12.8.4 (Who may Become a Member)

Subject to the provisions of law, the Memorandum and the Articles, any person sui juris can become a member of a company. The position of certain person in this regard is given below.

            (a) Minor. The position of a minor as a member of a company is summarised as under:

            (i) As a minor is wholly incompetent to enter into a contract [Mohir Bibi v.Dharmodas Ghose, (1903) 30 Cal. 539 (P.C)], an agreement by a minor to  take shares is void and hence, he cannot be a member of a company.

            (ii) If shares are allotted to a minor in response to his application and his name  entered on the Register of members, in ignorance of the fact of minority, the  company can repudiate the allotment and remove his name from the register on coming to know of the minority of the member. The company must repay all money received from him respect of the allotted shares.

            (iii) The minor can also repudiate the allotment during his minority and he shall be returned the amount he paid towards the allotment of shares.

            (iv) If the name of the minor continues on the register of members and neither   party repudiates the allotment, the minor does not incur any liability on the  shares during minority and he cannot be held a contributory at the time of winding up [Fazalbhoy Jaffar v.The Credit Bank of India (I914) 39 Bcom 331].

            (v) If an application for shares is made by a father as guardian of his minor  child and the company registers the shares in the name of the child describing   him as a minor, neither the minor nor the guardian can be placed on the list of  contributories at the time of winding up [Pahaniappa v. Official Liquidator,           Pasupati Bank Ltd., 1942 Mad 470 and 875].

            (vi) If somehow the name of a minor appears on a register of members and in the meantime he attains majority and if he does not want to continue to be a   member, then he must repudiate his liability on the shares on the grounds of minority. The company cannot take defence on the principle of estoppel that  the minor had fraudulently misrepresented his age or had received dividends   and other privileges as a member. However, if he had received dividends and   exercised his rights as a member of the company after attaining majority, then he cannot repudiate his liability on shares.

            (vii) In case of transfer of a partly-paid shares to a minor, the company may refuse to register him as a member. In case, the company, in ignorance of the  minority, has permitted the transfer, then the company may remove the name  of the minor and replace it by that of transferor, even though the latter may            have been ignorant of the minority.

            (viii) In case of fully paid shares, minor's name may be admitted in the register of members, if he happens to acquire the same by way of transfer or  transmission. In Deavn Singh v. Minerva Films Ltd. (AIR 1956 Punjab 106),   the Punjab High Court held that there is no legal bar to a minor becoming a             member of a company by acquiring shares (by way of transfer) provided the shares are fully paid-up and no further obligation or liability is attached to  them. Similarly, in S.L Bagree v. Britania Industries Ltd. (1980), Company   Law Board upheld transfer in favour of a minor.

   (b) Company. A company, being an artificial person and a separate legal entity may become a member of another company, if it is so authorised by its memorandum to purchase shares. This is, however, subject to the provisions of s.42. Under this section, a subsidiary company cannot be member of its holding company and any allotment or transfer of shares in a holding company to its subsidiary, or even to a nominee for such subsidiary, is void, except that a subsidiary company may:

            (i) hold shares in the holding company in the capacity of a personal                                     representative of a deceased shareholder, or

            (ii) hold such shares as trustees, (except where the holding company or  another subsidiary is beneficially interested under the trust otherwise than merely by way of the holding company's business), or

            (iii) remain a member of its holding company, if it was a member before April 1, 1956, but may not vote at meetings of a holding company or any class of its members.

As has been mentioned earlier, a company cannot purchase its own shares (s.77) and, therefore, cannot become a member of itself. However, a company may acquire a beneficial interest in its own shares, as by the exercise of its paramount lien on the shares of a member as security for moneys owning by him to the company, or by forfeiture of shares for non-payment of calls.

            (c) A partnership firm: A partnership firm being an unincorporated association and therefore, not having a separate legal entity from the Partners, cannot be registered as a member in the register of members of a company. However, partners, either individually or in their joint names (as joint members) may hold shares in a company as a part of the partnership property. But a partnership firm may become a member of a company registered under s.25 of the Companies Act, 1956 (i.e., associations not for profit).

            (d) A foreigner. As per the Law of Contract, a foreigner can enter into contracts and therefore, can purchase shares in a company but this is subject to the provisions of Foreign Exchange Management Act, 1999 (FEMA).

When the country, of which the foreigner is resident, is at war with India, then the foreigner becomes an alien enemy and therefore, his power of voting at company meetings and his right to receive notices are suspended during the war-period.

12.8.3 (Modes of Acquiring Membership)

A person may become a member or a shareholder of a company by any of the following ways:

            1. By subscribing to the memorandum of association. The subscribers of the memorandum of a company are deemed to have agreed to become members of the company only by reason of their having signed the memorandum. A subscriber to the memorandum becomes a member, the moment the company is registered and it is not necessary that their names must have been entered in the register of members.

Further, by subscribing the memorandum every one of the subscribers is deemed to have contracted to become a shareholder in respect of the shares he subscribed for.

