Limited Company

The principal legislation for Companies in India, i.e. Companies Act 2013 (the Act), allows the incorporation of various types of Companies. This includes Companies ‘limited by Guarantee’ and those ‘limited by Shares’ (Limited Company), wherein the latter, the liability of the Members is limited by the concerned Company’s Memorandum (of Association or MoA) to the amount (if any) unpaid on the Shares respectively held by them.

The Shares of a Company or other interest of any Member in a Company is movable property, transferable in the manner provided by the Articles of the said concerned Company.

Share Certificates, issued under the common seal of the Company, specifying the Shares held by any person, is prima facie evidence of the ‘title’ of the person to such Shares. Where a Share is held in ‘depository’ form, the record of the depository is similarly prima facie evidence of the interest of the beneficial owner.

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Types of Share Capital

The Act through the provisions of section 43^ thereunder, prescribes the kinds of Share Capital a Limited Company incorporated thereunder may have, i.e. Equity Share Capital and Preference Share Capital (as discussed below).


Equity Share Capital

‘‘Equity Share Capital’’, with reference to any Company limited by Shares, means all Share Capital which is not Preference Share Capital and may be —

  • With voting rights or
  • With ‘differential’ rights (as to Dividend, voting or otherwise in accordance with any prescribed and applicable rules)

Preference Share Capital

‘‘Preference Share Capital’’, with reference to any Company limited by Shares, means that part of the issued Share Capital of the Company which carries or would carry a preferential right with respect to —

  • Payment of Dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
  • Repayment, in the case of a winding up or repayment of capital, of the amount of the Share Capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the Memorandum or Articles (of Association or AoA) of the Company.

Capital is deemed to be Preference Capital, notwithstanding that it is entitled to either or both of the following rights, namely —

(a) That in respect of Dividends, in addition to the preferential rights to the amounts specified above, it has a right to participate, whether fully or to a limited extent, with Capital not entitled to the preferential right aforesaid;

(b) That in respect of Capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified above, it has a right to participate, whether fully or to a limited extent, with Capital not entitled to that preferential right in any surplus which may remain after the entire Capital has been repaid.


Voting Rights

Section 47^ of the Act, subject to the above mentioned provisions of sections 43 and section 50(2) (i.e. no voting rights on amounts uncalled but paid-up as Capital) of the Act, provides —

  • Every Member of a Company limited by Shares and holding Equity Share Capital therein, with a ‘right to vote’ on every ‘resolution’ placed before the concerned Company; and
  • Such Member’s voting right on a ‘poll’ is in proportion to his/her/its share in the paid-up Equity Share Capital of the Company.
  • Every Member of a Company limited by Shares and holding any Preference Share Capital therein, in respect of such Capital, has a right to vote only* on resolutions placed before the Company which ‘directly affect’ the rights attached to such Preference Shares and, any resolution for the ‘winding up’ of the Company or for the ‘repayment’ or ‘reduction’ of its Equity or Preference Share Capital, and such voting right on a poll is in proportion to his/her/its share in the paid-up Preference Share Capital of the concerned Company.

The ‘proportion’ of the voting rights of Equity Shareholders to the voting rights of the Preference Shareholders shall be in the same proportion as the paid-up Capital in respect of the Equity Shares bears to the paid-up Capital in respect of the Preference Shares.

*Where the Dividend in respect of a ‘class’ of Preference Shares has not been paid for a period of 2 years or more, such class of Preference Shareholders shall have a right to vote on all the resolutions placed before the concerned Company.

^Sections 43 and 47 of the Act do not apply to Private Companies where the relevant Memorandum or Articles of Association so provide. 

 

Ordinary Resolution

  • Relevant Notice required under the Act has been duly given;
  • Passed by the votes cast (show of hands, electronically or on a poll, as the case may be) in favor, including the casting vote (if any, of the Chairman) by Members (entitled and voting); and
  • Votes (in person, or where proxies are allowed, by proxy or by postal ballot) exceed the votes (if any) cast against by Members (entitled and voting).


Special Resolution

  • Intention to propose the resolution as a ‘special resolution’ has been duly specified in the notice calling the General Meeting (or other intimation given to the Members of the resolution);
  • Relevant notice required under this Act has been duly given; and
  • Votes cast in favor of the resolution (show of hands, or electronically or on a poll, as the case may be) by Members (entitled and voting in person or by proxy or by postal ballot) are not less than three times the number of the votes (if any) cast against by Members (so entitled and voting).

