Share Capital and Debentures: formula sheet

Key formulas

Kinds of share capital (Section 43)

Share capital = Equity share capital + Preference share capital

Only these two kinds are allowed for a company limited by shares. Equity can be with voting rights or with differential rights.

Meaning of equity share capital

Equity share capital = all share capital that is not preference share capital

This is a definition by exclusion, given in the Explanation to Section 43.

Test for preference share capital

Preference = share capital that carries or would carry a preferential right to dividend (fixed amount or fixed rate) and to repayment of capital on winding up or repayment of capital

The test is the preferential rights the share carries or would carry. Extra participation in profits or surplus does not change its status as preference capital.

Voting right of equity holders (Section 47(1))

Vote on every resolution; vote on a poll ∝ share in paid-up equity share capital

This is subject to Sections 43, 50(2) and 188(1), as the text of Section 47(1) states.

Voting right of preference holders (Section 47(2))

Vote only on (i) resolutions directly affecting rights of their shares, (ii) winding up, (iii) repayment or reduction of equity or preference capital

Vote on a poll is in proportion to the share in paid-up preference capital.

Preference holders voting on all resolutions

Dividend on a class unpaid for 2 years or more ⇒ that class votes on all resolutions

The right applies to the class whose dividend is unpaid.

Order of capital terms

Authorised ≥ Issued ≥ Subscribed ≥ Called-up ≥ Paid-up

Called-up is the amount demanded on subscribed shares. Paid-up is what has actually been received.

Prospectus form (Section 26(1))

Prospectus = dated + signed + SEBI-specified information and financial reports + compliance declaration

The date shown is deemed to be the date of publication.

Filing before issue (Section 26(4))

Copy signed by every director or proposed director (or authorised attorney) → delivered to Registrar on or before date of publication

No prospectus may be issued without this.

Validity of prospectus (Section 26(8))

Invalid if issued more than 90 days after copy is delivered to Registrar

Counted from delivery of the copy under Section 26(4).

Expert's statement (Section 26(5))

Expert must be independent (not engaged or interested in formation, promotion or management) + written consent not withdrawn before delivery to Registrar

The prospectus must include a statement that the expert is independent, has given written consent and has not withdrawn it.

Penalty for defective prospectus (Section 26(9))

Company: fine ₹50,000 to ₹3,00,000. Every person knowingly a party: fine ₹50,000 to ₹3,00,000

Under the text provided, the penalty is a fine only; the earlier imprisonment words have been omitted.

Minimum subscription (Section 39(1))

No allotment until stated minimum amount subscribed AND application sums received by cheque or other instrument

The minimum amount is the one stated in the prospectus.

Application money (Section 39(2))

Application money ≥ 5% of nominal amount of the security (or other percentage or amount specified by SEBI)

This is a floor, not a fixed amount.

Refund trigger (Section 39(3))

Minimum not subscribed and application sum not received within 30 days from date of issue of prospectus (or other SEBI period) → amount received must be returned

Until the 30 days lapse, allotment is simply barred. Once the period lapses, refund is due within the time and manner prescribed.

Return of allotment and default penalty (Section 39(4) and (5))

File return of allotment with Registrar. Default under (3) or (4): penalty ₹1,000 per day of default, or ₹1,00,000, whichever is less

Applies to the company and every officer in default, for each default.

Offer for sale (Section 25)

Offer-for-sale document = deemed prospectus. Evidence of intent: offer within 6 months of allotment, or full consideration not yet received

The evidence can be rebutted if the contrary is proved. Signing: two directors of the company, or not less than half of the partners of a firm.

Private placement: persons

Identified persons ≤ 50 (or higher number as prescribed) in a financial year, excluding QIBs and ESOP employees

Breach means the issue is deemed a public offer (Section 42(11)).

Private placement: allotment time

Allot within 60 days of receiving application money; else refund within 15 days after those 60 days

If refund is late, interest at 12% p.a. runs from the expiry of the 60th day.

Private placement: return of allotment

File return with Registrar within 15 days of allotment

Money cannot be used until allotment is made and the return is filed. Late filing penalty is ₹1,000 per day, maximum ₹25 lakh.