            2. By agreement and registration. Section 41(2) provides that apart from the subscribers of the memorandum, 'every other person who agrees in writing to become a member and whose name is entered in its register of members shall be a member of the company’. It follows that except in the case of the subscribers to the memorandum, a person does not become member of the company, until his name is dult recorded in the register of members.
 

Registration of the name of a person as a member of a company may arise:

            (a) Upon application and allotment.
 

            (b) By transfer, The member may acquire shares from an existing member by sale, gift or some other transaction.

            (c) By transmission. Here a person becomes a shareholder by transmission of shares to him through death, lunacy or insolvency.

            (d) By estoppel. This arises when a person holds himself out as a member or knowingly allows his name to remain on the register when he has actually parted with his shares. In the event of winding up, he will be liable, like other genuine members, as a contributory. However, he may escape liability by applying for removal of his name under s.155.

            (e) By agreeing to purchase qualification shares. A person who signs and delivers to the Registrar a written undertaking to take from the company and pay for qualification shares is in the same position as if he had subscribed to the memorandum for a similar number. As such, he is also deemed to have become a member automatically on incorporation of the company.

12.8.2 (Member and shareholder)

In the case of a company, limited by shares, the persons whose names are put on the register of members, are the members of the company. They may also be called shareholders of the company as they have been allotted shares and are holding them in their own right. In such a situation, the terms 'member' and 'shareholder' are interchangeably used to mean the same person. In Srikanta Data v. venkateshwara Real Estate Enterprises (P) Ltd. (1990) 68 Comp. Cas.216 (Kar), it was held that unless the context otherwise requires, the word 'member' under s.2(27) means a ‘shareholder’ excepting a person who is a bearer of a share warrant of the company. But in the case of an unlimited company or a company limited by guarantee, a member may not be a shareholder, for such a company may not have a share capital. However, sometimes a distinction is maintained between a member and a shareholder in the case of a company having a share capital. In other words, as regard the same set of shares one may be a members and another be the shareholder of the company. This distinction arises in the following situations:

            (1) X is a member of a company limited by shares. His name is placed on the register of members as he is holding shares in his own right and, therefore whether we call him a member or a shareholder, it is immaterial. In such a situation, the terms 'member' and. 'shareholder' may be used interchangeably. Now, in the following three situation he will cease to be a shareholder, though he continues to be the member of the company:

            (a) On sale. X sells the shares to Y. He fills in a share transfer form and hands   it over to Y. He also gives the share certificate representing the shares to y. In   return for sale of shares, he receives consideration from Y. X is no longer a   shareholder as he has sold the shares and property in the shares has passed to  Y. But the name of X continues to be on the Register of members till the transfer of shares is registered by the company in favour of Y.

            (b) On death. X dies and his property, including shares, is inherited by Y, his legal representative. X is no longer the shareholder. He is not in existence to   hold the shares. Y is holding the shares in his own right and, therefore, can rightly be called the shareholder. But X continues to be the member as his name still appears on the register of members. However, as soon as Y gets his  own name registered in the register of members, then X will cease to be a   member.

            (c) On becoming insolvent. X becomes insolvent and his property, including shares, vest in the official Receiver or Official Assignee. The Official   Receiver or Assignee is holding the shares in his own right. Therefore, X is no   longer the shareholder, though he continues to be the member of the company.

            (2) A person who is holding a share warrant is a shareholder but he is not a

member of the company as his name is struck off the register of members (s.115).

            (3) A person who subscribes to the memorandum of association immediately becomes the member, even though no shares are allotted to him. Till shares are allotted to the subscriber, he is a member but not the shareholder of the company.

            (4) In the case of a company limited by guarantee having no share capital or an unlimited company having no share capital, there will be only ‘members’ but  not

'shareholders'.

12.8.1 (MEMBERSHIP)

Definition of a Member. Section 41 provides that: (1) The subscribers of the Memorandum of a company shall be deemed to have agreed to become members of the company and on its registration, shall be entered as members in its register of members. (2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. On this basis, two pre-requisites for a person to become a member of a company are: (i) the agreement in writing to take shares of the company; and (ii) the registration of his name in its register of members;

Besides, a person may also become a member of a company through the depository system. Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company. (vide Depository Act, 1996).

Thus, a person can agree to take shares of a company either as the subscriber at the initial stage of its formation or in any of the following manner: (a) by subscribing to its further or new shares; (b) on transfer of its shares from an existing member;(c) on acquisition or purchase of its shares (for example, take-over bid, renunciation of rights shares by an existing member); and (d) on acquisition of its shares by devolution (for example, transmission of shares to legal heirs of a deceased member, on insolvency, upon merger/amalgamation through court's order); (e) on conversion of convertible debentures or loans pursuant to the terms of issue of such debenture or loan agreement respectively.

The fundamental difference between the subscribes who agree to take shares at the time of formation of the company and persons who agree to take shares later is that the former become members immediately on incorporation of the company, that is, they automatically become members. The latter, though having agreed to take shares, become members only after their names are registered in the register of members of the company.

