Key Terms of Companies Act 2013
- Blog|Company Law|
- 15 Min Read
- By Taxmann
- Last Updated on 15 September, 2022
FAQ 1. What is the difference between Reserve Capital vs. Capital Reserve?
Following are the main points of distinction between reserve capital & capital reserve:
|Points||Reserve Capital||Capital Reserve|
|Meaning||Reserve capital is that part of the uncalled capital of a company which the limited company has decided by special resolution not to call except in the event and for the purpose of the company being wound up.||Capital reserves are created out of capital profit. Capital Reserve may be statutory capital reserve or non statutory capital reserve.|
|Need of Creation||Creation of reserve capital is not mandatory.||Creation of capital reserve is mandatory in certain cases.|
|Balance Sheet Disclosure||There is no need to disclose reserve capital in balance sheet.||Capital reserves are disclosed in balance sheet under the head “Reserves & Surplus”.|
|Writing Off Capital Losses||Reserve Capital cannot be used to write-off capital losses.||Capital reserves can be used to write-off capital losses.|
|Created out of||Authorized capital||Capital profits|
|Specific condition||Special Resolution should be passed at AGM||No such conditions|
FAQ 2. What is the difference between Sweat Equity and the Issue of Capital on a Preferential Basis?
|Points||Sweat Equity Shares||Issue of capital on preferential basis|
|Meaning||Sweat equity Shares mean equity shares by a company to its employees or directors at a discount or for consideration, other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called.||A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 which is neither a rights issue nor a public issue.|
|To Whom Issued||Sweat Equity Shares are issued to employees or directors.||A preferential issue is an issue to a select group of persons.|
|How Issued||Sweat equity Shares are issued at a discount or for consideration, other than cash.||A preferential issue at a par or at premium.|
FAQ 3. What is the difference between Nominal Capital vs. Subscribed Capital?
- Nominal capital: The amount of capital with which a company is registered with the Registrar of companies (body responsible for registration of companies). It is the maximum amount of capital which a company can raise through shares i.e. shared capital can be maximum upto the authorized capital and not beyond. Due to this reason companies are registered with such authorized capital which is well above their current needs of financing so that if more is needed in future then it is easily possible. Authorized capital is also called registered capital or authorized capital.
- Section 2(8) of the Companies Act, 2013: “Authorised capital” or “nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company;
- Subscribed capital: The amount of capital (out of authorized capital) for which company has received applications from the general public who are interested in buying shares. If this term is too technical to be understood then subscription is simply an application in which investors expresses his interest to buy shares in the company.
Section 2(86) of the Companies Act, 2013: “Subscribed capital” means such part of the capital which is for the time being subscribed by the members of a company.
FAQ 4. What is the difference between Bonus Shares vs. Right Shares?
|Basis of Distinction||Bonus Shares
(Section 63 of the Companies Act, 2013)
(Section 62 of the Companies Act, 2013)
|Meaning||Bonus shares are shares issued by a company free of cost to its existing shareholders on a pro rata basis out of free reserve.||When company issues further shares to existing shareholder in ratio of their holding such issue is known as right issue.|
|Cash Flow||In case of bonus issue there is no cash flow.||In case of right issue there is cash inflow to the company.|
|Consideration||Company does not receive any consideration in case of bonus issue.||Company receives consideration as shares are issued against cash.|
|Authorization||Bonus issue is made on the recommendation of the Board and authorization from general meeting of the company.||In case of right issue authorization from members through ordinary or special resolution is necessary.|
|Market Value||Issue of bonus shares does not affect the market value of the Company.||Right Issue of shares affects the market value of the Company.|
FAQ 5. What is the difference between Sweat Equity Shares and Employees Stock Option Scheme?
Following are the main points of distinction between sweat equity shares & ESOS:
|Basis of Distinction||Sweat Equity Shares||ESOS|
|Meaning||Sweat Equity Shares means equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.||Employees Stock option means the option given to the whole-time directors, officers or employees of a company, which gives such directors, officers or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.|
|Issue||Sweat Equity shares can be issued at discounted price or free for know-how and services to the Company.||Employee Stock option can be issued with conversion right at a pre-determined price. The issue price can be less than the intrinsic value of the shares.|
|Consideration||The consideration can be partly cash and partly IPRs/value addition or fully non-cash consideration.||The consideration has to be paid in cash.|
|Lock-in-period||Sweat equity shares have compulsory lock-in-period of 3 years.||Lock-in-period is not specified for the ESOS.|
FAQ 6. What are Sweat Equity Shares?
