1. UNIT III

2. WHAT IS THE MEANING OF SHARE?
Section 2 (84) of the Companies Act, 2013
defines Share.
A share represents a unit of equity ownership in a
company. Shareholders are entitled to any profits that
the company may earn in the form of dividends. They
are also the bearers of any losses that the company
may face. In simple words, if you are a shareholder of a
company, you hold a percentage of ownership of the
issuing company in proportion to the shares you have
bought.
Shares can be further categorized into two types. These
are:
 Equity shares
 Preference shares
They vary based on their profitability, voting rights and
treatment in the event of liquidation.

3. PREFERENCE SHARES
Preferential shareholders receive preference in receiving
profits of a company as compared to ordinary
shareholders. Also, in the event of liquidation of a
particular company, the preferential shareholders are
paid off before ordinary shareholders. Here are the
different types of shares in this category:

4. PREFERENCE SHARE TYPES
 Cumulative preference shares: Cumulative preference
shares are types of shares where shareholders are
given the right to receive dividends for those years
where dividends could not be paid due to insufficient
profits. For instance, if a company does not make
enough profit in a year, then it will not pay any dividends
to its shareholders in that particular year but it pays
cumulative dividends in the next year as arrears.
 Non-cumulative preference shares: Non-cumulative
preference shares do not have the right to receive
dividend payments for a year when the company does
not have sufficient profits to pay dividends to its
shareholders. So if a company does not pay dividend
payments to its shareholders, the shareholders are not
entitled to claim dividends in the coming year.

5. CONTUD…
 Redeemable preference shares: Redeemable
preference shares are those shares that can be
redeemed by the issuing company.
 Non-redeemable preference shares: Non-
redeemable preference shares are shares that
cannot be redeemed by the company. The company
can redeem shares only on shutting down of
operation although Indian companies cannot issue
irredeemable preference shares.

6. CONTUD…
 Participating preference shares: Participating shares
have the right to partake in the surplus profit of the
company during liquidation after the company had paid to
other shareholders. Participating preference
shareholders have the right to receive dividends as well
as have a share in the extra earnings of the company.
 Non-participating preference shares: Non-participating
preference shares do not have the right to participate in
the extra profit made by the company, however, non-
participating preference shareholders are entitled to
receive fixed dividends offered by the company.

7. CONTUD…
 Convertible preference shares: Convertible
shares allow shareholders to convert the
convertible shares into equity shares but these
shares can only be converted after a specified time
as stated in the memorandum.
 Non-convertible shares: Non-convertible shares
cannot be converted into equity shares of the
company; however, they enjoy preferential rights
when it comes to payment of capital in case of
winding-up of the company.

8. EQUITY SHARES MEANING
These are also known as ordinary shares and comprise
the bulk of the shares being issued by a particular
company. Equity shares are transferable and are traded
actively by investors in stock markets. As an equity
shareholder, you are not only entitled to voting rights on
company issues but also have the right to receive
dividends.
These dividends, however, are not fixed. Equity
shareholders also partake in any losses faced by the
company, limited to the amount they had invested.
Equity shares can be further divided based on:
 Share capital
 Definition
 Returns

9. CLASSIFICATION OF EQUITY SHARES BASED
ON SHARE CAPITAL
Authorised Share Capital: Every company, in its Memorandum of
Associations, requires to prescribe the maximum amount of capital
that can be raised by issuing equity shares. The limit, however, can
be increased by paying additional fees and after the completion of
certain legal procedures.
Issued Share Capital: This implies the specified portion of the
company’s capital, which has been offered to investors through the
issuance of equity shares. For example, if the nominal value of one
stock is Rs 200 and the company issues 20,000 equity shares, the
issued share capital will be Rs 40 lakh.
Subscribed Share Capital: The portion of the issued capital, which has
been subscribed by investors is known as subscribed share capital.
Paid-Up Capital: The amount of money paid by investors for holding
the company’s stocks is known as paid-up capital. As investors pay
the entire amount at once, subscribed and paid-up capital refer to the
same amount.