12.7.2 (Share Certificate vs Share Warrant)

The distinction between the two is summarized below:

   1. A share certificate is issued in respect of partly or fully paid-up shares, while a share warrant can be issued only in respect of fully paid shares.

   2. The holder of a share certificate is a registered member of the company, while the share warrant holder is not a member of the company.

   3. The issue of a share certificate does not require the approval of the Central Government. A share warrant can be issued only if the articles authorise its issue and with the approval of the Central Government.

   4. Both public and private companies are required to issue share certificate, but share warrants can be issued only by public companies.

   5. The shares specified in a share certificate can be transferred by delivery and registration from the Board of Directors but in the case of a share warrant, the shares are transferred by a mere delivery of the share warrant.

   6. A share certificate is not a negotiable instrument, but a share warrant is.

   7. A share warrant does not constitute the share qualification of a director, but the share certificate does.

   8. The holder of the share certificate can present a petition for the winding up of the company, while the holder of a share warrant cannot do so.

   9. Stamp duty is payable on transfer of shares specified in a share certificate, but no stamp duty is payable on a transfer of a share warrant although heavy duty is payable at the time of issue of the share warrant.

  10 . A share warrant holder cannot requisition on extra-ordinary general meeting of a company.

12.7.1(ALLOTMENT OF SHARES)

Share Certificate (s.113). Once shares are allotted and the name of a person is entered in the Register of members, the company shall deliver certificate of its shares within three months after allotment and within two months after application for registration of transfer is made. The share certificate states the name, address, occupation of the holder together with the number of shares and their distinctive number and amount paid-up. It must bear the common seal of the company, must be stamped and bear the signature of one or more directors.

If default is made in complying with this provision, the company and every officer in default will be liable to a fine upto Rs 500 for every day of default.

Further, a notice may be served on the company by the person entitled to the certificate requiring it to make good the default. If the company fails to comply with this notice within ten days of the service thereof, the Court may, on the application of such person, order the company and any officer thereof to make good the default within a specified time and to pay costs of and incidental to the application.

12.6.20 (Raising of Capita/Issue of Shares)

Companies limited by shares have to issue shares to raise the necessary capital for their operations. Issue of shares may be made in 3 ways. (i) By private placement of shares; (ii) By allotting entire shares to an issue-house, which in turn, offers the shares for sale to the public; and (iii) By inviting the public to subscribe for shares in the company through a prospectus.

Private placement of shares. A private company limited by shares is prohibited by the Act and the Articles from inviting the public for subscription of shares or debentures. It also need not file statement in lieu of prospectus. Its shares are issued privately to a small number of persons known to the promoters or related to them by family connections.

A public company can also raise its capital by placing the shares privately and without inviting the public for subscription of its shares or debentures. In this kind of arrangement, an underwriter or broker finds persons, normally his clients who wish to buy the shares. He acts merely as an agent and his function is simply to procure buyer for the shares, i.e., to place them. Since no public offer is made for shares, there is no need to issue any prospectus. However, under s.70, such a company is required to file with the Registrar a statement in lieu of prospectus at least 3 days before making allotment of any shares or debentures.

As per guideline issued by SEBI in June, 1992, private placement of shares should not be made by subscription of shares from unrelated investors through any kind of market intermediaries. This means promoters share should not be contributed by subscription of those shares by unrelated investors through brokers, merchant bankers, etc. However, subscription of such shares by friends, relatives and associates is allowed.

By an offer for sale. Under this arrangement, the company allots or agrees to allot shares or debentures at a price to a financial institution or an Issue-house for sale to the public. The Issue-house publishes a document called an offer for sale, with an application form attached, offering to the public shares or debentures for sale at a price higher than what is paid by it or at par. This document is deemed to be a prospectus [s.64(1)]. On receipt of applications from the public, the Issue-house renounces the allotment of the number of shares mentioned in the application in favour of the applicant purchaser who becomes a direct allottee of the shares.

By inviting public through prospectus. This is the most common method by which a company seeks to raise capital from the public. The company invites offers from members of the public to subscribe for the shares or debentures through prospectus. An investor is expected to study the prospectus and if convinced about the prospects of the company, apply for shares.

Issue of shares to existing shareholders. The capital is also raised by issue of rights shares to the existing shareholders (s.81). In this case shares are allotted to the existing equity shareholders in proportion to their original shareholding, e.g., one share against every two shares held by a member.

Public issue of shares. Public issue of shares means the selling or marketing of shares for subscription by the public by issue of prospectus. For raising capital from the public by the issue of shares or debentures, a public company has to comply with the provisions of the Companies Act, the Securities Contracts (Regulations) Act including the Rules made there under and the Guidelines and instructions issued by the concerned Government authorities, the Stock Exchange and SEBI, etc. Management of public issue involves coordination of activities and cooperation of a number of agencies such as managers to the issue, underwrites, brokers, registrars to the issue, solicitors/legal advisors, printers, publicity and advertising agents, financial institutions, auditors and other Government/Statutory agencies such as registrar of Companies, Reserve Bank of India, stock exchange, SEBI, etc.
 