Private placement: penalty for contravention

Penalty up to the lower of (amount raised, ₹2 crore)

Applies to company, promoters and directors, plus refund with interest within 30 days of the penalty order.

Private placement: key restrictions

No renunciation; payment by banking channel, not cash; no public advertisement; separate bank account for application money

No fresh offer until earlier allotments are completed or the earlier offer is withdrawn or abandoned.

Rights issue: offer period

Offer open for not less than 15 days (or such lesser days as prescribed) and not more than 30 days

Notice must be sent at least 3 days before the issue opens, by registered post, speed post, electronic mode, courier or other mode with proof of delivery.

Rights issue: entitlement

Offer to equity holders in proportion to paid-up equity share capital held at the date of offer

Renunciation right is included unless articles provide otherwise.

Bonus issue: sources

Free reserves, securities premium account, capital redemption reserve account

Revaluation reserve cannot be capitalised.

Bonus issue: conditions

Articles authorise + general meeting authorises on Board recommendation + no default on deposits/debt securities + no default on employee statutory dues + partly paid shares made fully paid + prescribed conditions

Bonus shares cannot be issued in lieu of dividend.

Preferential allotment

Special resolution + price fixed by registered valuer's valuation report

Under Section 62(1)(c); may be for cash or consideration other than cash.

Sweat equity: authority

Section 54(1)(a): issue must be authorised by a special resolution

An ordinary resolution or a board resolution alone is not enough.

Sweat equity: what the resolution must specify

Number of shares + current market price + consideration, if any + class or classes of directors or employees

Section 54(1)(b). Learn all four items; examiners test the list.

Sweat equity: class of shares

Shares must be of a class already issued

You cannot create a brand-new class through sweat equity.

Sweat equity: governing rules

Listed: SEBI regulations. Unlisted: prescribed rules

Section 54(1)(d). Pricing, limits and lock-in details sit in these rules, not in the section.

Sweat equity: rights

Same rights, limitations and restrictions as equity shares; rank pari passu

Section 54(2).

ESOP: authority

Section 62(1)(b): special resolution + prescribed conditions

Offer is to employees under a scheme of employees' stock option.

Rights issue offer period (for contrast)

Section 62(1)(a)(i): not less than 15 days (or lesser prescribed days) and not more than 30 days

Applies to offers to existing equity holders, not to ESOP or sweat equity.

Securities premium to be transferred

Premium per share × Number of shares issued = Amount credited to securities premium account

Premium = Issue price − Face value. Section 52(1) applies whether the issue is for cash or otherwise.

Permitted uses of securities premium (Section 52(2))

(a) fully paid bonus shares; (b) preliminary expenses; (c) expenses, commission or discount on issue of shares or debentures; (d) premium payable on redemption of redeemable preference shares or debentures; (e) buy-back under Section 68

Learn this as a closed list of five uses. The list is exhaustive.

Discount rule (Section 53)

Issue at discount = prohibited, and the shares are void

Exceptions: sweat equity under Section 54, and debt conversion to creditors under Section 53(2A).

Penalty for issue at discount (Section 53(3))

Penalty = lower of (amount raised through shares issued at discount) and ₹5,00,000; plus refund of money with 12% p.a. interest from date of issue

Applies to the company and every officer in default. The penalty is the lesser of the two amounts.

Sweat equity conditions (Section 54(1))

Class already issued + special resolution + resolution states number of shares, current market price, consideration (if any), and class of directors or employees

Listed companies follow SEBI regulations. Unlisted companies follow prescribed rules. Sweat equity shares rank pari passu with other equity shareholders.

Certificate as evidence (S.46(1))

Valid certificate = common seal (if any) OR 2 directors OR 1 director + Company Secretary (where appointed) → prima facie evidence of title

Prima facie, not conclusive.

Duplicate certificate (S.46(2))

Lost or destroyed → on proof; defaced, mutilated or torn → on surrender

Issue with intent to defraud: fine of 5 to 10 times face value, or ₹10 crores if higher.

Demat shares (S.46(4))

Depository record = prima facie evidence of beneficial owner's interest

No paper certificate needed.