10. CLASSIFICATION OF EQUITY SHARES BASED
ON DEFINITION
Bonus Shares: Bonus share definition implies those
additional stocks which are issued to existing shareholders
free-of-cost, or as a bonus.
Rights Shares: Right shares meaning is that a company can
provide new shares to its existing shareholders - at a
particular price and within a specific period - before being
offered for trading in stock markets.
Sweat Equity Shares: If as an employee of the company,
you have made a significant contribution, the company can
reward you by issuing sweat equity shares.
Voting And Non-Voting Shares: Although the majority of
shares carry voting rights, the company can make an
exception and issue differential or zero voting rights to
shareholders.

11. CLASSIFICATION OF EQUITY SHARES BASED
ON RETURNS
Based on returns, here is a look at the types of shares:
Dividend Shares: A company can choose to pay
dividends in the form of issuing new shares, on a pro-
rata basis.
Growth Shares: These types of shares are associated
with companies that have extraordinary growth rates.
While such companies might not provide dividends, the
value of their stocks increases rapidly, thereby
providing capital gains to investors.
Value Shares: These types of shares are traded in stock
markets at prices lower than their intrinsic value.
Investors can expect the prices to appreciate over
some time, thus providing them with a better share
price.

12. SHARE & STOCK
 As per Section 61, Companies Act, 2013, the
company can convert its shares which are fully paid
up, into stock. A ‘Share‘ is the smallest unit into
which the company’s capital is divided,
representing the ownership of the shareholders in
the company. A ‘Stock‘ on the other hand is a
collection of shares of a member that are fully paid
up. When shares are transformed into stock, the
shareholder becomes a stockholder, who possess
same right with respect to the dividend, as a
shareholder possess.

13. BASIS FOR
COMPARISON
SHARE STOCK
Meaning The capital of a
company, is divided into
small units, which are
commonly known as
shares and it represents
the part ownership of a
company.
The conversion of
the fully paid up
shares of a member
into a single fund is
known as stock and
that represents part
ownership in one or
more organisations.
Nominal value Yes No
Paid up value Shares can be partly or
fully paid up.
Stock can only be
fully paid up.

14. BASIS FOR
COMPARISON
SHARE STOCK
Scope Shares have a
narrower scope
when compared to
stocks.
Stocks have a wider
scope when
compared to shares.
Fractional transfer Not possible. Possible
Denomination The value of two
different shares of a
company can be
equal to each other.
The value of two
different stocks of a
company may or
may not be equal to
each other.

15. INTRODUCTION ALLOTMENT OF SHARES
 Allotment of shares is the formation and distribution
of new shares by a company. New shares can be
issued either to the new or current shareholders.
Offers for shares are made on application forms
provided by the company. When the application is
accepted, it is called an allotment.. Therefore where
the forfeited shares are reissued, it is different from
the allotment. An allotment to be valid has to abide
by the requirements and instructions of
the Companies Act, 2013 and principles of the Law
of Contract relating to the acceptance of offers.

16. CONCEPT OF ALLOTMENT OF SHARES
 The allotment is the allocation of a portion of shares to an
underwriting participant during Initial Public Offering (IPO).
When the shares allotted to the underwriting form, the
remaining shares are allotted to other forms that participate
in the same.
 The process of appropriation of a certain number of shares
and distribution among those who have submitted the
return applications of shares is known as allotment of
shares. Companies Act 2013 incorporated therein forms
allotment of shares that are listed on NSE and BSE or any
other stock exchanges in India. Other regulations that are
applicable for subsidiaries of listed companies include the
provision of SEBI Act, 1992 and Securities Contract
Regulation Act, 1956.
 Allotment of shares is basically creating and issuing a new
number of shares by the company to the new or existing
shareholders. The purpose of allotting new shares is to
bring new business partners.

17. GENERAL PRINCIPLES AS TO ALLOTMENT OF
SHARES
Allotment by proper authority
An allotment should be made by a resolution of the Board of
directors. The Allotment is the primary duty of the directors and
this duty cannot be delegated except in accordance with the
provisions of the articles.
Within reasonable time
Allotment should be made within a reasonable period of time
otherwise the application fails. Reasonable time should remain a
question of fact in each case. The interval of six months between
application and allotment has been held unreasonable. If the
reasonable time expires Section 6 of the Contract Act applies and
the application must be deemed to be revoked.
Must be communicated
The allotment should be properly communicated to the applicant.
Posting of a properly addressed and stamped letter of allotment
is sufficient communication, even though the letter is lost or held
up.
Absolute and unconditional
Allotment should be absolute and should be according to the
terms and conditions of the application if any.

18. SPECIAL PROVISIONS RELATING TO APPLICATION
AND ALLOTMENT SHARES & DEBENTURES
The Companies Act, 1956 prescribes certain restrictions regarding the
allotment of shares and debentures by public companies. These
restrictions may be discussed under the following two heads:
I. When no public offer is made; and
II. When public offer is made.
I. When no public offer is made.
Where a public company having a share capital does not offer shares or
debentures to the public, it need not issue a prospectus. In such a case it
shall not proceed to allot shares or debentures unless at least 3 days
before the first allotment it has filed with the Registrar for registration a
statement in lieu of prospectus. The statement shall be signed by every
person who is named therein as a director or proposed director of the
company or by his agent authorized in writing (Sec. 70 (1)]. If the
company acts in contravention of this rule, the allotment shall be irregular
and it will be voidable at the option of the allottee. Further the company,
and every director of the company who willfully authorizes or permits the
contravention, shall be punishable with fine which may extend to
Rs.10.000 [Sec. 70 (4)].

19. CONTUD…
II. When public offer is made.
In the case of a public company which offer shares and
debentures to the public for subscription, the provisions
relating to allotment may be studied under the following
heads:
 First allotment of shares
 Subsequent allotment of shares.
 Allotment of debentures.

20. 1. FIRST ALLOTMENT OF SHARES
A public company which offers shares to the public for subscription for
the first time must comply with the following restrictions:
1. Registration of Prospectus:
The Company has to file a copy of the prospectus with the Registrar of
Companies (ROC) while raising its capital by issuing the shares to the
general public.
When the company raises the capital privately, it has to prepare
'Statement in lieu of Prospectus'.
2. Over Subscription:
In the case of oversubscription, the company has to refund the excess
application money to the applicants.
If it is failed to do so in the prescribed time then every officer of the
company would be punishable.
SEBI does not allow any allotment in excess of securities offered
through offer document or prospectus.
However, it may permit to allot not more than 10% of the net offer.

21. CONTUD…
3. Application Money:
The part of the face values of shares which are collected
by the company along with share application, is known as
Application Money. Application money should not be less
than 5% of the face value of the share. SEBI has specified
(for public companies) the application money should not
be less than 25% of the nominal amount of shares.
4. Depositing the Application Money:
As per this condition, the company has to deposit the
money into separate account known as Share Application
Money Account opened in a scheduled bank by the
company. The company is not allowed to withdraw this
amount..

22. CONTUD…
5. Minimum Subscription:
Minimum subscription is the minimum amount raised by the company for
obtaining a trading certificate and to start the work of allotment of
shares. This amount is mentioned in the prospectus.
• It must be collected within thirty (30) days from the issue of prospectus.
The minimum subscription amount should be 90% of the issued capital.
• SEBI has stated minimum subscription should be 90% of the issue:
• Usually, when a company does not collect minimum subscriptions, it
means its issue has been undersubscribed i.e. the number of shares
applied for is less than the shares offered by the company.
• If a minimum subscription is not collected within the specified time. the
entire amount received as application money should be returned to the
subscribers within fifteen days of closure of the issue.
• To avoid such a situation, the company may enter into an underwriting
agreement with the underwriters.

23. CONTUD…
6. Appointment of managers to the issue and various other
agencies:
• The company has to appoint one or more Merchant Bankers to act
as managers to the public issue.
• It also has to appoint:
• Registrar to the issue.
• Collecting Bankers,
• Underwriters to the issue and Brokers to the issue.
• Advertising agents etc.
7. Permission to deal on Stock Exchange:
• Every company, before making a public offer shall apply to one or
more recognized Stock Exchanges to seek permission for listing
its shares with them. For this the prospectus shall mention the
name of the Stock Exchange
• In addition, an application for permission to list in that stock
exchange has to be made by the company.
• If permission is not given by the stock exchange the allotment
made shall be considered void

24. CONTUD…
8. Closing of the Subscription List:
• There is no provision in the Companies Act regarding the closing
of the subscription list
• But as per SEBI guidelines the subscription list must be sued for
a minimum of 3 and a maximum of 10 working days
• In the case of the Rights issue, the subscription list is open for
not more than 60 days
9. Beginning of allotment work:
The company can start the work of allotment after 5 days of
opening the issue (in case of filing of prospectus) and within 3
days (in case of filing statement in lieu of prospectus). This
enables the member of the public to go through the prospectus
thoroughly and decide.

25. 2. SUBSEQUENT ALLOTMENT OF SHARES
In case of subsequent allotment of shares offered
to the public for subscription by a public company,
the special provisions applicable to 'first allotment
of shares' as contained in Sec. 69 shall not apply,
except the provisions relating to minimum amount
(5 per cent) payable on application.

26. 3. ALLOTMENT OF DEBENTURES.
The special provisions applicable to 'first
allotment of shares' also apply to issue of
debentures by a public company which invites
public to apply for debentures except
provisions relating to
(a) the amount payable on application, and
(b) deposit of application money in a Scheduled
Bank.

27. IRREGULAR ALLOTMENT
1. An allotment shall be irregular when, it is made by the
company
 Without receiving the minimum subscription or the application
money subject to a minimum of 5% of the nominal value of the
share, or
 Without filing a statement in lieu of prospectus at least three
days before the allotment, if no prospectus is issued.
2. Where an application has been made to Stock
Exchange(s) as per Sec. 73 of the Companies Act for the
purpose of listing the shares and the permission has not
been granted before the expiry of 10 weeks from the date
of closing of subscription list the allotment is void.
3. Where the allotment is made before the expiry of the fifth
day after the publication of the prospectus, the allotment is
valid, but the Company and its officers in default are liable
to a fine.

28. EFFECTS OF IRREGULAR ALLOTMENT OF SHARES
1. Voidable at the option of the Shareholder
An allotment which is not made after complying with the
statutory requirements cited above, shall be considered
as an invalid allotment and is void. But an irregular
allotment is not an invalid allotment or a void allotment.
An irregular allotment is only voidable at the instance of
the allottee.
2. Time Limit
The option to avoid the allotment should be exercised
within two months after the holding of the statutory
meeting. In case of allotment by existing companies, the
allottee should exercise his option within two months
from the date of allotment.

29. CONTUD…
3. Compensation
Every director, who knowingly authorizes the allotment, is
liable to the applicant for any loss or damage incurred by
him. They should make good the loss incurred by the
allottee.
4. Ratification of the Allotment
The allottee alone can avoid the allotment but not the
company. If the allottee never avoids the allotment, the
company is bound by it as if it is a regular allotment. An
irregular allotment made by the directors can also be
ratified by the company at a general meeting
subsequently.