It is advisable to keep in mind the guidelines issued by SEBI with regard  to issue of

shares termed as "Guidelines for Disclosure and investor protection” before issuing shares to the public.

Share application form to seek permanent account number. In respect of applications for value of Rs 50,000 or more, the applicant or in case of applications in joint names, each of the applicant, shall mention his/her permanent account numbers/GIR numbers and incomes-tax circle, ward, district or the fact of non-allotment of PAN/GIR numbers, as the case may be and applications not complying with the provisions are liable to be rejected.

12.6.19 (Purchase of its own Shares by a Company)

No company limited by shares and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of share capital is effected and sanctioned by the court in pursuance of s.100 to 104 or of s.402. Further, no public company and no private company which is a subsidiary of a public company can directly or indirectly (through loans or guarantee) provide financial assistance to any person to buy shares in the company or in its holding company.

If default is made in compliance of s.77, then the company and every officer of the company in default shall be punishable with a fine upto Rs 1 lakh.

There are, however, certain exceptions to s.77. They are: (1) A company may redeem its redeemable preference shares issued under s.80; or (2) A banking company may lend money for the purpose in the ordinary course of its business; or (3) A company in pursuance of scheme for the purchase of fully paid-up shares in the company to be held by trustees for the benefit of its employees including salaried directors, may advance loan for the purchase; or (4) A company may advance loans to its bona fide employees (excluding directors managers) to enable them to purchase fully paid shares for amount not exceeding six months' salary or wages of each employee; or (5) An unlimited company can purchase its own shares; or (6) A private company which is not a subsidiary of a public company may advance loan or offer guarantee for purchase of its shares. However, even such a company cannot purchase its own shares.

The Companies (Amendment) Act,1999 has inserted three new sections -77A,77 AA and 77B.The companies have been allowed to buy-back their shares subject to certain safeguards. SEBI (Buy Back of Securities) Regulations, 1998 have also been issued. These provisions are summarized below.

Section 77A provides that a company may purchase its own shares or, other. specified securities (also known as "buy-back") out of (i) its free reserves; or (ii) the securities premium account; or (iii) the proceeds of any shares or other specified securities. However, no buy-back of any kind of shares or other specified securities shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities. This buy-back is allowed only if the following conditions are satisfied; (a) the buy-back is authorised by the articles, (b) a special resolution has been passed in general meeting of the company authorising the buy-back; (c) the buy back does not exceed 25% of the total paid-up capital and free reserves of the company; also, the buy-back of equity shares in any financial year shall not exceed 25% of the total paid-up equity capital in the financial year; (d) the ratio of the debt owed by the company must not be more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt for a class or classes of companies. The term 'debt' here includes all amounts of unsecured and secured debts; (e) all the shares or other specified securities, for buyback must be fully paid-up; (f) the buy-back of the shares or other specified securities listed on any recognised stock exchange is in accordance with the regulations made by SEBI; (g) the buy-back in respect of unlisted shares or other specified securities is in accordance with the guidelines prescribed.

The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating (a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased under the buy-back, (d) the amount to be invested under the buy-back; (e) the time limit for completion of buy-back. In any case every buy-back shall be completed within 12 months from the date of passing the special resolution.

The buy-back may be (a) from the existing security-holders on a proportionate basis; or (b) from the open-market; or (c) from odd lots, (i.e., where the lot of securities of a public company, whose shares are listed on a recognised stock exchange, is smaller than such marketable lot, as may be specified by the stock exchange; or (d) by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Where a company has passed a special resolution to buy-back its own shares or other securities, it shall, before making such buy-back file with the Registrar of Companies and the SEBI a declaration of solvency in the prescribed form. This declaration is to be verified by an affidavit to the effect that the Board of Directors of the company has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board and signed by at least two directors of the company, one of whom shall be the managing director, if any.

However, in case if a company whose shares are not listed on a recognised stock exchange, no such declaration need be filed with SEBI.

Where a company buys back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last day of completion of buy-back.

Where a company completes a buy-back of its shares or other specified securities, it shall not make further issue of the same kind of shares [including allotment of further shares under s.81 (1)] or other specified securities within a period of 24 months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Where a company buys-back the securities, it shall maintain a register of the securities so bought, the consideration paid for the securities bought back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed.

A company shall, after the completion of the buy-back, file with the Registrar and SEBI, a return containing such particulars relating to the buy-back within 30 days of such completion as may be prescribed. However, no such return need be filed with SEBI, in the case of a company whose shares are not listed on any recognized stock exchange.

If a company makes a default in complying with the above provisions, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend upto 2 years, or with fine which may extend upto Rs 50,000 or with both.

