls upon the members in respect
of any monies unpaid on their shares. No call shall exceed one-fourth of the
nominal value of the share. There must be an interval of at least one month
between two calls.
2. At least fourteen days' notice specifying the time and place of payment, shall
be given to members.
3. A call may be revoked or postponed at the discretion of the Board.
4. The joint holders of a share shall be jointly and severally liable to pay all
calls in respect thereof.
Calls in Arrears
1. If a sum called in respect of a share is not paid, the person from whom the
sum is due shall pay interest thereon from the day appointed for payment
thereof to the time of actual payment at 10% per annum or at such lower rate, if
any, as the Board determine.
2. The Board shall be at liberty to waive payment of any such interest wholly or
in part.

Calls in Advance
A company may, if so authorised by its articles, accept from any member, the
whole or a part of the amount remaining unpaid on any shares held by him, even
if no part of the amount has been called and such amount is known as calls in
advance [Sec. 50(1)].

No Additional Voting Rights

A member of the company limited by shares shall not be entitled to any

additional voting rights in respect of the amount paid by him as calls in advance
[Sec. 50(2)].

Payment of Dividend in Proportion to Amount Paid-up (Sec. 51)

A company may, if so authorised by its articles, pay dividends in proportion to
the amount paid-up on each share that means additional Dividend can be paid to
those who have paid calls-in-advance. As per Regulation 18 of Table F, the
Board-
(a) may, if it thinks fit, receive from any member willing to advance the same,
all or any part of the monies uncalled and unpaid upon any shares held by him;
and
(b) upon all or any of the monies so advanced, may pay interest at such rate not
exceeding, 12% per annum, as may be agreed upon between the Board and the
member paying the sum in advance.

FORFEITURE OF SHARES (REGULATIONS 28 TO 32 OF TABLEF)

Meaning of Forfeiture of shares

It means taking back of shares by the company, on non-payment of calls.
Forfeiture is a penal action by the company.
Process of Forfeiture
1. At least 14 days' Notice to be Served on Defaulting Member:
(a) If a member fails to pay any call, on the day appointed payment thereof, the
Board may, serve a notice on him requiring payment of so much of the call
together with any interest which may have accrued;
(b) name a further day (not being earlier than the expiry of 14 days from the date
of service of the notice) on or before which the payment required by the notice is
to be made; and
(c) state that, in the event of non-payment on or before the day so named, the
shares in respect of which the call was made shall be liable to be forfeited.

2. Board Resolution for Forfeiture:

(a) If the requirements of any such notice
are not complied with, shares shall be forfeited by a resolution of the Board to
that effect;
(b) A forfeited share may be sold or otherwise disposed of on such terms and in
such manner as the Board thinks fit;
(c) At any time before a sale or disposal as aforesaid, the Board may cancel the
forfeiture on such terms as it thinks fit.

Case Law:
Arvind Mohan Johri v. Carlton Hotels Pvt. Ltd. (2015)
It was held that any omission or negligence to comply with any of the procedural
formalities would render the forfeiture invalid.

3. Consequences of Forfeiture: A person whose shares have been forfeited shall

cease to be a member in respect of the forfeited shares, but shall remain liable to
pay to the company all monies which, at the date of forfeiture, were presently
payable by him to the company in respect of the shares. The liability of such
person shall cease if and when the company shall have received payment in full
of all such monies in respect of the shares.

Reissue of Forfeited Shares: Forfeited shares are reissued and discount on

reissue cannot exceed the amount
already received.
TRANSFER OF SHARES (SEC. 56)

Process of Transfer of Shares when Shares are held in Physical Form

1. Instrument of Transfer along with Share Certificate or Letter of Allot-

ment: A company shall not register a transfer of securities of the company unless
a proper instrument of transfer, in such form as may be prescribed, transferee and
specifying the name, address and occupation, if any, of the duly stamped, dated
and executed by or on behalf of the transferor and the transferee has been
delivered to the company by the transferor or the transferee within a period of
sixty days from the date of execution, along with the certificate relating to the
securities, or if no such certificate is in existence, along with the letter of allotment
of securities.
In case where the instrument of transfer has been lost or the instrument of transfer
has not been delivered within the prescribed period, the company may register
the transfer on such terms as to indemnity as the Board may think fit.