 

Important Concepts, Terms and Issues***

Section 2 of the Companies Act 2013 (the Act) lists the ‘Definitions‘ applicable (unless the context otherwise requires) to the provisions of the Act, some of which considered directly relevant to the subject matter discussed above have been listed below —

Articles” means the Articles of Association of a Company as originally framed or as altered from time to time or applied in pursuance of any previous Company law or of the Act.

Associate Company”, in relation to another Company, means a Company in which that other Company has a significant influence, but which is not a Subsidiary Company of the Company having such influence and includes a Joint Venture Company.

Explanation.—For the purposes of this clause, “significant influence” means control of at least 20 per cent of total Share Capital, or of business decisions under an agreement.

Authorised Capital” or “Nominal Capital” means such capital as is authorised by the Memorandum of a Company to be the maximum amount of Share Capital of the Company.

Contributory” means a person liable to contribute towards the assets of the Company in the event of its being wound up.

Explanation.—For the purposes of this clause, it is hereby clarified that a person holding fully paid-up Shares in a company shall be considered as a Contributory but shall have no liabilities of a Contributory under the Act whilst retaining rights of such a Contributory.

Control” shall include the right to appoint majority of the Directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their Shareholding or management rights or Shareholders agreements or voting agreements or in any
other manner.

Employees’ Stock Option” means the option given to the Directors, officers or employees of a Company or of its Holding Company or Subsidiary Company or Companies, if any, which gives such Directors, officers or employees, the benefit or right to purchase, or to subscribe for, the Shares of the Company at a future date at a pre-determined price.

Free Reserves” means such reserves which, as per the latest audited balance sheet of a Company, are available for distribution as dividend.

Provided that —

(i) Any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

(ii) Any change in carrying amount of an asset or of a liability recognised in Equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value,

shall not be treated as free reserves.

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;
(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.

Net Worth” means the aggregate value of the paid-up Share Capital and all reserves created out of the profits and Securities Premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

Paid-up Share Capital” or “Share Capital paid-up” means such aggregate amount of money credited as paid-up as is equivalent to the amount received as paidup in respect of Shares issued and also includes any amount credited as paid-up in respect of Shares of the Company, but does not include any other amount received in respect of such Shares, by whatever name called.

Private Company” means a company having a minimum (as amended or notified) Share Capital or such higher paid-up Share Capital as may be prescribed, and which by its Articles,—

(i) Restricts the right to transfer its Shares;
(ii) Except in case of One Person Company, limits the number of its Members to 200.

Provided that where two or more persons hold one or more Shares in a Company jointly, they shall, for the purposes of this clause, be treated as a single Member.

Provided further that—
(A) persons who are in the employment of the Company; and
(B) persons who, having been formerly in the employment of the Company, were members of the Company while in that employment and have continued to be members after the employment ceased, shall not be included in the number of Members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the Company.

Promoter” means a person—
(a) who has been named as such in a prospectus or is identified by the Company in the Annual Return referred to in section 92; or
(b) who has control over the affairs of the Company, directly or indirectly whether as a Shareholder, Director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the Company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity.

Public Company” means a company which—
(a) Is not a Private Company;
(b) Has a minimum (as amended or notified) paid-up Share Capital or such higher paid-up Capital, as may be prescribed:

Provided that a Company which is a Subsidiary of a Company, not being a Private Company, shall be deemed to be Public Company for the purposes of this Act even where such Subsidiary Company continues to be a Private Company in its Articles.

Postal ballot” means voting by post or through any electronic mode.

Related party”, with reference to a company, means—

(i) a Director or his relative;
(ii) a Key Managerial Personnel or his relative;
(iii) a Firm, in which a Director, manager or his relative is a partner;
(iv) a Private Company in which a Director or manager is a member or Director;
(v) a Public Company in which a Director or manager is a Director or holds along with his relatives, more than two per cent. of its paid-up Share Capital;
(vi) any body corporate whose Board of Directors, Managing Director or Manager is accustomed to act in accordance with the advice, directions or instructions of a Director or Manager;
(vii) any person on whose advice, directions or instructions a Director or Manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity.
(viii) any Company which is—

(A) a Holding, Subsidiary or an Associate Company of such Company; or
(B) a Subsidiary of a Holding Company to which it is also a Subsidiary;

(ix) such other person as may be prescribed.

Share” means a share in the Share Capital of a Company and includes Stock.