30. DEFINITION OF TRANSFER OF SHARES
 Transfer of shares refers to the intentional transfer of title
(rights as well as duties) to shares by one person to
another. There are two parties to transfer of shares, i.e.
transferor and transferee.
 The shares of the public company are freely transferable
unless there is an express restriction provided in the
articles of association. However, the company can refuse
the transfer of shares, if it has a valid reason for the same.
In the case of a private company, there is a restriction on
the transfer of shares subject to certain exceptions.

31. DEFINITION OF TRANSMISSION OF SHARES
 There are some cases when the transfer of shares
occurs due to the operation of law, i.e. when the
registered shareholder is no more, or when he is
insolvent or lunatic. Transmission of shares also
occurs when the shares are held by a company,
and it is wound up.
 The shares are transferred to the legal
representative of the deceased and the official
assignee of the insolvent. The transmission is
recorded by the company when the transferee
gives the proof of entitlement of shares.

32. BASIS FOR
COMPARISON
TRANSFER OF
SHARES
TRANSMISSION OF
SHARES
Meaning Transfer of shares
refers to the transfer of
title to shares,
voluntarily, by one party
to another.
Transmission of
shares means the
transfer of title to
shares by the
operation of law.
Affected by Deliberate act of
parties.
Insolvency, death,
inheritance or lunacy
of the member.
Initiated by Transferor and
transferee
Legal heir or receiver

33. BASIS FOR
COMPARISON
TRANSFER OF
SHARES
TRANSMISSION OF
SHARES
Consideration Adequate
consideration must be
there.
No consideration is
paid.
Execution of valid
transfer deed
Yes No
Liability Liabilities of transferor
cease on the
completion of transfer.
Original liability of
shares continues to
exist.
Stamp duty Payable on the market
value of shares.
No need to pay.

34. KEY DIFFERENCES BETWEEN TRANSFER AND
TRANSMISSION OF SHARES
 When the shares are transferred by one party to another
party, voluntarily, it is known as transfer of shares. When
the transfer of shares happens due to the operation of
law, it is referred to as transmission of shares.
 Transfer of shares is done intentionally whereas death,
bankruptcy and lunacy are the reasons for transmission
of shares.
 The transfer of shares is initiated by the parties to
transfer, i.e. transferor and transferee. Unlike
transmission of shares which is initiated by the legal
representative of the concerned member.

35. CONTUD…
 Transferee pays an adequate consideration to the
transferor for the transfer of shares. In the case of
transmission of shares, no consideration shall be paid.
 Execution of valid transfer deed is necessary when there is
the transfer of shares, but not in the transmission of
shares.
 When the transfer is completed, the liability of the
transferor is over. On the other hand, the original liability of
shares exists.
 Stamp duty is payable on the market value of shares in
case of transfer while in the transmission of shares no
stamp duty is to be paid.

36. DEBENTURE
 Debenture is used to issue the loan by government
and companies. The loan is issued at the
fixed interest depending upon the reputation of the companies.
When companies need to borrow some money to expand
themselves they take the help of debentures. There are four
different types of debentures.
 The word ‘debenture’ itself is a derivation of the Latin word
‘debere’ which means to borrow or loan. Debentures are written
instruments of debt that companies issue under their common
seal. They are similar to a loan certificate.
 Debentures are issued to the public as a contract of repayment
of money borrowed from them. These debentures are for a fixed
period and a fixed interest rate that can be payable yearly or
half-yearly. Debentures are also offered to the public at large,
like equity shares. Debentures are actually the most common
way for large companies to borrow money.

37. FEATURES OF DEBENTURES
 Debentures are instruments of debt, which means that
debenture holders become creditors of the company
 They are a certificate of debt, with the date of redemption
and amount of repayment mentioned on it. This certificate is
issued under the company seal and is known as a
Debenture Deed
 Debentures have a fixed rate of interest, and such interest
amount is payable yearly or half-yearly
 Debenture holders do not get any voting rights. This is
because they are not instruments of equity, so debenture
holders are not owners of the company, only creditors
 The interest payable to these debenture holders is a charge
against the profits of the company. So these payments have
to be made even in case of a loss.

