SHARE

A share is the share capital of the

company and includes stock except
where the difference between stock and
shares is express and implied (Sec-
2(46))
A share is a fraction into which the
total share capital of company is
divided.
REDUCTION OF SHARE CAPITAL
 To ensure that the company’s assets are not freely
distributed to the shareholders.
 It is done to :
1. Write off lost capital
2. To pay off surplus capital
PROCEDURE
• Authority of articles must be secure
• Special resolution
• Petition to the court
• Registration
METHODS OF REDUCTION
 According to section 100 of the company’s act :
1. Reduce liability of members on shares not fully paid
up
2. Write off lost capital
3. Pay off excess paid-up share capital
Preference Shares
 Provides preferential rights
 As to Payment of Dividend at a fixed rate during the life of the company
 As to Return of capital on winding up of company
 Voting rights on:
 Resolutions directly affecting preference shareholders
 Winding up of company
 Repayment or reduction of company’s share capital
 Entitled to vote on every resolution at any general meeting if dividend or
part thereof unpaid

 For cumulative shares a period of not less than 2 years preceding the
meeting date
 For non cumulative shares , either a period of 2 consecutive years or for 3
years aggregate in the 6 years ending with the expiry of financial year
immediately preceding the meeting date
Equity Shares
 Those shares which are not preference shares
 Carry the right to receive the whole number of surplus
profits after the preference shares , if any , have received
their fixed dividend
 If no profits left after paying fixed preference dividends for
equity shareholders
 Kinds of Equity Shares
 Equity shares with voting rights – The holders have normal
voting rights in the company.
 Equity shares with differential rights – The holders have
differential rights as to dividends , voting and otherwise in
accordance with rules prescribed by the Government.
Issue of Securities at
Premium
 Sometimes companies with good prospects issues securities at a
premium . No restriction upon the issue of securities at premium and
the
 Company is free to make such an issue whenever it so desired.
 Certain restrictions upon the use of premium amount
 The premium amount must be transferred to the Securities Premium
Account and this account is to be treated as share capital for reduction
purposes , except when it is to be used for the following:-
 To issue fully paid bonus shares to members.
 To write off preliminary expenses of the company.
 To write off expenses of , or commission paid or discount allowed on
any issue of shares or debenture of the company
 To provide the premium payable on the redemption of redeemable
preference shares or debenture.
 For buyback of own securities under Section 77A.
Issue of Shares at a
Discount
 A company is permitted to issue shares at a discount provided –
 The shares must be of a class already issued.
 At least 1 year must have elapsed since the company started
business.
 The issue must be authorized by an ordinary resolution in the
general meeting which must state the max. rate of discount.
 The issue must be sanctioned by the Company Law Board . No
such issue shall be sanctioned by the Company Law Board if the
max. rate of discount specified in the resolution exceeds 10%
 , unless the board is of the opinion that higher percentage of
discount be allowed.
 The issue must be made within two months.
Issue of Sweat Equity
Shares
 Sweat equity shares means equity shares issued by the company to
employees or directors at a discount or for consideration other than
cash.
 The company may issue Sweat equity shares if the following conditions
are fulfilled-
 The shares must be of a class already issued.
 At least 1 year must have elapsed since the company started business.
 The issue must be authorized by a special resolution passed by the
company in the general meeting.
 The resolution must specify the no. of shares , their current market
price , consideration , , if any , and the class or classes of directors or
employees to whom they are issued.
 The shares must be issued in accordance with SEBI guidelines in case
of listed shares or Central Government in case of unlisted shares.
Restriction on Purchase by a
Company on its own Shares
 Public or private ltd. – no company can buy its own
shares.
 Conditions under which company can buy its own
shares-
 Section 100-104
 Special sanction of court is needed for reduction of
share of capital.
 Section 402