Small Company” means a Company, other than a Public Company,—

(i) Paid-up Share Capital of which does not exceed Rs.50 lacs or such higher amount as may be prescribed which shall not be more than Rs.5 crores; or
(ii) Turnover of which as per its last profit and loss account does not exceed Rs.2 crores or such higher amount as may be prescribed which shall not be more than Rs.20 crores:

Provided that nothing in this clause shall apply to—

(A) a Holding Company or a Subsidiary Company;
(B) a Company registered under section 8; or
(C) a Company or body corporate governed by any special Act;

Subscribed Capital” means such part of the Capital which is for the time being subscribed by the Members of a Company.

Subsidiary Company” or “Subsidiary”, in relation to any other Company (that is to say the Holding Company), means a Company in which the Holding Company—

(i) Controls the composition of the Board of Directors; or
(ii) Exercises or controls more than one-half of the total Share Capital either at its own or together with one or more of its Subsidiary Companies:

Provided that such class or classes of Holding Companies as may be prescribed shall not have layers of Subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,—
(a) A Company shall be deemed to be a Subsidiary Company of the Holding Company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another Subsidiary Company of the Holding Company;
(b) The composition of a Company’s Board of Directors shall be deemed to be controlled by another Company if that other Company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the Directors;
(c) The expression “Company” includes any body corporate;
(d) “Layer” in relation to a Holding Company means its Subsidiary or Subsidiaries.

Sweat Equity Shares” means such Equity Shares as are issued by a Company to its Directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Total Voting Power”, in relation to any matter, means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a Company if all the Members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes.

Unlimited Company” means a Company not having any limit on the liability of its Members.

Voting right” means the right of a Member of a Company to vote in any meeting of the Company or by means of postal ballot.


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Where the Share Capital of a Company is divided into different ‘classes’ of shares, the rights attached to the Shares of any class can be varied with the consent in writing of the holders of not less than ¾th of the issued Shares of that class or by means of a ‘special resolution’ passed at a separate meeting of such holders —

  • If provision with respect to such variation is contained in the Memorandum or Articles of the company; or
  • In the absence of any such provision, such variation is not prohibited by the terms of issue of the Shares of that class.
  • If variation by one class of Shareholders affects the rights of any other class of Shareholders, the consent of ¾th of such other class has to also be obtained.


Non-Consent and NCLT Application

Where the holders of not less than 10 percent of the issued shares of a class does not consent to such variation or vote in favour of the special resolution for the variation, they may apply to the National Company Law Tribunal (NCLT) to have the relevant variation cancelled, and where any such application is made, the variation will not have effect unless and until it is confirmed by the NCLT. Any decision by the NCLT on such application is binding on the Shareholders of the concerned Company.

However, the Act requires the said application to the NCLT be made within 21 days after the date on which the consent was given or the relevant resolution was passed (as the case may be), and such application may be made on behalf of the Shareholders entitled to make the application by such one or more of their number as they may appoint in writing for the purpose.


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Under the provisions of section 54 of the Act, a Company may issue ‘Sweat Equity Shares’ of a class of Shares already issued, if the following conditions are fulfilled —

  • The issue is authorised by a ‘special resolution’ passed by the concerned Company;
  • The said resolution specifies the number of Shares, the current market price, consideration, if any, and the class or classes of Directors or employees to whom such Equity Shares are to be issued;
  • Not less than 1 year has, at the date of such issue, elapsed since the date on which the Company had commenced business; and
  • Where the Equity Shares of the Company are listed on a recognised stock exchange, the sweat equity shares are issued in accordance with the regulations made by the Securities and Exchange Board (SEBI) in this behalf and if they are not so listed, the ‘Sweat Equity Shares’ are issued in accordance with such rules as may be prescribed.

The rights, limitations, restrictions and provisions as are for the time being applicable to Equity Shares shall be applicable to the Sweat Equity Shares issued and the holders of such Shares shall rank pari passu with other Equity Shareholders.


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Section 58 of the Act requires a Private Company limited by Shares, which refuses (whether in pursuance of any power of the Company under its Articles or otherwise) to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a Member in the Company, within a period of 30 days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the concerned Company, send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission (as the case may be), giving reasons for such refusal.

Subject to the above, the securities or other interest of any Member in a Public Company shall be freely transferable.

Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.


Appeal to the NCLT

The transferee may appeal to the National Company Law Tribunal (NCLT) against the refusal within a period of 30 days from the date of receipt of the notice or in case no notice has been sent by the Company, within a period of 60 days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the Company.

