Transfer of Shares
Asok
Nadhani,
6.12 Transfer of Shares
i.
The shares of a member in a company are movable
property, transferable as prescribed in the Act and the Articles of the company
(s. 82).
ii.
The shares are freely transferable in case of a
public company whereas some restrictions are imposed on transferability of
shares in a private company.
iii.
In case of company having
no share capital, the provisions of s.108(1) regarding transfer will apply in
the same manner in respect of transfer of interest of the member in the
company. (s.108(2))
6.12.1 Rules of
Transfer
Various
provisions relating to transfer of shares are stated below: (s.108)
a. Transfer Deed: The transferor should deliver to the company signed and stamped deed
specifying the particulars of transferee and the shares transferred,
accompanied by the share certificate (or letter of allotment).
b.
Pre
Authentication of Transfer Deed: The blank transfer deed, before anything is
written into, shall be presented to the prescribed authority (Registrar of Company)
for stamping before it is signed by transferor and any entry is made therein. The prescribed authority shall stamp or
otherwise endorse thereon the date on which the instrument is so presented.
c.
Submission of
transfer deed:
i.
The transfer deed may be presented to the company
by the transferor or the transferee.
ii.
In case of transferor of partly paid shares, the
transfer shall not be registered unless the company gives notice of the
application to the transferee and the transferee makes no objection to the
transfer within 2 weeks from the receipt of the notice. (s.110)
iii.
The Transfer deed must
be delivered to the company within the validity period as follows:
·
In case of listed
company (whose shares are quoted on a recognised stock exchange) before the date on which the
register of members is closed for the first time after the date of such
presentation, or within 12 months from the date of presentation to the
prescribed authority whichever is later.
·
In other cases, the
transfer of deed must be presented within 2 months from the date of stamping.
iv. The Central Government on application by the company may extend the
period of presentment of transfer deed to the company.
v. Transfer by
legal representatives (s. 109): A transfer
executed by the legal representative
of a deceased member is as valid as the one executed by the member himself.
vi. Any instrument
of transfer which is not in conformity with these provisions shall not be
accepted by the company. (s.110)
d.
Registration of
Transfer:
i.
The company, on being satisfied that all the
provisions of transfer has been complied, will register the name of the
Transferee in the register of members within 2 months of receipt of Transfer
Deed.
ii.
The transferee becomes a member of a company only
when the transfer is registered by the company.
e.
Transfer by Joint Holders: Shares can be held in joint holding in the company, but not exceeding three.
In case of joint holding, all the joint holders are treated as one member, and
the company sends all the correspondence only on the name of the first named
person. If the joint holders intend to dispose of the shares, all the joint
holders must sign on the transfer form.
6.12.1.1 Rights
of transferor and transferee pending registration of transfer
i.
Membership: The transferor
continues to be the member of the company, until the transfer is registered and
the name of the transferee is entered in the register of members.
ii.
Title: The transferor
meanwhile holds the shares as a trustee for the transferee. The legal title
remains with the transferor but the beneficial interest is transferred to the
transferee. The transferor should not again sell the shares.
iii.
Payment of
Calls: The transferor is liable to pay the calls, if any, made by the company,
and can recover the money paid by him, from the transferee.
iv.
Rights: The transferor
is entitled to vote on all the resolutions put for vote in the general meetings
of the company, as per
the directions of the transferee.
6.12.2 Certification of transfer (Sec. 112)
Certification of transfer is needed where a member intends to transfer
only a part or full of its shares contained in one share certificate to two or
more persons.
a. Certification
i. The transfer deed & the share certificate shall be submitted by the
shareholders to the company.
ii. On receipt of the necessary documents the company shall –
retain the share certificate
make a certification by writing the words like ‘Certificate deposited’
on the transfer deed
return the share transfer deed (after certification to the member)
b. Transfer of shares by
the member
i. The member may transfer such number of shares to transferees after
making the certification of transfer.
ii. The company shall issue a fresh share certificate to each transferee.
c. Balance ticket
i.
For any share not sold
by the member, the company shall issue a balance ticket to the transferor.
ii.
On production of the
balance ticket, the transferor shall be issued a share certificate for the
shares not sold by him.
6.12.3 Refusal of Transfer in Public Company
i.
A public company can refuse to transfer the shares only
where the proposed transfer of shares is in contravention of SEBI Act,
SEBI Guidelines, Sick Industrial Companies (Special provisions) Act or
any other law for the time being
in force. [Luxmi Tea Company v P K
Sarkar], [Nandit Investment Co Private Limited v Prem Chand Jute Mills Limited]
ii.
For example, the following grounds shall not be
deemed to be ‘sufficient cause’:
§ The transferee
carries on business in competition with the company.
§ The transferee
is a past employee who was dismissed on account of misconduct.
§ The conduct of
the transferee is not bonafide.
§ The allegation
of the company that the transferee has some ulterior motives behind the
acquisition of shares.
6.12.3.1 Refusal
of Transfer in a Private Company (Sec. 111)
i.
Ground of Refusal
a.
If a private company refuses to transfer the shares
on any ground not contained in the articles, such a refusal is not valid. Thus,
the Board has no inherent or general power to refuse transfer. [V. B
Rangaraj v v B Gopalakrishnan.], [K. V Sasidhar vs. Dhanalakshmi Bank Limited.]
b.
The grounds contained in the articles must be fair
and reasonable.
c.
The company has to furnish reasons for refusing the
transfer, otherwise the refusal shall be deemed to be unfair.
d.
‘Pre-emption’Clause:
The
Articles may contain a clause that a member shall have to first offer his shares
to the other members of the company. If none of the other members exercises the
option to purchase his shares, only then such a member can transfer his shares
to an outsider.
e.
A company is not justified to refuse a transfer of
shares on the ground that the proposed transfer was without any consideration.
ii.
Notice
of refusal: Where a private company refuses to transfer the shares, it shall give a
notice of such refusal to transferor and the transferee, within 2 months of
receipt of a valid transfer deed.
iii.