 Buy its shares from certain oppressed members.
 Unlimited companies are free from such restrictions.
 Sub section(2) – no public co. can give any financial
assistance to buy its own shares.
EXCEPT -
 When loan is made by banking company.
 When provision of money is under scheme.
 When loan are made by company to employers other
than director.
Buyback of own securities
Companies(Amendment) Act , 1999 permits the companies to
buyback their shares
Rationale
 Repurchase of shares reduces the number of shares outstanding
and thus improves EPS – increases market price of share
 Buyback maybe used to prevent a hostile takeover
 A means of investment
 Funds out of which buyback may be financed[Sec. 77a(1)]
 Free reserves
 Proceeds of any shares or other specified securities
 Securities premium account
 Transfer of certain sum to “Capital Redemption Reserve
Account” {Sec. 77 AA]
 When co. purchases its own shares out of ‘free reserve’, then a
sum equal to the nominal value of shares so purchased must be
transferred to CRR a/c
 Conditions to be fulfilled before resorting to buyback [Sec.
77A(2),(3)&(4)]
 There should be a provision in AoA authorizing buyback
 Special resolution must be passed in the general meeting of co.
authorizing buyback , notice for convening the meeting should
be accompanied by explanatory statement disclosing all material
facts of the buyback
 Amount of buyback should not exceed 25% of total paid up
capital and free reserves of the co. , in case of buyback of equity
shares , amount should not , exceed 25% of co.’s total paid up
equity capital
 After buyback , ratio of debt to capital and free reserves should
not be more than 2:1
 Shares or securities sought to be bought back must be fully paid
up
 Buyback should be in accordance with SEBI guidelines in case of
listed securities or in accordance with guidelines prescribed by
Central govt. in case of unlisted securities
 Buyback operations must be completed within 12 months from
date of passing special resolution
 Methods of buyback[Sec. 77A(5)]
 From the existing security holders on a proportionate basis
 From the open market
 From odd lots i.e. securities of listed public co.
 By purchasing the securities issued to employees
 Declaration of solvency[Sec. 77a(6)]
 To be fulfilled with Register of Co. and SEBI
 Physical destruction of securities[Sec.77a(7)]
 Within 7 days of completion of buyback
 Further issue after buyback [Sec. 77A(8)]
 Co. is free to issue other types of securities other than the type bought
back
 Same kind cannot be issued before 6 months
 Register of bought back securities[Sec. 77A(9)]
 Register has to be maintained with all particulars of securities bought
back
 Return of buyback [Sec.77A(10)]
 After completion of buyback a return is to be fulfilled with Register of
Co. and SEBI within 30 days
 Penalty[Sec. 77A(11)]
 Imprisonment up to 2 years and fine up to Rs. 50000 in case of non-
compliance with the above provisions
Buyback methods
Tender methods
 Co. fixes and announces a price at which it intends to
buyback
 If no. of shares offered for buyback is more than what
is sought , they are bought back proportionately
Open market Purchases
 Stock exchange purchase method
 Dutch auction method
BONUS SHARES
 Bonus shares are issued to the existing shareholders
out of the accumulated profits and reserves.
 Bonus shares are always fully paid.
 There is no requirement of minimum subscription.
 It is also called capitalisation of profit.
OBJECTIVES
 Expanding the capital base
 Add to the reputation or goodwill
In accordance with the section 2(55)of the Companies
Act2013,a person can become the
Member of the company in the following ways-
 By subscribing to the memorandum of association
 By agreeing to become a member
 By holding equity share capital of the company on his
name being entered as a beneficial owner in the
records of the depository
 Agreeing to become a member can happen in any of the
following ways-
 by making an application to the company for allotment of
shares.
 By executing an instrument of transfer of shares as
transferee .

 By consenting to the transmission of shares of a deceased

memberin his/her name.
 by acquiescence or estoppel and his name being entered in
the register of the members of the company.
WHO MAY BECOME A MEMBER

The company law does not prescribe any disqualification

,which would depart a person from becoming a member of a
company.It appears that any person who is competent to
enter into a valid contract can become a member of a
company.

