# 228

Euro-equity issues-Waiver of two-year lock-in-period

The Government has waived the requirement of lock-in-period of two years in respect of eLli-o-equity issues through the mechanism of depositary receipts by Indian companies. This waiver will apply to companies intending to offer such securities abroad as well as to those which have already made such issues or are in the process of doing so by virtue of final approvals issued by the Ministry of Finance. This decision has been taken following the representations received from several Indian companies.

Allotment of shares

S. 72- Allotment of shares-Board Resolution

"RESOLVED that the statement showing the name(s), address(es) and number of shares applied for against the public offer of 80,00,000 equity shares of Rs. 10/-each (on which Rs. 5/-is payable on application and allotment) submitted to this meeting and for the purpose of identification, initialed by the Chairman, be and is hereby approved and that each applicant for the shares pursuant to his/her application, be allotted the exact number of shares as applied for, and that such number of shares as hereby allotted be put in the column of the statement provided for the purpose against such applicant, and that notice of such allotment be communicated to the respective allottees.

RESOLVED FURTHER that the company having received total valid applications for aggregate of 79,40,600 equity shares against offer of 80,00,000 equity shares, the balance of 59,400 equity shares be and are hereby allotted to the following underwriters as per the details mentioned below:

S1. Name and Number of Amount

No. address equity shares Rs.

1. PRD Co. of 14,850 1,48,500

2. NPK & Co. of 14,850 1,48,500

3. DPR (P) Ltd. Of 14,850 1,48,500

4. Finance Corporation of 14,850 1,48,500

RESOLVED FURTHER that a call of Rs. 5/-per share be and is hereby made on the aforesaid underwriters for the shares so allotted and that the said underwriters be notified accordingly."

PRACTICE NOTES

1. SEBI Guidelines,

(a) Allotment can be made only if the company receives minimum subscription of 90% of the issued amount, on the date of closure of the issue in case of a nonunderwritten issue and if the company receives minimum subscription of 90% of the net offer to public including devolvement of underwriters within 60 days from the date of closure of the issue.

(b) Computation of underwriter's obligation is to be made in the manner set out in clause 10 of the 'Model Underwriting Agreement' devised by SEBI.

(c) The particulars of devolvement on underwriters should be communicated to them within 30 days of the closure of the subscription.

(d) Within 30 days of the receipt of the communication, underwriters should subscribe or procure subscription to the shares.

(e) The company is free to arrange for subscription of the unsubscribe shares in the event of the failure of the underwriter to fulfill his obligation.

2. Allotment not to be made unless minimum subscription received.-Section 69 prohibits allotment of shares in the case of public issue by the company unless minimum subscription is received by the company. This minimum subscription is the minimum amount which according to the Board must be raised by the first share issue in order to provide for the following five matters specified in clause 5 of Schedule 11, namely,

(i) the purchase price of any property purchased or to be purchased;

(ii) preliminary expenses;

(iii) the repayment of moneys borrowed for the above;

(iv) working capital;

(v) any other expenditure stating the nature, purpose and estimated amount in each case.

3. Compliance with section sufficient if followed in first allotment.-If there are two allotments in corresponding two years, then it will be sufficient compliance with the provisions of section 69, if they are followed in the first allotment.

209

Allotment of debentures

S. 72- Allotment of debentures-Board Resolution

"RESOLVED that 15% secured redeemable non-convertible debentures of Rs. 100/- each be and are hereby allotted to the persons mentioned in the allotment list placed before the meeting and initialed by the Chairman, so that each allottee receives the number of debentures specified against his name in the list.

RESOLVED FURTHER that the draft letter of allotment and draft letter of Regret placed before the meeting and initialed by the Chairman for the purpose of identification be and are hereby approved and the Secretary of the company be directed to issue the said letters of allotment or letter of regret with refund vouchers as the case may be.

RESOLVED FURTHER that the ………. Bank ………. Branch, in which the company has opened an account called the 'Rushabh Issue of Debenture Account', be and are hereby authorised to receive debenture allotment monies and to credit the said account with such amounts."

RESOLVED FURTHER that the said Bank be and are hereby authorised to honour debenture refund vouchers from and out of the credit balance in the said account."

PRACTICE NOTES

1. Provision similar both for allotment of shares/debentures.-The provisions relating to allotment of shares and debentures are basically the same.

Where the debentures are issued pursuant to a prospectus, no allotment can be made (in the absence of a longer period specified in the prospectus) until the beginning of the 5th day after that on which the prospectus is first issued, whether as a newspaper advertisement or otherwise.

2. Maximum and minimum duration of subscription lists.-The subscription list should be kept open for at least 3 days in case of a public company opting for listing of its shares on a recognised stock exchange. [Rule 19(2)(b) of Securities Contracts (Regulations) Rules, 19571. The maximum period of keeping the subscription lists open is for 10 days.

3. Violation not to invalidate allotment.-The violation does not invalidate the allotment but renders the company and officers in default liable to penal action.

4. Allotment void if permission not granted by Stock Exchange.-Where the prospectus states that an application under sub-section (1) of section 73 for permission to deal in the shares or debentures in one or more Stock Exchanges then any allotment made in pursuance of such prospectus shall be void if permission has not been granted by the Stock Exchange or each such Stock Exchange, as the case may be, before the expiry of ten weeks from the date of the closing of the subscription list.

5. SEBI Guidelines.-The following SEBI guidelines should be adhered to:

(i) Promoters' contribution including premium, if any, should be brought in advance at least one day before the public issue opens.

(ii) Credit rating is compulsory for debentures irrespective of maturity period. If the issue is greater than or equal to Rs. 100 crore, two ratings from two different credit rating, agencies should be obtained.

(iii) All Debenture issues except fully convertible debentures with conversion period of 18 months by companies belonging to the same group for providing loan to or acquiring shareholding in others is not permitted.

(iv) premium amount and time of conversion of the debentures can be determined by the issuer company and disclosed.

(v) The interest rate for debentures can be freely determined by the issuer company.

210

Allotment of Debentures

S. 72- Allotment of Debentures-Board Resolution

"RESOLVED THAT % Secured Convertible/ Non Convertible Debentures of Rs . …../-each (hereinafter referred to as 'Debentures') aggregating Rs …..be allotted to the allottees as per the Allotment List prepared in accordance with the scheme of allotment approved by the Stock Exchange as detailed below

(a) Debentures to the Equity Share-holders of ................ and (promoter/associate companies).

(b) Debentures to the permanent employees of the company.

"RESOLVED FURTHER THAT Letters of Allotment (Part A) cum Share Certificates for the convertible portion of Rs . comprised in Rs . of each Debenture and Letters of Allotment (Part B) for the non-convertible portion of Rs . /-of each Debenture/Letter of Allotment for the non-convertible debentures be issued to the respective allottees whose names appear in the Allotment Register placed before the meeting.

"RESOLVED FURT14ER THAT the Letters of Allotment (Part B) be issued bearing the facsimile signature of Mr . Managing Director and the Letter of Allotment (Part A)-cum.-Share Certificate be issued under the Common Seal of the company bearing facsimile signatures of Mr . Managing Director and Mr. ........................ Director and the autographic signatures of any one of the following persons as authorised signatories . (give names of authorised signatories).

"RESOLVED FURTHER THAT Allotment Advice-cum-Refund Order/Allotment Money Due Notice be issued to the respective applicants and that the Allotment Money at the rate of Rs . /- per Debenture be payable by ………. being the last date fixed for payment of Allotment Money, upon the terms and conditions contained therein or such other date as may be extended by the Board from time to time and where the application money paid by an allottee exceeds the amount payable on the debentures allotted, the excess application money be adjusted against the allotment money payable and the balance amount, and in the case of unsuccessful applicants, the entire amount be refunded to the applicants in accordance with the provisions of section 73 of the Companies Act, 1956 and the Prospectus dated .......

"RESOLVED FURTHER THAT Mr . ……….. Secretary be and is hereby authorised to take all necessary steps to issue the afore mentioned Letters of Allotment-cum-Share Certificates/Letters of Allotment to the allottees of the Debentures and register their names in the Register of Debenture holders as the holders of such Debentures."

PRACTICE NOTES

1. Provision similar both for allotment of shares/debentures.-The provisions relating to allotment of shares and debentures are basically the same.

Where the debentures are issued pursuant to a prospectus, no allotment can be made (in the absence of a longer period specified in the prospectus) until the beginning of the 5^th day after that on which the prospectus is first issued, whether as a newspaper advertisement or otherwise.

2. Maximum and minimum duration of subscription lists.-The subscription list should be kept open for at least 3 days in case of a public company opting for listing of its shares on a recognised stock exchange. [Rule 19(2)(b) of Securities Contracts (Regulations) Rules, 1957]. The maximum period of keeping the subscription lists open for 10 days.

3. Violation not to invalidate allotment.-The violation does not invalidate the allotment but renders the company and officers in default liable to penal action.

211

Allotment of shares on conversion of fully convertible debentures

S. 72-Allotment on conversion of fully convertible debentures-Board Resolution

"RESOLVED that in accordance with the terms of issue, 50,000 15% secured fully convertible debentures of Rs. 100 each be and are hereby converted into 5,00,000 equity shares of Rs. 10/each credited as fully paid-LIP.

RESOLVED FURTHER that the new equity Shares be issued and allotted to the debenture-holders in accordance with the allotment list placed before the meeting and initialed by the Chairman so that each debenture-holder receives the number of equity share specified against his name in the list and the Secretary be directed to inform the debenture-holders accordingly."

PRACTICE NOTES

1. Authorised capital be increased if not sufficient to cover allotment.-It should be ensured that the authorised capital of the company is sufficient to permit this allotment, otherwise the authorised capital will first have to be increased.

2. SEBI (DIP) Guidelines 2000.-Whenever fully convertible debentures (FCD) are issued bearing interest at a rate less than the bank rate, the offer document should contain disclosure about the price that would work out to the investor, taking into account the notional interest loss on the investment from the date of allotment of FCDs to the date of conversion. No company shall issue FCDs having a conversion period of more than 36 months, unless conversion is made optional with 'put' and 'call' option. If the conversion takes place at or after IS months from the date of allotment, but before 36 months, any conversion in part or whole of the debenture shall be optional at the hands of the debenture holder."

212

Allotment of shares oversubscribed

S. 72- Allotment of shares oversubscribed-Board Resolution

"RESOLVED that 30,00,000 equity shares in the share capital of the company of Rs. 10/-each, on which Rs. 51- the money payable on application has been received, be and is hereby allotted on the basis of the scheme of allotment finalised in consultation with the Stock Exchange, to the applicants as detailed in the Allotment Register which was placed on the table duly initialed by the Chairman for the purpose of identification.

RESOLVED FURTHER that the Secretary be and is hereby authorised to arrange necessary refunds to those who paid in excess of the amount payable on his/her allotments made according to the scheme of allotment agreed upon by the Stock Exchange within the time prescribed in section 73(2A) of the Companies Act, 1956."

PRACTICE NOTES

1. SEBI Guidelines

(i) Retention of over subscription is not permitted. [Clause 8.10.1]

(ii) As the process of rounding off to the nearer multiple of 100 may result on actual allocation being higher than the shares offered, the final allotment may be higher upto 110% of the size of the offer. [Clause 8. 10.1 Proviso]

(iii) SEBI nominated public representative is associated in the process of finalisation of allotment in case of over subscription. [Clause 16.2.]. ].(a)]

(iv) SEBI Regional Managers at Chennai, Mumbai, Calcutta and Delhi will also be associated with public representatives. [Clause 16.2. 1. L(e)]

2. Company to abide by scheme of allotment suggested by Stock Exchange.-In the case of a company whose shares are being listed or are already listed with a Stock Exchange, allotment of further shares oversubscribed in a public issue must be pursuant to the agreement with such recognised Stock Exchange.

3. Repayment of money received in excess.-Where permission has been granted by the recognised Stock Exchange for dealing in any shares or debentures in such Stock Exchange and the moneys received from the applicants for shares or debentures are in excess of the aggregate of the application money relating to the shares or debentures in respect of which allotments have been made, the company shall repay the moneys to the extent of such excess forthwith without interest, and if such money is not repaid within eight days from the day the company becomes liable to repay it must refund the money with interest from the expiry of the said eighth day.

4. Payment of interest on excess application money.-In case of over subscription of shares, the rate of interest payable is 15% per annum for the delayed period.

5. Basis of Allotment.-In a public issue of securities the Executive Director/Managing Director of the Regional Stock Exchange along with the post issue Lead Merchant Banker and the Registrar to an Issue, will be responsible to ensure that the basis of allotment is finalised in a fair and proper manner in accordance with SEBI (DIP) Guidelines, 2000, given for proportionate allotment, in clause 7.6.1.1. provided in the book building portion of a book built public issue notwithstanding the above clause, clause 11.3.5. of Chapter XI of these Guidelines will be applicable.

6. Proportionate allotment on over subscription.-The proportionate allotment as mentioned above in an issue that is oversubscribed should be subject to the reservation for small individual applicants as described below :

(a) A minimum of 50 per cent of the net offer of securities to the public shall initially be made available for allotment to individual applicants who have applied for allotment equal to or less than 10 marketable lots of shares or debentures or the securities offered, as the case may be.

(b) The balance net offer of securities to the public shall initially be made available for allotment to investors, including corporate bodies/institutions, irrespective of the number of shares or debentures etc., applied for and individual applicants who have applied for allotment of more than 10 marketable lots of shares or debentures or the securities offered, as the case may be.

(c) The unsubscribed portion of the net offer to any one of the categories specified in (a) or (b) shall/may be made available for allotment to applicants in the other category, if so required.

7. Drawal of lots.-The drawal of lots (where required) to finalise the basis of allotment shall be done in the presence of a public representative on the Governing Board of the Regional Stock Exchange."

213

Refusal to allot shares

S. 72- Refusal to allot shares-Board Resolution

"RESOLVED that the applications for equity shares in the company, listed out below, be and are hereby rejected.

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to intimate the applicants of the company's refusal to allot shares to them and to return the application money paid by them on their application, as shown against their respective names below:

S. Name of Application Number of Application

No. applicant No. shares money

applied for paid

PRACTICE NOTES

1. Resolution to be passed at Board Meeting or by circulation.-This resolution can be passed by the Board either at a meeting or by circulation.

2. Refund orders to applicants.-The refund orders will have to be sent to the applicant at the earliest and in no event later than eight days, where the refusal to allot is due to over subscription of the issue. In default of this, the Directors of the company become liable to refund the application money with interest.

229. Compulsory Listing with Stock Exchange (S. 73)

Section 73 has been amended by the Companies (Amendment) Act, 1988, which make it obligatory for companies going for public issue of shares or debentures to list with at least one recognised Stock Exchange.

Sub-section (2) provides that where the permission has not been applied under subsection (1) or such permission having been applied for, has not been granted, the company shall forthwith repay without interest all moneys received from applicants in pursuance of the prospectus and if any such money is not repaid within eight days after the company becomes liable to repay it, the company and every Director of the company who is an officer in default shall on and from the expiry of the eighth day be jointly and severally liable to repay that money with interest at such rate not less than four per cent and not more than fifteen per cent as may be prescribed, having regard to the length of the period of delay in making the repayment of such money.

Sub-section (2A) further provides that where permission has been granted by the recounised Stock Exchange or Stock Exchanges for dealing in any shares or debentures in such Stock Exchange or each such Stock Exchange and the moneys received from applicants for shares or debentures are in excess of the aggregate of the application moneys relating to the shares or debentures in respect of which allotments have been made, the company shall repay the moneys to the extent of such excess forthwith without interest, and if such money is not repaid within eight days from the day the company becomes liable to pay it, the company and every Director of the company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate not less than four per cent and not more than fifteen per cent as may be prescribed having regard to the length of the period of delay in making the repayment of such money.

Public issue becoming void due to refusal of listing by one of the Stock Exchanges necessitating the refund of application money, the release of subscription money by the bank to the company in such a case even before listing refusal was received was held to be a breach of trust. Bank of Baroda v. SEBI, (2001) CLC 714.

The rates of interest prescribed t4de new Rule 4D of Companies (Central Govt.) General Rules and Forms, 1956, vide GSR No. 312(E), dated 6-3-1992 with effect from 21-21992 is 15% per annum and remains unchanged till now.

Sub-section (213) provides that if default is made in complying with the provisions of sub-section (2A), the company and every officer of the company who is in default shall be punishable with fine of upto Rs. 50,0001- and where repayment is not made within 6 months from the expiry of the 8th day also with imprisonment for a term of 1 year.

230. Listing of shares on Stock Exchange (S. 73)

The grant of conditional permission did not amount to sanction of permission for the shares to be dealt with on the Stock Exchange as contemplated under section 73(l). The provisions contemplates an unqualified permission. A qualified permission is as good as refusal and the application should be construed as not disposed of within the time prescribed by sub-section (1)."

The application monies do not form part of the assets of the company., 4 The application money can be used only for the purposes mentioned and for no other purposes."

231. Section 73 to be Administered by SEBI

The Companies (Amendment) Act, 2000 vide new section 55A inserted that the provisions contained in this shall in case of listed public companies and of public companies which purport to be listed be administered by SEBI. In case of other companies the provisions of this sect-ion will be administered by the Central Government.

232. Issue of refund orders, allotment letters/certificates, and letters of offer by registered post (S. 73)

Circular No. 6 of 1992, dated 3-9-1992.-Ministry of Finance, Department of Economic Affairs, vide their circular letter No. 8/15/SE/86-B, dated 3rd June, 1986, addressed to all stock exchanges, informed that the Government has decided that henceforth all companies listed or seeking enlistment on stock exchanges, shall issue refund orders, allotment letters/certificates only by registered post. It has now been considered necessary that with a view to protect the interests of investors, the letters of offer for rights issue be also issued to the shareholders by registered post, in future. This circular was amended by another circular dated 16-3-1993, contents of which are given under 228.

233. Rate of interest in case of delay in refund-Companies (Central Governments) General Rules and forms Amendment Rules, 1992 (S. 73(2)&(2A))

"Notification, dated 6-3-1992-G.S.R. 312(E).-Rule 4D of the Companies (Central Government's) General Rules and Forms, 1956, the rates of interest of 15% per annum for the purposes of sub-sections (2) and (2A) of section 73.

234. Issue of refund orders under section 73(2)/(2A) of the Companies Act, 1956 (S. 73(2)/(2A))

Circular No. I of 1993, dated 16th March, 1993.-Keeping in view the constraints faced by the companies in issuing the refund orders by registered post, as the Postal Department is not able to cope up with the work involved, it has, accordingly, been decided that it will be in order for the companies to issue refund orders for amounts exceeding Rs. 1,500 per refund order only by registered post and the refund orders below that amount be issued under certificate of posting. In case of delay in refund, interest for the delayed period be calculated at 15 per cent per annum and paid along with the refund order or while issuing the duplicate refund order, as the case may be, up to the date of actual despatch. In this regard, attention is also invited to the penal provisions contained in section 73(2B) of the Companies Act, 1956.

214

Opening of bank account-For refund of Application money and/or Excess amount

S. 73-0pening of bank account-For refund of Application money and/or Excess amount-Board Resolution

RESOLVED that the company do open a Current Bank Account in the name and style of ……….with (name and address of the Bank) for refund of Application money and/or excess amount of application money received from the investors.

RESOLVED FURTHER that Shri ………. Secretary and Shri ………................... Financial Controller of the company be and are hereby authorised severally to sign refund cheques and that the said refund cheques be made payable at places where application money was received.

RESOLVED FURTHER that the said Bank be and is hereby authorised to honour all cheques drawn on behalf of the company severally by Shri ………. Secretary and Shri ………. Financial Controller of the company and to act on any instructions so given by any of them relating to the said banking account of the company.

PRACTICE NOTES

1. Registrar to prepare statement of applicants to whom money to be refunded.- It is the duty of Registrars to the issue to prepare immediately statement of applicants to whom the entire or part of the application money is to be refund on account of rejection of application or on account of excess amount received.

2. Refund to include interest where payment not made within stipulated period, In case refund is not made within 78 days of closing of subscription list, interest will also have to be paid. Here 78 days is calculated by adding eight days mentioned in sub-section (2) to 10 weeks mentioned in sub-section (I A) of section 73.

215

Refund of application money

S. 73- Refund of Application money-Board Resolution

RESOLVED that the share application money received from the applicant whose names are detailed in the sheets (Signed for the purpose of identification by the Chairman of the meeting) and kept in a separate Bank Account styled as A B C Limited with ……….bank ……….be and is hereby returned to the respective applicants.

RESOLVED FURTHER that Mr ……….. Director of the company be and is hereby authorised to give effect to the resolution.

PRACTICE NOTES

1. Refund of Application money.-Where the company does not receive the minimum subscription of 90% of the issue including devolvement of underwriters if any, then the company within 120 days of the date of opening of subscription list should refund the entire subscription amount received to the applicant forthwith. Where there is delay beyond 130 days in refund of the amount the company is required to pay interest @ 6% per annum as per the provisions contained in Section 69(5) of the Companies Act, 1956.

2. Prosecution under IPC on failure to refund subscription money.-The investors in companies are not to be confined to their remedies under the Companies Act and that if a prima facie case is made out and proof of mens rea is there, a prosecution under the Indian Penal Code would also be permissible but that the High Court and Supreme Court could not go into the factual question whether the accused would be likely to be punished. (Radhey Shyanz Khetnka v. State of Bihar, (1993) 77 Comp Cas 356 (SC).

216

Collection of Allotment and Call Moneys

S. 73-Appointment of bankers for collection of allotment and call moneys Board Resolution

"RESOLVED that the State Bank of India, Parliament Street, New Delhi Main Branch be and is hereby appointed as one of the Bankers of the company for the purposes of collection of allotment and. call moneys on 10,00,000 equity shares of Rs. 10/-each issued by the company.

RESOLVED FURTHER that for the aforesaid purpose a banking account be opened and operated on behalf of the company by Shri XYZ, the Managing Director of the company."

PRACTICE NOTES

1. Board's Power.- The power to make calls on shareholders in respect of moneys unpaid on their shares lies on the Board of Directors and such power can be exercised only by passing a resolution at a meeting of the Board under section 292(l)(a) and not by passing a resolution by circulation under section 289 of the Act.

2. Power to make calls cannot be delegated.-The Board's power to make calls cannot be delegated to any committee of directors or managing director or manager or any other principle officer of the company.

217

Listing of shares on Stock Exchange

S. 73-- Listing of shares on Stock Exchange-Board Resolution

"RESOLVED that the consent of the Board of Directors be and is hereby given to the company for the execution of the Listing Agreement with Bombay Stock Exchange, as per draft placed before the meeting and duly initialed by the Chairman for purposes of identification.

RESOLVED FURTHER that the Managing Director of the company be and is hereby authorised to execute the said agreement on behalf of the company by affixing the common seal of the company thereon."

PRACTICE NOTES

1. Application to recognised Stock Exchange for listing of shares.-Every public company is required before issuing shares or debentures for public subscription by issue of a prospectus, to make an application for listing the security in one or more recognised Stock Exchanges.

2. No allotment to be made when permission not granted.-In case permission is not granted by any Stock Exchange before the expiry of 10 weeks from the date of closing the subscription list, no allotment can be made.

3. Repayment of money to applicants when no application made or permission not granted.-In case no application is made, or permission has not been granted, the company shall forthwith repay all moneys received from the applicants.

4. Company and its officers liable to pay interest when money not repaid within eight days.-Failure to repay the moneys within eight days will make the company and its officers liable to repay that money with interest between 4 to 15 per cent having regard to the period of delay.

5. Money to be kept in separate account until permission granted.-The company is also required to keep the money in a separate Bank account until the permission is granted, failure to do is also a punishable offence and if default is made in complying with this requirement, the company and every officer of the company who is in default will be punishable with fine of Rs. 50,000/- [Section 73(3)].

6. Eligibility for listing on a Stock Exchange.-The eligibility criteria for listing of securities of a company on Stock Exchange lays down that the minimum issued equity capital of a company shall be Rupees Three Crores and the minimum public offer of equity capital shall not be less than Rs. 1.80 crores. For listing with Bombay Stock Exchange for the first time the minimum issue of equity capital should be Rs. 5 crores.

7. Reservations and/or firm allotments in public issues.-According to the existing guidelines for listing of securities on recognised stock exchanges, new companies have to make the net offer to public of at least 10% or 25 per cent of the post-issue capital of the company. In case of infrastructure companies the minimum public offer of 10% or 25% of securities to public for subscription is not required as per clause 8.3.3 of SEBI (DIP) Guidelines, 2000.

Since the minimum offer to public has been specified at 10% or 25% in respect of the balance, the issuer company is free to make reservations and/or firm allotment to various categories of persons subject to other relevant provisions of SEBI (DIP) Guidelines, 2000. The lead merchant banker(s) can be included in the category of persons entitled to firm allotments subject, to an aggregate maximum ceiling of 5% of the proposed issue of securities. The aggregate of reservations and firm allotments for employees in an issue should not exceed 10% of the total proposed amount. For shareholders of promoting companies or group companies, the reservation should not exceed 10% of the total proposed issue amount.

The requirement of minimum 25% to be offered to public has been released to 10% in the eligible sectors such as Telecom, media and entertainment subject to certain conditions.

8. Grant of conditional permission not to be taken as sanction of permission.-The grant of conditional permission did not amount to sanction of permission for the shares to be dealt with on the Stock Exchange as contemplated under section 73(l). The provisions contemplates an unqualified permission. A qualified permission is as good as refusal and the application should be construed as not disposed of within the time prescribed by subsection (1).

9. Application money not assets of company.-The application monies do not form part of the assets of the company.

10. Application to be used for purposes mentioned only.-The application money can be used only for the purposes mentioned in the application and for no other purpose." Application money could not have been withdrawn till compliance of formalities and it was immaterial that the amount of over subscription money was withdrawn before SEBI directed to refund it. The diversion and expenditure of the fund was an illegality ab initio. Jaltrang Motels Ltd. v. Union of India, (1999) 96 Com Cases 442 (Guj).

235. Amendments to Rules on Listing of Shares of Companies on Stock Exchanges (S. 73)

Circular dated 20-9-1993.-The Ministry of Finance has amended Rule 19(2)(b) of the Securities Conti-acts (Regulation) Rules, 1957, relating to the requirement of a public offer of securities by a company seeking listing on a Stock Exchange by lowering the minimum public offer of capital to be made by a company to 25 per cent of its issued capital, as compared to the earlier requirement of 60 per cent or such other percentage as was admissible under the administrative guidelines of the Ministry. The amendment also incorporates a proviso under which the Central Government can relax this 25 per cent limit for Government companies. This relaxation has been incorporated in order to facilitate the listing of companies where Government is proposing to disinvest share capital. Finally, the amendment also excludes the reservation of securities to Government or other specified institutions from the minimum 25 per cent of securities to be offered to the public.

The amendment so notified eliminates the requirement for companies, other than Government companies, to seek relaxation of the minimum requirement of public offer of capital from the Stock Exchanges. The amendment is expected to simplify the procedure for listing of shares of companies on Stock Exchanges. It is also expected to encourage the listing of a large number of companies on Stock Exchanges and thereby broaden the capital market.

Notification No. GSR 415(E) dated 7-6-2001.-This notification released the minimum requirement of offering 25% to the public in any public issue to 10% subject to certain conditions by way of substitution of Rule 19(2)(b) by Amendment Rules, 2001.

As per the said substitution, at least 10% of each class or kind of securities issued by the company should be offered to the public for subscription through advertisement in newspapers for a period not less than 2 days and that applications received in pursuance of such offer were allotted subject to the following conditions:

(i) Minimum 20 lakh securities excluding reservations, firm allotments and promoters contribution) should be offered to the public.

(ii) The size of the offer to the public should be minimum of Rs. 100 crores.

(iii) The issue should be made only through book building method with allocation of 60% of the issue size to the qualified institutional buyers as specified by SEBI.

218

Enlisting of Foreign Currency Convertible Bonds on Overseas Stock Exchange

S. 73-Enlisting of Foreign Currency Convertible Bonds on Overseas Stock Exchange-Board Resolution

RESOLVED that Shri ………. the Managing Director and Shri ………. ......... Secretary of the Company be and are hereby authorised severally to submit applications to Overseas Stock Exchanges at (mention here overseas countries where enlisting desired) for enlisting "Foreign Currency Convertible Bonds of a Global value of ........................... and to comply with (mention here the value in US Dollar) all the terms and conditions imposed by the said Overseas Stock Exchanges in this regard.

PRACTICE NOTES

1. Obtaining of approval of Central Government.-An issuing company both listed and unlisted desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds through Global Depository Receipts is required to obtain prior permission of the Department of Economic Affairs, Ministry of Finance.

2. Company to have a consistent track record.-The issuing company shall have a consistent track record of good performance for a minimum period of three years. This three year track record requirement will be relaxed in case of companies seeking such issues to finance investments in infrastructure industries such as power generation, telecommunications, petroleum, exploration and refining, ports, airports and roads.

3. Second approval on finalisation of issue structure.-On the completion of finalisation of issue structure in consultation with Lead Manager to the issue, the issuing company is to obtain final approval from the Department of Economic Affairs. But before obtaining such final approval, a company which is implementing projects not predominantly contained in Annexure III of the New Industrial Policy of 1991, or a company which undertakes a project contained in Annexure III but whose direct foreign investment after the proposed Euro-issue is likely to exceed 51 per cent of the post issue subscribed capital, will need to obtain prior FIPB clearance.

4. Listing of GDR.-A Global Depository Receipt may be issued in the negotiable form and may be listed on any international stock exchanges for trading outside India.

5. Applicability of Laws.-The provisions of any law relating to issue of capital by an Indian company shall apply in relation to the issue of Foreign Currency Convertible Bonds or the ordinary shares of an issuing company and the issuing company shall obtain the necessary permission-or--exemption from the appropriate authority under the relevant law relating to issue of capital.

6. Foreign Currency Convertible Bonds and GDR be denominated in any freely convertible foreign currency.-The Foreign Currency Convertible Bonds and Global Depository Receipts may be denominated in any freely convertible foreign currency.

7. GDR to employees of software companies.- Indian Companies engaged in information technology software and information technology services are eligible to offer to their non-resident and resident permanent employees (including Indian and Overseas Working directors) GDRs against issue of ordinary shares under the Foreign Currency Convertible Bond and Ordinary Shares (Through Depository Receipt Mechanism), Scheme, 1993 subject to the operational guidelines/conditions issued from time to time by the Government.

8. Conversion price how to be determined.- For the purpose of conversion of Foreign Currency Convertible Bonds, the cost of acquisition in the hands of the non-resident investors would, be the conversion price determined on the basis of the price of the shares at the Bombay Stock Exchange or the National Stock Exchange on the date of conversion of Foreign Currency Convertible Bonds into shares.

9. Taxation on Foreign Currency Convertible Bonds.-(I) Interest payments on the bonds, until the conversion option is exercised, shall be subject to deduction of tax at source at the rate of ten per cent.

(2) Tax on dividend on the converted portion of the bond shall be subject to deduction of tax at source at the rate of ten percent.

(3) Conversion of Foreign Currency Convertible Bonds into shares shall not give rise to any capital gains liable to income-tax in India.

(4) Transfers of Foreign Currency Convertible Bonds made outside India by a nonresident investor to another non-resident investor shall not give rise to any capital gains liable to tax in India.

10. Intimation to Stock Exchange.-On conversion of bond the company shall immediately make application to the Stock Exchange for enlisting the shares.

11. Return of Allotment.-File return of allotment with the Registrar of Companies within thirty days of allotment in Form No. 2. If this return is not so filed, every officer of the company who is in default will be punishable with fine of upto Rs. 50001 for every day during which the default continues.

12. Stock option for Indian software companies linked with GDR/ADR-In order to retain highly skilled professionals of software companies, the Department of Economic Affairs, Investment Division vide its Press Note No. F. 17/2/97-NRI dated 23-6-1998 announced a special stock option scheme for Indian software companies linked with American Depository Receipts (ADR) and Global Depository Receipts (GDR) offerings by these companies. The scheme would enable Indian software companies to offer terms comparable to the packages offered by international companies in the field.

219

Listing of shares with Stock Exchange

S. 73, Listing of shares with stock exchanges-Board Resolution

WHEREAS the company had applied for listing of its shares with the ………. and ……….Stock Exchanges and it is necessary to enter into a listing agreement with the above stock exchanges in this regard;

"NOW THEREFORE IT IS RESOLVED that the listing agreement with the ………. and ………. Stock Exchanges in connection with the listing of and dealing in ……….equity shares of Rs. 10/- each on the said stock exchanges be executed under the common seal of the Company in terms of article ……….of the Articles of Association of the Company in the presence of the following Directors of the Company, namely ……….and ………. who do sign the same in token thereof."

PRACTICE NOTES

1. Public issues compulsory listing.-A company intending to offer shares or debentures to the public for subscription by the issue of prospectus should make application to Stock Exchange for listing of shares or debentures as per section 73 of the Act.

2. Issues for Rs. 3 crores or more.- As per Stock Exchange Guidelines, all issues of Rs. 3 crores or more will be eligible for listing with the Stock Exchanges. In case of Mumbai Stock Exchange the minimum amount to apply for listing is Rs. 5 crores. Unlisted companies where capital after the proposed issue of securities is less than Rs. 3 crore shall be eligible to be listed on the Over the Counter Exchange of India.

220

Application for listing of shares on Stock Exchange

S. 73-Application for listing of shares on Stock Exchange-Board Resolution

RESOLVED that application be made to ………. Stock Exchanges for permission to deal in the equity shares of Rs. 10/-each being offered by the company to public.

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to make the application and to comply with all formalities and requirements of the Stock Exchanges in connection with the enlistment.

RESOLVED FURTHER that draft of the listing agreement to be entered into with ……….stock exchanges, a copy whereof placed before the meeting and initialed by the Chairman for purposes of identification, be and is hereby approved and the Managing Director, any other Director and Secretary of the Company be and are hereby jointly authorised to execute the same under the common seal of the company.

PRACTICE NOTES

1. Allotment of shares and debentures to be dealt in on Stock Exchange.-Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognised stock exchange for permission for the shares or debentures intending to be so offered to be dealt with in the stock exchange or each such stock exchange.

2. Prospectus to state name of Stock Exchange.-Where a prospectus, whether issued generally or not, states that an application under sub-section (1) has been made for permission for the shares or debentures offered thereby to be dealt in one or more recognized stock exchange such prospectus shall state the name of the stock exchange or, as the case may be, each such stock exchange, and any allotment made on an application in pursuance of such prospectus shall, whenever made, be void.

221

Execution of Listing Agreement with Stock Exchange

S. 73- Execution of listing agreement-Board Resolution

"RESOLVED that the Company do execute listing agreements as per formats received from the Stock Exchanges at Delhi and Mumbai, a draft copy of which, duly initialed by Chairman, is placed before this Meeting for purposes of identification.

RESOLVED FURTBER that Shri SKM, Managing Director, Slu-i AKM, Director and Shri SPM, Secretary of the Company be and are hereby jointly authorised to sign the listing agreement and affix Common Sea] of the Company thereon".

PRACTICE NOTES

1. Permission of Stock Exchange for listing of shares.-Every public company is required before issuing shares or debentures for public subscription by issue of a prospectus, to make an application for listing the security in one or more recognised stock exchange. In case permission is not granted by any stock exchange, before the expiry of 10 weeks from the date of closing the subscription list, no allotment can be made. In case no application is made, or permission has not been granted, the company shall forthwith repay all moneys received from the applicants.

2. Filing of listing application.-The company is required to file with the Stock Exchange the listing application for dealing of shares on the Stock Exchange. When application for listing of shares, is made on different Stock Exchanges ensure to obtain approval of all the Stock Exchanges.

3. Execution of listing agreement.-On receipt of approval from the Stock Exchanges the company is required to execute the listing agreements.

4. Separate application required for listing of each kind of securities.-The Company is required to make separate application to the Stock Exchange for listing of its each kind of securities.

222

Listing agreement with the Stock Exchange

S. 73-Listing agreement with the Stock Exchange-Board Resolution

"RESOLVED that the agreement with the ………. Stock Exchange Association Limited, in connection with the listing of and dealing in 60,00,000 equity shares of Rs. 10/-each on the said Exchange, be executed under the common sea] of the company in terms of article ........ of the Articles of Association of the company in the presence of two Directors and the Secretary of the company who shall also sign the same."

PRACTICE NOTES

1. Application to recognised Stock Exchange for listing of shares.-Before public issue under the prospectus, a company is required to make an application to a recognised Stock Exchange for the listing of and dealing in shares/ debentures being offered to the public for subscription. Where permission of the Stock Exchange is granted, the company agrees to certain guidelines suggested by the Stock Exchange, which form the basis of an agreement between the company and such recognised Stock Exchange. The resolution in the form set out above gives authority for execution of such agreement under the seal of the company.

2. Appeal against refusal of Stock Exchange.-Appeal against refusal of Stock Exchange to grant permission of listing of shares, will lie before Securities Appellate Tribunal under section 22A of the Securities Contracts (Regulation) Act, 1956.

223

Refusal of permission by the Stock Exchange

S. 73- Refusal of permission by the Stock Exchange-Board Resolution

WHEREAS the company's application for listing of and dealing in with 10,00,000 equity shares issued under prospectus dated the ........... 2002, to the Stock Exchange Association Ltd., which is recognised under the Securities Contracts (Regulation) Act, 1956, was refused;

AND WHEREAS the decision to prefer an appeal against such refusal of permission under section 22 of the Securities Contracts (Regulation) Act, 1956 to the SEBI having been taken;

"NOW THEREFORE IT WAS RESOLVED that the draft application initialed by the Chairman for the purpose of identification, be and is hereby approved for immediate submission to the SEBI.

RESOLVED FURTHER that in terms of the provisions of sub-section (1) of section 73 of the Companies Act, 1956, the allotment of shares to the applicants therefor be postponed until disposal of such appeal to the SEBI."

PRACTICE NOTES

1. Allotment already made not void until dismissal of appeal filed against decision of Stock Exchange.-Proviso to sub-section (1) of S. 73 states that where an appeal against the decision of the Stock Exchange refusing permission has been preferred under S. 22 of the Security Contracts (Regulation) Act, 1956, allotment already made would not be void until the dismissal of the appeal.

2. Central Government's power delegated to SEBI-By Notification dated 13th September, 1994 issued under section 29A of the Securities Contracts (Regulation) Act, 1956, (SCRA), the Central Government has delegated the powers exercisable by it under section 22 of the SCRA to SEBI and by Securities Laws (Second Amendment) Act, 1999 with effect from 16th December, 1999 sections 22A to 22F were added giving right of appeal to Securities Appellate Tribunal against refusal of stock exchange to list securities of pubic companies. A company aggrieved by the refusal/omission/failure of a stock exchange in connection with the listing of its securities on the exchange should appeal to Securities Appellate Tribunal within 15 days from the date on which the reasons for refusal are furnished to it. The memorandum of appeal should be in the form given in the Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000, and should be presented in the registry of the Appellate Tribunal in three sets in a paper book with an empty file size envelope bearing full address of the respondent. Every appeal should be accompanied by a fee of Rs. 5,0001 by way of crossed demand draft drawn on a nationalisd bank in favour of "the Registrar Securities -Appellate Tribunal" and payable at the station where the registry is located. The said appeal should specify the ,grounds of appeal and set out all the material particulars relating to the issue of securities, the decision of the stock exchange in respect of the application for listing etc. The appeal should be accompanied by copies of all the relevant documents such as prospectus, application for listing, the reasons for refusal and other relevant correspondence exchanged between the company and the stock exchange along with copies of the order of the stock exchange at least one of which should be a certified copy, against which the appeal is filed. The Appellate Authority must satisfy itself that the mandatory requirement of minimum subscription has been complied with.

224

Refusal of permission to enlist the equity shares

(Another format)

S. 73- Refusal of permission to enlist the equity shares-Board Resolution

RESOLVED that the letter dated ………. received from......................... Stock Exchange refusing enlistment of equity shares of Rs. 10/-each of the company be and is hereby noted.

RESOLVED FURTHER that an appeal be preferred to the Securities and Exchange Board of India against the aforesaid refusal and Shri .: .......... Secretary of the Company be and is authorised to sign the said appeal and to do all such acts and things as may be necessary in this regard.

RESOLVED FURTHER that the allotment of equity shares 'be deferred till disposal of the aforesaid appeal.

PRACTICE NOTES

1. Conditional Permission.-The grant of conditional permission did not amount to sanction of permission for the shares to be dealt on with the Stock Exchange as contemplated under section 73(l). The provision contemplates an unqualified permission. A qualified permission is as good as refusal and the application should be construed as not disposed of within the time prescribed by sub-section (1). (Deccan Farms & Distillaries Ltd. v. Velabai LaxInidar Bhanji, (1979) 49 Comp Cas 321 (Bom) (1)13)).

2. Refusal by Stock Exchange.-If a single stock exchange out of the stock exchanges applied for refuses to grant permission, the entire allotment becomes void unless of course, the refusal of the stock exchange is set aside on appeal. Bishyashringa Jewellery Ltd. v. Stock Exchange, Mumbai, (1996) 85 Com Cases 479 (SC).

3. Appeal against refusal by stock exchange.-As per the proviso to sub-section (1), appeal may be preferred under section 22 of the Securities Contracts (Regulation) Act, 1956 both against the decision of a Stock Exchange refusing permission and its failure to dispose of the application for permission within ten weeks from the date of closing of the subscription lists, as such failure has to be presumed to be tantamount to not granting permission.

4. Appeals under section 22A of the Securities Contracts (Regulation) Act, 1956 to Securities Appellate Tribunal.-The memorandum appeal should be filed in three sets in a paper book with an empty file size envelope bearing full address of the respondent. The said memorandum of appeal should be in the form given in the Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000, and should be accompanies by a fee of Rs. 5000/- specifying the grounds of appeal and setting out all the material particulars relating to the issue of securities, the decision of the stock exchange in respect of the application for listing, etc. The appeal should be accompanied by copies of all the seven relevant documents, such as prospectus, the application for listing, the reasons for refusal, etc., and other relevant correspondence exchanged between the company and the stock exchange(s) along with copies of the order against which the appeal is filed.

225

Opening of Bank Account for Collection of Allotment Money

S. 73-Opening of Bank Account for Collection of Allotment Money-Board Resolution

WHEREAS it was necessary to appoint bankers for collection of allotment money from the allottees of the equity shares/ debentures;

AND WHEREAS the Board decided to appoint (name of Bank and address of controlling branch of the bank) as the bankers for collection of allotment money;

"NOW THEREFORE IT WAS RESOLVED THAT a bank account of the Company be opened in the name and style of ……….Ltd. EQUITY/DEBENTURE ALLOTMENT MONEY" with ............(name and address of controlling branch of the bank) and the said bank be and is hereby authorised to accept cheques/drafts/cash from

the allottees of Equity shares/ Debentures at its Branch (controlling branch) and at the following centres-(the names of centres to be given).

RESOLVED FURTHER THAT all instructions concerning the above account be given severally by any one of the following Directors, namely, Mr ……….Mr ……….OR jointly by any two of the following officers, namely, Mr ………... Chief Executive, Mr. ……….I Financial Controller and Mr ………. Secretary of the Company."

PRACTICE NOTES

1. Information to Stock Exchanges.-Once the bankers to any issue are appointed, the company is required to inform the Stock Exchanges with which the company's shares are enlisted or with which the company's shares will be enlisted. SEBI should also be informed about the appointment of specific bankers.

2. Rules and Regulations.-While appointing Bankers to an issue, it is necessary to keep in mind the Securities and Exchange Board of India (Bankers to an Issue) Rules, 1994 and its regulations.

226

Opening of Collection Account with Bankers to the Issue

S. 73-Opening of collection accounts with bankers to the issue-Board Resolution

"RESOLVED THAT separate bank accounts of the company in the ……….name and style of Equity/Debenture issue-public" be and are hereby opened for collection of application money for equity share /debentures from Indian public with the following bankers to the issue:

(Names of bankers and addresses of controlling branches)

and that the said banks be requested to open similar account with their following collection branches as given below:

(Names of collecting branches)

RESOLVED FURTHER that the said banks and their collecting branches be and are hereby authorised to accept cheques, demand drafts, cash from the applicants to the credit of the aforesaid accounts and to act on any instructions so given relating to the said accounts jointly by any two of the following persons as authorised signatories, namely Mr . ……….and Mr. ………. Directors, Mr. .................. I Financial Controller and Mr ……….. Secretary."

PRACTICE NOTES

1. Agreement with the Bankers to the issue.-As per Regulation 14(l) of the SEBI (Bankers to an Issue) Regulations, 1994, the company should enter into an agreement with the bankers to an issue which should contain the number of centres at which the application and application monies of an issue will be collected from the investors apart from other things, as per Regulation 14(2) of the said Regulations.

2. Information to Stock Exchange.-Once the bankers to any issue are appointed, the company is required to inform the Stock Exchanges with which the Company's shares are enlisted or with which the Company's shares will be enlisted. SEBI should also be informed about the appointment of specific bankers.

227

Refusal of listing by Calcutta Stock Exchange

S. 73-Refusal of listing by Calcutta Stock Exchange-Board Resolution

WHEREAS the company issued a prospectus on ……….and applied for listing of the shares with the Bombay Stock Exchange and the Calcutta Stock Exchange; AND WHEREAS the Bombay Stock Exchange had agreed for listing of the shares;

AND WHEREAS the Calcutta Stock Exchange has not granted the permission when the period of ten weeks from the date of closure of the subscription list is going to be over by tomorrow;

NOW THEREFORE IT IS RESOLVED that an appeal be filed against the decision of the Calcutta Stock Exchange refusing permission for the shares to be dealt in on that Stock Exchange under section 22A of the Securities Contracts (Regulation) Act, 1956, to the Securities Appellate Tribunal it being clearly understood that even in the event of the dismissal of the appeal, the allotment made shall not be void as the Bombay Stock Exchange has already granted permission for the shares being dealt in on that Stock Exchange.

RESOLVED FURTHER that in the event of the company being aggrieved by any decision or order of the Securities Appellate Tribunal do file an appeal to the High Court within sixty days from the date of communication of the decision or order of the Securities Appellate Tribunal to the company on any question of fact or law arising out of such order under section 22F of the Securities Contracts (Regulation) Act, 1956.

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to file the appeal and take every step and action they may be necessary in connection therewith or incidental or ancillary thereto.

PRACTICE NOTES

1. Simultaneous decision.-Although usually all Stock Exchanges to which application for listing is made take simultaneous decision, but a case like the above resolution cannot be ruled out.

2. Time of appeal.-The appeal, if preferred against the refusal of granting permission by any Stock Exchange, should be made within fifteen days from the date on which the reasons for such refusal are furnished under section 22A of the Securities Contracts (Regulation) Act, 1956 read with Securities Contracts (Regulation) (Appeal to Securities Appellate Tribunal) Rules, 2000.

3. Procedure for appeal'

228

Listing of shares with OTCEI

S. 73-Listing of shares with Over The Counter Exchange of India-Board Resolution.

WHEREAS the company had issued a prospectus on ……….and applied for listing of ……….equity shares of Rs. 10/- each with the Over The Counter Exchange of India (OTCEI); AND WHEREAS Over The Counter Exchange of India (OTCEI) had agreed for listing of ……….equity shares of Rs. 10/- each;

NOW, THEREFORE, IT IS RESOLVED that the listing agreement with the OTCEI in connection with the listing of and dealing in........... equity shares of Rs. 10/- each of the company on the said exchange be and is hereby executed under the common seal of the company in terms of article ……….of the Articles of Association of the company in the presence of Mr. ABC and Mr. XYZ, the Directors of the company and Mr. PQR, the Secretary of the company who shall also sign the said agreement;

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to take necessary steps in connection with the listing of the aforesaid shares with the OTCEI.

PRACTICE NOTES

1. Eligibility norm for listing on OTCEL-As per the guidelines issued by the Ministry of Finance, Department of Economic Affairs, Stock Exchange Division, the minimum issued equity share capital of -the company other than investment, leasing, finance and hire purchase companies for eligibility for listing on the OTCEI is Rs. 30 lacs subject to a minimum public offer of equity shares worth Rs. 20 lacs in face value. Any company with an issued equity share capital of more than Rs. 10 crores will not be eligible for listing on the OTCEI. A company which is already listed on any other recognised Stock Exchange in India would not simultaneously be eligible for listing on the OTCEI. Companies with an issued equity share capital of more than Rs. 300 lacs seeking listing on the OTCEI will have to comply with the listing requirements as are applicable to said companies for enlistments on other recognised Stock Exchanges.

2. Minimum number of collection centres.-The minimum number of collection centres for application forms in respect of securities by companies under the OTCEI should be four, one each from the Northern, Western, Southern and Eastern regions of the country. OTCEI can always increase the number of these centres depending upon size and nature of the issue of securities made by a company.

3. SEBI (DIP) Guidelines 2000.-Any company making an initial public offer of equity shares or any other security convertible at a later date into equity shares and proposing to list them on the OTCEI shall comply with all the requirements specified in these guidelines. [Clause 14.0]

229

Listing of shares of Investment, Leasing, Finance and Hire purchase companies with OTCEI

S. 73-Listing of shares of Investment, Leasing, Finance and Hire purchase companies with OTCEI-Board Resolution.

RESOLVED that the leasing agreements as per format received from the Over The Counter Exchange of India (OTCEI) a draft copy of which duly initialed by the Chairman is placed before this meeting for the purposes of identification be and are hereby executed;

RESOLVED FURTHER that Mr. ABC, Managing Director, Mr. XYZ, Director and Mr. PQR, Secretary of the company be and are hereby jointly authorised to sign the aforesaid leasing agreements on behalf of the company and affix common seal of the company thereon;

RESOLVED FURTHER that Mr. PQR, the Secretary of the company be and is hereby directed to take necessary steps in connection with the leasing agreement on ……….equity shares of Rs. 10/- each with the OTCEI.

PRACTICE NOTES

1. Minimum eligibility norm for investment, leasing, finance and hire purchase companies-As per the guidelines for listing on the OTCEI for leasing, finance and hire purchase companies, these companies are eligible for listing with OTCEI provided their post issued paid up share capital is not less than one, crore. These companies should have a track record for the past three years represented by the continuous profitability.

2. Registration with Reserve Bank of India-Investment, leasing, finance and hire purchase companies should be registered with the Reserve Bank of India under the Non Banking Finance Companies Acceptance of Deposits (Reserve Bank) Directions, 1998 under the category of equipment leasing companies, hire purchase companies, housing finance companies, investment companies or loan companies at least not less than two years prior to the date of applying for listing on the OTCEI. The debt equity ratio of these companies before making application to the OTCEI for listing should be as per the Non Banking Finance Companies Acceptance of Deposits (Reserve Bank) Directions, 1998.

230

Return of allotment

S. 75-Return of allotment-Board Resolution

"RESOLVED that in relation to the allotment of shares made by the company, Shri ……….a Director of the company be and is hereby authorised to file with the Registrar of Companies a return of allotment in Form No. 2 and to do anything that is necessary in connection therewith."

PRACTICE NOTES

1. Filing of return of allotment with Registrar.-Pursuant to clause (a) of subsection (1) of section 75 of the Companies Act, a return of allotment is to be filed with the Registrar within thirty days of the allotment of shares in Form No. 2 of the Companies (Central Government's) General Rules and Forms, 1956.

2. Extension of time.-The concerned Registrar of Companies can extend the period of 30 days required for filing of return of allotment on application made to him. There is no prescribed form of this application.

3. Penalty for default.-It default is made in complying with section 73, every officer of the company who is in default will be punishable with fine of Rs. 50001- for every day during which the default continues.

4. Companies (Compliance Certificate) Rules, 2001.-As per paragraph 2 of the Form of Compliance Certificate appended to the said Rules, it is to stated in the Compliance Certificate inter alia that the company has duly filed the returns as stated in Annexure B to that Certificate and return of allotment is one of them. These Rules are applicable to companies having a paid-up share capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs.

231

Allotment of shares for consideration other than cash

S. 75-Allotment of shares for consideration other than cash-Board Resolution

"RESOLVED that in terms of a contract dated the ……….2002 , entered into between the company and ABC, being a contract (for services) in respect of the land belonging to such allottee for-'which a value of Rs. 70,00,000 has been agreed upon and in consideration thereof, 7,00,000 fully paid equity shares of Rs. 10/- each having distinctive numbers from ……….to ……….be and are hereby allotted to the said ABC in satisfaction of the agreed purchase price of the land fully described in separate deed of conveyance produced before the meeting and that the Secretary be asked to file with the Registrar of Companies a return of allotment in Form No'. 2 with the copies of the relevant contract and the deed of conveyance constituting the title of the allottee duly verified in the prescribed manner.

RESOLVED FURTHER that the unsecured loan of Rs taken from ABC & Co. Ltd. on 2002 , be converted into 70,000 equity shares of Rs. 10/- each bearing numbers from ………. to ……….in the share capital of the company and that the said ABC & Co. Ltd. be allotted 70,000 equity shares of Rs. 10/- each and that the Secretary be in structed to file a return of such allotment with the Registrar of Companies."

PRACTICE NOTES

1. Filing of Returns with Registrar.-Returns in Forms Nos. 2 and 3 of allotment for shares allotted for consideration other than cash and for issue of 'bonus shares' are to be filed separately. In the event of shares being allotted either as fully paid-up or partly paid-up otherwise than in cash, the allotment should be justified with reference to evidence in the form of contracts with the allottee, or a document constituting the title of the allottee of the property being taken over by the company. If the contract is not reduced to writing, then prescribed particulars of the contract should be filed with the Registrar within thirty days of allotment. Such particulars should be stamped with the same stamp duty as would have been payable if the contract was made in writing (Section 75(2)).

2. Power of Registrar to extend time by thirty -days.-The period of thirty days allowed for filing of the returns may be relaxed by the Registrar, if he is satisfied, on application made to him, that in the circumstances of a particular case, period allowed for compliance thereof is or was inadequate. Such application may be made either before or after the expiry of the thirty days' period, and the Registrar may extend the period of filing as he thinks fit (Section 75(3)). There is no prescribed form of this application.

3. Filing of original contract together with a copy thereof duly verified by an affidavit with Registrar of companies.-Where the shares are allotted for consideration other than cash, the original contract together with a copy thereof duly verified by an affidavit should be sent alone, with the return of allotment to the Registrar. The affidavit has to be made on a non-judicial stamp paper by a responsible officer of the company stating that the copy is a true copy of the contract.

4. Obtaining of letters from parties when shares to be allotted to nominees.- Where in terms of a contract, shares are allotted to nominees of the parties to the contract, a letter or letters, from each such party should be obtained, addressed to the company to allot such shares to the nominees.

5. Filing of copies of letters duly verified by an affidavit with Registrar.--Copies of the letters should be duly verified by an affidavit by a Director, Manager or Secretary of the company.

6. Holders of coupons for fractional shares not to be regarded as allottee of shares.-Holders of coupons for fractional shares Will not be regarded as allottees of the shares till they get an actual intimation from the company that they are allotted shares by the company in exchange of their coupons. Any dividend declared on the capital held by coupon holders will not mean dividend declared in favour of any particular shareholder but will be given to any one who acquires full shares in exchange of those coupons.

7. Allotment of fully paid shares to charitable trust as donation invalid.-Allotment of fully paid-up shares to a charitable trust as donation is invalid in law. (Letter No. 8/50(77)/65-CL.V. dt. 10-8-1965).

8. Allotment of shares in lieu of genuine debt.-A company can allot shares to a person in lieu of a genuine debt due to him but in doing so it must ensure that the debt due from it is satisfied to the extent of the value of shares so allotted. (Letter No. 8/32(75)77CLN dt. 13-3-1978).

9. Companies (Compliance Certificate) Rules, 2001.-As per paragraph 2 of the Form of Compliance Certificate appended to the said Rules, it is to stated in the Compliance Certificate inter alia that the company has duly filed the returns as stated in Annexure B to that Certificate and return of allotment is one of them. These Rules are applicable to companies having a paid-up share capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs.

232

Allotment of shares for services rendered

S. 75-Allotment of shares for services rendered-Board Resolution

"RESOLVED that whereas Rushabh served as the Manager of the company for a period of 10 years from ………. to ………. And the company owes him a sum of Rs. 50,000/-towards services rendered, now therefore 5000 equity shares of Rs. 10/-each bearing numbers from ……….to ……….inclusive in the share capital of the company be and are hereby allotted to Rushabh as fully paid-up shares in full and final settlement of the amounts due to him."