Examples
of valid grounds for refusal
Some common grounds on
which a private company has been held to have validly refused to transfer the
shares are:
a.
Where the transferee is a person whose activities
are against the interests of the company [Amirthalingam M G v Gudiyatham Textiles
Ltd.]. But the mere fact that the transferee had at some time in the past
applied for winding up of the company is not a valid ground to refuse transfer
the shares to him [Rangpur Tea Association Ltd. v Makkanlal
Samaddar].
b.
Where acquisition of shares had not been made as a
genuine investment but only to acquire membership rights for the purpose of
taking other actions available under the Act [Somesh Sengupta v Eastern
Dooars Tea Co. Ltd.].
c.
Where the transferee belongs to a rival concern [Modi
Carpets Ltd. v Trans-Asia Carpets Ltd.].
d.
Where the transferor is indebted to the company and
the articles give the authority to the Board to refuse the transfers
made by indebted members.
e.
Where the intended transfer would lead to a change
in the management, prejudicial to the interests of the company or to
public interest.
[Patel Engg. Co.
Ltd. v Patel Realtors P. Ltd.].
f.
Where the transferee is not financially capable of
paying the calls remaining unpaid on the shares.
g.
Where partly paid shares are proposed to be
transferred to a minor.
h.
Where transfer of shares is not in the interest of
the company.
i.
Where the instrument of transfer is not properly
filled in, or is not properly executed, or is not properly stamped.
j.
Where the articles stipulate that the shares cannot
be transferred to an outsider if any member of the company is willing to
purchase the shares at a fair price, as determined by the directors
(pre-emption clause).
6.12.3.2 Remedy
available against refusal (Sec.111, 111A)
a.
Appeal to the Company Law Board
i.
Where a public company refuses (without sufficient
cause) to register the transfer of shares within 2 months, the transferor and
the transferee, may appeal to the Company Law Board within a reasonable time.
ii.
The Company Law Board shall give an opportunity of
being heard to both the parties, viz., the applicant and the company.
iii.
After hearing to both the parties, the Company Law
Board may pass the following orders:
a.
Dismissal of appeal. The Company Law Board may
dismiss the appeal, if it is satisfied that there was sufficient cause for
refusing transfer of shares.
b.
Direction to register the transfer. If the Company
Law Board is satisfied that the transfer of shares is refused without
sufficient cause, it shall direct the company to register the transfer and the
company shall be required to register the transfer of shares within 10 days of
receipt of the direction of the Company Law Board. It may also direct the
company to pay damages to the aggrieved party.
c.
CLB order. The Company Law Board is
empowered to pass any interim order, grant injunction, grant
stay of proceedings, make an order as to costs or pass such incidental
or consequential orders regarding payment of dividend or allotment of bonus or
right shares, as it may deem fit.
b.
Rectification of register of members (Sec. 111A)
i.
The application may be made to the company, SEBI,
the depository, the depository participant to the Company Law Board, for
rectification of register of members on the ground that the transfer of shares
has been effected by a public company in contravention of SEBI Act, or SEBI
guidelines, SICA or any other law for the time being in force.
ii.
The application must be made within 2 months from
the date of:
§ submission of
transfer deed to the company; or
§ submission of
intimation of transmission of shares to the company; or
§ transfer of
shares held by a depository.
iii.
The transferee shall be entitled to exercise all
the membership rights, e.g., right to dividend, right to receive bonus shares
and right shares, right to further transfer the shares. The transferee shall be
entitled to exercise voting rights also.
iv.
The Company Law Board is empowered to make an
interim order restricting the voting rights in respect of such shares until
final disposal of the application. However, the Company Law Board cannot restrict
any other right of the transferee.
v.
If during the pendency of application with Company
Law Board, the transferee further transfer the shares to a new transferee, the
new transferee shall be entitled to exercise all the rights, including voting
rights. (unless an order of suspension of voting rights has been made by
Company Law Board).
6.12.4 Forged
Transfer
a.
A transfer of shares
made by forging the signature of the transferor is called a 'forged
transfer'.
b.
Consequences of a forged
transfer
i.
A forged transfer is a nullity. So forged transfer
shall have no legal effect.
ii.
Rights
of parties in a Forged Transfer
a.
Transferee: The transferee
does not become the owner of such shares nor does he get any right under a
forged transfer. [Kaushalua Devi v Nationallnsulaled Cable Company of India
Limited]
b.
True owner: The original
owner continues to be the shareholder. His rights are not at all affected by
the forged transfer.
c.
Consequences: Where a company
has registered the transferee as a shareholder on the basis of a forged
transfer, following consequences shall follow:
i.
The original owner can compel the company to
restore his name on the register of members.
ii.
The company may cancel the share certificate issued
to the transferee, and consequently the transferee shall cease to be a member
of the company.
iii.
Where the transferee has already transferred the
shares to an innocent purchaser (before the share certificate held by him is
cancelled): [Bahia and San
Francisco Rail Co.]
§ The company can
refuse to register the new purchaser of shares, as a member.
§ Applying the
rule of estoppel, the new purchaser of shares can claim damages from the
company.
§ Company can
recover the damages from the person who had lodged the forged transfer deed,
even if he had acted in good faith.
6.12.5 Blank Transfer
a.
In a blank transfer, the transferor signs an
instrument of transfer without specifying the date, name and other particulars
of the transferee, to facilitate quick transfer of shares from one person to
another.
i.
A blank transfer deed is not a negotiable
instrument, as it does not pass any title to any buyer of shares. A buyer
becomes the holder of shares only when he submits to the company the transfer
deed (after filling the blanks) alongwith the share certificate, and the
company registers him as a transferee.
ii.
The buyer does not automatically become the owner
of shares on receipt of the share certificate and the blank transfer deed. The
buyer just gets an implied authority to complete the instrument.
b.