- According to section 2(88), sweat equity shares mean such equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.
- According to Explanation to rule 8(1) of Companies (Share Capital and Debentures) Rules, 2014:
For the purposes of this rule- The expressions ‘‘Employee’’ means—
(a) a permanent employee of the company who has been working in India or outside India;
(b) a director of the company, whether a whole time director or not; or
(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.
Section 54(1) provides that notwithstanding anything contained in Section 53, a company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:
(i) the issue has been authorized by a special resolution passed by the company in the general meeting.
(ii) the following are clearly specified in the resolution: (a) number of shares (b) current market price; (c) consideration, if any; and (d) class or classes of directors or employees to whom such equity shares are to be issued.
(iii) Where shares are listed on a recognized stock exchange, the company issuing sweat equity shares should comply with the regulations made in this behalf by SEBI.
(iv) a company whose shares are not so listed should issue sweat equity shares in compliance with the rules made in this behalf by the Central Government i.e., Companies (Share Capital and Debentures) Rules, 2014.
FAQ 7. Is Bonus issue viewed as a ‘right issue’?
- Rights Issue is an issue of capital to be offered to the existing shareholders of the company through a letter of offer
- Bonus Shares: When a company is prosperous and accumulates large distributable profits, it converts these accumulated profits into capital and divides the capital among the existing members in proportion to their entitlements. Members do not have to pay any amount for such shares. A company may, if its Articles provide, capitalize its profits by issuing fully-paid bonus shares
- In case of bonus issue, reserves which belong to shareholder is paid/converted into equity shares.
- Hence, it is correct to say that bonus issue may be viewed as a “right issue” except that money is paid by the company on behalf of the investing shareholders from its reserves.
FAQ 8. What is Section 62 and further issue of Share Capital?
- To preserve the shareholders’ proportionate dividend, liquidation and voting rights, pre-emptive rights are often recognised, but their existence and scope can be effected by provisions in the articles.
However, Section 62 of the Companies Act, 2013 secures shareholders’ pre-emptive rights with regard to the further issue of share capital by the company.
- As per Section 62(1) of the Companies Act, 2013, Existing Shareholder in proportion to the paid-up share capital on those shares by sending a letter of offer. Such right issue is subject to the following conditions:
- The offer shall be made by notice specified in the number of shares offered, time for accepting offer which may be minimum 15 days or such lesser number of days as may be prescribed.
- The notice shall be dispatched through registered post or Speed Post or through electronic to all the existing shareholders at least three days before the opening of the issue.
- If offer is not accepted within period specified it shall be deemed to have been declined.
- The offer shall include the right to renounce the shares in a favour of any other person and this fact should be specifically mentioned in the notice.
- After the expiry of the time specified in the notice or on receipt of earlier intimation from the person that he declines to accept the shares offered, the Board of directors may dispose of them in manner which is advantages to the shareholders and the company.
- To employees under the scheme of employee stock option by passing special resolution and complying with prescribed conditions
- To other persons by passing a special resolution either for cash or for consideration other than cash. The price of such shares has to be determined by the valuation report of a registered valuer subject to prescribed conditions.
- To preserve the shareholders’ proportionate dividend, liquidation and voting rights, pre-emptive rights are often recognised, but their existence and scope can be effected by provisions in the articles.
FAQ 9. What are the conditions required to be fulfilled before a company can issue bonus shares?
Conditions for issue of Bonus Shares:
In terms of section 63(2), no company shall capitalise its profits or reserves for the purpose of issuing fully paid-up bonus shares, unless—
- it is authorised by its articles;
- it has, on the recommendation of the Board, been authorised in the general meeting of the company;
- it has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it;
- it has not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus;
- the partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-up.
FAQ 10. What is reversal of the announced proposal for issue of Bonus shares?
- In terms of the Provisions of the Rule 14 of the Companies (Shares & Debentures) Rules, 2014, the company which has once announced the decision of its board recommending a bonus issue shall not subsequently withdraw the same.