38. TYPES OF DEBENTURES
1. Based on Performance
 Redeemable Debentures
Redeemable debentures are the debentures where the date of
redemption of the debentures are specifically mentioned in the
debenture certificate issued, where on such date, the company
is legally bound to return the principal amount to the debenture
holder.
 Irredeemable Debentures
Irredeemable debentures continue and unlike redeemable
debentures, there is no fixed date on which the company needs
to pay the debenture holders. It becomes redeemable only when
the company goes into liquidation.

39. CONTUD…
2. Based on security
 Secured Debentures
When the debentures are issued by way of creation of charge over
the assets of the company, then such debentures are called as
secured debentures. The charge created over the debentures may be
fixed or maybe floating. In accordance with the provisions of the
Companies Act, 2013, such charge created has to be registered with
the Registrar within 30 days of such creation.
 Unsecured Debentures
Unlike secured debentures, unsecured debentures are issued by the
company without creation of charge over the assets of the company.
In other words, these debentures do not offer any protection to the
debenture holder in case the company is unable to pay the principal
amount on the due date.

40. CONTUD…
3. Based on Priority
 First Mortgaged Debentures
Basically, the distinction of debentures based on priority can be called
as a subcategory of the secured debentures. First Mortgaged
Debentures are those debentures which has first preference over all
the other debentures issued by the company. Such preference is
claimed at the time of liquidation of the company when the assets of
the company are distributed among the credit holders.
 Second Mortgaged Debentures
Second Mortgage Debenture, as the name suggests, has second
preference over the assets of the company at the time of liquidation
after the first mortgaged debentures. Only after the first mortgaged
debenture holders are satisfied, will the second mortgaged debenture
holders can claim their principal amount from the company at the time
of liquidation.

41. CONTUD…
4. Based on Convertibility
 Fully Convertible Debentures
Fully convertible debenture holders have the right to convert their
debentures into equity shares of the company at a future date, at the
option of the debenture holders. The conversion ratio, the rights of the
debenture holders post-conversion and the trigger date for conversion
are defined at the time of issue of these debentures.
 Partially Convertible Debentures
Partially convertible debentures can be divided into two parts. The first
part being the debentures which are convertible to equity shares of the
company and the second part being non-convertible debentures which
shall redeem at the expiry of its tenure. An option is given to the
debenture holder to partially convert its debt into shares of the
company. Partially convertible debentures are also deemed as
optionally convertible debentures.
 Non-Convertible Debentures
Debentures which do not have an option to get converted into equity
shares of the company are called non-convertible debentures. These
debentures get redeemed at the end of the maturity period.

42. CONTUD…
5. Based on Record
 Registered Debenture
In case of registered debenture, the name, address, number of
debentures and other details pertaining to holding are entered
by the company in the register of debentures. In such cases,
the transfer of debentures from one debenture holder to
another debenture holder is recorded in the register of
debenture holders as well as register of transfer.
 Unregistered Debentures
Unregistered debentures are also called bearer debentures.
Unlike registered debentures, the company does not maintain
the records of such debentures and the principal amount and
the interest is paid to the bearer of the instrument as against
the name written over such instrument. These debentures are
easily transferrable in the market.

43. REGULATIONS OF SEBI
1. Minimum Listing Requirements for New Companies
In respect of the requirement of paid-up capital and market capitalization,
the issuers shall be required to include in the disclaimer clause forming a
part of the offer document that in the event of the market capitalization
(product of issue price and the post issue number of shares) requirement
of BSE not being met, the securities of the issuer would not be listed on
BSE. The applicant, promoters and/or group companies, shall not be in
default in compliance of the listing agreement.
2. Minimum Requirements for Companies Delisted by BSE seeking
Relisting on BSE
Companies delisted by BSE and seeking relisting at BSE are required to
make a fresh public offer and comply with the existing guidelines of SEBI
and BSE regarding initial public offerings.