Effect of blank transfer: The buyer who
obtains the shares under a blank transfer deed has following options:
i. To become the
owner of such shares: He becomes the
owner of shares only when he completes the blank transfer deed, delivers the
share certificate and duly filled in transfer deed to the company for effecting
transfer of shares in his name, and the company registers the transfer of
shares in his name.
ii. To further
transfer such shares: The buyer may further transfer such shares, merely
by delivering the share certificate and blank transfer deed to a new buyer.
c.
The transfer chain
i. When a person
transfers the blank transfer deed and share certificate to a new buyer, the new
buyer may again transfer the same documents to another new buyer. This process
may continue till a new buyer elects to get registered as a shareholder by
submitting these documents to the company.
ii. In this process:
a.
The last holder of the blank transfer deed will
become the ‘transferee’ of shares, and no intervening buyer of shares shall be
regarded as ‘transferee’.
b.
In the records of the company, this transaction
shall be viewed as one sale transaction only, i.e., between the ‘transferor’
and ‘transferee’ only. Therefore the stamp duty shall be payable only once.
c.
Until some buyer is registered as a shareholder,
the original holder of shares (i.e., the transferor) shall continue to be the
owner of the shares.
d.
Validity period of blank transfer deed
i. As per section
108, a stamped transfer deed shall be delivered to the company, as explained
below:
a.
In case of a listed company: The transfer
deed must be presented to the company before the date on which the register of
members is closed for the first time after the stamping of the transfer deed;
or 12 months from the date of stamping of the transfer deed, whichever is
later.
b.
In any other case: The transfer deed must be
presented to the company within 2 months from the date of stamping.
ii. A blank transfer
deed thus remain valid only for such period.
6.12.6
Restrictions on acquisition and transfer of shares (Secs.108A to 108I)
i.
Prohibition on acquisition (S.108 A)
a.
Any
individual, firm, body corporate, group, constituents of a group or bodies corporate
under common management shall not acquire more than 25 percent of the paid up
equity share capital of a public company without the prior approval of the
Central Government. [Sec. 108A (1)]
b.
Where any individual, firm, group is prohibited as
above, any share of a public limited company or company in which fifty one
percent (or more) of the share capital is held by the Central Government, a corporation
or a financial institution, shall not transfer any share to such individual,
firm etc. without permission of the Central Government. [Sec. 108A (2)]
ii.
Intimation of Transfer & acquisition by
Government (S.108 B)
a.
Bodies corporate under the same management holding
10 percent or more of the subscribed equity share capital of any company, must
intimate the Central Government about its proposal for transfer of such shares giving
the prescribed particulars of such proposed transferee. [Sec. 108 (B) (1)]
b.
Central Govt. may direct that no such shares shall
be transferred where a change in composition of Board is likely to take place,
prejudicial to the interest of the company or to public interest.
c.
Where such share is held in a company engaged in
any specified industry it may direct the transfer of such shares to corporation
owned or controlled by the Government and make payment at market value of such
shares, within specified time.
iii.
Restriction on Transfer of Foreign Company
Shares. (S.108C)
No bodies corporate under the same
management which hold in aggregate, ten percent or more of equity share of a
foreign company shall transfer any share in such foreign company to any Indian
citizen or body corporate without approval of the Central Government.
iv.
Restriction
on Transfer to prevent change in Controlling Interest (S.108D)
Central Government may prevent transfer which
is likely to bring about a change prejudicial to the interest of the company or
to public interest. Where a share transfer has been registered, the Government
may prohibit the transferee to exercise voting or other rights attached in such
shares.
v.
Grant
of Approval by Government on transfer of Shares (S.108 E)
Every request to the
Central Government for approval for acquisition or transfer u/s 108 A or 108 C
shall be presumed to have been granted unless, the Central Government
communicates that the approval has not been granted within 60 days. (Section
108E)
vi.
Application
of Restriction
a.
Restrictions contained in Section 108A,
108B, 108C or 108D shall not apply to any company in which not less than fifty one
percent of share capital is held by the Central Government or any corporation &
financial institution. (S. 108F)
b.
Section 108A to 108F (both inclusive) shall apply
to the acquisition or transfer of shares or share capital by, or to, an
individual, firm, etc. under the same management in relation to a dominant
undertaking as specified u/s 108G.
c.
The expressions ‘”group”, “same management”, “financial
institution”, “dominant undertaking” and "owner" used in Sections 108
A to 108G (both inclusive), shall have the meanings respectively assigned to
them in the Monopolies and Restrictive Trade Practices Act, 1969 [S. 108(H)].
vii.
Penalties for
contravention (S.108I)
Any person contravening the
provision of S. 108A to 108D shall be punishable with fine upto Rs. fifty
thousand and or imprisonment upto 3
years, as provided u/s 108I.
6.13
Transmission of Shares (109- B)
i.
Meaning: Transmission of
shares means the transfer of ownership of shares from one person to another by
operation of law (like death, insolvency, insanity of member, minor attaining
majority or company member going on amalgamation or liquidation). Shares may be
assigned to specified Nominee by the shareholder, whom the shares would vest after
transmission.
ii.
Rights: Any person who
becomes a nominee by virtue of the provisions of Sec 109-A, upon the production
of evidence as required by the Board of directors, may :
a.
get himself as registered holder of the share or
debenture, or
b.
make transfer of the share or debenture as the
deceased holder could have made [Sec. 109-B (1)).
iii.
Joint Holder: Where the
shares are held in joint names, the transmission shall take place only in case
of death of all the joint holders. Where one of the joint holders die, the
surviving joint holders shall be entitled to those shares, and the legal
representative of the deceased member shall not have any right on such shares
(Regulation 25 of Table A).
6.13.1 Rules of
Transmission of Shares
i.
Rights of a person entitled to transmission of
shares
a.
Right to dividend. He shall be entitled to the same dividends, rights shares, bonus shares
etc. and other advantages to which the registered holder of
the shares was entitled to.
b.
No right to vote. He shall not be entitled to exercise any voting
rights in the general meetings of the company, unless his name is entered on
the register of members.
c.