2. Notice to Transferee in case of Partly Paid-up Shares: Where an application

is made by the transferor alone and relates to partly paid shares, the transfer shall
not be registered, unless the company gives the notice of the application, in such
manner as may be prescribed, to the transferee and the transferee gives no
objection to the transfer within two weeks from the receipt of notice. Every
company shall deliver the certificates of all securities allotted, transferred or
transmitted:
(a) within a period of two month from the date of incorporation, in the case of
subscribers to the memorandum;
(b) within a period of two months from the date of allotment, in the case of any
allotment of any of its shares;
(c) within a period of one month from the date of receipt by the company of the
instrument of transfer.
(d) within a period of six month from the date of allotment in the case of any
allotment of debenture.

However, where the securities are dealt with in a depository, the company
shall intimate the details of allotment of securities to depository (i.e., NSDL
or CDSL as the case may be) immediately on allotment of such securities.

3. Validity of Transfer by Legal Representative: The transfer of any security

or other interest of a deceased person in a company made by his legal
representative shall, even if the legal representative is not a holder thereof, be
valid as if he had been the holder at the time of the execution of the instrument of
transfer.
Refusal of Registration and Appeal against Refusal (Sec. 58)

1. Notice of Refusal to Register the Transfer: If a private company limited by

shares refuses, whether in pursuance of any power of the company under its
articles or otherwise, to register the transfer of any securities or interest of a
member in a company, it shall within a period of thirty days from the date on
which the instrument of transfer was delivered to the company, send notice of the
refusal to the transferor and the transferee giving reasons for such refusal.
The securities or other interest of any member in a public company shall be
freely transferable.

2. Appeal to the Tribunal against the Refusal: The transferee may appeal to
the Tribunal against the refusal within a period of thirty days from the date of
receipt of the notice or in case no notice has been sent by the company, within
a period of sixty days from the date on which the instrument of transfer was
delivered to the
company.
If a public company without sufficient cause refuses to register the transfer of
securities within a period of thirty days from the date on which the instrument
of transfer is delivered to the company, the transferee may, within a period
of sixty days of such refusal or where no intimation has been received from
the company, within ninety days of the delivery of the instrument of transfer
appeal to the Tribunal.

3. Order of Tribunal: The Tribunal, while dealing with an appeal made may,
after hearing the parties, either dismiss the appeal, or by order-
(a) direct that the transfer shall be registered by the company and the company
shall comply with such order within a period of ten days of the receipt of the
order; or
(b) direct rectification of the register and also direct the company to pay damages,
if any, sustained by any party aggrieved.

4. Punishment for Contravention of Order of Tribunal: If a person

contravenes the order of the Tribunal under this section, he shall be punishable
with imprisonment for a term which shall not be less than one year but which may
extend to three years and with fine which shall not be less than one lakh rupees
but which may extend to five lakh rupees.

Regulations Regarding Transfer of Shares

1. The instrument of transfer of any share in the Company shall be executed by
or on behalf of both the transferor and transferee.
2. The transferor shall be deemed to remain a holder of the share until the name
of the transferee is entered in the register of members in respect thereof.
3. Board's Power to Decline Registration of Transfer: The Board may, subject
to the right of appeal conferred by Sec. 58, decline to register-
(a) the transfer of a share, not being a fully paid share, to a person of whom
(b) any transfer of shares on which the company has a lien.

4. Board may Decline to Recognise any Instrument: The Board may decline
to recognise any instrument of transfer unless-
(a) The instrument of transfer is in the form as prescribed in rules as per Sec.
56(1);
(b) The instrument of transfer is accompanied by the certificate of the shares to
which it relates, and such other evidence as the Board may reasonably require to
show the right of the transferor to make the transfer; and
(c) The instrument of transfer is in respect of only one class of shares.

