[FAQs] on Different Types of Capital and Share Issuance Methods

Nominal, Authorized or Registered Capital [Section 2(8)]: This is the sum stated in the memorandum of association of a company limited by shares as the capital of the company with which it is registered.

It is the maximum amount which the company is authorized to raise by issuing shares.

This is the capital, on which the company had paid the prescribed fee at the time of registration; hence it is also called Registered Capital. As and when this capital is increased, fees for such increase will have to be paid to the ROC.

Subscribed Capital [Section 2(86)]: It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company.

Following are the main points of distinction between share & stock:

Following are the main points of distinction between reserve capital & capital reserve:

Dividends on preference shares, like equity shares, can be paid only out of profits.

With regard to the payment of dividends, preference shares may be cumulative or non-cumulative.

A cumulative preference share confers a right on its holder to claim fixed dividend of the past and the current year and out of future profits. The dividend keeps on accumulating until it is fully paid.

The non-cumulative preference share gives right to its holder to a fixed amount or a fixed percentage of dividends out of the profits of each year. If no profits are available in any year, the shareholders get nothing, nor can they claim, unpaid dividend in any subsequent year.

Preference shares are cumulative unless expressly stated to be non-cumulative.

Issue & Redemption of Preference Shares [Section 55]:

1. Irredeemable preference shares cannot be issued: No company limited by shares shall issue any preference shares which are irredeemable.

2. Period for which preference shares can be issued: If authorized by its articles, a company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue subject to prescribed conditions.

However, a company may issue preference shares for a period exceeding 20 years for infrastructure projects, subject to the redemption of prescribed percentage of shares on an annual basis at the option of such preferential shareholders.

As per Rule 10 of the Companies (Share Capital & Debentures) Rules,  2014, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum 10% of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders. The term ‘‘infrastructure projects’’ means the infrastructure projects specified in Schedule VI.

3. Source of funds for redemption: Preference shares shall be redeemed:

(a) Out of the profits of the company which would otherwise be available for dividend.

(b) Out of the proceeds of a fresh issue of shares.

(c) Partly out the profits of the company and partly out of the proceeds of a fresh issue of shares.

4. Paid-up value of redemption: Preference shares shall be redeemed only if they are fully paid-up.

5. Capital Redemption Reserve Account: Where preference shares are proposed to be redeemed out of the profits a sum equal to the nominal amount of the shares should be transferred to the Capital Redemption Reserve Account. Capital Redemption Reserve Account may be applied for issue of fully paid-up bonus shares.

6. Premium on redemption of preference shares:

(i) In case of prescribed class of companies whose financial statement required to comply with the prescribed accounting standards under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed.

(ii) In a other cases, the premium payable on redemption shall be provided for:

(a) Out of the profits of the company.

(b) Out of the company’s securities premium account, before such shares are redeemed.

(c) Partly out the profits of the company and partly out of securities premium account.

7. Redemption of preference shares by issue of further redeemable preference shares: Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares referred as unredeemed preference shares), it may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

While giving approval, the Tribunal shall order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

Explanation: The issue of further redeemable preference shares or redemption of preference shares shall not be deemed to be an increase or a reduction, in the share capital of the company.

There is not specific provision in the Companies Act, 2013 regarding conversion of equity shares into redeemable preference shares. However, it was held that where the equity shares are to be converted into redeemable preference shares it was necessary to adopt the process of reduction of capital u/s 66 of the Companies Act, 2013. [Re. Chowgule & Co. (P.) Ltd., St. James Court Estates Ltd.]

As per Section 55 of the Companies Act, 2013, a company limited by shares shall not issue preference shares which are irredeemable.

A company limited by shares may issue preference shares which are liable to be redeemed within a period 20 years from the date of issue.

As per Rule 10 of the Companies (Share Capital & Debentures) Rules, 2014, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum ten percent of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders. The term ‘‘infrastructure projects’’ means the infrastructure projects specified in Schedule VI.

Thus, it is incorrect to say that in no circumstances a company can issue redeemable preference shares with a redemption period of 20 years.

Following are the main points of distinction between preference share capital & equity share capital:

A company may issue securities at a premium when it is able to sell them at a price above face value. The Companies Act, 2013, does not stipulate any conditions or restrictions regulating the issue of securities by a company at a premium. However, it imposes conditions regulating the utilization of the amount of premium collected on securities.

Securities Premium Account [Section 52(1)]: Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of the Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.

Conditions relating to utilization of securities premium [Section 52(2)]:

Securities premium can be used by the company for the following purposes:

(a) Issuing fully paid bonus shares.

(b) Writing off the preliminary expenses.

(c) Writing off commission or discount or the expenses on issue of shares or debentures.

(d) Writing off premium on redemption of redeemable preference shares or debentures.

(e) Buy-back of face value of shares and writing off premium on buy-back.

Conditions relating to utilization of securities premium in case of prescribed class of companies [Section 52(3)]:

In case of prescribed class of companies whose financial statement comply with the accounting standards prescribed under section 133, securities premium account can be used for the following purposes:

(i) Issuing fully paid-up bonus shares.

(ii) Writing off expenses or commission or discount on any issue of equity shares.

(iii) Buy-back of face value of shares and writing off premium on buy-back.

In view of above provisions, answer to given case is as follows:

(i) Company can use the amount laying in securities premium for issuance of bonus shares.

(ii) Company cannot use the amount laying in securities premium for payment of dividends declared by the company at its general meeting.

In view of above provisions, answer to given case is as follows:

(i) Balance in securities premium cannot be utilized for writing-off expenses of foreign travelling of directors.

(ii) Balance in securities premium can be utilized writing-off preliminary expenses of the company.

(iii) Balance in securities premium cannot be utilized for payment of dividend.

Prohibition on issue of shares at discount [Section 53]: Except as provided in Section 54 [issue of sweat equity shares], a company shall not issue shares at a discount.

Any share issued by a company at a discount price shall be void.

However, a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the RBI under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.

Penalty: Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or ` 5 lakh, whichever is less.

The company shall also be liable to refund all monies received with interest  at the rate of 12% p.a. from the date of issue of such shares to the persons to whom such shares have been issued.

Sweat Equity Shares [Section 2(88)]: 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.

Issue of sweat equity shares [Section 54]: A company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:

(a) The issue has been authorized by a special resolution passed by the company in the general meeting.

(b) Such special resolution should clearly specify:

– Number of shares
– Current market price
– Consideration and
– Classes of directors or employees to whom such equity shares are to be issued.

(c) At least 1 year should have elapsed from the date on which the company was entitled to commence business. [Deleted by the Companies (Amendment) Act, 2017]

(d) A company whose shares are listed on a recognized stock exchange issuing sweat equity shares should comply with the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021.

(e) A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014.

Rights, limitations, restrictions applicable to sweat equity shares [Section 54(2)]: The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued and the holders of sweat equity shares shall rank pari passu (on an equal footing) with other equity shareholders

Considering provisions of Section 2(88), Section 54 of the Companies Act, 2013 read with the Companies (Share Capital & Debentures) Rules, 2014 relating to Sweat Equity Shares, answer to given case is as follows:

1. Sweat equity shares can be issued by a company to its directors or employees for providing know-how or making available rights in the nature of intellectual property rights or value additions. Thus, the company can compensate its managing director by issuing to Sweat Equity Shares for providing technical know-how.
2. The special resolution is required to be passed for issue of sweat equity shares. Such resolution is valid for making the allotment within a period of not more than 12 months from the date of passing of the special resolution.
3. The company shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of ` 5 Crore, whichever is higher.
   As the paid-up share capital of the company is ` 30 Crore. The company can allot sweat equity shares of ` 4.5 Crore (30 Crore × 15%) or ` 5 Crore, whichever is higher.
   Thus, Raney Ltd. can allot maximum ` 5 Crore value of sweat equity shares to its directors and employees.
4. Sweat equity shares issued to directors or employees shall be locked-in/ non-transferable for a period of 3 years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.
   Hence, the sweat equity shares allotted to Russel can be sold in the market only after the expiry of the lock-in period of 3 years.
5. The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of Sections 197 & 198 of the Companies Act, 2013, if the following conditions are fulfilled –