Right to become member. He may choose to
become a member of the company, by an application to the company. (No transfer
deed is required).
i.
Signed by the person entitled to the shares as a
consequence of transmission.
ii.
Accompanied by the relevant documents evidencing
that the person making the application is entitled to the shares specified in
the application.
iii.
Attaching share certificate allotted to the
erstwhile member.
d.
Right to sell. The person entitled to shares may sell such shares without first
becoming a member, by executing a transfer deed through the name of the person
entitled to shares is not entered in the register of members.
ii.
Rights of the
Company
a.
The Board may, at any time, give the nominee a
notice to get himself registered as member or to transfer the shares.
b.
If the notice is not complied with within 90 days,
the Board may thereafter withhold payment of all dividend, bonus or other
moneys payable in respect of the share or debenture, until compliance of the
notice [Sec. 109B (4)].
c.
The Board shall have the same right to decline or
suspend registration as it would have had, if the deceased shareholder or
debenture-holder, had transferred the share or debenture, before his death
[Sec. 109-B (2)].
iii.
Rights of the
Nominee
a.
Notice to
Company: The Nominee, to become registered holder of the shares or debentures,
shall send a notice to the company in writing signed by him to register the
shares / debenture in his name, accompanying the death certificate of the
deceased shareholder or debenture-holder [Sec. 109-B (2))
b.
Dividend : The nominee
shall be entitled to the same dividend and other advantages to which the decreased
holder of the shares was entitled.
c.
Membership Right : The nominee,
before being registered as a member shall not be entitled to exercise
his rights of membership in relation to meetings of the company [Sec.109B (4)].
iv.
Applicability of
Rules
All limitations,
restrictions and provisions of the Companies Act, 1956 relating to the right to
transfer and the registration of transfers of shares or debentures shall be
applicable, had the deceased member himself applied for the transfer [Sec. 109B
(3)].
v.
Stamp duty
a.
No transfer deed is to be executed and therefore no
stamp duty is to be paid when the person entitled to the shares chooses to
become a member.
b.
However, to sell such shares without first becoming
a member, transfer deed with proper stamp duty is required.
vi.
Liabilities
In case of transmission of
shares, the shares shall continue to be subject to original liabilities (e.g.
prior lien would subsist).
6.13.2 Distinction between transmission of shares and
transfer of shares
Basis
|
Transmission of shares
|
Transfer of shares
|
Means of Transfer
|
Transfer of
ownership of shares by operation of law.
|
Transfer of
ownership of shares by voluntary act of the parties.
|
Transfer deed and stamp
duty
|
Neither
transfer deed nor stamp duty is required if the persons entitled to such
shares agrees to become a member of the company.
|
Transfer deed
along with stamp duty is required unless the shares are transferred under the
depository system.
|
Consideration
|
It takes place
without any consideration.
|
It is generally
made on some consideration by the transferor.
|
SEBI Regulations
|
No regulations
of SEBI (like Substantial Acquisitions and Take-overs) are imposed.
|
Regulations of
SEBI are imposed (e.g. Substantial Acquisitions and Take-overs).
|
Winding-up
|
No permission
of liquidator is required.
|
Permission of official
liquidator is required.
|
6.14 Lien on shares
i.
Lien means a right of a person to retain the
possession of property of some other person until some debt receivable by him is
paid. The grounds on which the company can exercise lien must be specified in
the articles.
ii.
The company may exercise lien on shares on:
-
unpaid shares.
-
the dividends payable and assets receivable on winding up of the
company.
iii.
The lien continues even after the death of the
shareholder.
iv.
A public company can restrain its member from
voting on grounds of lien. (S. 181)
6.14.1 Effects
of exercise of lien
i.
If the shares are subject to lien, such shares
cannot be sold (i.e., transferred) by the shareholder.
ii.
A company may lawfully refuse to pay dividend to a
shareholder whose shares are subject to lien.
iii.
If the shareholder makes a default in payment of
debt due to the company, the company has the right to sell such shares,
fulfilling the following conditions:
a.
The power to sell the shares in default of payment
by the shareholder must be contained in the articles of the company, otherwise,
the company has to seek the permission of the Court.
b.
The company must give a reasonable notice to the
shareholder intimating him the last date for payment of debt due from him, and
informing him the consequences of non-payment.
6.14.2 Loss of
lien
§ The lien is not
lost even if the shareholder dies.
§ The lien is not
lost even if the debt becomes time barred.
§ Where the debt
of the company is discharged by the member, the lien to the company comes to an
end.
§ Lien is lost if
the shareholder whose shares are subject to lien applies for transfer of such
shares and the company mistakenly registers such transfer of shares. In this
case, the transferee’s title to such shares shall be free from any lien.
§ The articles may
also empower the Board to free the shares from lien at anytime.
6.15 Surrender
of Shares
a.
Surrender of Shares means shareholder voluntarily
giving up his shares allowing the company to forfeit his shares. Surrender of
partly paid shares, which are not liable to forfeiture, is not valid as it
would amount to : Ex.6.1
i.
unauthorized reduction of capital without the
sanction of the Tribunal
ii.
release of the shareholder from further liability
in respect of shares.
b.
However, the Article may allow surrender of shares
under following conditions:
i.
Partly paid
shares: Surrender of shares is valid in case of partly paid shares subject to
forfeiture, to save the company from going through the formalities of
forfeiture.
ii.
Fully paid
shares: Surrender of fully paid shares in exchange for new shares of
the same nominal value is valid and the surrendered shares remain capable of
reissue.
c.
Surrendered shares can be validly re-issued in the
same way as forfeited shares if the Articles authorise their re-issue.
6.16 Forfeiture of
Shares
i.
Forfeiture means depriving a person from exercising
his rights over his property, in case of breach of contract by such person.
ii.
When a shareholder makes a default in the
non-payment of calls due on his shares, a company may forfeit his
shares, under following conditions : Ex.6.2
a.