For the purposes of this Section - (i) 'specified securities' includes employees' stock option or other securities as may be notified by the Central Government from time to time, (ii)" free reserves" shall have the meaning assigned to it in s.372A

Transfer of certain sums to capital redemption reserve account (s.77AA). Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the shares so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet.

Prohibition for buy-back in certain circumstances (s.77b). This section provides that no company shall directly or indirectly purchase its own shares or other specified securities (a) through any subsidiary company including its own subsidiary companies, or (b) through any investment company or group of investment companies; or (c) if a default, by the company, in repayment of deposit or interest payable thereon, redemption of debentures, or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institution or bank, is subsisting.

Further no company shall directly or indirectly purchase its own shares or other specified securities in case it has not complied with provisions of Ss. 159, 207 and

211.

12.6.18 (Reduction of Share Capital without the Sanction of the Court)

There are some cases in which there is reduction of share capital and no confirmation by the Court is necessary. These are:

            (i) Forfeiture of shares. A company may, in pursuance of its articles, forfeit shares for non-payment of calls.

            (ii) Surrender of shares. It is a shortcut to forfeiture. It may be accepted by the company under circumstances where its forfeiture is justified. It has the effect of releasing the shareholder whose surrender is accepted from liability on shares.

            (iii) Diminution of capital. This has already been explained. Section 94 clearly states that diminution of capital does not amount to reduction of capital.

            (iv) Redemption of redeemable preference shares. This has already been explained as provided by s.80.

            (v) Purchase of shares of a member by the company under s. 402. The Company Law Board may order the purchase of shares of any member of the company by the company, under certain circumstances.

Reduction of capital vs. diminution of capital. Reduction of capital involves working off past losses against capital cancellation of the uncalled capital or repayment of surplus capital. It may involve reduction of issued capital, subscribed or paid up share capital. Diminution of capital denotes cancellation of the authorised or issued capital (but not subscribed). Diminution of capital does not constitute a reduction of capital within the meaning of the Companies Act. The distinction between reduction and diminution of capital is as follows:

            1. Diminution of capital is the reduction of the issued capital. Reduction of capital involves reduction of subscribed or paid up capital; there is no reduction of issued capital.

            2. Both require authorisation by Articles but whereas 'diminution' can be effected by an ordinary resolution (if so authorised by Articles), reduction of capital cannot be effected without passing a special resolution.

            3. 'Reduction' requires confirmation by Court (s.100) but ‘diminution’ needs no confirmation by the Court (s.94).

 
            4. In case of 'reduction', Court may order the company to add the words ‘and reduced' after its name [s.102 (3) but no such order can be passed in case of 'diminution' s.94].

            5. In case of 'diminution', notice is to be given to Registrar within 30 days from the date of cancellation whereupon the Registrar shall record the notice and make the necessary alteration in the Memorandum of Association and Articles of Association. In case of 'reduction' more detailed procedure has been prescribed though there is no time limit as in case of 'diminution'.

12.6.17 (Reduction of Capital)

Sections 100-105 provide for the reduction of share capital. A company limited by shares, if so authorised by its articles, may, by special resolution, which is to be confirmed by the Court, reduce its share capital:

            (i) by reducing or extinguishing the liability of members for uncalled capital, e.g., where a share of Rs 10 on which Rs 5 are paid, is treated as a share of Rs5 fully paid-up. In this way the shareholder is relieved from liability on the uncalled capital;

            (ii) by paying off or returning capital which is in excess of the wants of the company, e.g., where there is a share of Rs 10 fully paid-up, reduce it to Rs 5 and pay back Rs 5 to the shareholder;

            (iii) pay off paid-up capital on the understanding that it may be called up again, e.g., a share of Rs 10 is fully paid-up, on which Rs 2.50 may be returned to the shareholder on the condition that when necessary, the company may call it up again. Thus, the difference between method (i) and this method is that the uncalled liability is not extinguished in the latter;

            (iv) a combination of the preceding methods;

            (v) write off or cancel capital which has been lost or is not represented by available assets, e.g., a share of Rs 10 fully paid-up is represented by Rs 7.50 worth of assets. In such a situation, reality can be re-introduced into the balance sheet position of the company by writing off Rs 2.50 per share. This is the most common method of reduction of capital. The assets side of the balance sheet may include useless assets, fictitious goodwill, preliminary expenses, discount on issue of shares and debentures, etc. these assets are either cancelled or their values are reduced to the extent they are useless. Correspondingly, share capital on the liability side is reduced.

Procedure for reduction of capital. After passing the special resolution for the reduction of capital, the company has to apply to the Court by way of petition to confirm the resolution under s.101. The creditors are entitled to object where the proposed reduction of share capital involves either: (1) the diminution of liability in respect of unpaid capital; or (2) the payment to any shareholder of any paid-up share capital, or in any other case, if the Court so directs.

To enable the creditors to object, the Court settles a list of such people. If any creditor objects, either his consent to the proposed reduction should be obtained or he should be paid off or his payment secured. However, the Court may dispense with the consent of a creditor on the company securing payment of the debt or claim by appropriating the full amount or that fixed by the Court.

