santhanagopalan jayaraman company secretary in practice

Santhanagopalan JayaramanCompany Secretary in Practice1

Sec.43 – Kinds of share capital Sec.44 – Nature of shares or debentures Sec.46 – Certificate of shares Sec.47 - Voting rights Sec.48 - Variation of shareholder’s rights Sec.55 – Preference Shares Sec.56 - Transfer & Transmission of Securities Sec.58 – Refusal of registration and appeal against refusal Sec.59 – Rectification of Register of Members Sec.61 – Alteration of share capital Sec.63 – Issue of Bonus Shares Sec.71 - Debentures Sec.72 – Power to nominate

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Whether the classification of shares

mentioned in the capital clause of

the memorandum of association of a

company can be altered?

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In the case of a company having a share capital it is mandated that the

‘capital clause’ in the memorandum of association should mention the

amount of share capital with which the company is to be registered and the

division thereof into shares of a fixed amount. Detailed classification of the

authorised capital such as the composition of equity shares and/or

preference shares, etc., need not be mentioned. Such classification is

reserved for mentioning in the articles of association.

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Now section 13 of the Act deals with the alteration of the memorandum of

association of a company. The said section, inter alia, states that “save

otherwise provided in section 61, a company may, by a special resolution

and after complying with the procedure specified in this section alter the

provisions of its memorandum”. Section 61 refers to the alteration of the

authorised capital and not to the classification of the authorised capital.

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Will a preferential allotment of

equity shares to the holding company of

a listed company attract the provisions of

section 188 of the Companies Act, 2013 ?

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Restrictions stipulated in section 188, inter alia, cover ‘sale, purchase or

supply of any goods or materials.’ Shares are not materials but are goods. In

the view of the Supreme Court of India as expressed in Morgan Stanley

Mutual Fund v. Kartick Das [1994] 14 CLA 161 (SC) till the allotment

of shares takes place “the shares do not exist”. Therefore, they can never be

called goods’.

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Can bonus entitlement be denied to

certain holders of fully paid-up

equity shares?

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Bonus entitlement cannot be deprived to any holder of equity shares in a

company whether such equity shares is with voting rights or equity shares

with differential voting rights.

However, a shareholder is free to surrender his bonus entitlement but such

surrender will have consequences in income-tax for such surrender would

amount to diversion of income.

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Can a Company compel transfer of shares

when a person ceases to be a director or

employee?

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Shareholder’s agreement was a contract between particular shareholders and

there was no reason why a shareholder should not bind himself to operate a

voluntary procedure for transferring shares if a particular contingency arose.

Accordingly, the effect of agreement was that an outgoing executive director

was obliged to sell his entire share interest to the subscribers pro rata

through mechanism set out in the Articles.

Halt vs. Faulks [2002] 2 BCLC 816, [2001] BCC 50 (Ch D).

Section 58(2) should also be referred.

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Whether a Private Company whose debt is

listed is considered as listed Company?

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2013 1956

Sec.2(52):Listed company means acompany which has any of itssecurities listed on any recognisedstock exchange.

Sec.2(23A): Listed PUBLIC Companiesmeans a public company which hasany of its securities listed inrecognized stock exchange.

“Listed entity" means an entity which has listed, on a recognised stock

exchange(s), the designated securities issued by it or designated

securities issued under schemes managed by it, in accordance with the

listing agreement entered into between the entity and the recognised

stock exchange(s)

Dahiben Umedbhai Patel v. Norman James Hamilton (1983) 85 BOMLR

275, 1985 57 CompCas 700 Bom

Companies of classes mentioned in 1st proviso to

Rule 18(1)(a) of SCD Rules are allowed to issue

debentures for more than 10 yrs.

Whether the clause (i) “Companies engaged in

setting up of infrastructure projects” can be

considered as those covered in Schedule VI?

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Infrastructure projects specified in Schedule VI is specific for Sec.55 and

186. Whereas the clause (i) mentioned above includes the projects enlisted

Schedule VI as well as other projects which are considered as

infrastructure even though those aren’t covered in Schedule VI.

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A Company which has issued 0.5% CCPS

redeemable within 10 years proposes to

extend the time period of redemption by

another 5 years. Whether the Company

is eligible to extend the date of

redemption?

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Preference shares should be redeemed as per the terms of issue.

The Company can extend the date of redemption which amounts to

variation of terms of issue by obtaining the approval of preference

shareholders under section 48 of the Act as enshrined under sub rule (6)

of Rule 9 of SCD Rules.

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Whether it is mandatory for a Company

to pay Dividend on Non-Cumulative

Compulsorily Convertible preference

shares, each year up to year of

redemption?

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The payment of dividend to preference shareholder is a preferential right

and not a mandatory right.

Hence, it is pertinent to note that the right of Preference Shareholders is

not to receipt of Dividend but to preferential treatment if and when

Dividend is declared.

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For the rectification of the register

of members, is there any time limit?

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A Devarajan v. N S Nemura Consultancy P Ltd. (2005) 58 SCL 203 (CLB)

It was held that there is no time limit for filing application for rectification

of register of members.