If a Public Company without sufficient cause refuses to register the transfer of securities within a period of 30 days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the Company, the transferee may, within a period of 60 days of such refusal or where no intimation has been received from the Company, within 90 days of the delivery of the instrument of transfer or intimation of transmission, appeal to the NCLT.


Orders of the NCLT

The NCLT while dealing with the said appeal, may after hearing the relevant parties, either dismiss the said appeal, or by order —

  • Direct that the transfer or transmission shall be registered by the Company and the Company shall comply with such order within a period of 10 days of the receipt of the order; or
  • Direct the rectification of the Register and also direct the Company to pay damages, if any, sustained by any party aggrieved.


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If the name of any person is, without sufficient cause, entered in the Register of Members of a Company, or after having been entered in the said register, is, without sufficient cause, omitted therefrom, or if a default is made, or unnecessary delay takes place in entering in the register, the fact of any person having become or ceased to be a Member, the person aggrieved, or any Member of the Company, or the Company may appeal in such form as may be prescribed, to the National Company Law Tribunal (NCLT), or to a competent court outside India, specified by the Central Government by notification, in respect of ‘foreign members’ or Debenture holders residing outside India, for rectification of the register.

The NCLT may, after hearing the parties to the said appeal by order, either dismiss the appeal or direct that the transfer or transmission shall be registered by the Company within a period of 10 days of the receipt of the order or direct rectification of the records of the depository or the register and in the latter case, direct the Company to pay damages, if any, sustained by the party aggrieved.

  • Any of the above shall not restrict the right of a holder of securities, to transfer such securities and any person acquiring such securities shall be entitled to voting rights unless the voting rights have been suspended by an order of the NCLT.
  • Where the transfer of securities is in contravention of any of the provisions of the Securities Contracts (Regulation) Act 1956, the Securities and Exchange Board of India Act 1992 or this Act or any other law for the time being in force, the NCLT may, on an application made by the depository, company, depository participant, the holder of the securities or the Securities and Exchange Board, direct any Company or a depository to set right the contravention and rectify its register or records concerned.


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A Limited Company with Share Capital may, if so authorised by its Articles, alter its Memorandum in its General Meeting to—

  • Increase its ‘authorised’ Share Capital by such amount as it thinks expedient;
  • Consolidate and divide all or any of its Share Capital into Shares of a larger amount than its existing Shares*;

*No consolidation and division which results in changes in the ‘voting percentage’ of Shareholders shall take effect unless it is approved by the National Company Law Tribunal (NCLT) on an application made in the prescribed manner.

  • Convert all or any of its fully paid-up Shares into Stock, and reconvert that Stock into fully paid-up Shares of any denomination;
  • Sub-divide its Shares, or any of them, into Shares of smaller amount than is fixed by the Memorandum, so, however, that in the sub-division the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the Share from which the reduced Share is derived;
  • Cancel Shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person, and diminish the amount of its Share Capital by the amount of the Shares so cancelled (such ‘cancellation of Shares’ would not be deemed to be a ‘Reduction’ of Share Capital).


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Where at any time, a Company having Share Capital proposes to increase its ‘subscribed’ Capital by the issue of further Shares, such Shares are required to be offered —

(a) To persons who, at the date of the offer, are holders of Equity Shares of the Company in proportion, as nearly as circumstances admit, to the ‘paid-up’ Share Capital on those shares by sending a ‘letter of offer’ subject to the following conditions —

  • The offer shall be made by notice specifying the number of Shares offered and limiting a time not being less than 15 days and not exceeding 30 days (lesser period may apply for Private Companies) from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;
  • Unless the Articles of the Company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the said notice shall contain a statement of this right;
  • After the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the Shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the Shareholders and the Company.

(b) To employees under a scheme of Employees’ Stock Option, subject to ‘special resolution(‘ordinary’ resolution for Private Companies) passed by Company and subject to such conditions as may be prescribed;or

(c) To any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to above, either for cash or for a consideration other than cash, if the price of such Shares is determined by the valuation report of a registered valuer subject to such conditions as may be prescribed.


Letter of Offer

The said notice is required to be dispatched through registered post or speed post or through electronic mode to all the existing Shareholders at least 3 days before the opening of the said issue.


Non-application^^ to Convertible Debentures/Loans

The above said requirements do not apply to the increase of the ‘subscribed’ Capital of a Company caused by the exercise of an option as a term attached to the Debentures issued or loan raised by the Company to convert such Debentures or loans into Shares in the Company.

^^ The terms of issue of such Debentures or loan containing such an option must have been approved before the said issue by a special resolution passed by the Company in General Meeting.