Authorisation in
the Articles : A forfeiture
must be authorised by the Articles of the company, and on grounds as specified
in the Articles.
b.
Notice of
forfeiture:
i.
Before shares can be forfeited, the company must
serve a notice of forfeiture to the defaulting shareholder, specifying [Mrs.
Promila Bansal Vs Wearwell Cycle Co. (India
a.
the last date of payment (not less than 14 days
time from the date of receipt of notice), amount due and interest payable, if any.
b.
that in event of non payment within the date
specified, the shares would be forfeited.
ii.
A defective notice invalidates the forfeiture.
c.
Resolution
of Forfeiture
i.
In case of default of payment within specified
time, the directors must pass a resolution forfeiting the shares, otherwise the
forfeiture is invalid.
ii.
Where the notice stipulates that in the event of
default, the shares shall be deemed to have been forfeited, no further
resolution is necessary.
d.
Good Faith : The power to forfeit shares must be exercised by
the directors in good faith and for the benefit of the company.
6.16.1 Effect of
forfeiture
i.
Membership: The person
whose shares are forfeited ceases to be a member.
ii.
Liability:
a.
The member still remains liable to pay the company
all its due in respect of the shares at the date of forfeiture.
b.
The liability of the person whose shares have been
forfeited ceases when the company receives payment in full of all such money in
respect of the shares.
iii.
Past Members: Past member
whose shares have been forfeited remains liable as a contributory if liquidation
takes place within 1 year of forfeiture.
iv.
Disposal: Forfeited
shares become the property of the company. These may be re-issued or otherwise
disposed of on such terms and in such manner as the Board thinks fit.
6.16.2 Re-issue
of forfeited shares
i.
Re-issue: A company may
decide to reissue the forfeited shares. If fully paid shares are forfeited,
reissue of such shares is compulsory. The reissue of forfeited shares does not
amount to allotment of shares.
ii.
Terms: The Board may
reissue the shares at such terms as it thinks fit (or may decide not to reissue
the forfeited shares at all).
iii.
Price: The Board can
determine the price payable on reissue of shares. However, aggregate of amount
already received from the defaulting shareholder and amount receivable on
reissue should not be less than the original issue price of shares, otherwise,
it would amount to unauthorized issue of shares at discount.
6.16.3
Similarities & Distinction between Lien and Forfeiture
a.
Similarities between lien and forfeiture
i.
Both the rights are exercised by the company
against a defaulting shareholder.
ii.
Both the rights are exercisable by the company only
if the articles of the company authorize the company to exercise such right.
iii.
The Board may voluntarily waive its right of lien
on any shares, or right of forfeiture on any shares.
b.
Distinction between lien and forfeiture
Basis of distinction
|
Lien
|
Forfeiture
|
1.
Rights
|
Lien means the right of a
company to retain the shares of a member who is indebted to the company.
|
Forfeiture
means depriving a member from exercising his rights over the shares held by
him.
|
2.
Purpose
|
To claim security.
|
To take penal
action against the defaulting shareholder.
|
3.
Exercise of Rights
|
The right of
lien can be exercised when any calls are due on shares held by him, or any
amount is due in any other capacity.
|
The right of
forfeiture is generally exercised in case of non-payment of calls (though,
forfeiture can be made on any bonafide ground contained in the articles).
But, shares cannot be forfeited for non-payment of money due from the member
in any other capacity.
|
4.
Right on fully paid shares
|
A company may have lien on
fully paid shares.
|
A company
cannot forfeit fully paid shares (except in accordance with a bonafide ground
contained in the articles).
|
5.
Rights to sell the shares
|
The company cannot sell
shares on which lien has been exercised unless a notice of sale is given to
the shareholder.
|
The company is
free to re-issue forfeited shares to any other person without giving any
notice to the shareholder whose shares were forfeited.
|
6.
Retention of Surplus amount
|
The excess amount realised
by the company by sale of shares over the amount due to the company, must be
returned to the shareholder.
|
The excess of
amount received from the defaulting shareholder together with amount received
on reissue over the original issue price of shares, shall be retained by the
company.
|
6.17 Nomination
of shares and Debentures (Sec. 109-A)
Nomination means
conferring one’s right to another in the event of his death.
a.
A shareholder may make nomination in the prescribed
manner to confer on any person the right to vest the shares or debentures of
the company.
b.
On the death of the shareholder / debenture holder,
the nominee becomes entitled to all the rights of the deceased shareholder [Sec.
109-A (3)].
c.
Rules of
Nomination
i.
Single holder: Every
shareholder who is an individual is entitled to make nomination. [Sec. 109-A
(1)).
ii.
Joint holders: In case of
joint holders, nomination shall be valid only when it is signed by all the
joint holders. In such a case, nomination shall become effective only when all
the joint holders of share die. [Sec. 109-A (2))
iii.
Minor nominee: A minor can
also be a nominee provided some adult person’s name is specified in the
nomination form to act as a guardian of the minor during his minority.[Sec.
109-A (4)]
d.
Consequences
in case of death of member
i.
If a valid nomination exists as on the date of
death of the member, the shares shall vest in the nominee to the exclusion of all
the other persons, notwithstanding anything contained in any other law or any
will or any other instrument executed by the shareholder.
ii.
If no valid nomination exists as on the date of
death of the member, transmission of shares shall take place as per the
provisions of section 109.
e.
Rights
of nominee
In case of death of a shareholder, the nominee shall have
the following rights:
i.
Right to
dividend etc. The nominee shall be entitled to the same dividends,
rights shares, bonus shares and other benefits to which the registered
holder of the shares was entitled to.
ii.
No right to vote. The nominee shall not be entitled to exercise any
voting rights in the general meetings of the company, unless his name is
entered on the register of members.
iii.
Right to
become a member. The nominee may apply to
the company to become a member by serving a notice, in writing, signed by the
nominee enclosing a death certificate of the deceased shareholder.
iv.
Right to
transfer the shares. The nominee shall have a
right to transfer the shares to any other person in the same manner as if the
transfer were made by the member when he was alive.
f.
Notice by Board to the nominee
i.
After death of a member, the Board may at anytime
give a notice to the nominee requiring him to opt to become a member or
transfer the shares to any other person.
ii.
If the nominee does not take a decision within 90
days of notice by the Board, the Board may thereafter withhold payment of all
dividends, bonus issues, or other moneys payable in respect of such shares,
until the requirements of the notice have been complied with.
6.18 Conversion
of Debentures/Loans to Shares
a.
A company may issue debentures which are
convertible into shares (called Convertible
Debentures) after a fixed period of time. Similarly, a company may raise
loans which shall be converted into shares after a fixed period of time.
b.
A company may also issue debentures or raise loans
with an option to subscribe for new shares (without conversion of
debentures or loan into shares).
c.
The terms of issue of such debentures
or loans must contain a term regarding conversion of such debentures or
loans into shares, or entitling the debenture holders or lenders to subscribe
for new shares, as the case may be.
d.
The company must obtain the approval of Central
Government before issue of such debentures or loans, or comply with rules as
prescribed by Central Government.
e.
Special
resolution must be passed for issue of such debentures, unless they are issued to
the Government or any institution specified by the Central Government or loans
are raised from the Government or any institution specified by the Central
Government.
6.19 Depository
System
i.
Depository
a.
'Depository means a company formed and registered
under the Companies Act, 1956, who has been granted a certificate of registration
under section 12(1A) of the SEBI Act, 1992.
b.
A depository is a custodian that holds securities of
the investors for the benefit of investors. The investor can transfer
the
securities
by giving instructions to the depository. A depository operates through its
branches, called as depository participants, who act as a link between the
depository and the investors.
c.
Presently, there are two depositories, viz., National
Securities Depository Limited (NSDL), and Central Depository Services Limited
(CDSL).
ii.
Securities
under depository system
In depository system, the
securities are kept in electronic form (called dematerialized form):
a.
Distinctive numbers. The shares held in the dematerialised form do not
have any distinctive numbers (i.e., the shares become fungible).
b.
Share Certificates. The members who hold shares in depository form are not issued a share
certificate (Section 113).
iii.
Shares
in dematerialised form
a. Account with a depository. An investor should open an
account with a depository. Account holder with the depository is called as ‘Beneficial
Owner’.
b. Conversion of shares
into dematerialised form. A share holder may
apply to the company for converting the shares into dematerialised form. On
dematerisation:
§
The share certificates are destroyed and the distinctive
numbers are lost.
§
The company removes the name of the member from the
register of members.
§
The company enters the name of the depository in
its register of members.
§
The shares are credited in the account of the
member maintained by the depository.
§
After dematerialisation of shares, the member becomes
beneficial owner of shares (since the benefit relating to such shares belongs
to him) while the shares are registered in the name of the depository (i.e.,
the depository is called as registered holder of shares).
c.
Transfer of
shares under depository system. The transfer of shares from
the account of one beneficial owner is made in following way:
§ The transfer of
shares are effected by the depository when it receives an authorisation from
the beneficial owner, without any execution of transfer deed and without any
delivery of share certificate.
§ The depository
maintains a register of beneficial owners. Any change effected by the
depository is immediately entered in this register.
§ Since the name
of the depository appears in the register of members, the company does not make
any change in the register of members (since the registered holder, i.e., the
depository remains the same).
§ The depository serves
to the company, the records of beneficial owners by means of electronic mode.
(Section 51)
d.
Issue of shares to be in
dematerialised form.
A
company making public offer exceeding Rs.10 crore, must do in dematerialised
form only.
iv.
Member in a depository system
-
The name of the depository is entered in the
register of members, though the depository is not a beneficial owner. The
beneficial owner whose name is entered in the register of depository shall be
deemed to be the member (Section 41). Therefore, for all the provisions of the
Act, the term 'member' shall mean the concerned beneficial owner, and not the
depository.
-
Similarly, the register and index of beneficial
owners maintained by the depository shall be deemed to be the register and
index of members (Section 152A).
v.
Stamp
duty
a.
Dematerialisation: No stamp duty is payable
where shares are converted from physical form to dematerialised form.
b.
Rematerialisation: Stamp duty is
payable where shares are converted from dematerialised form to physical form
(called as rematerialisation of shares).
c.
Original issue: Stamp duty is
payable in case of original issue of shares in dematerialised form.
d.
Transfer: No stamp duty is
payable in case of transfer of shares under dematerialised form.
vi.
Benefits
of depository system
a.
Fast. Under physical form, the procedure for transfer of
shares could take upto 2 months, whereas in the depository system, the transfer
is effected within 2 days.
b.
Economical. The transfer of shares are
much economical since printing, safe custody and dispatch of transfer deed and
share certificate is not required.
c.
Paperless working. No share certificate is
required to be issued under the depository system, nor any transfer deed is
required to be executed.
d.
Savings of human efforts. Under depository
system, the transfer of shares takes place in electronic form, saving a great
deal of human efforts of handling papers.
e.
Elimination of frauds. Under depository system, this problem of forged
certificate is gone.
f.
Elimination of 'bad
delivery'. Under depository system, as no transfer deed is to be executed and the
beneficial owner is only required just to give an instruction to the
depository, the problems of 'bad delivery' have come to an end.
g.
Savings of stamp duty. No stamp duty is payable in
case of conversion of shares into dematerialised form or transfer of shares in
dematerialised form, resulting in savings of costs and growth of the business
in the stock market.
6.20 Voting
rights of the shareholders
Voting rights
are attached to various specific classes of shares depending on the terms as
prescribed in the Articles. The voting right in poll is in proportion to the
shares held by him.
6.20.1 Equity shareholders'
rights
i.
Equity shareholders have the right to vote on every
resolution placed before them, to elect directors and to participate in the
management of the company. [S. 87 (1) (a)]
ii. Right of an
equity shareholder to vote cannot be prohibited on any other ground than
provided under section 181, as below: (S. 182).
nonpayment of calls
nonpayment of other sums
due against a member
company exercised its
right of lien
iii.
