Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Corporate and Economic Laws

Companies Act 2013: Incorporation and Share Capital for CA Final IBS

Updated 5 October 2026 · Fact-checked

This topic covers how a company is formed and how it raises and reduces capital under the Companies Act 2013. Solve case questions by identifying the type of company, the document or event involved, the rule with its conditions, then applying the facts and stating a conclusion.

Understand Companies Act 2013: Incorporation and Share Capital

A company is a separate legal person. It is formed by registering with the Registrar of Companies. The MOA (Memorandum of Association) states the company's name, registered office state, objects, liability of members and capital. The AOA (Articles of Association) sets the internal rules for running it. The MOA is the charter. The AOA is subordinate to the MOA and to the Act.

Once incorporated, a company can raise money from the public or from a select group. A public offer is made through a prospectus, which must contain the information required by the Act and the rules. Misstatements in it can lead to civil and criminal liability for those responsible. A private placement is an offer to a select group of persons, made through a private placement offer letter and subject to limits on the number of persons and to rules on payment and records.

After an offer, shares are allotted. Allotment must follow the conditions for the offer, such as minimum subscription for public issues and money received through banking channels. Share capital can be equity or preference. Preference shares carry a preferential right to dividend and to repayment of capital on winding up, and they have a maximum redemption period under the Act.

Capital can also be altered or reduced. Alteration includes consolidation, sub-division and conversion of shares into stock, as permitted by the Act and the AOA. A buyback lets a company repurchase its own shares from its free reserves, securities premium or the proceeds of a different kind of share issue. It is subject to limits, board or shareholder approval and a cooling period between buybacks.

In the IBS case study, the facts are usually a growing company that issues shares, restructures capital or buys back shares. Your task is to spot which rule is triggered, check its conditions, and give a clear conclusion. Often you also link the answer to accounting, tax or strategy.

Key rules to remember

Buyback source of funds: Buyback only out of: free reserves, securities premium account, or proceeds of an earlier issue of shares or other specified securities (not the same kind of shares being bought back); A buyback cannot be funded from the proceeds of an earlier issue of the same kind of shares or the same kind of other specified securities.
Buyback size limit: Two tests, both to be met: (1) total buyback ≤ 25% of (total paid-up capital + free reserves); (2) equity-share buyback in a financial year ≤ 25% of total paid-up equity capital; The total test uses a base that includes free reserves. The equity-share test uses paid-up equity capital only. Free reserves are not part of the equity base. Board resolution is enough for a buyback up to 10% of the aggregate of total paid-up capital and free reserves, provided the AOA authorises it; above that, a special resolution is required.
Post-buyback debt-equity ratio: Debt ÷ (paid-up capital + free reserves) ≤ 2 ÷ 1 after the buyback; A different ratio can be notified for certain classes of companies.
Buyback cooling period: No further offer of buyback within one year from the date of closure of the preceding offer; Also, no issue of the same kind of shares or other specified securities is allowed within 6 months of the buyback, except bonus shares or shares issued in discharge of subsisting obligations, such as conversion of warrants, stock options, sweat equity or conversion of preference shares or debentures into equity.
Completion of buyback: Buyback must be completed within one year from the date of passing the special resolution or board resolution; After completion, the bought-back shares must be extinguished and physically destroyed within the prescribed time.
Private placement limit: Offer or invitation to not more than 200 persons in aggregate in a financial year (excluding qualified institutional buyers and employees under ESOP); Offers of different kinds of securities in the same financial year are counted together, not separately. Payment must come through banking channels from the subscriber's own account.
Minimum and maximum members: Private company: minimum 2, maximum 200 members. Public company: minimum 7 members. One Person Company: 1 member; The 200 limit excludes present employees who are members and former employees who were members while employed and continue to be members. Joint holders are treated as a single member.
Preference share redemption period: Preference shares must be redeemed within a maximum of 20 years from issue; for infrastructure projects, longer terms are allowed, with at least 10% redeemed annually from the 21st year on a proportionate basis, as per the rules; Preference shares can be redeemed only out of profits available for dividend or the proceeds of a fresh issue made for redemption.