Government Loans/Debentures and NCLT Appeal against Conversion

Where any Debentures have been issued, or loan has been obtained from any Government by a Company, such said Government is empowered by the Act, where it considers it necessary in the public interest so to do, by order direct that such Debentures or loans or any part thereof be converted into Shares in the Company on such terms and conditions as appear to the said Government as reasonable in the circumstances of the case, even if terms of the issue of such Debentures or loans do not include a term for providing for an option for such conversion.

  • The Act however requires the said Government whilst determining the terms and conditions of conversion, to have due regard to the financial position of the concerned Company, the terms of issue of Debentures or loans, the rate of interest payable on the same and such other matters as it may consider necessary.
  • Where the terms and conditions of such conversion are not acceptable to the concerned Company, it may, within 60 days from the date of communication of such order, appeal to the National Company Law Tribunal (NCLT), which after hearing the said Company and the concerned Government pass such order as it deems fit.


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The Act empowers a Company to issue fully paid-up Bonus Shares to its Members, in any manner* whatsoever, out of—

  • Free Reserves
  • Securities Premium Account
  • Capital Redemption Reserve account

*No issue of Bonus Shares can be made by capitalising reserves created by the revaluation of assets and also cannot be issued in lieu of Dividend.


Capitalisation of Profits and Reserves

No Company can ‘capitalise’ its profits or reserves for the purpose of issuing fully paid-up Bonus Shares unless the concerned Company satisfies all of the following —

  • Authorised by its Articles
  • On the recommendation of the Board (of Directors), it has been authorised in the General Meeting of the Company
  • Not defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it
  • Not defaulted in respect of the payment of statutory dues of the employees, such as, contribution to provident fund, gratuity and bonus
  • The partly paid-up Shares (if any outstanding on the date of allotment) are made fully paid-up
  • Complies with such conditions as may be prescribed


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A Company limited by Shares (or limited by ‘Guarantee’) and having a Share Capital via special resolution and confirmation by the National Company Law Tribunal (NCLT) on an application made for such purposes, can ‘reduce’ its Share Capital and consequently alter its Memorandum by reducing the amount of its Share Capital and of its Shares accordingly.

For doing so, in particular, such Company may*

(a) Extinguish or reduce the liability on any of its Shares in respect of the Share Capital not paid-up; or

(b) Either with or without extinguishing or reducing liability on any of its Shares —

  • Cancel any paid-up Share Capital which is lost or is unrepresented by available assets; or
  • Pay off any paid-up Share Capital which is in excess of the wants of the Company.

*No such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it, either before or after the commencement of this Act, or the interest payable thereon.


NCLT Application, Notice, Representations and Orders

The NCLT shall give notice of every such ‘Reduction of Share Capital’ application made to it, to the Central Government, Registrar (of Companies or ROC), the Securities and Exchange Board (listed Companies), and the creditors of the applicant-Company, and take into consideration their representations (if any) made to it within a period of 3 months** from the date of receipt of the notice.

  • The NCLT if satisfied that the debt or claim of every creditor of the applicant-Company has been discharged or determined or has been secured or consent obtained, may make an order confirming the reduction of Share Capital on such terms and conditions as it deems fit.

**Where no representation has been received from the Central Government, Registrar etc. within the said period, it shall be presumed that they have no objection to the ‘Reduction’ application.

No application for reduction of Share Capital shall be sanctioned by the NCLT unless the accounting treatment, proposed by the Company for such reduction is in conformity with the prescribed Accounting Standards and a certificate to that effect by the Company’s Auditor has been filed with the NCLT.

The above said provisions of the Act will not apply to the buy-back of its own Securities by a Company as provided for under the relevant provision of the Act (under section 68).


Member Liability Post-Reduction

A Member of the concerned Company (past or present) shall not be liable to any call or contribution in respect of any Share held, exceeding the amount of difference (if any) between the amount paid on the Share or reduced amount (if any), which is to be deemed to have been paid thereon (as the case may be) and the amount of the share as fixed by the order of reduction.

Where the name of any creditor entitled to object to the reduction of Share Capital, by reason of ignorance of the proceedings for reduction or of their nature and effect with respect to his/her/its debt or claim, not entered on the list of creditors, and after such reduction, the concerned Company commits a default (within the meaning of section 6 of the Insolvency and Bankruptcy Code 2016) in respect of the amount of the said debt or claim —

  • Every person, who was a Member of the said Company on the date of the registration of the order for reduction by the Registrar, shall be liable to contribute to the payment of that debt or claim, an amount not exceeding the amount which he/she/it would have been liable to contribute if the Company had commenced ‘winding up’ on the day immediately before the said date; and
  • If the said Company is wound up, the NCLT may, on the application of any such creditor and proof of his/her/its ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to contribute, and make and enforce calls and orders on the contributories settled on the list, as if they were ordinary contributories in a winding up.