As regards to certain special category of persons,the

judiciary has laid down certain principles for acquiring
membership in a company.They are as follows-
 Minors: A minor ,is not a competent person to enter into
valid contract. As such,he is disqualified to acquire
membership. However,
Minors may be alloted shares.On attaining majority, the
minor can avoid the contract. But
The minor should repudiate the contract within
a reasonable time.

Lunatic and insolvent: A lunatic cannot become a

member.An insolvent,however,can become a member and is
entitled to vote at the meetings of the company.But his
shares vest in the official receiver when he is adjudged
insolvent.
 Partnership Firm:A partnership firm may hold shares
in a company in the individual name of partners as
joint holders.But the shares cannot be issued in the
name of the partnership firm,as it is not a legal person
in the eye of law.
 Company:A company,being a legal person ,can become
the member of another company in its own name.But
a company can subscribe for the shares of another
company only when it is authorised by
Memorandum.Similarly,a subsidiary company cannot
buy the shares of its holding company.
 Foreigners: Foreign national can be members of
companies registered in india.For that permission of
RBI is mandatory.When he turns an alien enemy,his
right as a member will be suspended.
 Fictitious Person: A person who takes the shares in the
name of fictitious person becomes liable as a
member.Besides, such a person can be punished for
inpersonation under section68-A.
 TERMINATION OF MEMBERSHIP
A person will cease to be a member of the company when his name is removed
from the register of members. It may take place in any of the following ways:
 When a person transfers his shares.In such a case the transferor ceases to be a
member as soom as the transferee is registered but not before.
 When a person makes a valid forfeited by the company.
 When a person makes a valid surrender of his shares of the company.
 When a company sells the shares in exercise of its right of lien over them.
 When he dies.
 When he is declared insolvent and the official assignee either disclaims or
transfers the shares.
 When he is holding redeemable preference shares and such shares are
redeemed.
 When the share are sold in execution of a decree of the court.When the
company is wound-up.But he remains liable as contributory.
 When he repudiates the contract on the ground of
false or misleading statement in the prospectus of the
company.
RIGHTS OF MEMBERS
 Statutory Rights: These are the rights conferred upon the members by the
companies act .These rights cannot be taken away by the articles of association
or memorandum of association.Some of the important statutory rights are
given below-
1. Rights to receive notice of meetings,attend,
to take part in the discussions and vote at the meetings.
1. Right to transfer the shares .
2. Right to receive copies of the annual accounts of the company.
3. Right to inspect the documents of the company such as register of
members,annual returns,etc.
4. Right to participate in appointments of directors and auditors in the
Annual General Meetings.
5. Right to apply to the Government for ordering an investigation into the
affairs of the company .
6. Right to apply to the court for winding up of the company.
7. Right to apply to the National Company Law Tribunal for relief in case of
 Documentary Rights: In addition to the statutory
rights, there are certain rights that can be conferred
upon the shareholders by the documents like the
Mamorandum and Articles of Association.
 Legal Rights: These are the rights,which are given to
the members by the General Law.
REGISTERS OF MEMBERS

Every company under the act shall keep a register of its

members.There is no form but the following particulars
must appear in the register.
 The name,address,and occupation of each member.
 In case of a company having a share capital,the shares held
by each member with numbers and amount paid or
considered to be paid on them.
 The date on which each member’s name was entered in the
register.
 The date on which any person ceased to be a member;and
 If the shares have been converted into stock,and notice of
conversion given to the registerar,it will show the amount
of stock held by each mrmber.
For default in complying with these provisions,
the company and every officer of the company who is in
default shall be liable to a fine up to
Rs.50 for every day during which the default
Continues.
 Introduction
A forfeited share is a share in a company that the owner
loses (forfeits) by failing to meet the purchase
requirement. Requirements may include paying an
allotment or call money owned, or avoiding selling or
transferring shares during a restricted period. When a
share is forfeited, the shareholder no longer owes any
remaining balance and surrenders any potential capital
gain in the shares, and he shares become the property of
the company.
Essential requisites of valid call on shares
(Indian Contract Act, 1956)
Demand made by a company towards the payment of value of shares in
pursuance of resolution of resolution of the board and the terms of the
articles is termed as call. However, money payable on application and
allotment are not calls.