Section 102 states that if the Court is satisfied that either the creditors entitled to object have consented to the reduction, or that their debts have been paid or secured, it may confirm the reduction. It may also direct that, the words “and reduced” be added to the company’s name for a specified period and that the company must publish the reasons for the reduction and the causes which led to it.

Section 103 provides for registration of the Court’s order with the Registrar of Companies. The company has also to send the minutes giving details of the share capital as altered. The reduction of share capital takes effect only on registration of the Court’s order with the Registrar and not before. The Registrar will issue a certificate of registration which will be a conclusive evidence that both the requirements of the Act have been complied with and that the share capital is now as set out in the minutes. The registered minutes are deemed to be substituted for the corresponding capital clause in the memorandum, thereby altering the memorandum within the meaning of s.40. The copies of the memorandum which will be issued subsequently must, therefore, be in accordance with the articles.

Section 104 provides that the reduction of capital, the members cease to be liable for calls as regards the amount by which the nominal amount of their shares has been reduced. If, however, any creditor entitled to object to the reduction of share capital is not entered on the list of creditors, then every member at the time of the registration of the Court order and minutes is liable to contribute for the payment of that debt

Section 105 provides for punishment with imprisonment extending to one year or with fine or both. if any officer of the company knowingly conceals the name of any creditor entitled to object to the reduction or misrepresents the nature or amount of claim or debt or abets such concealment or misrepresentation.

12.6.16 (Alteration of Share Capital)

Section 94 provides that, if the articles authorise, a company limited by share capital may ,by an ordinary resolution passed in general meeting, alter the conditions of its memorandum in regard to capital so as:

            (1) to increase its authorised share capital by such amount as it thinks expedient by issuing fresh shares;

            (2) to consolidate and divide all or any of its share capital into shares of larger amount than its existing shares;

            (3) to covert all or any of its fully paid-up shares into stock and reconvert the stock into fully paid-up shares of any denomination;

            (4) to sub-divide its shares, or any of them, into shares of smaller amount than fixed by the memorandum, but the proportion paid and unpaid on each share must remain the same;

            (5) to cancel shares which, at the date of the passing of the resolution in this behalf, have not been taken or agreed to be taken by any person.

These five clauses are now explained.

            1 . Increase of authorised share capital. A company, limited by shares, if the articles authorise, can increase its authorised share capital by passing an ordinary resolution.

Within 30 days of the passing of the resolution, a notice of increase in the share capital must be filed with the Registrar of Companies. On receipt of the notice, the Registrar shall record the increase and also make any alterations which may be necessary in the company’s memorandum or articles or both.

If default is made in filing the notice, the company and every officer of the company who is in default shall be punishable with fine upto Rs 50 per day during which the default continues (s.97).

            2. Consolidation and sub-division of shares. Consolidation is the process of combining shares of smaller denomination. For instance, 10 shares of Rs 10 each are consolidated into one share of Rs 100.

sub-division of shares is just the opposite of consolidation, i.e., one share of Rs 100 is divided into 10 shares of Rs 10 each.

Once a resolution has been passed, a copy of the resolution is required to be sent within thirty days to the Registrar of Companies.

            3. Conversion of shares into stock and vice versa. stock is simply a set of fully paid up shares put together and is transferable in any denomination or fraction. On the other hand, a share is transferable as a whole; it cannot be split parts. For example, a share of Rs 10 can be transferred as a whole; it cannot be transferred in parts. But if 10 shares of Rs 10 each fully paid are converted into stock, of Rs 100, then the stockholder can transfer stock, say, worth Rs 17 also.

Section 94 empowers a company to convert its fully paid-up shares into stock by passing a resolution in general meeting, if its articles authorize such conversion. A notice is to be filed with the Registrar within thirty days of the passing of the resolution specifying the shares so converted.

It is to be noted that stock cannot be issued in the first instance. It is necessary to first issue shares and have them fully paid-up and then convert them into stock. Also, stock can be reconverted into fully paid-up shares by passing a resolution in general meeting.

When shares are converted into stock, the shareholders are issued stock certificates. In the Register of Members, the amount of stock is written against the name of a particular member in place of number of shares. The stockholder is as much a member of the company as a shareholder.

            4. Diminution of share capital. Sometimes, it so happens that shares are issued, but are not taken up by the members of the public and, therefore, not allotted. Section 94 provides that a company may, if its articles authorise, by resolution in general meeting, cancel shares which at the date of the passing of the resolution in that behalf have not been taken or agreed to be taken by any person and diminish the amount of the share capital by the amount of the shares so cancelled. This constitutes diminution of capital and should be distinguished from reduction of capital which is discussed herein below.

12.6.15 (Meaning of Share Capital)

It means the capital of a company, or the figure in terms of so may rupees divided into shares of a fixed amount, or the money raised by the issue of shares by a company.