- A resolution passed by the director to reverse the bonus issue announced is not valid.
Thus, once proposed cannot be reversed such proposal of bonus issue.
FAQ 11. What is utilization of Securities Premium Account?
Utilization of Securities Premium: In accordance with the provisions of Section 52(2) of the Act, the securities premium can be utilised only for:
(a) issuing fully paid bonus shares to members;
(b) writing off the balance of the preliminary expenses of the company
(c) writing off commission paid or discount allowed, or the expenses incurred on issue of shares or debentures of the company;
(d) for providing for the premium payable on redemption of any redeemable preference shares or debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
FAQ 12. What are the conditions for Issuing Shares with differential rights?
Conditions for Issuing Shares with Differential Rights [Rule 4 of Companies (Share Capital and Debentures) Rules, 2014]: A Company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise. Such company has to comply with the following conditions, namely:
- the articles of association of the company authorizes the issue of shares with differential rights;
- the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders. However, where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
- the voting power in respect of shares with differential rights of the company shall not exceed seventy four per cent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time;
- the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
- the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;
- the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government. However, a company may issue equity shares with differential rights upon expiry of five years from the end of the financial year in which such default was made good.
- the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.
FAQ 13. What is the Board of Directors Report regarding the matter relating to issue of shares with differential rights?
As per Rule 4(4) of the Companies Act, 2013, The Board of Directors shall, inter alia, disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the following details, namely:-
- the total number of shares allotted with differential rights;
- the details of the differential rights relating to voting rights and dividends;
- the percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time and percentage of voting rights which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
- the price at which such shares have been issued;
- the particulars of promoters, directors or key managerial personnel to whom such shares are issued;
- the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;
- the Diluted Earnings Per Share pursuant to the issue of each class of shares, calculated in accordance with the applicable accounting standards;
- the pre and post issue shareholding pattern along with voting rights.
FAQ 14. What is Closure of Register of Members or Debenture Holder or Other Security Holders?
- Section 91 of the Companies Act, 2013 contains guidelines for closing the register of members: A company may close the register of members or the register of debenture-holders or the register of other security holders for any period or periods not exceeding in the aggregate forty-five days in each year, but not exceeding thirty days at any one time, subject to giving of previous notice of at least 7 days or such lesser period as may be specified by Securities and Exchange Board for listed companies or the companies which intend to get their securities listed, in the prescribed manner.
- Rule 10 of the Companies (Management and Administration) Rules, 2014 in relation to Closure of register of members or debenture holders or other security holders provides that a company closing the register of members or the register of debenture holders or the register of other security holders:—
- shall give at least seven days previous notice and in such manner, as may be specified by Securities and Exchange Board of India(SEBI), if such company is a listed company or intends to get its securities listed,
- by advertisement at least once in a vernacular newspaper in the principal vernacular language of the district and having a wide circulation in the place where the registered office of the company is situated, and at least once in English language in an English newspaper circulating in that district and having wide circulation in the place where the registered office of the company is situated and publish the notice on the website as may be notified by the Central Government and on the website, if any, of the Company.
FAQ 15. What is the difference between Letter of Allotment vs. Letter of Renunciation?
|Basis of Distinction||Letter of Allotment||Letter of Renunciation|
|Applicability||Letter of allotment is applicable in all cases where shares are allotted to persons.||Letter of renunciation is applicable in case of right issue under Section 62 of the Companies Act, 2013.|
|Option||Letter of allotment do not contain any option.||Letter of renunciation contains an option to renounce the shares in favour of any other person.|
|Transfer of Shares||Shares can be transferred with the help of letter of allotment if share certificate do not exists.||Shares cannot be transferred with the help of letter of renunciation.
But right shares can be subscribed by the persons in whose favour the right has been renounced.
|Surrender||Letter of allotment is required to be surrendered to company for issue of share certificate.||Letter of renunciation is not required to be surrendered to company. In fact it is right to transfer to subscribe the right shares of the Company.|
FAQ 16. What is the difference between Brokerage vs. Underwriting Commission?
In general, A broker is a person or firm who arranges transactions between a buyer and a seller for a commission when the deal is executed.
A broker undertakes only to find buyers who are willing to buy shares or debentures and does not guarantee the sale of shares or debentures and amount paid to brokers for their services is known as brokerage.
