Corporate and Other Laws · Incorporation of Company and Matters Incidental Thereto

Share Capital, Allotment and Related Matters for CA Intermediate

Updated 4 October 2026 · Fact-checked

Share capital of a company limited by shares is of two kinds: equity and preference (Section 43). Allotment of securities offered to the public needs the minimum subscription and application money (Section 39). Sweat equity needs a special resolution (Section 54). Buy-back must meet the conditions in Section 68. Answer by stating the provision, applying the facts, then concluding.

Understand Share Capital, Allotment and Related Matters

A company limited by shares raises money by issuing securities. The law fixes what kinds of share capital exist, when shares can be allotted, and who can get special types such as sweat equity.

Under Section 43, share capital is of two kinds: equity share capital and preference share capital. Equity is with voting rights, or with differential rights as to dividend, voting or otherwise as per the prescribed rules. Equity is defined by exclusion: all share capital that is not preference capital. Preference capital carries a preferential right to dividend (a fixed amount or a fixed rate) and a preferential right to repayment of capital on winding up or repayment of capital. Even if preference shares also participate in surplus dividend or surplus assets, they are still treated as preference capital.

Section 39 governs allotment of securities offered to the public. The company cannot allot until the minimum amount stated in the prospectus has been subscribed and the sums payable on application for that amount have been received by cheque or other instrument. The application money cannot be less than 5% of the nominal amount, or such other percentage or amount as SEBI specifies. If the minimum is not subscribed and application money not received within 30 days from the date of issue of the prospectus (or the period SEBI specifies), the amount received must be returned. After any allotment, a company having share capital must file a return of allotment with the Registrar.

Section 54 allows sweat equity shares: shares issued to directors or employees at a discount or for consideration other than cash, for know-how or intellectual property rights. The section itself sets the conditions: the shares must be of a class already issued, a special resolution must authorise the issue, and the resolution must specify the number of shares, the current market price, the consideration (if any) and the class of directors or employees. Listed companies follow SEBI regulations; unlisted companies follow the prescribed rules. Sweat equity shares rank pari passu with other equity shares.

Section 68 lets a company buy back its own shares or other specified securities, subject to conditions on source of funds, approvals, limits and timelines. Section 70 lists situations where buy-back is prohibited. These are favourite topics for case-study questions.

Key rules to remember

Kinds of share capital (Section 43): Share capital = Equity (voting, or differential rights) + Preference; Equity means all share capital that is not preference capital. Preference carries preferential dividend and preferential repayment rights.
Minimum subscription and application money (Section 39(1)): No allotment until minimum amount in prospectus is subscribed AND application sums for it are received; Payment must be by cheque or other instrument.
Minimum application money (Section 39(2)): Application money ≥ 5% of nominal amount (or other SEBI-specified percentage or amount); This is a floor per security.
Refund trigger (Section 39(3)): Minimum not subscribed within 30 days of prospectus issue date → return amount received; The period may be a different one specified by SEBI. Time and manner of return are as prescribed.
Return of allotment (Section 39(4)): Any allotment by a company having share capital → file return with Registrar; Applies to every allotment, not only public issues.
Penalty (Section 39(5)): ₹1,000 per day of default, or ₹1,00,000, whichever is less; Applies to default under sub-section (3) or (4), on the company and every officer in default. Each default attracts its own penalty.
Sweat equity conditions (Section 54(1)): Class already issued + special resolution + resolution states number, market price, consideration, class of directors/employees + SEBI regulations (listed) or prescribed rules (unlisted); Sweat equity shares rank pari passu with other equity shares (Section 54(2)).
Buy-back sources (Section 68(1)): Free reserves, or securities premium account, or proceeds of issue of shares or other specified securities; No buy-back of any kind of shares out of proceeds of an earlier issue of the same kind. Free reserves include securities premium.
Buy-back approval (Section 68(2)(b)): Special resolution at general meeting; Board resolution suffices if buy-back ≤ 10% of total paid-up equity capital and free reserves; The articles must also authorise the buy-back.
Buy-back size limit (Section 68(2)(c)): Buy-back ≤ 25% of (paid-up capital + free reserves); The proviso changes the base for equity shares. For a buy-back of equity shares in a financial year, the 25% is worked on the total paid-up equity capital in that financial year.
Debt-equity after buy-back (Section 68(2)(d)): (Secured + unsecured debts) after buy-back ≤ 2 × (paid-up capital + free reserves); Central Government may notify a higher ratio for a class of companies.
Other buy-back conditions: Shares fully paid-up; no fresh offer within 1 year of closure of preceding offer; completion within 1 year of resolution; destroy shares within 7 days of completion; no further issue of the same kind of shares or other securities for 6 months; file return with Registrar and SEBI within 30 days of completion (SEBI filing only for listed companies); The 6-month bar is on a further issue of the same kind of shares or other securities. Exceptions: bonus issue and discharge of subsisting obligations such as conversion of warrants, stock options, sweat equity, preference shares or debentures into equity.
Buy-back default (Section 68(11)): Company: fine ₹1,00,000 to ₹3,00,000; every officer in default: fine ₹1,00,000 to ₹3,00,000; Imprisonment was omitted by the 2020 amendment.