Rectification of register of members can be applied to the NCLT within a

period of three years of acquiring knowledge of error.

By virtue of Sec.433 of the Companies Act, 2013, the provisions of

Limitation Act, 1963 would be applicable for proceedings or appeals before

the Tribunals or the Appellate Tribunal.

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Whether the money received against the

debenture is a loan taken by the issuer-

company???

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Debenture is considered as a security under Section 2(h)(i) of the

Securities Contract Regulation Act,1956.

According to Black's Law Dictionary 'loan' means a lending; delivery by one

party to and receipt by another party of a sum of money upon agreement,

express or implied, to repay it with or without interest.

Hence, it shall not be treated as the Borrowing

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A debenture is not a loan for the purposes of sections 179, 185 and 186,

but it is an investment in securities. Accordingly, clause (d) of section

179(3) [to borrow monies] will not apply to the company which issues

debenture but clause (c) of that section [to issue securities, including

debentures, whether in or outside India] shall apply, and clause (e) of

section 179(3) [to invest the funds of the company] shall apply to the

company subscribing for the debenture, but not clause (f) [to grant loans

…]. Section 185 will not apply to the company subscribing for the

debenture and section 186 will apply to the company subscribing for the

debenture as investment in securities of a body corporate.

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Whether a nominee can claim the

securities when the nomination form

isn’t in the prescribed form ?

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No, the nomination form shall be submitted in Form No.SH 13.

The Company isn’t obliged to register the nomination and the securities

can be claimed only as per laws of succession.

It is pertinent to note that the judgement of Delhi High Court [2008], in

the matter of Dayagen (P.) Ltd. vs. Rajendra Dorian Punj 87 CLA 113

(Delhi), if the nomination is not submitted in not in prescribed manner (i.e.

in compliance with SH-13) it would not have the effect of overriding.

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Supreme Court judgement in the matter of In Shin-Etsu Chemical Co. Ltd.

vs. Aksh Optifibre Ltd. [2005] 63 SCL 1 (Mag), while dealing with section

45 of the Arbitration and Conciliation Act 1996 observed as follows:-

Sec.29 If the requirements of a statute which prescribes the manner in

which something is to be done are expressed in negative language, that is

to say, if the statute enacts that it shall be done in such a manner and no

other manner, it has been laid down that those requirements are in all

cases absolute, and that neglect to attend to them will invalidate the whole

proceeding.

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When does a donee becomes the rightful

owner of shares gifted to him ?

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• On date of execution gift / settlement deed in favour of donee

• Date of registration isn’t the criteria for determining ownership

Re., V R Shelat vs. P J Thakar (1975) 45 Comp. Cas 43 (SC), it was held that

the gift of the right to get share certificates made out in the name of donee

became irrevocable and complete by registration of the gift deed + delivery.

The actual transfers in the registers of the Co. concerned, which were

necessary to enable the donee to exercise the rights of the shareholder, were

mere enforcement of this right and mere fact that such transfers had to be

recorded in accordance with the Company Law didn’t detract from the

completeness of which was donated.

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Can a Company have only preference

share capital ?

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• The word “preference” in the expression “preference share capital”

indicates that there has to be equity share capital if a company is to have

preference share capital. Without equity there cannot be a preference share

• According to Sec.2(55) both equity and preference shareholders are

members and therefore both are entitled to receive notices of general

meetings of a company and attend a general meeting. However the there is

no express provision that the members are entitled to attend every general

meeting as per MCA had issued a circular dt 16.06.1964.

• The real difficulty will be the voting if all the members present in the GM

are only preference shareholders because of restriction by Sec.47.

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Can a Company reduce its share capital

on selective basis ?

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• Yes, reduction of share capital is one of the modes of corporate

restructuring. It enables a company to reorganize its capital, and in many

cases, clean up its balance sheet by getting rid of accumulated losses by

writing off capital of an equivalent amount.

• Sandhvik Asia Ltd . vs. Bharat Kumar Padamsi and Others [2009] 151 Comp

Cas 251 (Bom)

• The Division Bench of Bombay High Court held that the non-promoter

shareholders were being paid a fair value of their shares and an

overwhelming majority of the non-promoters had voted in favour of the

resolution. There was no justification in withholding the sanction of the

resolution.

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Can a Company cancel allotment of

shares ?

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• When an allotment is made it is a binding contract, it cannot be cancelled

by the company. Cancellation of allotment would amount to reduction of

share capital for which is not permitted unless the company complies with

Sec. 66 of the Act.

• Directors are not entitled to remove the name of a shareholder from the

register of members so as to strip him of his membership in the company

unless there is an order from the NCLT for rectification of the register of

members under section 58 and 59 of the Companies Act 2013 to delete

the name.

• Bhimbhai vs. Ishwardas Jugjiwandas (1893) ILR 1 Bom 152

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“The Olympic Games: ‘The most important thing in the Olympic

Games is not winning but taking part; the essential thing in life is

not conquering but fighting well.”

-Fali S. Nariman, Before Memory Fades: An Autobiography

Santhanagopalan Jayaraman

santhanam@dblawchambers.com

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