As mentioned above, a public company and its subsidiary can issue only two kinds of shares, viz., preference and equity. Therefore, such a company can have only two kinds of share capital by issue of preference shares and equity shares, viz., preference share capital and equity share capital. The expression "Preference Share

Capital" and "Equity Share Capital" are used in the following different senses:

Nominal, authorised or registered capital. This is the sum stated in the memorandum as the share capital of a company with which it is proposed to be registered. This is the maximum amount of capital which it is authorised to raise by issuing shares and upon which 'it pays stamp duty. As we shall see later, when the original amount of the authorised capital is exhausted by issue of shares, it can be increased by passing an ordinary resolution.

Issued capital. It is that part of the authorised capital which the company has issued for subscription. The amount of issued capital is either equal to or less than the authorised capital.

Subscribed capital. It is that portion of the issued capital which has been subscribed for by the purchasers of the company's shares. The amount of subscribed capital is either equal to or less than the issued capital.

Called-up capital. The company may not call up full amount of the face value of the shares. Thus, the called-up capital represents the total amount called-up on the shares subscribed. The total amount of called-up capital can be either equal to or less than the subscribed capital.

Thus, uncalled capital represents the total amount not called up on shares subscribed and the shareholders continue to be liable to pay the amounts as and when called. However, the company may reserve all or part of the uncalled capital, which can then be called in the event of the company being wound up. For this purpose, a special resolution is required to be passed and then it is known as Reserve Capital or Reserve Liability (s.99).

Paid-up capital. Paid-up capital is the amount of money paid-up on the shares subscribed.

12.6.14 (Conversion of Loans or Debentures Into Shares)

There is one more situation where the existing equity shareholders may lose the right to be offered the shares, discussed above. Sub-sections (4) to (7) of s.81 provide for such a contingency.

A company may issue shares to its lenders or debentures-holders who have been given the option to convert their loan or debentures into shares. However, the company can do so only if such conversion has been approved before the issue of debentures or raising of the loan by a special resolution and also by the Central Government. But no such special resolution is necessary where the lender or the debenture-holder is either the Government or any institution specified by the Central Government in this behalf. Moreover, the Central Government may allow a Government holder of debentures or a Government lender of money to the company to ask for shares of the company in lieu of the loan or debenture amount, even though the instrument of loan or debenture does not contain any option for conversion. A copy of every such order issued by the Central Government must be laid in draft before each House of Parliament while it is in session for a total period of thirty days.

Section 94A empowers the Central Government to administratively increase the authorised capital when conversion is ordered by it and the company does not have shares to issue and has not increased its share capital by ordinary resolution.

12.6.13 (Rights Shares)

The existing members of the company have a right to be offered shares, when the company wants to increase its subscribed capital. Such shares are known as "right shares" but they are not issued free of charge.

Section 81 provides that where at any time after the expiration of two years from

the date of incorporation of the company or after one year from the date of the first allotment of shares, whichever is earlier, a public company limited by shares, issues further shares within the limits of the authorised capital, its directors must first offer these shares to the existing holders of equity shares in proportion, as nearly as circumstances admit, to the capital paid up on their shares at the time of the further issue. The company must give notice to each of the equity shareholders, giving him the option to buy the shares offered to him by the company. The shareholders must be informed of the number of shares he has the option to buy. He must be given at least fifteen days to decide whether he would exercise his option or not. If the shareholder does not inform the company of his decision, he shall be deemed to have declined the offer. Unless the articles of the company otherwise provide, the directors must state in the notice of offer the fact that the shareholder has also the right to renounce the offer, in whole or part, in favour of some other person who need not be member of the company. If the shareholder declines or is deemed to have declined or if the person in whose favour the renunciation is made declines to buy the shares, the company's directors may dispose of those shares in such manner as they may think fit.

Exceptions. However, the company may, by special resolution in general meeting,

decide that the directors need not offer the shares in the further issue to the existing  equity shareholders and that they may dispose them off in any manner whatsoever. But where, it has been possible to muster ordinary majority only, the directors may

not offer the shares to the existing equity shareholders, if permission is obtained from the Central Government. Further, s.81 does not apply to a private company. Thus, a private company need not offer its further issue first to existing shareholders. Directors are free to offer them in the manner they deem fit. Further, s.81 is not applicable in the case of issue of shares against conversion of loans or debentures.

SEBI has issued guidelines regarding Rights Issues.

Duty of transferor to transferee in respect of rights shares. There may be pending transfers at the time when a rights issue takes place. This raises the question whether the transferor of an unregistered transfer is under any obligation towards his transferee to apply for the rights shares for the benefit of the transferee. The Supreme Court in

R, Mathalone v. Bombay Life Assurance Co. Ltd. AIR 1953 SC 385 has observed that after the transfer form has been executed, the transferor cannot be held to undertake any additional financial burden in respect of the shares at the instance of the transferee where, after the transfer of shares, but before the company had registered the transfer, the company offered rights shares to its members. The transferor could not be compelled by the transferee to take up on his behalf the rights shares offered to the transferor and all that he could require the transferor to do was to renounce the rights issue in the transferee's favour.