How to solve Share Capital, Allotment and Related Matters questions

Use this method for any question on share capital, allotment, sweat equity or buy-back.

1Identify the section being tested: kind of capital (43), allotment (39), sweat equity (54) or buy-back (68/70).
2Write the rule in one or two lines in plain words, with the section number.
3List the facts given in the question: amounts, percentages, dates, type of resolution, listed or unlisted.
4Test each fact against each condition of the section, one condition at a time. Do the arithmetic where needed.
5For buy-back, also check the Section 70 prohibitions: buy-back through a subsidiary or investment company, or default in deposits, debentures, dividends or term loans.
6State the conclusion clearly: allowed or not allowed, valid or invalid, and the consequence (refund, penalty, fine).
7If a rule is not in the given text, state it in plain words without a section number.

Quickest way: Condition checklist for MCQs and written answers

When to use it: Use when you have 2 to 5 minutes per question and the question lists several facts.

For MCQs, look for the number being tested: 5%, 30 days, 10%, 25%, 2 times, 1 year, 7 days, 6 months, 30 days for return.
Eliminate options that change a number or swap special resolution with Board resolution.
For written answers, use a three-line format: Provision, Facts applied, Conclusion.
Show every calculation (25% limit, 2:1 debt ratio) on its own line so you earn step marks.
Close with the penalty or consequence if the question hints at default.

Common mistakes in Share Capital, Allotment and Related Matters

Saying Section 39 minimum application money is 10% of nominal value.
Students confuse it with the 10% limit for Board-approved buy-back.
Fix: Remember 5% of nominal amount (or other SEBI-specified percentage or amount) for application money.
Treating participating preference shares as equity.
The right to share in surplus dividend or surplus assets looks like equity.
Fix: Section 43 deems such capital to be preference capital despite those extra rights.
Saying a Board resolution is always enough for buy-back.
Students remember the 10% exception but forget its limits.
Fix: A Board resolution works only if the buy-back is 10% or less of total paid-up equity capital and free reserves. Otherwise a special resolution is needed, and the articles must authorise buy-back.
Forgetting that sweat equity must be of a class already issued.
Students focus only on the special resolution.
Fix: Check the three items: class already issued, special resolution, and the contents of the resolution.
Mixing up 30 days for refund of application money and 30 days for the buy-back return.
Both use the same number for different events.
Fix: Section 39(3): 30 days from the date of issue of prospectus. Section 68(10): 30 days from completion of buy-back, with the return filed with the Registrar (and with SEBI for listed companies).

Worked examples

Example 1

A company has paid-up equity capital of ₹40,00,000, no preference capital, and free reserves of ₹60,00,000. Its secured and unsecured debts are ₹1,50,00,000 before buy-back. It proposes to buy back equity shares worth ₹20,00,000 out of free reserves, using cash, so debts remain unchanged. Can it proceed, and what is the maximum buy-back?

Show the solution

There is no preference capital, so total paid-up capital equals paid-up equity capital (₹40,00,000). Paid-up capital plus free reserves = ₹40,00,000 + ₹60,00,000 = ₹1,00,00,000. This figure is used for the 10% approval test and as the starting point for the debt test.
The size limit, the Board-approval threshold and the debt test are three separate tests. Each is checked on its own below.
Size limit (Section 68(2)(c)): the company is buying back equity shares, so under the proviso the 25% is worked on total paid-up equity capital in that financial year. 25% × ₹40,00,000 = ₹10,00,000. The proposed buy-back of ₹20,00,000 exceeds this limit, so it breaches Section 68(2)(c).
Debt test (Section 68(2)(d)): the buy-back is out of free reserves, so free reserves fall by ₹20,00,000 to ₹40,00,000. Capital plus free reserves after buy-back = ₹40,00,000 + ₹40,00,000 = ₹80,00,000. Maximum debt allowed = 2 × ₹80,00,000 = ₹1,60,00,000. Debt of ₹1,50,00,000 is within this, so the debt test is satisfied. But passing this test does not cure the size-limit breach.
Approval test (Section 68(2)(b) proviso): the Board can approve a buy-back of 10% or less of total paid-up equity capital and free reserves. 10% × ₹1,00,00,000 = ₹10,00,000. A ₹20,00,000 buy-back exceeds this, so a Board resolution alone would not be enough and a special resolution would be needed. A special resolution cannot cure the breach of the size limit.
Maximum permissible buy-back: let the buy-back be x (in ₹ lakh). The size limit gives x ≤ 10. The debt test needs 150 ≤ 2 × (100 − x), which gives x ≤ 25. The lower figure governs, so the maximum is ₹10,00,000. Check at ₹10,00,000: capital plus free reserves after buy-back = ₹90,00,000, and 2 × ₹90,00,000 = ₹1,80,00,000, which is more than the debt of ₹1,50,00,000, so the debt test is met.
Note that the 25% size limit (₹10,00,000, worked on paid-up equity capital of ₹40,00,000) and the 10% Board-approval threshold (₹10,00,000, worked on paid-up equity capital plus free reserves of ₹1,00,00,000) are separate tests with different bases. They happen to give the same figure here only because of the numbers chosen. Do not treat them as linked.
A buy-back of ₹10,00,000 meets the size limit and is also 10% or less of ₹1,00,00,000, so a Board resolution can authorise it, provided the articles authorise buy-back. The other conditions must still be met, including fully paid-up shares, the declaration of solvency, completion within one year and destruction of shares within seven days of completion.

Answer: No, it cannot proceed as proposed. The ₹20,00,000 buy-back of equity shares exceeds the size limit of ₹10,00,000 (25% of paid-up equity capital of ₹40,00,000), so it breaches Section 68(2)(c). The debt test is met (₹1,50,00,000 against an allowed ₹1,60,00,000), but that does not cure the breach. The maximum buy-back is ₹10,00,000. At that size the debt test is still met. A Board resolution is also enough, because ₹10,00,000 is within 10% of paid-up equity capital and free reserves (₹10,00,000), provided the articles authorise it. The 25% limit and the 10% threshold are separate tests that give the same figure here by coincidence.

Example 2

A company issued a prospectus on 1 March. By 31 March, thirty days after issue, the minimum amount stated in the prospectus had not been subscribed. The company still allotted shares on 2 April to those who had applied. Advise on the legality, and state the consequence if the company also fails to refund the money and fails to file a return of allotment.

Show the solution

Provision: Section 39(1) bars allotment of securities offered to the public unless the minimum amount stated in the prospectus has been subscribed and the application sums for it received.
Facts: the minimum was not subscribed within 30 days from the date of issue of the prospectus (1 March to 31 March), unless SEBI specified a different period. So the allotment on 2 April contravenes Section 39(1).
Refund: because the 30 days (or the SEBI-specified period) have lapsed without the minimum being subscribed, Section 39(3) requires the amount received to be returned within the time and manner prescribed.
Return of allotment: Section 39(4) requires a company having share capital to file a return of allotment with the Registrar after any allotment. This is a separate obligation from the refund.
Penalty: under Section 39(5), default under sub-section (3) or (4) makes the company and its officer in default liable to a penalty, for each default, of ₹1,000 for each day the default continues or ₹1,00,000, whichever is less. Failure to refund and failure to file the return are two separate defaults, so the penalty applies to each default separately.

Answer: The allotment on 2 April contravenes Section 39(1), because the minimum subscription was not received, and the money received is due for refund under Section 39(3). Failure to refund and failure to file the return of allotment are separate defaults. For each default, Section 39(5) makes the company and its officer in default liable to a penalty of ₹1,000 for each day of default or ₹1,00,000, whichever is less.

Exam tips

Memorise the numbers in Sections 39, 54 and 68. Examiners build MCQs by changing one number.
In case studies, compute the 10% and 25% limits and the 2:1 debt ratio explicitly and show the figures.
Answer in provision-facts-conclusion format. Name the section only when you are sure of it.
For buy-back, mention Section 70 prohibitions when the facts hint at default in dividends, deposits, debentures or loans, or a buy-back through a subsidiary.
Remember that sweat equity shares rank pari passu with other equity shares; this is a common one-line MCQ.

Practice questions from Incorporation of Company and Matters Incidental Thereto

Share Capital, Allotment and Related Matters: frequently asked questions

What is the minimum application money on shares under Section 39?

It must not be less than 5% of the nominal amount of the security, or such other percentage or amount as SEBI specifies by regulations. Allotment also needs the minimum subscription stated in the prospectus.

What conditions apply to issue of sweat equity shares?

The shares must be of a class already issued, and a special resolution must authorise the issue. The resolution must state the number of shares, current market price, consideration if any, and the class of directors or employees. Listed companies follow SEBI regulations and unlisted companies follow the prescribed rules.

What are the main conditions for buy-back under Section 68?

The articles must authorise it, and a special resolution is needed unless a Board resolution covers a buy-back of up to 10% of paid-up equity capital and free reserves. The buy-back must be within 25% of the aggregate of paid-up capital and free reserves. For a buy-back of equity shares in a financial year, the 25% is worked on the total paid-up equity capital of that year. Debts after buy-back must be at most twice paid-up capital and free reserves, the shares must be fully paid-up, and the buy-back must be completed within one year of the resolution.

What are the two kinds of share capital?

Section 43 says a company limited by shares has equity share capital and preference share capital. Equity is all capital that is not preference. Preference carries preferential rights to dividend and to repayment of capital.