(a) Sweat equity shares are issued to any director or manager; and

(b) They are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

In simple words, amount of sweat equity shares issued shall be treated as part of managerial remuneration only if it is expensed in the books of the company.

Sweat Equity Shares [Section 2(88)]: 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.

As per Section 54 of the Companies Act, 2013, a company may issue sweat equity shares of a class of shares already issued, if the issue is authorized by a special resolution passed by the company. Such resolution specifies the number of shares, the current market price, consideration and the class or classes of directors or employees to whom such equity shares are to be issued.

Further, as per Rule 8(9) of the Companies (Share Capital & Debentures) Rules, 2014, company can issue sweat equity shares for non-cash consideration on the basis of valuation report in respect thereof obtained from a registered valuer.

Based on above provisions, we can conclude that the view of the Managing Director is not correct.

Type of meeting: General Meeting

Kind of resolution: Special Resolution

Specimen resolution:

RESOLVED THAT subject to the provisions of Section 54 of the Companies Act, 2013 read with Rule 8 of the Companies (Share Capital & Debentures) Rules, 2014, in accordance with the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021, the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 consent of the members be and is hereby accorded to allot        Equity Shares as Sweat Equity Shares of `               each to Mr Chairman & Managing Director of the Company holding DIN      , for the value addition he continues to create in 4 years while in employment of the Company, in such tranches as may be decided from time to time within the time permissible under relevant regulation, at `                per share on the basis of the valuation reports dated                   from (SEBI Category-I Merchant Banker) & from                                    Registered Valuer.

RESOLVED FURTHER THAT the Equity Shares to be allotted shall rank pari passu with the existing Equity Shares of the Company.

RESOLVED FURTHER THAT the price of the same shall be determined as prescribed under Regulation 33 of the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021.

RESOLVED  FURTHER THAT Mr                       (Company  Secretary) and Mr                    (Director) be and are hereby authorized to do all such acts and deeds as may be deemed necessary for giving effect to the aforementioned resolution.

Shares with differential rights: Shares with differential rights means shares issued with differential rights as to dividend, voting or otherwise in accordance with Section 43(a)(ii) of the Companies Act, 2013.

Conditions for issuing shares with differential rights: Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 provides that no company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions:

1. Authorization from AOA: The article of association authorizes the issue of shares with differential rights.

2. Resolution: The issue of shares is authorized by an ordinary resolution
passed at a general meeting of the shareholders.

However, in case of listed company the issue of such shares shall be approved by the shareholders through postal ballot.

3. Limit on voting power: Voting power in respect of shares with differential rights of the company shall not exceed 74% of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.

4. Track record of profits: The company having consistent track record of distributable profits for the last 3 years.

5. No default in financial statements & annual returns: The company has not defaulted in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it is decided to issue such shares.

6. No subsisting default in certain matters: The company has no subsisting default in following:

(a) Payment of a declared dividend to its equity shareholders.

(b) Repayment of its matured deposits.

(c) Redemption of its preference shares or debentures that have become due for redemption.

(d) Payment of interest on deposits or debentures.

(e) Payment of preference dividend.

7. No defaults in respect of dividend, term loans etc.: The company has not defaulted in following:

(a) Dividend on preference shares.

(b) 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.

(c) Dues with respect to statutory payments relating to its employees to any authority.

(d) In crediting the amount in Investor Education & Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial Year in which such default was made good.