Allotment to renouncee. As per s.8(1)(c), unless the Articles of the company otherwise provide, the letter of offer of rights shall be deemed to include a right to renounce the shares offered to a member in favour of any other person; and the notice sent to him must contain a statement to this effect. When a shareholder renounces any of the rights shares offered to him, in favour of third person, it is not in the nature of transfer of such shares. The Board of Directors, therefore, cannot refuse to allot the shares to the renouncee unless the Articles so provide - Re Simo Securiries Trust Ltd. (1972) 42 Comp. Cas.457.

However, the right to renounce shares is not available to members of a s.43A company even to the limited extent of renouncing in favour of other members. The Articles of a company may contain provisions enabling members to transfer shares to each other, but that is different from a renunciation of shares - Needle Industries' case (supra).

In the case of shares registered in joint names, any of the joint holders may lodge a letter of renunciation.

12.6.12 (Bonus Shares)

A company may, if the articles so provide, capitalise profits by issuing fully paid-up shares to the members thereby transferring the sums capitalised from the profit and loss account or Reserve Account to the Share Capital [s.205 (3)]. Such shares are known as bonus shares and are issued to the existing members of the company free of charge.

The issue of bonus shares is regulated not only by the Companies Act, 1956 but also by the guidelines issued by SEBI in this regard.

12.6.11 (Issue of Shares at Par, at Premium and at Discount)

A company may issue shares at par, or at premium, or at a discount. Issue at par. Shares are deemed to have been issued at par when subscribers are required to pay only the amount equivalent to the nominal or face value of the shares issued. For instance, if the face value of a share is Rs 10 and the buyer is required to pay thereon Rs 10 only - nothing more nothing less - then he will be said to be holder of a share issued at par

According of SEBI guidelines of 11^th June 1992, a new company set up by entrepreneurs (individuals) without a track record can issue shares only at par. Likewise, issues of existing private/closely held and other unlisted companies without three years track record of consistent profitability (including disinvestments by offer to public) are only allowed to be priced at par. Again, issues of new companies set-up by existing unlisted companies without a 5 year track record of consistent profitability can be made only at par.

Issue at a premium. In the above example, if the buyer is required to pay more than

the face value of the share, e.g., Rs 12.50 on a share of Rs 10, then the share is said to be issued or sold at a premium.

The Companies Act, 1956 does not stipulate any conditions or restrictions regarding the issue of shares by a company at a premium. However, it does impose conditions regulating the utilisation of the amount of premium collected on shares. Firstly, the premium cannot be treated as profit and, therefore, cannot be distributed as dividend. Secondly, the amount of premium received in cash and the equivalent of it received in kind must be kept in a separate bank account known as the 'Share Premium Account'. Thirdly, the amount of share premium is to be maintained with the same sanctity as the share capital. Fourthly, the share premium account can not be treated as free reserves as it is in the nature of capital reserve. Fifthly, the amount credited to the 'Share Premium Account' can be used only for the purposes listed in s.78(2).

In accordance with the provisions of s.78(2), the share premium can be utilised only for the following purposes: (i) to pay for unissued shares of the company to be issued to members of the company as fully paid bonus shares; (ii) to write off the preliminary expenses of the company; (iii) to write off the expenses or the commission paid or discount allowed on, any issue of shares or debentures of the company; (iv) to provide for the payment of premium payable on the redemption of redeemable preference shares or of any debentures of the company.

The issue of shares at a premium does not require the sanction of the Company Law Board. The company is, however, required to ensure compliance of SEBI guidelines in this regard.

SEBI has allowed a certain class of companies to make their issues at any premium subject, however, to certain conditions as to promoters contribution and lock in period.

The Companies (Amendment) Act, 1999 has amended s. 78 to the effect that for the word 'share' in the section, the word 'securities' shall be substituted.

Issue at a discount. If the buyer of shares is required to pay less than the face value of the share, e.g., Rs 8.50 on a share of Rs 10, then the share is said to be issued or sold at a discount. However, the issue of shares at a discount is regulated by law and s.79 provides for certain conditions subject to which shares can be issued at a discount. These conditions are:

            (1) The issue of shares at a discount is authorised by a resolution passed by the company in general meeting and sanctioned by the Company Law Board.

            (2) The issue must be of a class of shares already issued.

            (3) The maximum rate of discount must not exceed 10 per cent or such higher rate as the Company Law Board may permit in any special case.

            (4) Not less than one year has, at the date of issue, elapsed since the date on which the company was entitled to commence business.

            (5) The shares to be issued at a discount must be issued within two months of

the sanction by the Company Law Board or within such extended time as it may allow; and

            (6) Every prospectus at the date of its issue must mention particulars of the discount allowed on the issue of shares, or the exact amount of the discount as has not been written off. In case of default, the company and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees.