Share Capital and Debentures

Companies Act, 2013 as amended, per the May 2026 syllabus. Bare section numbers are the Companies Act, 2013; rules are the Share Capital and Debentures Rules, 2014, unless stated.

How the chapter fits together

Sections 43–72 plus the SC&D Rules, 2014 split into two blocks — A. Shares (43–70) and B. Debentures (71). Learn the shares block in its statutory order with the mnemonic K-C-V-V-C-P-S-I-T-A:

Golden thread: the conservation of capital principle runs through Ss. 66–70 (reduction, buy-back restrictions) — capital is the creditors’ security, so every route that returns it to shareholders is fenced with conditions.

Kinds of capital and shareholder rights — Sections 43 to 48

Section 43 recognises two kinds of share capital: equity (plain or with differential voting rights) and preference. A company can have equity capital alone but not preference capital alone — there must be equity for the preference to be “preferred” over (Bihar State Financial Corp v CIT). Shares are movable property, transferable in the manner the AOA provides (Sec 44). S.43 does not apply to a Specified IFSC public company or a private company if its MOA/AOA so provides.

DVR equity (Rule 4): differential rights as to dividend or voting; DVR shares can carry at most 74% of total voting power, and conversion between DVR and ordinary shares is prohibited.

Certificates (Sec 46): the share certificate (Forms SH-1, SH-2) is prima facie evidence of title. A renewed certificate replaces one that is defaced/mutilated/torn (surrender required); a duplicate replaces one lost or destroyed (Board satisfaction required). Duplicates must be issued within 3 months (unlisted) / 45 days (listed) (Rule 6); certificate books are preserved minimum 30 years, and surrendered/cancelled certificates are destroyed only after 3 years (Rule 7). Fraudulent duplicate issue attracts the heavy S.46(5) punishment (see penalties table).

Voting rights (Sec 47): equity shareholders vote in proportion to their share of paid-up equity capital; preference shareholders vote only on limited matters — but gain full voting rights on all resolutions if their dividend is unpaid for 2 years. Nidhi companies: voting capped at 5% per member. Specified IFSC public/private companies may opt out via AOA/MOA. Note the interplay: S.43 (DVR) overrides S.47 for DVR holders.

Variation of rights (Sec 48): class rights can be varied with 75% consent of that class; holders of at least 10% who dissent may apply to the Tribunal within 21 days, and the order must be filed with the ROC within 30 days. Case anchors: issuing new pari-passu preference shares is not a variation (White v Bristol Aeroplane); capital reduction is not a variation (Essar Steel); a member’s pre-emptive right can make him a separate class (Cumbrian Newspapers).

Calls, premium, sweat equity and preference shares — Sections 49 to 55

Calls (Ss. 49–51): calls on the same class must be on a uniform basis (Sec 49) — a call on select members only is invalid unless they form a separate class (Galloway v Halle). Calls-in-advance (Sec 50) need AOA authorisation and give no extra voting rights until called up. Dividend may be paid pro-rata on paid-up amounts if the AOA permits (Sec 51) — preference dividend stays fixed.

Securities premium (Sec 52): premium goes to the Securities Premium Account with restricted uses; for prescribed AS-compliant companies, sub-section (3) narrows the uses to only bonus shares, issue expenses (shares only, not debentures), and buy-back. SPA is not a free reserve (DCA Circular 3/77) — but Explanation II to S.68 counts it in “free reserves” for buy-back only.

Discount prohibited (Sec 53): issue at a discount is void; the company must refund with 12% p.a. interest, and the officer in default pays the amount raised via the discount or ₹5 lakh, whichever is less. Exceptions: sweat equity (S.54) and debt-to-equity conversion under a statutory resolution plan / debt restructuring per RBI or Banking Regulation Act guidelines (S.53(2A)). Ss. 52–53 apply only to shares, not to debentures/bonds (which are YTM-priced).

Preference shares (Sec 55): no irredeemable preference shares (abolished by the 1988 amendment to the 1956 Act). Maximum tenor 20 years; for infrastructure projects (Schedule VI) up to 30 years, with at least 10% redeemed annually from the 21st year. On redemption out of profits, an equivalent amount goes to the Capital Redemption Reserve (CRR) — which has the same sanctity as paid-up capital and can be used only to issue fully paid bonus shares. Saving: the Act does not affect rights of preference shareholders entitled to participate in winding-up proceeds prior to its commencement.

Transfer, transmission and alteration — Sections 56 to 65

Transfer vs transmission: transfer is a voluntary conveyance by a stamped instrument in Form SH-4, executed by both parties and delivered with the certificate within 60 days of execution (Sec 56(1)). Transmission is devolution by operation of law (death, succession, insolvency, marriage) — no instrument needed. A forged transfer is a nullity (void ab initio): the original owner is restored; a genuine buyer may get compensation. For partly paid shares on the transferor’s sole application, the transferee gets 2 weeks to object (56(3)). Government-company nominee transfers are fully exempt from S.56 conditions; govt-company bonds partially (intimation only) [GSR 463(E)]. Default in S.56(1)–(5): ₹50,000 on company and officer; depository fraud in transfer → S.447 plus Depositories Act, 1996 liability (56(7)).

Personation (Sec 57): deceitfully impersonating an owner to obtain securities or money → imprisonment 1–3 years plus fine ₹1–5 lakh (see also S.38 → S.447).

Refusal and appeal (Ss. 58–59): a private company refusing registration must send notice within 30 days to BOTH transferor and transferee. Appeal to the Tribunal: private company — 30 days from notice / 60 days from delivery if no notice; public company — 60/90 days. The company must comply with a Tribunal transfer/rectification order within 10 days (58(5)/59(2)); contravening the order is punishable with imprisonment 1–3 years plus fine ₹1–5 lakh (58(6)).

Alteration (Sec 61): by ordinary resolution — increase, consolidate, convert (shares ↔ stock, 61(1)(c)), sub-divide, or cancel unsubscribed shares. Cancellation under 61(1)(e) is explicitly not a reduction of capital. Notify the ROC in Form SH-7 within 30 days of any alteration (Sec 64), else ₹500/day. (Sec 65: unlimited companies may create reserve share capital.)

Further issue (Sec 62): three routes —

S.62 does not apply to conversion of debentures/loans into equity on pre-approved terms, or to Nidhi companies. A company may appeal to the Tribunal against a Government conversion order within 60 days (62(4)).

Bonus shares (Sec 63): free fully paid shares from capitalised profits — “distribution of capitalised undivided profit” (Standard Chartered Bank v Custodian). Sources: free reserves, SPA, CRR — never the revaluation reserve. Not in lieu of dividend; only to fully paid shares (partly paid must first be made fully paid); once the Board recommends, it cannot be withdrawn.

Reduction, buy-back and debentures — Sections 66 to 71

Reduction (Sec 66): special resolution plus Tribunal confirmation, with creditor consent; the Tribunal considers representations for 3 months, and the certified order goes to the ROC within 30 days. Reduction does not apply to a S.68 buy-back (66(6)). Concealing or misrepresenting a creditor’s claim → punishable under S.447 (66(10)).

Financial assistance (Sec 67): a public company cannot give financial assistance for the purchase of its own shares. Exceptions to memorise: (a) banking company’s ordinary-course lending; (b) trustee funding for an employee share scheme (up to 5% of paid-up capital + free reserves); (c) employee loans up to 6 months’ salary (not for directors/KMP). Also exempt: certain private companies / Specified IFSC companies meeting 3 conditions (no body corporate investment; borrowings under 2× paid-up capital or ₹50 crore, whichever lower; no default), and Nidhi companies (member ceasing to be depositor/borrower). Penalty: company fine ₹1–25 lakh; officer up to 3 years’ imprisonment plus fine ₹1–25 lakh.

Buy-back (Sec 68):

Buy-back cannot be funded from proceeds of an earlier issue of the same kind of securities. The 6-month cooling period (68(8)) does not block: bonus issue, warrant conversion, ESOP, sweat equity, or conversion of preference shares/debentures. Procedural chain in order:

CRR (Sec 69): the nominal value of shares bought back is transferred to CRR — usable only for bonus shares. Prohibitions (Sec 70): no buy-back through a subsidiary or investment company, or while in default — the bar lifts only 3 years after the default is remedied. Buy-back default penalty: fine ₹1–3 lakh (68(11)).

Debentures (Sec 71):

• Secured debentures (71(3)): maximum tenor 10 years — up to 30 years for infrastructure companies, Infrastructure Finance Companies, Infrastructure Debt Fund NBFCs, and CG/RBI/NHB-permitted companies; charge creation (exempt for government-company debentures fully guaranteed by Central/State Government); debenture trustee appointed before the prospectus/offer to more than 500 members; trust deed in Form SH-12 within 3 months of closure of the issue.
• DRR (71(4), Rule 18(7)): from profits, usable only for debenture redemption. Unlisted companies: DRR = 10% of outstanding debentures. Exempt: AIFIs and banking companies (always); listed companies (except NBFCs not registered u/s 45-IA and HFCs not registered with NHB). By 30 April, invest/deposit 15% of debentures maturing during the year.
• Trustee (Rule 18(2)): 7 disqualification categories — beneficiary shareholder; promoter/director/KMP/officer; their relative; beneficiary of company moneys; person indebted to the company (amount immaterial — even ₹499 disqualifies); guarantor for the debentures; pecuniary relationship of 2% of turnover or ₹50 lakh, whichever lower, or more. Removal before term needs ¾ in value of debenture holders; exemption from trustee liability is valid only if 75% in value agree at a meeting.
• Remedies: debenture holders/trustee may petition the Tribunal (71(9),(10)); the Tribunal can order specific performance of redemption (71(12)); CG may make rules (71(13)). File PAS-3 return of allotment within 30 days (Rule 12(1), PAS Rules). If the debt-equity ratio exceeds 1, a shareholder special resolution is needed before the debenture issue (excluding short-term/temporary loans).

Special-company relaxations: Nidhi companies — 5% voting cap (S.47), exempt from S.62 pro-rata rights and from S.67(1). Specified IFSC companies — exemptions span Ss. 43, 47, 56(4) (uniform 60-day timeline), 62 timelines, and 67.

Key timelines and penalties

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