Voting right on a poll shall be in proportion to
his paid up equity capital. [S. 87(1) (b)]
iv.
Companies
whose equity share carried excessive voting rights must reduce the rights
accordingly (S. 89).
6.20.2 Preference
shareholders' rights [Sec. 87(2)]
i.
A preference shareholder has a right to vote only
on those resolutions which directly affect their rights (e.g. resolution for
winding up the company, repayment or reduction of its share capital).
ii.
The voting right of the preference shareholders on
a poll shall be in the proportion of which the capital paid up on preference
shares and equity shares. Cumulative and non-cumulative preference shareholders
have a further right to vote on all resolutions of the company if their
dividends have remained unpaid for 2 years or more (for cumulative shares) and
for 2 years or more (or for any 3 years during a period of 6 years), for
non-cumulative share.
iii.
These rules do not apply to a private company which
is not a subsidiary of a public company.
6.20.3 Variation
of shareholders' rights (Sec. 106)
i.
A company may issue different classes of shares having
varied rights attached to a particular class.
ii.
These rights may be varied as specified in Articles
of Association or in Memorandum of Association.
a.
with the consent of
3/4ths of the holders of the
specified class.
b.
with the sanction of a special resolution passed at
the separate meeting of the holders of the shares of that class
iii.
The voting rights specified in the memorandum may
be varied accordingly. [Welsbach Incandescent Gas Co.]
6.20.3.1 Rights to
challenge Variation of shareholders’ Rights (Sec. 107)
a.
In case of variation of class rights, the holders
of at least 10 per cent of the issued shares of that class may apply to the
Tribunal within 21 days of the passing of the resolution. The Tribunal, on
hearing the applicants, may :
i. disallow the
variation if it unfairly prejudice the class of shareholders
ii. confirm the
variation.
b.
Decision of the order by the tribunal shall be
final.
c.
The company must forward a copy of the order to the
Registrar of Companies, within 30 days
d.
Any default in such case shall be punishable with
fine which may extend to Rs.500.
6.21 Dividend
i.
‘Dividend’ means the portion of the profits of the
company which is distributed to the shareholders. [Commr. of Income-tax v.
Girdhadas & Co. {Pvt.} Ltd.]
ii.
A dividend may be declared in following stages:
a.
Proposed dividend. Dividend when proposed (i.e., recommended) by the
Board in its report, is called as ‘Proposed Dividend’. (Sec. 217).
b.
Final dividend. Proposed dividend, when consented to by the
shareholders at the general meeting, becomes final dividend.
c.
Interim dividend. The dividend declared by the Board during financial
year is called as interim dividend. It is declared in between two annual
general meetings.
6.21.1 Declaration of Dividend
i.
Dividend may be declared out of profit only (out of
current year profit or previous years’ undistributed Profit). Dividend may also
be provided out of fund provided by the Central or State Government in
pursuance of a guarantee given by it.
ii.
Dividend is generally declared at an Annual General
Meeting (AGM). The Board of directors recommends the rate of dividend and is
reflected in the company’s balance sheet laid before the annual general
meeting. The rate of dividend is to be approved by the members of the company
in general meeting. [Raghunandan Neotia Vs Swadeshi Cloth Dealers Ltd.]
iii.
A company which could not declare dividend at an
annual general meeting, may declare dividend for that year at an extraordinary
general meeting, as a special business. [Raghunandan Neotia Vs Swadeshi Cloth Dealers Ltd.]
iv.
Once a final dividend is
declared at an annual general meting, the company cannot declare further
dividend in respect of the same financial year.
v.
A Company may pay dividend in proportion to the
amount paid up on each share (if authorised by its Articles). (Sec. 93) [Oakbank
Oil Co. v. Crum]
6.21.2 Interim
Dividend [Sec. 2(14A)]
a.
In case of adequate profits, the board of directors
may even declare dividend (called interim dividend) before the next annual
general meeting, if provided by the Articles.
b.
The amount of interim dividend must be deposited in
a separate bank account, within 5 days of passing the Board resolution for payment
of interim dividend [Sec. 205(1A)] and the interim dividend must be paid within
30 days of its declaration.
c.
It must have provided for Depreciation, compulsory
transfer to Reserves, Bad Debts and other contingencies, if any.
d.
As per s.2(14A), Dividend included Interim
Dividend. So, like Final Dividend, Interim Dividend on declaration, also
becomes a debt due and so cannot be revoked.
6.21.3 Distinction between Interim and Final
Dividend
a. Interim dividend
is declared before determination of the profits of the current year. Final
dividend is paid after determination of the profits of the current year.
b.
Interim dividend is declared by the Board of
directors in a Board meeting. Final dividend is declared by the members in
annual general meeting.
c.
Interim dividend is required to be approved by the
members in the annual general meeting. Once approved by the members in annual
general meeting, final dividend does not require any approval or confirmation.
6.21.4
Preference Dividend
Dividend on preference
shares is paid in priority to equity shares at a fixed rate (or fixed amount).
i.
Arrears of cumulative preference shares : In case of
cumulative preference shares, arrears of dividend in respect of past financial
years as well as for current financial year must be paid in the current
financial year before any dividend is paid on equity shares.
ii.
Writing off past year losses
a.
The company can set off the past years’ losses
against the current year profits, even if the residual profits become
insufficient to pay preference dividend in respect of current year.
b.
Where the articles empower to create reserves
before payment of a dividend, preference shareholders cannot compel the
directors to declare dividend without making such reserves (Boand v Barrow Haematitle Steel Company Ltd.).
iii.
Payment of arrears of preference dividend in
winding up: In case of cumulative preference shares, following rules apply if the
winding up of the company is commenced:
a.
If dividend for any year is declared before the
commencement of winding up, such dividend results in a debt owed to the
shareholders by the company. Therefore, the company shall be liable to pay such
dividend.
b.