44. 3. Permission to Use the Name of BSE in an Issuer
Company's Prospectus
Companies desiring to list their securities offered through a
public issue are required to obtain prior permission of BSE to
use the name of BSE in their prospectus or offer for sale
documents before filing the same with the concerned office of
the Registrar of Companies.
4. Submission of Letter of Application
As per Section 73 of the Companies Act, 1956, a company
seeking listing of its securities on BSE is required to submit a
Letter of Application to all the stock exchanges where it
proposes to have its securities listed before filing the
prospectus with the Registrar of Companies.
CONTUD…

45. 5. Allotment of Securities
As per the Listing Agreement, a company is required to
complete the allotment of securities offered to the public
within 30 days of the date of closure of the subscription
list and approach the Designated Stock Exchange for
approval of the basis of allotment.
In the case of Book Building issues, allotment shall be
made not later than 15 days from the closure of the
issue, failing which interest at the rate of 15% shall be
paid to the investors.
CONTUD…

46. 6. Trading Permission
As per SEBI Guidelines, an issuer company should complete the
formalities for trading at all the stock exchanges where the securities
are to be listed within 7 working days of finalization of the basis of
allotment.
A company should time limit specified in SEBI (Disclosure and
Investor Protection) Guidelines 2000 for allotment of all securities and
dispatch of allotment letters/share certificates/credit in depository
accounts and refund orders and for obtaining the listing permissions of
all the exchanges whose names are stated in its prospectus or offer
document. In the event of listing permission to a company being
denied by any stock exchange where it had applied for listing of its
securities, the company cannot proceed with the allotment of shares.
However, the company may file an appeal before SEBI under Section
22 of the Securities Contracts (Regulation) Act, 1956.
CONTUD…

47. CONTUD…
7. A requirement of 1% Security
Companies making public/rights issues are required to deposit
1% of the issue amount with the Designated Stock Exchange
before the issue opens. This amount is liable to be forfeited in
the event of the company not resolving the complaints of
investors regarding a delay in sending refund orders/share
certificates, non-payment of a commission to underwriters,
brokers, etc.
8. Payment of Listing Fees
All companies listed on BSE are required to pay to BSE the
Annual Listing Fees by 30th April of every financial year as per
the Schedule of Listing Fees prescribed from time to time.

48. MEMBERSHIP IN A COMPANY
By definition, the term “Member” in relation to a company
means, one who has agreed to become the member of the
company by entering his name into the ‘Register of Members’.
Every person who has agreed in writing to become a part of the
company and also holds shares of the company is considered
the ‘Member of the Company’ and is said to hold membership in
a company. The name of the member of the company is entered
as ‘Beneficial owner in the record of depository’.
In order to acquire the membership of the company, the following
two elements must be presented:
 An Agreement to become a member.
 Entry of the name of the person so agreeing, in the Register of
members of the company.
 The enlisted person should be in a capable of entering into a
contract with the company. But a bearer of share warrant is not
a member of the company. Finally, to become the registered
member of the company the person should be satisfactory as an
asset to the company.

49. MATTER Member Shareholder
Meaning A person whose name is
entered in the register of
members of a company.
A person who owns the shares
of the company.
Definintion Companies Act, 2013 defines
‘Member’ under section 2(55)
Shareholder is not listed under
the Companies Act, 2013
Share Warrantes The holder of the share warrant
is not a member.
The holder of the share warrant
is a Shareholder.
Company Every company must have a
minimum number of members.
The Company limited by
shares can have shareholders
Memorandum A person who signs the
memorandum of association
with the company becomes a
member.
After signing the memorandum,
a person can become a
shareholder only if shares are
allotted to him.