How to solve Companies Act 2013: Incorporation and Share Capital questions

Use this sequence on any incorporation or share capital question in a case study.

1Identify the type of company: private, public, OPC, listed or unlisted. Many rules depend on this.
2Identify the event: incorporation, change in MOA or AOA, public offer, private placement, allotment, alteration, reduction or buyback.
3State the rule in plain words with its exact conditions, such as the approvals, limits and time periods.
4Match each fact from the case to a condition. Mark which conditions are met and which are not.
5Check source of funds, resolution type and filing requirements, because cases often hide a breach there.
6Write a clear conclusion: the action is valid or invalid, and what the company must do to comply.
7If the case links to accounting or tax, add one line on the effect, such as the entry for the buyback or the premium account.

Quickest way: Rule, condition, fact, conclusion in four lines

When to use it: Use when time is short, especially for MCQs and 4-5 mark descriptive parts.

Name the company type and the event in the first line.
Write the rule with its numerical limit or approval requirement.
Compute the limit if numbers are given: 25% or 10% of the right base, or the 2:1 ratio.
Conclude in one line with consequence or remedy.

Common mistakes in Companies Act 2013: Incorporation and Share Capital

Using the wrong base for the 25% buyback limit, such as leaving free reserves out of the total limit or the 10% board limit, or adding free reserves to the equity-share limit.
Students see 25% and apply one base to every test, forgetting that the total limit uses capital plus free reserves while the equity-share limit uses paid-up equity capital only.
Fix: Total limit: 25% of (total paid-up capital + free reserves). Equity-share limit: 25% of paid-up equity capital. Write each base on its own line and check both. The 10% board limit uses the total base, which includes free reserves, and a buyback above it needs a special resolution.
Treating private placement and a public offer as the same, counting each kind of security separately, or counting 200 persons across all years.
Both involve inviting subscriptions, so the differences blur, and the 200 limit is often wrongly applied security by security.
Fix: Remember: the public offer uses a prospectus to the public; private placement is to a select group, with an overall limit of 200 persons in a financial year across all offers and kinds of security, and a private placement offer letter.
Saying the AOA can override the MOA.
Students focus on the AOA being detailed and practical.
Fix: State that the AOA is subordinate to the MOA and the Act. Any conflicting clause is void to that extent.
Forgetting the cooling-off and completion timelines in a buyback.
Students learn the percentage limits and skip the time rules.
Fix: Add a one-line checklist: complete within one year, no further buyback for one year, no same-kind issue within 6 months, with the stated exceptions.
Funding a buyback from proceeds of the same kind of shares issued earlier.
The rule on source of funds is stated negatively and is easy to misread.
Fix: List the three permitted sources. Then check whether the case funds the buyback from any source outside them.
Ignoring the type of resolution needed.
Students jump to the limit and forget who must approve.
Fix: State the resolution type next to every action: board for smaller buybacks within the stated limit if the AOA authorises it, special resolution otherwise.

Worked examples

Example 1

Case: Zenith Ltd, an unlisted public company, has paid-up equity capital of ₹40,00,000, which is its only paid-up capital, and free reserves of ₹60,00,000. Its total paid-up capital plus free reserves is therefore ₹1,00,00,000. The AOA authorises buyback. The board wants to buy back equity shares worth ₹12,00,000 by board resolution only, from free reserves. Secured and unsecured debt is ₹1,20,00,000. Advise whether this is allowed.