If dividend for any year is not declared before the
commencement of winding up, the company shall not be liable to pay such
dividend, unless there is a provision to that effect in the articles.
c.
If any surplus remains after repayment in full of
preference and equity share capital, the company shall be liable to pay
dividend for every year for which no dividend was declared.
6.21.5
Distribution of capital profit as dividend
Capital profits
are available for distribution as dividend in following conditions: (Lubbock
i.
The articles permit such distribution
ii.
The capital profit has actually been realised (i.e.
capital profits arising on a revaluation of assets cannot be distributed as
dividends)
iii.
The capital profits remain after a valuation of
whole of the assets and liabilities.
6.21.6 Payment
of dividend out of capital
i.
Dividend must be paid out of profits, and not out
of capital. Payment of dividend out of capital amounts to unauthorized
reduction of capital.
ii.
The consequences of such payments are:
a.
The directors who knowingly paid dividends out of
capital shall be held personally liable to make good the loss caused to the company
[Oxford Benefit
Building
b.
The directors have a right of indemnity against the
members who received dividends knowingly that they dividend was being paid out
of capital.
c.
Where dividends improperly paid out of capital have
been made good out of subsequent profits, Directors’ liability ceases.
6.21.7 Dividend
out of reserves
a.
Dividend
can be declared utilising credit balance of Profit and Loss Account Carried forward (profits
which have not been transferred to the reserves) without any restriction.
b.
Dividend can be declared out of the profits
transferred to the reserves where:
i. previous
approval of the Central Government is obtained; or
ii. In the event of
inadequacy or absence of profits in any year, a company may declare dividend
out of the accumulated profits earned by it in previous years and transferred
to the reserves, in accordance the Companies (Declaration of Dividend out of
Reserves) Rules, 1975 subject to the following conditions:
a. The rate of
dividend must not exceed average of the rates of dividend in immediately preceding 5 financial years, or 10 % whichever is
lower.
b. The amount to be
withdrawn from reserves must not exceed 1/10th of aggregate of paid up capital
and free reserves. The amount so withdrawn shall be first utilised to set off
the losses incurred in the financial year, and the balance amount can only be
utilised for the declaration of dividend.
c. The balance of
reserves, after such withdrawal, shall not fall below 15% of paid up share
capital.
6.21.8 Payment of Dividend
1.
The dividend shall be paid within 30 days from the
date of declaration of dividend.
2.
In the following cases, no default is deemed to
have been committed by the company, even though the dividend is not paid within
30 days of its declaration:
a.
Where dividend could not be paid by reason of the
operation of any law.
b.
Where a shareholder has given directions to the
company regarding payment of dividend, but those directions cannot be complied
with.
c.
Where dividend is lawfully adjusted by the company
against any sum due to it from the shareholder.
d.
Where there is a dispute regarding the right to
receive the divided.
e.
Where the non-payment of dividend is not due to any
default of the Company.
3.
Penalty for non-payment
a.
Director. Every director who is
knowingly a party to the default shall be liable for simple imprisonment upto 3
years and a fine of Rs.1,000 per day.
b.
Company. The company shall be
liable to pay simple interest @ 18% per annum.
6.22 Reserve
Capital (Sec. 98)
i.
Reserve capital is that part of uncalled capital of
a company which cannot be called up except in the event of winding up of the
company. Therefore, if calls have already been made by a company, it is not
possible to convert such called money into the reserve capital. [Mayfair Property
Company]
ii.
Features of Reserve Capital:
a.
It applies to a company limited by shares or a
company limited by guarantee and having a share capital.
b. A limited
company may, by special resolution, determine that any portion of its share
capital which has not been already called-up shall not be called-up, except for
the purposes of winding up.
c.
Once the reserve capital is created, calls can be
made only by the liquidator at the time of winding up of the company and the
money received in respect of reserve capital can be utilised only for the
purposes of winding up of the company.
d.
Conversion of reserve capital into ordinary
uncalled capital of the company amounts to reduction of capital, which requires
the sanction of the Court in accordance with the provisions of section 100 to 104.
e.
A company cannot create a charge on its reserve
capital.
6.22.1 Distinction between Reserve Capital
and Capital Reserve
Reserve Capital
|
Capital Reserve
|
Reserve Capital
is a part of uncalled capital of the company.
|
Capital Reserve
is not a part of share capital of the company.
|
Reserve Capital
is receivable by the company in the winding up of the Company.
|
Capital Reserve
does not reflect any amount receivable by the Company.
|
Reserve Capital
can be used only for purpose of winding up of the Company.
|
Capital Reserve
cannot be used for any purpose (whether during the lifetime of the company or
at the time winding up).
|
Examples:
Surrender of
Shares
Ex.6.1 The nominal value of a
share in a limited company is Rs.100 out of which Rs.40 is called and paid up.
The company, as disclosed by is last balance sheet, is losing heavily. A
shareholder surrenders his 10 shares to the company and the Board of directors
of the company accept the surrender.
Held, the
surrender is unlawful. [Ref. 6.15(a)]
Forfeiture of
Shares
Ex.6.2 The directors of B Ltd.
made a call on the shareholders but the resolution for making the call did not
mention the amount of the call or the time or place for its payment. On the
failure of M, a shareholder, to pay the call, the directors purported to
forfeit his shares. The directors subsequently discovered their mistake,
recinded their previous resolution of forfeiture and made a proper fresh call
on the shareholders. On M’s failure to pay the call money, filed a suit against
him to recover the amount due.
M contended that
his shares had already been forfeited and as such he had ceased to be a
shareholder and was, therefore, not liable for the call made.
Held, M is
liable to pay the call money. His shares could not be validly forfeited for
non-payment of an invalid call. On his failure to pay the subsequent valid
call, the company can proceed against him for the recovery of the call. [Ref.
6.16(ii)]
For more details, refer to Business & Corporate Laws, by
Asok Nadhani, BPB Publications-ww.bpbonline.com, bpbpublications@gmail.com
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