Instrument of transfer (S.56(1))

Proper instrument, stamped, dated, executed by transferor and transferee, delivered within 60 days of execution, with certificate or letter of allotment

Does not apply to transfers between persons both holding beneficial interest in a depository. If lost or late, the Board may register on indemnity terms.

Partly paid shares (S.56(3))

Transferor alone applies → notice to transferee → no objection within 2 weeks

Transfer cannot be registered without that.

Delivery of certificates (S.56(4))

Subscribers: 2 months from incorporation | Allotment of shares: 2 months | Transfer or transmission: 1 month from receipt | Debentures: 6 months from allotment

Count from the date stated for each case.

Penalty (S.56(6))

Default in S.56(1) to (5) → penalty of ₹50,000 on the company and every officer in default

Penalty, not imprisonment.

Private company refusal (S.58(1))

Notice with reasons to transferor and transferee within 30 days of delivery

Applies to private company limited by shares.

Appeal to Tribunal (S.58(3) and (4))

Private: within 30 days of notice, or 60 days from delivery if no notice | Public: within 60 days of refusal, or 90 days from delivery if no intimation

Public company: if it without sufficient cause refuses to register the transfer within 30 days of delivery, the transferee may appeal within 60 days of refusal, or within 90 days from delivery if no intimation has been received.

Tribunal order (S.58(5) and (6))

Dismiss, or direct registration within 10 days, or direct rectification plus damages | Contravention: imprisonment 1 to 3 years and fine ₹1 lakh to ₹5 lakhs

Learn both the order options and the punishment.

Sources of buy-back (Section 68(1))

Free reserves | Securities premium account | Proceeds of issue of any shares or other specified securities

No buy-back of any kind of shares or securities out of the proceeds of an earlier issue of the same kind. Free reserves includes securities premium account (Explanation II).

Size limit (Section 68(2)(c))

Buy-back ≤ 25% of (paid-up capital + free reserves)

For buy-back of equity shares in a financial year, the 25% is applied to total paid-up equity capital in that year.

Board-resolution limit (Section 68(2)(b) proviso)

Buy-back ≤ 10% of (total paid-up equity capital + free reserves)

If within this limit, Board resolution at a meeting is enough and no special resolution is needed. Articles must still authorise buy-back.

Debt-equity test (Section 68(2)(d))

(Secured + unsecured debts owed after buy-back) ≤ 2 × (paid-up capital + free reserves)

The Act measures the debts owed after the buy-back against twice the paid-up capital and free reserves. It does not say that capital and reserves are reduced by the buy-back amount. The usual exam convention is to reduce them by the buy-back amount, unless the question says otherwise. The Central Government may notify a higher ratio for a class of companies.

Time gaps and deadlines

Complete within 1 year; no new offer within 1 year of closure of previous offer; destroy securities within 7 days; no further issue of same kind for 6 months; return within 30 days

One year runs from the date of the special resolution or Board resolution. The 7 days run from the last date of completion. The 30-day return goes to the Registrar (and SEBI for listed companies).

Penalty for buy-back default (Section 68(11))

Company: ₹1,00,000 to ₹3,00,000; every officer in default: ₹1,00,000 to ₹3,00,000

Fine only; imprisonment was omitted in 2020.

Conversion option

Convertible debentures (wholly or partly) → special resolution at a general meeting

Section 71(1) and its proviso. The option is exercised at the time of redemption.

No voting rights

No company shall issue debentures carrying any voting rights

Section 71(2). This is a key point of difference from shares.

Debenture redemption reserve

DRR created out of profits available for payment of dividend; used only to redeem debentures

Section 71(4). The quantum is as per the rules, so write 'as prescribed'. Do not quote a percentage unless you are sure.

Debenture trustee requirement

Prospectus, or offer/invitation to the public or to its members exceeding 500 → appoint trustee(s) before the issue or offer

Section 71(5). Conditions of appointment are as prescribed.

Trustee exemption from liability

Exemption agreed by majority holding ≥ 3/4 in value of total debentures, at a meeting held for the purpose

Section 71(7) proviso. A clause exempting a trustee from breach of trust liability is otherwise void.