Payment made by a shareholder by installments is not calls. A call can be

made only after the minimum subscription is allotted and the company is
entitled to commence business. Call may also be made by a liquidator in
the course of the winding up. Articles usually provide the rules regarding
making of calls and these are to be strictly followed.
Essential requisites of valid call on
shares (Indian Contract Act, 1956)
Section 36(2) of the companies act provides that all money payable by any
member to the company under memorandum or articles shall be a debt
due from him to the company. But this is when a valid call has been made.
Following are the essential of a valid call:-
i) Resolution at board’s meeting
ii) In accordance with the articles
iii) The amount, place and time of payment
iv) Bona fide and in the interest of the company
v) Uniformly
Resolution at board’s meeting
A call must be made under a resolution of the board of
directors. The resolution must be passed by a competent
board of directors, at a properly called and convened
board’s meeting. In order to prevent trifling
irregularities from invalidating a call, the articles usually
contain a clause that some defect in the appointment or
qualifications of the directors, will not render the call
invalid. If such a clause exists in the articles, call made
by the directors will be valid even if some of them maybe
subsequently found to be disqualified.
In accordance with the articles
A call must be made in accordance with the provisions of the articles of
association of the company. If the articles are silent, Table A would apply which
has the following rules regarding the making of calls:
i) The board may from time to time make calls the members in respect of any
moneys unpaid on their shares.
ii) No call shall exceed one-fourth of the nominal value of the share.
iii) No call shall be payable at least less than one month from the date fixed for
the payment of the preceding call.
iv) Each member shall subject to receiving at least 14 days’ notice specifying the
time and place of payment shall the amount called on his shares.
v) A call may be revoked or postponed at the discretion of the board.
The amount, place and time of
payment
The resolution must state the amount, time and the
place of payment. If this is not done, the resolution is
defective and the call made thereon shall be invalid.
Bona fide and in the interest of the company
The power to make calls in the nature of a trust and must be exercised
bona fide by the directors for the directors for the benefit of the company.
If the call is made by the directors for their own personal advantage, the
call shall be taken to have been improperly made. Shareholders, in such a
case, can either prevent its enforcement by an order of the court, to hand
over the benefit received by them to the company.
Uniformly
As per section 91, calls on shares must be made on a uniform basis, on all shares
falling under the same class. Hence, a call cannot be made on some members only
unless they constitute a separate class. If the directors make a call on the
shareholders and pay nothing on their own shares in respect of such call, they are
guilty of breach of trust.
If a call is invisibility made, a shareholder is not bound to pay it. He can restrain
the directors by injection from forfeiting his shares for the non payment of such a
call or defend an action brought against him by the directors to recover such call.
The joint holders of a share are jointly and severally liable to pay calls. Articles
usually provide for charging from shareholders interest on calls in arrears.
According to article16 of Table A, the rate of interest shall be 5% p.a. or such lower
rate as the board may determine.
Money payable on allotment is not deemed to be a call but the articles may
provide that the provisions relating to payment of calls will also apply to such
cases.
 Lien of shares
It is the right to retain possession of a thing until a claim is satisfied. In
the case of a company lien on a share means that the member would
not be permitted to transfer his shares unless he pays his debt to the
company. The articles generally provide that the company shall have a
first lien on the shares of each member for his debts and liabilities to
the company. The right of lien is not inherent but must be clearly
provided in the articles. The articles may give the right of lien over
share either for unpaid calls or for any other debt due by the member
of the company. The company may have lien on fully paid up shares.
The lien also extends to the dividends payable on the shares.
 Surrender of shares
The companies act does not provide for surrender of shares. Shares are
not said to be surrendered when they are voluntarily given up. The articles
of a company may be authorize the directors to accept surrender of
shares. Surrender of shares is valid where it is done to relive the company
from going through the formality of forfeiture of shares and the
shareholder is willing to surrender the shares. A surrender and a forfeiture
have practically the same effect, the only difference being that the former
is done with the latter is done at the instance of the company.
Main procedures for the forfeiture
of shares in a company
When a call remains unpaid and the time allowed for its payment has expired, the
company may subject to the provisions of the articles, forfeit those shares and the
amount received thereon. The power to forfeit shares must be expressly given in
the company’s articles. It cannot be implied. In order that the forfeiture of shares
is valid, the procedure expressly prescribed by the articles must be strictly adhered
to. The technicalities must be strictly complied with as even a little inaccuracy
may be as fatal as the greatest one. Even the whole body of shareholders or
creditors cannot ratify a defective forfeiture.
The procedure to be followed for the forfeiture of shares is as follows:-
i) In accordance with the articles of association
ii) Notice precedent to forfeiture
iii) Resolution of forfeiture
iv) Bone fide
In accordance with the articles of
association
Shares can be forfeited only in accordance with the provisions laid down
in the articles of association of a company. The ground on which shares
can be forfeited has to be explicitly stated in the articles and generally the
ground mentioned is non-payment of a call(s). But if the articles provide,
the company can forfeit fully paid up shares on grounds other than the
non payment of a call.
Notice precedent to forfeiture
A default in the payment of calls does not ipso facto bring about
forfeiture. A notice of demand requiring the member to pay calls within a
fixed period of the notice must be given to the holder of shares.

The notice shall also state that in the event of non payment of calls shares
shall be forfeited. The amount to be paid by way of interest or expenses
besides the amount due on the call must be stated specifically in the
notice; otherwise the forfeiture will be invalid.
Resolution of forfeiture
The board must also pass a resolution for
the forfeiture of shares. “A declared
intention to forfeit not carried into effect is
no forfeiture at all.” Forfeiture without a
board’s resolution is invalid.
 Bone fide
The power to forfeit shares is in the nature of a trust.
Directors must exercise this power bona fide for the
benefit of the company. It should not be exercised to
expel a member or to get rid of him, nor it should be
exercised to relieve a friend from liability.
 Illustration
Certain directors of a company took up shares in the
company only to qualify themselves for appointment as
directors. They paid nothing on their shares. When the
company was in difficulties, they got their shares
forfeited and cancelled. It was held that the forfeiture
was invalid, and therefore, the directors were still the
shareholders of the company.
 Introduction
A company shall register a transfer of securities or
interest of members only when such a proper instrument
of transfer; duly stamped, dated and executed by or on
behalf of the transferor and transferee and specifying
the name, address and occupation has been delivered to
the company by either party within a period of sixty days
from date of execution, along with the certificate of
security or the letter of allotment of securities.
Procedure for the transfer of
securities through transfer deeds
We look at the procedures for approval and registration
involved in share transfer which is physical in mode.
:- Transfer deed
:- Acknowledgement
:- Scrutiny
:- Approval
:- Registration
:- Delivery of share certificate
 Transfer deed
Share transfer deed is an instrument of transfer that
must be executed by both transferor and transferee.
Share transfer deed must be duly stamped and delivered
to the company along with certificate relating to shares
transferred. Any instrument of transfer which is not in
conformity with these provisions cannot be accepting by
the company.
 Acknowledgement
Some companies send a notice or acknowledgement of the
instrument to the transferor who can lodged a transfer with
the company before the documents are scrutinized. The
notice of acknowledgement is usually in the form of a letter
which holds a checklist for scrutiny of the transfer
documents. Some companies follow a practice of issuing
transfer receipt. If the transfer application is made by the
transferor alone and he has partly paid for the shares; the
company must not register the transfer unless the company
acknowledges the transferee, and he does not have any
objection is transferring the shares within 2 weeks from the
receipt of the notice.
 Scrutiny
On receipt of all the transfer documents, a scrutiny
should be done to ensure that all the documents are in
place. The scrutiny should be done within 3 to 5 days
from the receipt of the transfer documents. In case the
documents are not acceptable, the same should be
returned returned to the transferee. In case the signature
of the transferor in the transfer differs from the
specimen signature on the company’s record, then the
documents will be returned.
 Approval
Every transfer of shares must be placed before the board
of directors or committee for its approval. The
registration takes place after approval. If everything is
accepted after scrutiny, it should be approved by the
right authority. Transfer of shares must be approved by
the board. If articles of the company empower the board
to delegate its power of approval of share transfer, then it
may delegate it to a committee who might not be the
company’s directors.
 Registration
Registration of share transfer is a requirement for the