Underwriters undertake to find buyers who are willing to buy shares or debentures and guarantees the sale of shares or debentures and the amount paid to underwriters is known as underwriting commission.
FAQ 17. What is Forfeiture of Shares?
- Forfeiture of shares is the process by which the directors of a company cancel the power of a shareholder if he does not pay his call money when the company demands for it.
- For a valid forfeiture following conditions is necessary:
- The Articles of Association must authorise the forfeiture of shares.
- The directors may pass a resolution forfeiting the shares.
- The company will give 14 days’ notice; after 14 days if the shareholder does not pay the company will forfeit his shares and strike his name from the register of shareholders.
- The power of forfeiture must be exercised bona fide and for the benefit of the Company.
- Forfeiture of fully paid shares: The clause of Table F on forfeiture do not make specific provision for forfeiture of fully paid up shares. However, in Shyam Chand v. Calcutta Stock exchange Association  2.I.L.R. Cal 313.
FAQ 18. What are Forfeited shares of a defaulting shareholder?
- A company has forfeited shares of a defaulting shareholder for non-payment of call money. However, the defaulting shareholder approaches the Board after forfeiture of shares to cancel the said forfeiture.
- A Board is empowered to cancel forfeiture: In case, the defaulting shareholder approaches the Board after forfeiture to cancel the forfeiture, the board is empowered to cancel such forfeiture. Also, A Board is empowered to claim due amount with interest.
FAQ 19. What are Calls on Shares?
Usually, Articles of association of companies provide for the manner in which calls should be made. They follow the pattern set out in Regulation 13 to Regulation 18 of Table F of Schedule I appended to the Companies Act, 2013:
i. For each call at least 14 days notice must be given to members.
ii. An interval of 1 month is required between two successive calls and not more than one fourth of the nominal value of shares can be called at one time. However, company may have their own articles and raise the limit.
iii. The board of directors has the power to revoke or postpone a call after it is made.
iv. Joint shareholders are jointly and severally liable for payment of calls.
v. If a member fails to pay call money he is liable to pay interest not exceeding the rate specified in the articles or terms of issue or such lower rate, as the board may determine. The directors are free to waive the payment of interest wholly or in part.
vi. If any member desires to pay the call money in advance, the directors may at their discretion accepted any interest not exceeding the rate specified in the articles.
vii. A defaulting member will not have any voting right till call money is paid by him.
FAQ 20. What is Allotment of Shares?
- As per Section 39, no allotment of any securities of a company offered to the public for subscription shall be made unless-
(i) The amount stated in the prospectus as the minimum amount has been subscribed and
(ii) The sums payable on application for the amount so stated have been paid to and received by the company by cheque or other instrument.
As per SEBI ICDR Regulation, the minimum subscription for public company issuing shares to public is 90%.
- Minimum subscription received must be 90% of the public issue. If the subscription is less than 90%, shares cannot be allotted and application money received must be refunded as stated below:
(i) Non-underwritten issue: Within 15 days from the date of closure of the issue.
(ii) Underwritten Issue: Within 70 days from the date of closure of the issue of underwriters fail to make up shortfall within 60 days of the closure of the issue.
If application money is not refunded within the period stated above, interest is payable for the delay.
FAQ 21. What is the difference between Beneficial Owners Vs. Registered Owners?
Registered Owner & Beneficiary Owner:
- All the public limited companies are required by the Companies Act, 2013 to maintain an index of members, wherein they are required to keep a record or the owners of the company.
- So, in the index of members of any company, there are only two registered owners, i.e. the two depositories. The depositories keep a track of all clients through the depository participants.
- Therefore, the registered owners are the depositories whereas the beneficiary owners are the people who are holding the securities at any given point of time.
- For having securities of a company in demat form, first a company has to opt for the same. A company can do so by getting itself registered with at least one of the depositories. For this, the company has to transfer all its shares to the depository. For differentiating among all the companies, International Securities Identification Number (ISIN) is assigned to them which are unique in nature.
- Whenever a company declares a bonus shares, the securities are transferred in the name of two depositories and they further transfer it to the clients through their participants. Thus, the depositories are known as the registered owners and the investors are known as the beneficiary owners as they get the benefits of all the corporate actions.
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