Show the solution

Identify the event: a buyback of equity shares by an unlisted public company, funded from free reserves, which is a permitted source.
Check the board resolution limit: 10% of (total paid-up capital plus free reserves) = 10% × ₹1,00,00,000 = ₹10,00,000.
The proposed buyback of ₹12,00,000 is above ₹10,00,000, so a board resolution alone is not enough. A special resolution would be needed.
Check the total size limit: 25% of (total paid-up capital plus free reserves) = 25% × ₹1,00,00,000 = ₹25,00,000. The buyback of ₹12,00,000 is within this limit.
Check the equity-share limit: 25% of paid-up equity capital = 25% × ₹40,00,000 = ₹10,00,000. Free reserves are not part of this base. The buyback of ₹12,00,000 exceeds ₹10,00,000, so this limit is breached. A special resolution does not cure this breach.
Check the debt-equity ratio after the buyback: paid-up capital plus free reserves = ₹1,00,00,000 − ₹12,00,000 = ₹88,00,000. Maximum debt at 2:1 = ₹1,76,00,000. Debt of ₹1,20,00,000 is within this.

Answer: The buyback of ₹12,00,000 is not permissible. It meets the 25% test on the total base (₹25,00,000) and the post-buyback debt-equity ratio (debt ₹1,20,00,000 against a maximum of ₹1,76,00,000), but it exceeds the equity-share limit of ₹10,00,000 (25% of ₹40,00,000), and a special resolution cannot cure that. Zenith Ltd must reduce the buyback to ₹10,00,000 or less. At that size it also fits within the 10% board limit of ₹10,00,000, so a board resolution is enough, as the AOA authorises buyback. Other conditions must also be met, such as completing the buyback within one year.

Example 2

Case: Orchid Pvt Ltd plans to raise funds in one financial year by offering equity shares to 150 identified investors, and separately preference shares to 120 other identified investors. All will pay by cheque from their own bank accounts. A director says this breaches the private placement limit because 270 persons are invited in total. Evaluate the director's view.

Show the solution

Identify the event: private placement of two kinds of securities by a private company, not an offer to the public.
State the rule: a private placement offer may be made to not more than 200 persons in aggregate in a financial year. Offers of different kinds of securities are counted together. Qualified institutional buyers and employees under ESOP are excluded from the count.
Apply to facts: equity shares are offered to 150 persons and preference shares to 120 other persons. The total is 150 + 120 = 270 persons.
Compare with the limit: 270 is more than 200, so the limit is breached by 70 persons.
Check payment: money is to be received through banking channels from the subscribers' own accounts, which meets the payment condition. But meeting this condition does not cure the breach of the person limit.

Answer: The director's view is correct. The 200-person limit is counted in aggregate for the financial year and not separately for each kind of security, so 150 + 120 = 270 persons exceeds it. Orchid Pvt Ltd must reduce the total number of persons offered to 200 or fewer (excluding QIBs and ESOP employees), or use a different route such as a public offer.

Exam tips

Case scenarios hide the breach in one detail, such as the source of funds, the resolution type or the count of persons. Underline numbers as you read.
Always compute the limit with the right base. Write the base on its own line so the marker sees the logic.
Write answers in rule, fact, conclusion form. Do not copy section numbers unless you are certain of them.
In the IBS paper, link the company law answer to related areas, such as the accounting entry for buyback or the tax effect on the company, in one line each.
Since the paper is open book for IBS, use the Act and rules to confirm limits, but prepare a one-page summary so you do not lose time searching.

Practice questions from Corporate and Economic Laws

Companies Act 2013: Incorporation and Share Capital in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Companies Act 2013: Incorporation and Share Capital: frequently asked questions

What is the difference between private placement and a public offer?

A public offer invites the public through a prospectus and must meet detailed disclosure rules. A private placement is made to a select group through a private placement offer letter, with a limit of 200 persons in aggregate in a financial year, counting all kinds of security together, and payment through banking channels.

Can a company buy back its own shares at any time?

No. A buyback needs authority in the AOA, the right approval, a permitted source of funds and compliance with the size limits and debt-equity ratio. It must be completed within one year, and there is a one-year gap before another buyback offer.

What is the difference between MOA and AOA?

The MOA states the fundamental terms of the company, such as name, objects and liability. The AOA contains the internal rules for management. The AOA is subordinate to the MOA and the Act.

How should I answer Companies Act questions in the IBS case study?

Identify the company type and event, state the rule with its conditions, match each case fact to a condition and conclude. Keep it short and structured, and add the link to other subjects only if the case points to it.