50. MODES OF ACQUIRING MEMBERSHIP
As per Sec. 41 of the Companies Act, a person may acquire the
membership of a company
1. by subscribing to the Memorandum before the registration of the
company.
2. by agreeing to become a member
 by applying for the shares offered by a company.
 by becoming a transferee of a share or shares and being placed on the
register of members.
 by transmission of shares on succession to a deceased or bankrupt
member and the consequent registration in the register of the company.
 by holding out shares and by allowing his name to be retained on the
register.
Besides, there is another method of becoming a member of a company
i.e. “Membership by Qualification Shares“. If a person agrees to
become a director of a company, he is deemed to have accepted to
become a member of that company. On his appointment, certain
shares should be allotted to him. The Companies Act provides that any
one who agrees to become a director of a public company should take
at least one share before his appointment. Such shares are known as
qualification shares.

51. WHO CAN BECOME A MEMBER?
1. Minors: A minor, is not a competent person to enter into a valid
contract. As such, he is disqualified to acquire membership.
However, minors may be allotted shares. On attaining majority,
the minor can avoid the contract. But the minor should
repudiate the contract within a reasonable time.
2. Lunatic and Insolvent: A lunatic cannot become a member. An
insolvent, however, can become a member and is entitled to
vote at the meetings of the company. But his shares vest in the
Official Receiver when he is adjudged insolvent.
3. Partnership Firm: A partnership firm may hold shares in a
company in the individual name of partners as joint holders. But
the shares cannot be issued in the name of the partnership firm,
as it is not a legal person in the eye of law.

52. CONTUD…
4. Company: A company, being a legal person, can
become the member of another company in its own
name. But a company can subscribe for the shares of
another company only when it is authorized by
Memorandum. Similarly, a subsidiary company cannot
buy the shares of its holding company.
5. Foreigners: Foreign national can be members of
companies registered in India. For that permission of RBI
is mandatory. When he turns an alien enemy, his right as
a member will be suspended.
6. Fictitious Person: A person who takes the shares in the
name of fictitious person becomes liable as a member.
Besides, such a person can be punished for
impersonation under section 68-A.

53. RIGHTS OF THE MEMBERS
1. Statutory Rights: These are the rights conferred upon the members by
the Companies Act. These rights cannot be taken away by the Articles
of Association or Memorandum of Association. Some of the important
statutory rights are given below
 Right to receive notice of meetings, attend, to take part in the
discussion and vote at the meetings.
 Right to transfer the shares [in case of public companies].
 Right to receive copies of the Annual Accounts of the company.
 Right to inspect the documents of the company such as register of
members, annual returns, etc.
 Right to participate in appointments of directors and auditors in the
Annual General Meetings.
 Rights to apply to the Government for ordering an investigation into the
affairs of the company.
 Right to apply to the Court for winding up of the company.
 Right to apply to the National Company Law Tribunal for relief in case of
oppression and mismanagement under Secs. 397 and 398.

54. CONTUD…
2. Documentary Rights: In addition to the statutory
rights, there are certain rights that can be conferred
upon the shareholders by the documents like the
Memorandum and the Articles of Association.
3. Legal Rights: These are the rights, which are given to
the members by the General Law.
e.g., in case of any misstatement or concealment of a
material fact in a prospectus, a person who has applied
for shares on the faith of such prospectus and has been
allotted shares can avoid the contract and claim

55. LIABILITIES OF A MEMBER:
1. Companies limited by shares: Companies limited by
shares are the most common and may be a public company
or a private company, where the liability of members of a
company is limited to amount unpaid on the shares.
2. Companies limited by guarantee: In this type of companies
liability of members of a company is limited to a fixed amount
which members undertake to contribute to the assets of
company in the event of its being wound up.
3. Unlimited companies: Unlimited companies are those
companies without limited liability. Section 3 specifically
provides that any 7 or more persons (2 or more in case of a
private company) may form an incorporated company, with or
without limited liability.