5. Notice of Suspension of Registration: On giving not less than seven days'

previous notice, the registration of transfers may be suspended at such times and
for such periods as the Board may from time to time determine. Such registration
shall not be suspended for more than thirty days at any one time or for more than
forty-five days in the aggregate in any year. This is in accordance with the
provision of closure of register of members under Sec.

Process of Transfer of Shares when Shares are held in Demat Form

When shares are held in demat form, no instrument of transfer is to be filled and
filed, no share certificate to be surrendered as in this form no share certificate is
issued. Shares in depository system are issued by means of 'electronic entry' and
beneficial owner (i.e., shareholder) has an account with the depository
participant. Sec. 7 of the Depository Act, 1996 provides that if a shareholder
effects the transfer, he contacts his depository participant, who in turn conveys
the information relating to transfer to the Depository which will register the
security in the name of transferee.

Note: Even in case when shareholder holds shares in physical form it is required
of him to go for demat of shares in order to facilitate the transfer of shares. It has
been made mandatory and all the shareholders are required to convert their shares
into demat form first and then transfer. Even in case of unlisted public
companies* the system of demat of shares is to be used for transfer of shares
w.e.f. 02/10/2018. Rule 9B related to Demat of shares of private company other
than small company also mandates transfer in Demat form only, w.e.f. 30th
September, 2024.
TRANSMISSION OF SHARES (REGULATIONS 23 TO 26 OF
TABLE F)

Transmission of shares is different from transfer of shares. Transmission of shares

takes place by operation of law on death or insolvency of member.

1. On the death of a member: (a) the survivor or survivors where the member a
joint holder; and (b)his nominee or nominees or legal representatives where he
was a sole holder, shall be the only persons recognised by the company as having
title to his interest in the shares.

2. Person's right to make a choice: Any person becoming entitled to a share in

consequence of the death or insolvency of a member may, upon such evidence
being produced as may from time to time properly be required by the Board and
elect, either-
(a) to be registered himself as holder of the share; or
(b) to make such transfer of the share as the deceased or insolvent member
could have made.
The Board shall, in either case; have the same right to decline or suspend
registration as it would have had, if the deceased or insolvent member had
transferred the share before his death or insolvency.
If the person so becoming entitled shall elect to be registered as holder of the
share himself, he shall deliver or send to the company a notice in writing signed
by him stating that he so elects.
If the person aforesaid shall elect to transfer the share, he shall testify his election
executing a transfer of the share.

Time Given for Making of Choice

The Board may, at any time, give notice requiring any such person to elect either
to be registered himself or to transfer the share, and if the notice is not complied
within ninety days, the Board may thereafter withhold payment of dividends,
bonuses or other monies payable in respect of the share, until the requirements
of the notice have been complied with.

Lien on shares
Lien on shares means a right of a company to retain shares for non-payment of
debt due to the company. Right of lien on shares is to be provided for in the A/A.
Regulations under Table F relating to Lien on Shares:
1. The company shall have a first and paramount lien- On every share (not being
a fully paid share), for all monies called, or payable at a fixed time, in respect of
that share; and
2. The company's lien, on a share shall extend to all dividends payable and
bonuses declared from time to time in respect of such shares;
3. The company may sell, in such manner as the Board thinks fit, any shares on
which the company has a lien.
However, no sale shall be made-
(a) Unless a sum in respect of which the lien exists is presently payable; or
(b) Until the expiration of fourteen days after a notice in writing stating and
demanding payment of such part of the amount in respect of which the lien exists
has been given to the registered holder for the time being of the share or the person
entitled thereto by reason of his death or insolvency.
Note: Title of purchaser of such shares shall not be affected by any irregularity or
invalidity in the proceeding in reference to the sale.

Surrender of shares
Surrender of shares means voluntary return of shares by a member to the
company. It is the shortcut to the long procedure of forfeiture. When a shareholder
feels that he is not able to pay the calls, he may himself choose to surrender such
shares rather than the company going for forfeiture as a penal action.