Nothing above said would affect the rights of the ‘contributories’ among themselves.


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A Company may purchase its own Shares or other specified Securities (hereinafter referred to as ‘buy-back’) out of —

  • Free Reserves
  • Securities Premium account
  • Proceeds of the issue of any Shares or other specified Securities (no buy-back of any kind of Shares or other specified Securities shall be made out of the proceeds of an earlier issue of the same kind of Shares or same kind of other specified Securities)

The buy-back may be —

  • From the existing Shareholders or Security holders on a proportionate basis
  • From the open market
  • By purchasing the Securities issued to employees of the Company pursuant to a scheme of stock option or Sweat Equity


Conditions for Buy-Back

No Company shall purchase its own Shares or other specified Securities unless —

  • The buy-back is authorised by its Articles
  • A special resolution has been passed at a General Meeting of the Company authorising the buy-back

Provided the above conditions will not apply to a case where—
(i) The buy-back is 10 percent or less of the total paid-up Equity Capital and free reserves of the Company; and
(ii) Such buy-back has been authorised by the Board by means of a resolution passed at its meeting.

  • The buy-back is 25 percent or less of the aggregate of paid-up Capital and free reserves of the Company.
    Provided that in respect of the buy-back of Equity Shares in any financial year, the reference to 25 percent shall be construed with respect to its total paid-up Equity Capital in that financial year
  • Ratio of the aggregate of secured and unsecured debts owed by the Company after buy-back is not more than twice the paid-up Capital and its free reserves (the Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of Companies)
  • All the shares or other specified Securities for buy-back are fully paid-up
  • The buy-back of the Shares or other specified Securities listed on any recognised stock exchange is in accordance with the regulations made by the Securities and Exchange Board in this behalf
  • The buy-back in respect of non-listed shares or other specified Securities is in accordance with such rules as may be prescribed
  • No offer of buy-back can be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back (if any)


Declaration of Solvency

Where a Company proposes to buy-back its own Shares or other specified Securities in pursuance of a special resolution (or a Board resolution, as the case may be), before making such buy-back, it is required to file with the Registrar (of Companies) and the Securities and Exchange Board (for listed Company), a ‘declaration of solvency’ signed by at least 2 Directors of the concerned Company, one of whom shall be the Managing Director (if any), in such form as may be prescribed and verified by an affidavit, to the effect that the Board of Directors of the Company has made a full inquiry into the affairs of the Company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of 1 year from the date of declaration adopted by the Board.


Post Buy-Back Obligations

  • Where a Company buys back its own Shares or other specified Securities, it is required to extinguish and physically destroy the Shares or Securities so bought back within 7 days of the last date of completion of buy-back.
  • Such Company cannot make a further issue of the same kind of Shares or other Securities including allotment of new Shares or other Specified securities within a period of 6 months (except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, Stock Option schemes, Sweat Equity or conversion of Preference Shares or Debentures into Equity Shares) etc.

For the purposes of buy-back, “specified Securities” includes Employees’ Stock Option or other Securities as may be notified by the Central Government from time to time and “Free Reserves” includes Securities Premium account.


Prohibition on Buy-Back

Section 70 of the Act prohibits a Company from purchasing its own Shares or other specified Securities (directly or indirectly) —

  • Through any Subsidiary Company including its own Subsidiary Companies;
  • Through any Investment Company or group of Investment Companies; or
  • If a default is made by the Company, in the repayment of Deposits accepted either before or after the commencement of the Act, interest payment thereon, redemption of Debentures or Preference Shares or payment of Dividend to any Shareholder, or repayment of any term loan or interest payable thereon to any financial institution or Banking Company.

Buy-back is not prohibited, if the default is remedied and a period of 3 years have lapsed after such default ceased to subsist.

No company can (directly or indirectly) purchase its own Shares or other specified Securities in case such company has not complied with the provisions of sections 92 (Annual Return), 123 (Declaration of Dividend), 127 (Punishment for Failure to Distribute Dividends) and section 129 (Financial Statements) of the Act.


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*** The provisions and information may apply differently for and with respect to Listed Public Companies and other Companies subject to Special Acts, Rules and/or Regulations


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