transferee obtaining the status of a member of the
company. A transfer is incomplete without registration
of share transfer. A share transfer form is a document
through which the transferee agrees to accept the shares.
This becomes a legal contract with the company. Once
the company approves and registers the transfer, this
leads to the entry of the transferee’s name in the registry
of the member and it qualifies his status as a member.
The maintenance of the register of transfer is not a
statutory requirement.
 Delivery of share certificate
Transfer becomes effective only on registration of such
shares by the company. The company shall deliver the
share certificate within 1 month from the receipt by the
company’s instrument related to transfer. The
instrument must be endorsed with the respective name
of the transferee.
Procedure for transfer of securities
through depository system
 Under the provisions of depository ordinance, depositories facilitate script less
trading in capital market through dematerialization of securities. Equity
shares, debentures, warrants, bonds, units of mutual funds, venture capital
funds, commercial paper, certificates of deposit, secured debt, money market
instruments and unlisted securities are eligible to be admitted to the
depository for dematerialization.
 A depository holds all the securities in the electronic form. It can be regarded
as a ‘Bank’ for securities. It converts physical securities into book entry
securities, the process of which is called dematerialization. In this process,
certificates in physical form are eliminated altogether. When an investor
deposits his physical securities with the depository, his account with the
depository is credited for the deposit made. The transfer is effected
electronically whenever he buys and sells his shares and his account is credited
or debited accordingly.
Procedure for transfer of securities
through depository system
 The institution which acts as a depository is the registered owner of the
shares and the members owning the shares in a company will be beneficial
owners. A beneficial owner is entitled to all the benefits like dividend, right
shares, bonus shares and the voting rights.
 A depository interacts with the investors with the help of a depository
participant. He is similar to the broker who trades on behalf of the
customers in the stock exchanges. As per the SEBI guidelines, financial
institutions, banks, custodians, stock brokers, etc., can become
participants in the depository system.
 According to the depository ordinance, the holder of securities has an
option, whether to retain in non-depository mode or shift to depository
mode. Investors who wish to remain in non depository mode will hold the
physical possession of certificate of securities. The investors who opt to
hold securities in depository participant. The investor who has opened
such an account gets an is identification number which he will refer to in
all his transaction.
Restrictions on transfer
The intention behind a modern private company is dual:
i) To facilitate small traders or private persons
carrying on a family business to avail of the
advantages of corporate trading.
ii) To act as a subsidiary in a group of companies so as
to avoid having to establish a public company, given
the plethora of exacting requirements which are
required to follow.
Splitting of joint holding of shares
When a person holds one or more shares jointly with one or more persons
in a company is called joint shareholder. Since a joint shareholder is
different person, but in relation to private limited companies, joint
shareholders are considered as a
member.
All joint holders are members of the company in general law, but
provisions of the act and clauses of article of association of the company
may provide that the first named shareholder will be treated as member
of the company to the exclusion of others.