• A public company, but not a private company, is entitled , by issuing a
prospectus, to invite applications for its shares or debentures.
• Prospectus is defined by Sec. 2(70) as: ‘ Prospectus means any document
described or issued as a prospectus and includes a red herring prospectus
referred to in sec.32 or shelf prospectus referred to in section 31 or any
notice, circular, advertisement or other document inviting offers from the
public for subscription or purchase of any securities of a body corporate’.
• Shelf prospectus and red herring prospectus are also considered as a
2. Essentials for a document to be called as a prospectus
For any document to considered as a prospectus, it should satisfy
1.The document should invite the subscription to public share or
debentures, or it should invite deposits.
2.Such an invitation should be made to the public.
3.The invitation should be made by the company or on the behalf
4.The invitation should relate to shares, debentures or such other
3. • Every public company either issue a prospectus or file a statement in
lieu of prospectus. This is not mandatory for a private company. But
when a private company converts from private to public company, it
must have to either file a prospectus if earlier issued or it has to file a
statement in lieu of prospectus.
Objects of Prospectus
1. To bring to the notice of the public that a new company has been
2. To arouse interest of the public to make investment in the company.
3. to create confidence in the public about the company, its directors
and its profitability
4. to secure that the directors of the company accept responsibility of
the statements in prospectus.
4. Characteristics of Prospectus
1. Prospectus to be in writing
A prospectus must be in writing . An oral invitation or advertisement in
T.V and films is not treated to be a prospectus.
2. Invitation for the subscription
Prospectus invites the public to subscribe for shares in, or debentures of,
3. Public issue
Public includes any section of the public, whether selected as members or
debenture holders of the company concerned or as clients of the person
issuing the prospectus or in any other manner.
5. Advertisement of prospectus
Sec.30,Companies Act 2013 contains the provisions regarding the
advertisement of the prospectus.
This section states that when in any manner the advertisement of a
prospectus is published, it is mandatory to specify the contents of the
memorandum of the company regarding the object, member’s liabilities,
amount of the company’s share capital, signatories and the number of
shares subscribed by them and the capital structure of the company.
6. Types of the prospectus
1.Red Herring Prospectus
Red herring prospectus is the prospectus which lacks the complete particulars about
the quantum of the price of the securities. A company may issue a red herring
prospectus prior to the issue of prospectus when it is proposing to make an offer
• This type of prospectus needs to be filed with the registrar at least three days prior
to the opening of the subscription list or the offer. The obligations carried by a red
herring prospectus are same as a prospectus. If there is any variation between a
red herring prospectus and a prospectus then it should be highlighted in the
prospectus as variations.
• When the offer of securities closes then the prospectus has to state the total
capital raised either raised by the way of debt or share capital. It also has to state
the closing price of the securities. Any other details which have not been included
in the prospectus need to be registered with the registrar and SEBI.
• The applicant or subscriber has right under sec. 60B(7) withdraw the application
on any intimation of variation within 7 days of such intimation and the
withdrawal should be communicated in writing.
7. 2. Shelf Prospectus
Shelf prospectus can be defined as a prospectus that has been issued by any
public financial institution, company or bank for one or more issues of securities
or class of securities as mentioned in the prospectus. When a shelf prospectus is
issued then the issuer does not need to issue a separate prospectus for each
offering he can offer or sell securities without issuing any further prospectus.
• The provisions related to shelf prospectus has been discussed
under sec.31,Companies Act, 2013.
• The regulations are to be provided by the Securities and Exchange Board of
India (SEBI) for any class or classes of companies that may file a shelf
prospectus at the stage of the first offer of securities to the registrar.
• The prospectus shall prescribe the validity period of the prospectus and it
should be not be exceeding one year. This period commences from the opening
date of the first offer of the securities. For any second or further offer, no
separate prospectus is required.
• While filing for a shelf prospectus, a company is required to file an
information memorandum along with it.
8. 3.Abridged Prospectus
The abridged prospectus is a summary of a prospectus filed before the registrar. It
contains all the features of a prospectus. An abridged prospectus contains all the
information of the prospectus in brief so that it should be convenient and quick for an
investor to know all the useful information in short.
sec.33(1)companies Act also states that when any form for the purchase of securities of
a company is issued, it must be accompanied by an abridged prospectus.
• It contains all the useful and materialistic information so that the investor can take a
rational decision and it also reduces the cost of public issue of the capital as it is a
short form of a prospectus.
A deemed prospectus has been stated under sec.25(1).
When any company to offer securities for sale to the public, allots or agrees to allot
securities, the document will be considered as a deemed prospectus through which the
offer is made to the public for sale. The document is deemed to be a prospectus of a
company for all purposes and all the provision of content and liabilities of a prospectus
will be applied upon it.
• In the case SEBI v Kunnamkulam Paper Mills Ltd, it was held by the court that
where a rights issue is made to the existing members with a right to renounce in the
favor of others, it becomes a deemed prospectus if the number of such others exceeds
9. MATTERS CONTAINED IN THE PROSPECTUS
For filing and issuing the prospectus of a public company, it must be signed and dated and
contain all the necessary information as stated under sec.27, 2013 Act.
1.Name and registered address of the office, its secretary, auditor, legal advisor, bankers,
2.Date of the opening and closing of the issue.