Tribunal powers

Insufficient assets → trustee petitions, restrictions on further liabilities (71(9)); default on redemption or interest → redemption order (71(10))

Under 71(10), the application can be by any or all debenture-holders or the trustee.

Specific performance

A contract to take up and pay for debentures can be enforced by a decree for specific performance

Section 71(12).

Quick revision

• Share capital of a company limited by shares is of two kinds: equity and preference.
• Equity share capital means all share capital that is not preference share capital.
• Equity holders vote on every resolution, and a poll vote is in proportion to paid-up equity capital.
• Preference holders vote only on resolutions directly affecting their rights, winding up, or repayment or reduction of capital.
• If preference dividend is unpaid for two years or more, that class can vote on all resolutions.
• Premium on shares goes to the securities premium account, which can be used only for the purposes the Act lists.
• Buy-back can be from free reserves, securities premium or proceeds of a different kind of share issue.
• Buy-back needs authority in the articles and a special resolution, unless it is 10% or less and the Board authorises it.
• Buy-back must be 25% or less of paid-up capital and free reserves, and post buy-back debt must be at most twice paid-up capital and free reserves.
• Shares must be fully paid, and the buy-back must be completed within one year of the resolution.
• Bought-back shares must be extinguished and destroyed within seven days of completion.
• No further issue of the same kind of shares for six months after buy-back, except bonus or discharge of existing obligations; no new offer within one year of the last offer closing.

Common mistakes

• Saying there are three kinds of share capital: equity, preference and differential voting. Fix: Section 43 gives two kinds. Differential rights fall within equity share capital, as sub-clause (ii) of clause (a).
• Saying preference shareholders can never vote. Fix: They vote on resolutions directly affecting their rights, winding up, and repayment or reduction of capital. They vote on all resolutions if the dividend on their class is unpaid for two years or more.
• Treating the 90 days as running from the date of the prospectus. Fix: Remember it runs from the date the copy is delivered to the Registrar under Section 26(4).
• Saying the 30-day period for refund runs from the closing of the issue, or that refund is due the moment the minimum is missed. Fix: Section 39(3) counts thirty days from the date of issue of the prospectus, or such other period as SEBI specifies. Until then allotment is barred. If the minimum is still not subscribed when the period lapses, the amount must be returned in the prescribed time and manner.
• Saying private placement can be made to any number of persons. Fix: Remember: not more than fifty (or higher prescribed number) in a financial year, excluding QIBs and ESOP employees. Breach makes it a public offer.
• Allowing renunciation in a private placement offer. Fix: Private placement offer carries no right of renunciation. In rights issue it is included unless the articles say otherwise.
• Saying sweat equity needs only a board resolution. Fix: Remember Section 54(1)(a): a special resolution is mandatory.
• Leaving out items the sweat equity resolution must specify. Fix: Use the list: number of shares, current market price, consideration if any, class of directors or employees.
• Saying securities premium can be used to pay dividend. Fix: Section 52(2) gives a closed list. Dividend is not on it. The account is treated as paid-up share capital for reduction purposes.
• Saying a discounted issue is merely irregular or voidable. Fix: Section 53(2) says any share issued at a discount is void. Also add the penalty and refund with interest.

Exam tips

• Begin every answer with the section number and its exact rule. Section 43 for kinds of capital and Section 47 for voting are the ones to cite from memory.
• In a case study, mark the type of holder first, then the subject of the resolution, then check the two-year unpaid dividend exception.
• Write the definition of preference capital with both rights: dividend and repayment of capital. Use the words carries or would carry. Missing one loses marks.
• For MCQs, watch for absolute words such as always and never about preference voting. They are usually wrong.
• Define authorised, issued, subscribed, called-up and paid-up capital in one line each and show their order.
• Learn the numbers as a set: 90 days (validity), 30 days (refund trigger), 5% (application money), 6 months (offer for sale), ₹50,000 to ₹3,00,000 (fine). Most MCQs test one of these.
• In scenario questions, count dates carefully and write the count in your answer. Step marks go to the working.
• Always write both limbs of minimum subscription: subscribed and received. Examiners look for both.