3.Statements of the Board of Directors about separate bank accounts where receipts of
issues are to be kept.
4.Statement of the Board of Directors about the details of utilization and non-utilisation of
receipts of previous issues.
5.Consent of the directors, auditors, bankers to the issue, expert opinions.
6.Authority for the issue and details of the resolution passed for it.
7.Procedure and time scheduled for the allotment and issue of securities.
8.The capital structure of the in the manner which may be prescribed.
9.The objective of a public offer.
10.The objective of the business and its location.
10. 11.Particulars related to risk factors of the specific project, gestation period
of the project, any pending legal action and other important details related
to the project.
12.Minimum subscription and what amount is payable on the premium.
13.Details of directors, their remuneration and extent of their interest in the
14.Reports for the purpose of financial information such as auditor’s report,
report of profit and loss of the five financial years, business and transaction
reports, statement of compliance with the provisions of the Act and any
11. MISREPRESENTATION AND REMEDIES
There is no specific definition of misrepresentation in prospectus under
Companies Act,2013. It can be described as any statement which is untrue
or misleading in form of context in which it is included or where any
inclusion or omission of any matter is likely to mislead.
Civil and Criminal liabilities follow if the promoters are found guilty of
misrepresentation. Sec. 34 of the Act deals with criminal liability for
misstatement it has the same liability as that of fraud under sec. 447 of the
Act. As per Sec. 447,a person guilty of fraud shall be punishable with
imprisonment for a term ranging from six months to 10 years. Also, liable
for fine, which can extend to three times the amount involved in the fraud.
In case where the fraud involves public interest, the term of imprisonment
shall not be less than three years.
12. Sec. 35, Companies Act provides for civil liability for misstatement in
prospectus. Under sec. 36, those liable to pay compensation include the
directors of the company at the time of the issue of the prospectus and the
promoters, among others, to every person who has sustained loss or
In this case, those who seeking compensation have to file a law suit.
The law allows the following remedies for misrepresentation:
1. Damages for Deceit
those who issue a prospectus with fraudulent statements are liable to pay
damages to anyone who purchased shares on the faith of the prospectus. In
Derry v. Peek (1889) LR 14 AC337 (HL), the prospectus of the company
stated that the company had been authorised to use steam power in moving
its trams. The authority was in fact subject to the approval of the Board of
Trade, which refused its approval. Yet the directors were held to be not
guilty of fraud, because, they were honest, where as fraud requires a
statement which the maker knows to be false.
13. here, in the case of fraud or deceit, the burden of proof lies on the
person who undergoes fraud.
• FRAUDULENT MISSTATEMENT
Firstly, the plaintiff must prove that there was a fraudulent misstatement.
According to Lord Herschell, ‘ to support an action of deceit, fraud must
be proved and nothing less than fraud will do’.
Fraud must be proved when it is shown that false representation has
b) Without belief in its truth
c) Recklessly, carelessly whether it be false or true.
• The false representation must relate to some existing facts which are
material to the contract of purchasing shares.
14. 2.Compensation under Sec. 35
As per this sec. 35, a) every person who is a director of the company at
the time of the issue of the prospectus.
b) Every person who has authorised himself to be named as a director
in the prospectus.
c) Every promoter who was a party to the preparation of the
d) Every person who authorised the issue of the prospectus.
They are liable to compensate the investor for any loss sustained by
him by reason of any untrue statement contained in the prospectus. As
per this sec, the main advantage is that the plaintiff does not have to
• If the representation is false, the directors cannot escape liability even
if they had made it bonafide and not with intent to deceive.
15. 3. Recission for Misrepresentation
An allotment of shares can be avoided at the option of the allottee if it was caused by
misrepresentation whether innocent or fraudulent. By avoiding the contract he is able
to get rid of his shares and claim the money he paid for them.
• a contract induced by misrepresentation is valid until it is rescinded.
4.Liability under sec. 26
Sec.26(1) states that a company’s prospectus must contain certain particulars and
subsection (9) imposes penalty for its contravention. But this section is silent as to the
subscribers remedy in case all the required particulars are not disclosed. The provision
under sec. 26 contemplate a liability in damages on the part of directors and other
persons responsible for prospectus.
CRIMINAL LIABILITY FOR MISREPRESENTATION
Where a prospectus issued, circulated or distributed includes any statement which is
untrue or misleading in form or context in which it is included or where any inclusion
or omission of any matter is likely to mislead, every person who authorises the issue of
such prospectus is to be liable under sec.447, liability for fraudulent conduct.
16. • New Brunswick and Canada Railway and Land Co v Muggeridge (1860) 3
LT 651 - GOLDEN RULE OF PROSPECTUS
• Peek v Gurney (1873) LR 6 HL 377
17. RAISING OF FUNDS
Different methods available for a company to raise funds;
PUBLIC COMPANIES PRIVATE COMPANIES
18. Public offer: When a public company issues securities to the public for subscription, it is
known as public offer.
Public offer may be initial public offer (IPO) or further public offer (FPO). When an
unlisted issuer issues securities to the public, it is known as initial public offer whereas
when a listed issuer issues securities to the public, it is further pubic offer i.e. further issue
of capital by a company.
Public offer also includes offer for sale (OFS) by existing shareholders of the company.
Public offer has to be through issue of a prospectus. Every public offer by a public company
should be in dematerialized form in compliance with the Depositories Act, 1996.
According to s. 23 of the Companies Act, 2013(CA, 2013), a public company may issue
securities as under:
i. issue of securities to public through prospectus
ii. issue of securities through private placement
iii. through a rights issue or a bonus issue after complying with the provisions of the Act.
If a company is listed or wants to list its securities, it will have to comply with Securities and
Exchange Board of India Act, 1992 with its Rules and Regulations.
19. • Private Placement
According to s. 23 of the CA, 2013, a private company may issue securities as under:
i. private company may issue securities by way of rights issue or bonus issue
ii. through private placement
Private placement means any offer of securities or invitation to subscribe to securities
to a select group f persons by a company. S. 42, CA, 2013 deals with offer of
securities on private placement which can be made through issue of private placement
offer letter. Such an offer for securities or invitation to subscribe can be made to such
persons not exceeding fifty in a financial year. This does not include offer to qualified
institutional buyers and employees of the company receive securities under
employees’ stock options.
Rights Issue: Rights issue means an offer of specified securities by a listed issuer to
the shareholders of the issuer as on the record date fixed for the said purpose under
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Every equity
shareholder of a company has a right to be offered shares when the company goes for
further issue of capital. Such right falls under pre-emptive rights of existing
shareholders of any company having a share capital and is protected by s. 62 of the
Companies Act, 2013.
Issue of bonus shares: A bonus share is issued when a company capitalizes its profits
by transferring an amount equal to the face value of the share from its reserves to the
• Shares expresses the proprietary relationship of a corporate body. A share
holder is the proportionate proprietor of a company.
• A share is the legal recognition of a proportionate ownership of a company.
• Share can be defined in the Companies Act, 2013; it means share in the
‘share capital’ of a company, and includes stock.
• Borland’s Trustee v. Steel Bros. & Co. Ltd (1901) 1 Ch 279: 47 WR 120 , a
share in a company is not to be regarded as a sum of money settled subject
to certain conditions contained in the Articles of Association, but it is to be
regarded as an interest in the company measured.
• A share is a fractional part of the capital. The capital is the property of the
Capital means the amount invested in business. ’Capital’ may be used to
mean capital goods, i.e, tools of production; the money available for
investment, or invested; the discounted value of the future income to be
received from an investment; the real or money value of total assets; money
or property used for the production of wealth; sum total of corporate stock.
capital is accumulated goods, possessions, and assets, used for the
production of profits and wealth.
Trevor v Whitworth (1887) 12 A.C 409, the judgement states about the
explanation of capital.
22. SHARE CAPITAL
Capital and share capital are synonymous. Share capital means capital
raised by a company by the issue of shares. Share capital is not necessary
condition of incorporation of a company. But the memorandum states the
amount of capital with which the company desired to be registered and the
no. of shares into which it is to be divided.
companies limited by guarantee and unlimited companies may or may not
have share capital. But, companies limited by shares must necessarily have
23. TYPES OF CAPITAL
1. Authorised or Nominal or registered capital
the amount of capital stated in the company’s memorandum of association
at the time of registration is called ‘Authorised Capital’. There is no legal
limit to the max.amount which the company is authorised capital. The
authorised capital is the max.amount which the company is authorised to
raise by way of public subscription.
2. Issued capital
the amount of capital which is actually issued to the public called’ issued
capital’. It is less in amount than the authorised capital.
3. Subscribed capital
it is that part of the issued capital for which applications are received from
public is called the ‘subscribed capital’. It may be more less than the issued
24. 4. Called up capital
It is that part of the allotted share capital which has been called up by the
company. Or it is the amount on the shares which is actually demanded by the
company to be paid is known as ‘ called –up shares’.
5. Uncalled capital
It is that part of the allotted share capital which has not been called up by the
6. Paid up capital
It is a part of the issued capital which has been paid up by the share holder or
which is credited as paid up on the share.
7. Reserve capital
It is that part of uncalled capital which has been reserved by the company to be
called in tha event of winding up. A company cannot charge on its reserve
capital. It cannot turned into ordinary capital without the leave of the court.
25. KINDS OF SHARE CAPITAL
THE SHARE CAPITAL OF A COMPANY LIMITED BY SHARES SHALL BE OF TWO
1.Equity share capital
a) with voting rights
b) with differential rights as to dividend, voting or otherwise in
accordance with such rules as may be prescribed.
2) Preference share capital
it means that the part of the issued share capital of the company which
carries or would carry a preferential right related to payment of dividend, or
repayment in the case of a winding up or repayment of capital.
26. a capital of a company is dividend into a no. of a small units. Each
unit is called a share. A share is not a sum of money but is an interest
or right to participate in a profit made by the company or in the assets
of the company when it is wound up. A
A share secures to its owner (share holder) certain rights and
A ‘share’ means a share in the capital of the company. It is a tangible
FEATURES OF SHARES
1. Share is a definite part of the authorised share capital of a company.
2. share is a movable property transferable in the manner provided by
3. It is serially numbered so that the shares held by each member may
be easily identified.
27. 4. It carries with it the rights and obligations of the share holder which
remains shares of the company during its subsistence
5. It is that the interest of the share holder on the basis of which the
share holder does not have right over the assets of the company.
Nature of share
According to sec. 44, Companies Act, the shares or debentures or other
interest of any member in a company shall be movable property
transferable in the manner provided by the articles of the company.
In India, share is regarded as goods. A share in a company is chose-in-
action; it means the property of which one does not have immediate
possession , but has a right to it, which can be enforced by a legal
action and share certificate is the evidence of it.
According to Lindley L.J. Re National Bank of Wales (66 LJ
Ch225, 226) , a ‘share’ in a company does not denote rights only, it
denotes obligations also.
28. • In S. Viswanathan v. East India Distilleries and Sugar Factories Ltd.,
(AIR 1957 Mad 341,) court states that, ‘a share is undoubtedly movable
• shares are not goods in the ordinary sense. Shares are a peculiar kind of
movable property which cannot pass from hand to hand. The property in
these shares belonged to the registered share holders and could not be
transferred to another except according to the articles of the company.
• Share holders are the owners of certain rights and interest and subject to
some liabilities. A share holder acquires an interest not in a mere chattel,
but , in the company itself, an interest of a permanent nature.
• The share holder has a position of ‘functionless rentier’ of capital.
29. RIGHTS OF SHARE HOLDERS
1. VOTING RIGHTS (Sec. 47)
Every member of a company limited by shares and holding equity share
capital shall have a right to vote on every resolution placed before the
company. And his voting right on a poll shall be in proportion to his
share in the paid- up capital of the company.
2. Variation of share holder’s rights (sec. 48)
where a share capital of a company is divided into different classes of
shares, the rights attached to the shares of any class may be varied with
the consent in writing of the holders.
In detail, if variation by one class of share holders affects the rights of
any other class of share holders, the consent of three –fourth of such
other class of share holders shall also be obtained .
3. The decision of the Tribunal shall be binding on the share holders.
30. 4. The company shall , within thirty days of the date of the order of the
Tribunal, file a copy thereof with the registrar.
5. Where there is any kind of default is made in complying with the
provisions of the sec. 47&48 , company shall be punishable with fine
which shall not be less than RS. 25, 000 but which may extend to five
lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term of six months or with fine
which shall not less than Rs. 25000 , but which may extend to five lakh
rupees, or with both.
31. TYPES OF SHARES
1. PREFERENCE SHARES
Shares which carry preferential rights with regard to the payment of
dividend and repayment of capital and to the return of capital when the
company goes into liquidation are called preference shares. Prefernce
shares are of different kinds;
1. Cumulative preference shares
2. Non- cumulative preference shares
3. Participating preferential shares
4. Non- participating preferential shares
5. Convertible presential shares
6. Non- convertible preferential shares
7. Redeemable preference shares
32. 2. EQUITY SHARES
Equity shares are those which are not preference shares. They are also called
as ordinary shares. They carry no preferential rights as to dividend or capital
repayment. Equity share holders enjoy wide voting rights at the meetings.
Difference between preferential and equity share
1.THE NOMINAL VALUE OF
PREFERENCE SHARES IS RELATIVELY
HIGHER. IT IS USUALLY RS. 100 AND
2. THE RATE OF DIVIDEND OF THESE
SHARES IS FIXED.
3. A PUBLIC COMPANY CAN ISSUE
REDEEMABLE PREFERENCE SHARES
1.THE NOMINAL VALUE OF EQUITY
SHARES IS GENERALLY LOW. IT IS RS.
10 OR LESS.
2. THE RATE ON DIVIDEND ON THESE
SHARES IS NOT FIXED.
3. A PUBLIC COMPANY CANNOT ISSUE
REDEEMABLE EQUITY SHARES
33. 4. THESE SHARES ARE FIRST PAID
5. THESE SHARE HOLDERS HAVE A
FIRST RIGHT TO RECEIVE BACK
6. THEY ENJOY LIMITED VOTING
RIGHTS.THEY CAN VOTE ONLY ON
RESOLUTIONS WHICH DIRECTLY
AFFECT THE RIGHTS ATTACHED
TO THEIR PREFERNCE SHARES.
THEY CAN VOTE ALONG WITH
THE EQUITY SHARE HOLDERS
NAMELY, a) reduction of capital
b)repayment c)winding up
7. THESE ARE PURCHASED BY
THOSE WHO PREFER TO RECEIVE
REGULAR AND STABLE INCOME.
4. THESE SHARES ARE PAID
DIVIDEND AFTER PREFERENCE
SHARES ARE PAID.
5. THEIR RIGHT TO RECEIVE BACK
THEIR CAPITAL COMES NEXT TO
6. THEY ENJOY WIDE VOTING RIGHTS
ON EVERY RESOLUTION
7. THESE ARE PURCHASED BY THOSE
WHO ARE WILLING TO BEAR CAPITAL
34. 3. DEFFERED SHARES
According to Companies Act, 2013, a public limited company can issue
preference and equity shares. It cannot issue deffered shares. But , a private
limited company can issue deffered shares can be called as ‘Founders
Shares’ or ‘Management Shares’.
These shares will get dividend after dividends are paid on preference shares
and equity shares.
Bonus is something given in addition to what is usually or strictly due.
Bonus shares come to share holders in addition to what they get in the form
of dividend. The company may also issue Bonus shares in case it has surplus
cash and has no use for it. Bonus shares cannot be issued as a gift. Bonus
issue is not an offer. issue of bonus shares is called as ’capitalisation of
profits’. Bonus shares shall be fully paid.the result of bonus issue is there
will be a fall in the market value of the shares. This makes the shares readily
35. 6. RIGHT SHARES
When the unissued share of the authorised capital is not issued earlier but is
issued now, then the existing shareholders of the company have a first right
to get to get them. This right is known as ’right of pre-emption. The shares
are meant for existing share holders are known as ‘right shares’.
DIFFERENCE BETWEEN BONUS SHARES AND RIGHT SHARES
1. Bonus shares are the shares issued to
the existing share holders from the
profits and reserves of the company
without taking any extra payment.
2. the issue of bonus shares implies the
payment of dividend in the form of
shares instead of cash.
3. Bonus shares are issued to the existing
shareholders without taking any
1. The right shares are shares which are
meant for the existing share holders.
2. The object of the issue of right shares
is to increase the subscribed capital of
3. Right shares are issued to the existing
share holders for consideration.
36. • SHARE SCRIPTS
SHARE SCRIPTS ARE DOCUMENTS OF TITILE AND THEY ARE OF
NO VALUE TO A THIRD PARTY. ONLY IN THE SHAREHOLDER
HIMSELF TRANSFERRING THE SHARES TO A THIRD PARTY, THE
THIRD PARTY BECOMES OWNER OF THE SHARES.
RAJ BANS v JANAKI DEVI (AIR 1965 PUN.314), HELD THAT SHARE
SCRIPTS ARE MOVABLE PROPERTY.
37. ALLOTMENT OF SHARES
Offers for shares are made on application forms supplied by the company.
When an application is accepted, it is an allotment.Allotment of shares is
basically issuing new shares by the company to the public at large who are
either original or existing shareholders.
It is an appropriation out of the previously unappropriated capital of a
In case of forfeited shares are re- issued, it is not the same thing as an
a valid allotment has to comply with the requirements of the Companies
Act and the principles of Law of Contract relating to acceptance of offers.
STATUTORY RESTRICTIONS ON ALLOTTMENT
1. Minimum subscription and application money. (Sec. 39)
First requisite of a valid allotment is that of minimum subscription. When
shares are offered to the public, the amount of minimum subscription has to be
stated in the prospectus.
38. No shares can be allotted unless at least so much amount has been
subscribed and the application money , which must not been less than 5%
SEBI may prescribe different percentage of the nominal value of the
share, has been received in by cheque or other instruments.
Malabar Iron & Steel Works Ltd, re (AIR 1964 Ker 311) establishing that,
it is a condition to a valid allotment that the whole of the application
money should have been paid to and received by the company by cheque
or other instrument.
An application for shares , if not accompanied by any such payment,
does not constitute a valid offer.
In Indian States Bank Ltd v Sardar Singh (AIR 1934 All 855), it was held
that, an allotment of shares made without the application of money being
paid is invalid and the directors are guilty of misfeasance.
39. • if the minimum subscription has not been received within 30 days of the
issue of the prospectus, or such other period as may be specified by SEBI,
the amount received is to be returned within such time and manner as may
• RETURN OF ALLOTMENT - Sec.39(4) states that, where a company
having a share capital makes an allotment of securities, it has to file with
the registrar a return of allotment in such manner as may be prescribed.
• PENALTY FOR DEFAULT –in case of default, the company and its officer
who is in default is liable to a penalty for each default of Rs. 1000 for each
day during which the default continues or Rs 100,000 whichever is less.
2. Shares to be dealt in on stock exchange (Sec.40)
Every company intending to offer shares or debentures to the public by the
issue of a prospectus has to make an application before the issue to any one
or more of the recognised stock exchanges for permission for the shares or
debentures to be dealt with at the exchange. This is known as listing.
40. • The requirement is not merely to apply but also to obtain permission.
The name or the names of the stock exchanges to which the
applications has been made must also be stated in the prospectus.
• In Union of India v Allied International Products Ltd , (1970 3 SCC
594) , the object of this provision is stated as to enable shareholders to
find a ready market for their shares, so that they can convert their
investment into cash when ever they like.
General principles as to allotment of shares
An allotment to be effective has to comply with the requirements of the
law of contract relating to the acceptance of an offer.
1.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.
41. 2.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 Sec.6, Contract Act applies
and the application must be deemed to be revoked.
3.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.
4.Absolute and unconditional
Allotment should be absolute and should be according to the terms and
conditions of the application if any.
42. Provisions of Companies Act relating to issue and allotment of shares
1.A public company should file a prospectus or declaration in lieu of a prospectus
inviting offers from the public for the purchase of shares.
2.After reading the prospectus, the public applies for the company shares in printed
forms. The company can ask the issue price to be paid in full, together with the
application money or to be paid in instalments as share application money, share
first call, second call, etc. The application money must be paid at least 5% of
the nominal value of the share.
3.The Allotment of shares cannot be made unless the minimum amount that is the
minimum subscription stated in the prospectus is subscribed or applied. The
minimum subscription should be mentioned in the prospectus.
4.The share application amount should be deposited in the bank which can be
operated by the company only after the commencement certificate.
5.The company has to return and refund the entire subscription amount instantly
if 90% of the issue amount is not achieved by the company within 60 days. For
further delay, which is beyond 78 days, the company has to pay 6% interest per
43. CALLS ON SHARES
After allotment of shares, the company can call for the full amount or
instalments which are due on shares from the shareholders according to rules
mentioned in the prospectus. Usually, the articles of the company include
provisions regarding calls. If there are no such provisions then the following
provisions are applicable:
1.No call should be for more than 25% of the nominal value of each share.
2.The interval between two calls should not be less than a month.
3.At least 14 days should be provided to each member for the call mentioning
the amount, date, and place of payment.
4.Calls should be made on a uniform basis on the entire body of shareholders
falling under the same class.
44. Procedure of allotment of share
The general procedure that is accepted in the law of contract also applies
to the allotment of shares. These are:
• The resolution of the board of directors must be done prior to allotment.
The directors cannot be delegated this duty and it becomes very
important that a valid resolution is passed by the board for allotment in a
• According to Section 6 of the Indian contract Act, 1872, it is important
that the allotment of shares is done within a reasonable period of time
but this reasonable time varies from case to case. The refusal to accept
the shares by the applicant is the choice of himself if the allotment is
made after a very long time to him. The same thing happened in the case
of Ramsgate Victoria Hotel Company v. Montefiore 1866, wherein the
allotment of the share was made at an interval of six months between
application and allotment and it was held unreasonable.
45. • Moreover, the allotment must be unconditional and absolute and must
be allotted on the same terms upon which they were agreed upon
during the acceptance of the application.
• Acceptance is the key to allotment and without acceptance of valid
allotment cannot be made just on an oral request.
In Gopal Jalan and company v. Calcutta Stock Exchange Association
Limited case (AIR 1964 SC 250), it was held that appropriation of
shares to a particular person by any company is allotment of shares.
allotment of shares also includes acceptance which leads to a contract
between the company and the shareholder whereas the application for
shares is an offer.
In Khoday distilleries v. CIT, it was held that the allotment of shares is a
creation and not a transfer of shares.
46. CALLS ON SHARES
Where shares are issued , the usual procedure to realise the payment on
shares is laid down in the articles of the company.
a portion of the share value is paid with application, a portion with allotment
and the balance by instalment. The instalments are payable on calls.
In legal sense, calls may be defined as demand by the company to pay the
whole or a part of the face value of a share remaining unpaid on the basis of
resolution for an unpaid amount are when the company is a going or working
concern (institution), but also when the company is being wound up.
In the former situation, the calls are made on the initiative of directors, and
in the latter situation, the calls are made on the initiative of the liquidator.
Though every share holder is under the statutory obligation to pay the full
amount of the share and the money payable on share is a debt from a share
47. payment on calls is compulsory.
No right is conferred on an individual shareholder to restrain the directors
from making a call on mere ground that the particular share holder
considers it necessary.
If the articles provide that the time , place, and person and the amount
should be specified in respect of payment of call, the directors cannot
deviate from the mandates of the articles. Any calls made in contravention
of articles is to be considered as invalid.
In East and West Insurance Co. Ltd v. Kamala Jayanti Lal Mehta (AIR
1956 Bom 537), a call was made on a resolution by the directors in the
Board of meeting without specifying the time and place of payment of the
call, it was held that the the call was bot a valid one.
48. • Directors are the trustees of the company, so far as the calls on shares are
concerned. They must exercise the power to call on shares in the interest of
the company, for the company is in the nature of a trust.
• According to Sec. 49, the Companies Act, 2013 Call must be made on
uniform basis on all shares falling under the same class.
• Where there is an irregularity in making the call, it may be cured by
subsequent resolution. But, if the articles provide that a call suffering from
mere irregularity will be good, such call is not then invalid.
After the death of a member, a company made a call upon his shares and
gave notice thereof through post by letter addressed to him which did not
reach his executers. The letter came back to the company with a remark
‘Gone away’ . The executors upon being informed that the testator was a
member of the company, and the call of share being made were liable to pay
such calls out of his assets.
49. call on shares , when made- the word necessarily implies a calling which
ordinarily means a calling for the amount due on the share. A call
becomes due when a notice is issued making the call.
LIEN ON SHARES-
Lien can be defined to be a charge on property for the payment of a debt or
duty, and for which it may be sold in discharge of the lien.
According to Art. 9 – 12 of para II of Table F of schedule I , companies Act
9. the company shall have a first and paramount lien-
On every share, for all moneys called, or payable at a fixed time, in respect
of that share.
Resolution for call : a resolution for a call, to be valid, must state not only
the amount of the call , but also the time at which it is to be paid.
50. b) On all shares standing registered in the name of a single person;
the company’s lien on a share extend to all dividends payable in
respect of such shares.
the company may sell any share on which the company has a lien. The
company can sell the share only if a sum in respect of which the lien
exists is presently payable. Before selling such shares, 14 days notice
in writing should be given to the registered holder demanding
payment. If the company sells such shares, the purchaser's name
should be registered as holder of the shares.
51. ALTERATION AND REDUCTION OF
• ALTERATION OF CAPITAL (S. 61)
A limited company with a share capital can alter the capital clause of
its memorandum of association in the following ways;
- Which is provided authority to alter is given by the articles as;
1. It may increase its authorised capital by such amount as it thinks
Nupur Mitra v. Basubani (p) Ltd,(2002); stated as increase of capital
beyond the authorised limit set in the memorandum is ultra vires. The
capital clause of the memorandum would have to be altered for that
52. 2. Consolidate and divide the whole or any part of its share capital into shares
of larger amount
3. Convert all and any of its fully paid up shares into stock or vice versa into
4. Sub –divide the whole or any part of its share capital into shares of smaller
5. Cancel those shares which have not been taken up and reduce its capital
these things can be done by the company by passing special resolution at a
general meeting , but do not require to be confirmed by NCLT.
within 30 days of alteration, notice must be given to the registrar who will
record the same and make necessary alteration in the company’s
memorandum and articles.
53. REDUCTION OF CAPITAL
according to S.66(1), A reduction of capital is lawful except when
sanctioned by the tribunal.
‘ conservation of capital is one of the main principles of company law’.
• Share capital of a company is the only security on which the creditors can
rely. Therefore, any reduction of capital diminishes the fund out of which
they are to be paid. Only because of this reason that companies limited by
shares are not allowed to purchase their own shares, because the capital is
• For the same reason , power to forfeit, and to accept a surrender of, shares
is strictly guarded.
• Under sec. 66, a company limited by shares or a guarantee, a company
having a share capital may reduce its capital in any way. It may ;
Eg:1. extinguish or reduce the liability on any of its shares in respect of the
share capital not paid –up.
54. 2.Cancel any paid – up share capital which is lost or is unrepresented by any
3. Pay off any paid – up share capital which is in excess of the wants of the
Reduction procedures were stated in the companies act, and the authority to
reduce capital must be present in the articles of association.
On the basis of that authority, a special resolution must be passed, in order to
authorise the contemplated reduction of capital.
• the next step is to apply, by petition, to the tribunal for an order confirming
55. BUY –BACK OF SHARES
• Sec. 68, Companies Act, 2013 states about the power of company to
purchase its own securities; i.e.; buy – back of shares.
• Sec. 77A brought in by the companies (Amendment) Act, 1999
caused this structural change in the theme and philosophy of
company law that, subject to the restrictions envisaged in the section, a
company may buy back its own shares. Now this power is contained in
sec. 68, 2013 Act.
• The sources allowed are the company’s free reserves, securities
premium account, proceeds of an earlier issue of shares or other
56. • There should be a provision in the articles of association authorising the
buy-back of shares. In the exercise of that authority, passed authorising the
a special resolution at a meeting of the shareholders has been passed
authorising the scheme of buy-back.
PROHIBITION OF BUY-BACK IN CERTAIN CIRCUMSTANCES
According to Sec.70, a buy-back exercise has to be done directly and not
through the medium of other companies. Also, it is stating that, buy- back
shall not be done through any subsidiary company including the company’s
• The words ‘ member’ and ‘share holder’ are used interchangeably.
• Apart from few exceptional cases, these two words are synonymous.
E.g.; companies limited by guarantee or unlimited companies , which may not
have share capital and, therefore, can have no share holders, but they do have
• MEANING OF MEMBER: As per Section 2(55) of Companies Act 2013
‘member’, in relation to a company, means— (i) The subscriber to the
memorandum of the company who shall be deemed to have agreed to
become member of the company, and on its registration, shall be entered as
member in its register of members;
58. (ii) Every other person who agrees in writing to become a member of the company and whose name is
entered in the register of members of the company;
(iii) Every person holding shares of the company and whose name is entered as a beneficial owner in
the records of a depository; In general we can say that a person is said to be a member of the company
if his name is entered in the registers of members by the company or as a beneficial owner in the
records of depository.
METHODS OF BECOMING MEMBER:
1.By subscribing memorandum:
At the time of Incorporation, the persons who agree to purchase at least one share of the company.
2.By allotment of shares:
allotment of shares occurs when the company(issuer) issues shares initially either by way of Initial
Public Offering or Further Public Offering.
transferee becomes a member of the company when the company registers such transfer and enters
his name in register of members.
59. 4 By transmission: the person entitled for the shares of the deceased
member will become the member of the company when his name gets
entered in the register of members on providing notice of transmission
to the company.
5.By becoming beneficial owner: a person whose name is entered as
beneficial owner in the records of the depository
here “Beneficial owner” means a person who is entitled for the ultimate
6. By estoppel: a person whose name was entered in the register of
members and knowingly he does not apply for rectification of the
same, becomes a member by estoppel (estopped from his own act)
60. • The term Shareholder is distinct from the term Member
• Minor can become member of a company (only for fully paid up shares)
• A firm cannot become a member of a company as it does not carry a separate legal
HUF cannot become a member of a company; however a KARTA can become a
member in his individual capacity.
• Subsidiary company cannot become a member of its holding company except 3 cases
mentioned under section 19 of Companies Act 2013; Holding shares as a legal
Representative of a deceased member.
1.Holding shares as a legal Representative of a deceased member.
2. Holding shares as a trustee.
3. Was already a shareholder before being a subsidiary company.
61. CESSATION OF MEMBERSHIP
A member of a company ceases to be a member when his name is removed :
1. From the Register of members
2. From the register of beneficial owners which is maintained by the Depository
Ways of Cessation of MEMBERSHIP of a MEMBER:
(i) Transfer of shares by sale or otherwise:
IN CASE OF PHYSICAL MODE
When a member delivers duly signed (executed) share Transfer Deed along with
share certificate to the person he intends to transfer the share and his name got
removed from the register of members of the company or from the registers of
beneficial owner on Registration of transferee as member.
62. • IN CASE OF DEMAT MODE (ELECTRONIC)
• In case of shares held in electronic mode when a member issues delivery instruction
to his DP for transfer of shares and his name got removed from the registers of
beneficial owner maintained by the depository.
(ii) Forfeiture of shares: If a member does not pay the allotment money or any call
due on shares held by him, then the company has a power to forfeit such shares after
giving a proper notice of 14 days.
(iii) Sale of shares under lien: A member on whose shares, company enforces its lien
by way of sale of such shares, such member ceases to be a member on the date when
his name got removed from the registers of members or from the Registers of
Beneficial Owners. NOTE: A company can only exercise lien on the shares if such
power is given under AOA (Articles of Association) of the company.
(iv) Death/Insolvency : In case of death of a member he ceases to be a member on
removal of his name from the register of members or beneficial owners and enters the
name of his nominee/ successor in his place in the registers.
The nominee/ successor shall follow the laid down procedure for the transmission of
63. • (v) Conversion of shares into share warrants/stocks: A company can
convert its fully paid up shares into stock or share warrants (if authorized by
its Articles of Association), On such conversion the name of such members
got struck from the registers and they cease to be a member of the company.
• (vi) Buyback of shares: Subject to the provisions of Section 68 of the
Companies Act, 2018 and Articles of Association of the Company, those
members who offer their shares to the company for sell in buy back, such
members cease to be a member of the company on cancellation of such
bought back shares.
• (viii) Dissolution/Winding up/Striking off the name of the Company: In
case of Dissolution/ striking off : if a company’s name is stuck off or it has
been dissolved then the members of such company ceases to be members. In
case of winding up of the company : on winding up the members ceases to be
members but remain liable as contributories and are entitled to claim share in
the profits (if any).
64. SHARE HOLDER
• An individual who owns the share of a public or a private company is known
as a ‘Shareholder.’A subscriber of shares is not regarded as the shareholder
until the shares are actually allotted to him.
• The shareholders are the owners of the company, i.e. to the extent of the
share capital held by them. The legal representative of the deceased member,
is a shareholder, not the member, until and unless his name is recorded in the
register of members of the company. Hence, it can be said that every
shareholder is a member but every member, is not a shareholder.
• The following are the rights of a shareholder:
• Right to transfer or sell their shares.
• Right to get the dividend.
• Right to attend the general meeting and vote.
• Right to take copies of Memorandum and Articles of Association.
• Right to receive the copy of the statutory report.
65. • Key Differences Between Members and Shareholders
The following are the differences between members and
1.A member is a person who subscribed the memorandum of the
company. A shareholder is a person who owns the shares of the
2.The term member is defined under section 2 (55) of the Indian
Companies Act, 1956. Conversely, the term shareholder is not
defined in the Indian Companies Act, 1956.
3.The bearer of a share warrant is not a member, but the bearer
of a share warrant can be a shareholder.
4.All shareholders whose name are entered in the register of
members are the members. On the other hand, all members
may not be the shareholders.
In the case of a public company, there must be a minimum of 7
members. There is no such cap on the maximum number of
members. Similarly, a private company can have a minimum of 2
and maximum of 200 members. As opposed to shareholders,
there is no minimum or maximum limit, in the case of a public
67. Roles of a Shareholder
• Brainstorming and deciding the powers they will bestow upon the
company’s directors, including appointing and removing them from
• Deciding on how much the directors receive for their salary. The
practice is very tricky because stockholders must make sure that the
amount they will give will compensate for the expenses and cost of
living in the city where the director lives, without compromising the
• Making decisions on instances the directors have no power over,
including making changes to the company’s constitution
• Checking and making approvals of the financial statements of the
68. DEMATERIALISATION OF SHARES
• The Ministry of Corporate Affairs (MCA) vide its notification dated 10th Sep,
2018 issued the Companies (Prospectus and Allotment of Securities) Third
Amendment Rules, 2018 which came into force w.e.f. 2nd Oct, 2018.
• As per rule 9A of the Companies (Prospectus and Allotment of Securities)
Rules, 2014 every unlisted public company is required to:
1.issue its securities only in dematerialized form
2.facilitate dematerialization of all its existing securities by making necessary
application to a depository
3.secure International security Identification Number (ISIN) for each type of
4. and inform all its existing security holders about such facility
69. Obligation of company
• Before issue or buyback of securities, entire holding of securities of
promoters, directors, key managerial personnel should be dematerialised.
• Make timely payment of fees (admission as well as annual) to the
• Maintain security deposit of not less than two years at all times, with the
depository/ RTA; If there is default in making payment/ maintaining deposit
as mentioned above, the company cannot make any issue or buyback of
(RTA-REGISTRAR AND TRANSFER AGENT, are institutions assosiated with a
company to maintain investors records. )
70. Obligation of holder of securities
Every holder of security shall ensure that all his existing securities are
held in dematerialised form otherwise he cannot transfer his securities
or subscribe for any new securities in the company.
The aforesaid provisions are not applicable to a Nidhi Co/ Government
Co/ Wholly owned subsidiary.