PRACTICE NOTES

1. Dividend in kind.-Section 205(3) prohibits payment of dividend in kind except capitalisation of profits or reserves of a company for the purpose of issuing fully paid-up bonus shares.

2. Filing of return of allotment.-A return of allotment in Form No. 2 should be filed with the Registrar of Companies within 30 days of the date of such allotment of shares. For non-compliance penalty is fine of upto Rs. 5000/ for every day during which the default continues.

3. Companies (Compliance Certificate) Rules, 2001.-As per paragraph 2 of the Form of Compliance Certificate appended to the said Rules, it is to stated in the Compliance Certificate inter alia that the company has duly filed the returns as stated in Annexure B to that Certificate and return of allotment is one of them. These Rules are applicable to companies having a paid-up share capital of less than Rs. 2 crores but equal to or more than Rs. 10 lakhs.

233

Resolution allotting shares to renouncees

S. 75- Allotment of shares to renouncees-Board Resolution

"RESOLVED that 90,000 equity shares of Rs. 10/- each in the capital of the company be and are hereby allotted to the renouncees named in the letters of renunciation placed before the Board and duly initialed by the Chairman for identification so that each renouncee receives the number of shares specified against his name in the allotment list also placed before the meeting and initialed by the Chain-nan for identification thereof.

RESOLVED FURTHER that the Secretary of the company be directed to take necessary further action and to inform the allottees accordingly."

PRACTICE NOTES

1. Offer of shares to include right of renunciation.-An offer of shares by a public company to its members or to the general public generally should include a right of renunciation to the offeree and the letter of offer should also disclose the existence of this right (S. 81(l)).

2. Right of renunciation in Articles.-It is, however, open to a company to make provision in its articles regarding such a right.

3. Renunciation not to create right in shares.-Renunciation does not create any right in the shares offered.19

234

Resolution refusing to allot shares to nominee

S. 75-Refusal to allot shares to nominee-Board Resolution

"RESOLVED that allotment of 500 equity shares of Rs. 10/-each be and is hereby refused to be allotted to Mr. XY, a nominee of Mr. AB as per letter of renunciation dated ………. placed before the meeting, duly initialed by the Chairman.

RESOLVED FURTHER that the Secretary of the company be directed to inform Mr. AB about the non-acceptance of his renunciation and to re-offer the shares to him."

PRACTICE NOTES

1. Authorisation in the Articles of Association.-Unless the power to refuse allotment of shares is contained in the Articles of Association of the company it will not have the right to exercise this power.

2. Renunciation not a transfer of shares.-A renunciation is not in the nature of a transfer and normally the Board cannot refuse to allot to the renouncee.

236. Allotment of shares pursuant to a contract [S. 75(l)(b)]

Where shares are issued as fully or partly paid-up in consideration of property thereafter to be sold to the company or services to be rendered to the company or in consideration of the release of a claim or by way of compromise, the issue is for consideration other than cash .20 Where in terms of a contract shares are allotted to nominees of the parties to the contract, a letter or letters from each such party should be obtained, addressed to the company to allot such shares to the nominees. Copies of such letters duly verified by an affidavit by a responsible officer of the company be filed along with the return.

235

Allotment of shares pursuant to a contract

S. 75(l)(b)- Allotment of shares pursuant to a contract-Board Resolution

"RESOLVED that consent of the Board of Directors be and is hereby given to the allotment of 90,000 equity shares of the nominal value of Rs. 10/-each to Messrs. ABC Limited/Mr. LMN, as consideration towards the purchase price of the land/machinery/ undertaking pursuant to the agreement dated 21st January, 2002 entered into by the company with Messrs. ABC Limited/ Mr. LMN and in full and final settlement and performance of the said contract.,,

PRACTICE NOTES

1. Consent, be obtained at General Meeting.-If there is a requirement by the articles to obtain consent of the General Meeting for such allotment, the same should be taken at the Annual General Meeting of the company if being held or at the Extraordinary General Meeting, as the case may be.

2. Filing of copy of contract duly verified by affidavit with Registrar.-The copy of the contract where under shares are allotted duly verified by an affidavit is to be filed with the Registrar of Companies concerned along with Form No. 2 stating the number and nominal amount of shares so allotted, the extent to which they are paid-up and the consideration for which they have been allotted. If there is no agreement in writing, particulars thereof should be filed in Form No. 3 with the Registrar of Companies concerned. A copy of the resolution authorising the issue of the shares is also to be attached with the return. If the shares are issued at a discount, the copy of the resolution permitting such an issue and a copy of the order of the Company Law Board where the rate of discount exceeds the prescribed limit is also to be filed with the Registrar of Companies concerned within thirty days.

3. Issue of shares for consideration other than cash.-Where shares are issued as fully or partly paid-up in consideration of property thereafter to be sold to the company or services to be rendered to the company or in consideration of the release of a claim or by way of compromise, the issue is for consideration other than cash.

4. Obtaining of letters when allotment to be made to nominees.-Where in terms of a contract shares are allotted to nominees of the parties to the contract, a letter or letters from each such party should be obtained, addressed to the company to allot such shares to the nominees .

5. Filing of copies of letters duly verified by an affidavit with Registrar.-The copies of the letters obtained from the parties duly verified by an affidavit by a responsible officer of the company be filed along with return with the Registrar of Companies concerned.

6. Penalty for default-A company should not show in the return of allotment any shares as having been allotted for cash, if cash has not actually been received in respect of such allotment. In case of contravention of this provision, every officer and every promoter of the company who is guilty of the contravention will be punishable with fine of upto Rs. 50,WO/-.

236

Application to ROC for extension of time for riling return of allotment

S. 75(3)- Extension of time for filing return of allotment-Board Resolution

WHEREAS the company is required to file return of allotment in Form No. 2 with the Registrar of Companies, West Bengal within thirty days of the allotments made of five thousand equity shares of Rs. 10/- each on 2002;

AND WHEREAS the said thirty days will expire within a week from to-day;

AND WHEREAS the company due to unavoidable circumstances cannot file the said return of allotment within such date;

NOW, THEREFORE, IT IS RESOLVED that an application be made under section 75(3) of the Companies Act, 1956 to the Registrar of Companies, West Bengal immediately for extension of the period of filing the said return of allotment by another period of thirty days;

RESOLVED FURTHER that the Secretary be and is hereby authorised to file the application with the said Registrar of Companies and obtain the approval of extension of time of thirty days and take steps necessary in connection therewith or incidental or ancillary thereto.

PRACTICE NOTES

1. Registrar's power of extension for riling return-The Registrar can now extend the period for filing the return, on application made whether before or after the expiry of the period of thirty days provided by the section. If the Registrar refuses, a remedy to apply to the Central Government is now provided by section 63713, clause(b). The Government has the power under the section to condone delay.

237. Approval of underwriting agreement (S. 76)

The payment of underwriting commission should be authorised by the articles of the company; authority in the memorandum is not sufficient.24 The underwriting agreement being a contract that the underwriter will either himself purchase or procure purchasers for the shares underwritten by him, it is no concern of the company as to how the underwriter procures the purchasers .25 The word 'commission' is not restricted to payment of money out of capital only; it includes payments from profits as well .

Under SEBI (DIP) Guidelines 2000, underwriting means an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them.

237

Underwriting contracts

S. 76- Underwriting contracts-Board Resolution

"RESOLVED that the following underwriting contracts, underwriters whereof have sufficient resources, and the drafts whereof have been submitted to this meeting, be and are hereby approved and the said underwriters be paid underwriting commission at three and a half per cent on the nominal value of the shares so underwritten, by each of the following underwriters appointed in consultation with the Law Manager(s), namely:

(a) O.K. & Co., for 3,00,000 equity shares;

(b) Shri P.M. for 3,00,000 equity shares;

PRACTICE NOTES

1. Commission payable only on shares/debentures offered to public.-Pursuant to section 76(4A), commission to the underwriter is payable only on the shares or debentures which are offered to the public for subscription.

2. Articles must empower company.-The payment of commission must be authorised by the articles of association of the company. Pursuant to sub-section (1)(b)(i) of the above section, the commission paid or agreed to be paid should not exceed, in the case of shares, five per cent or the amount or rate authorised by the articles, whichever is less and in the case of debentures, two and a half per cent of the issue price or the amount or the rate authorised by the articles, whichever is less.

3. Contract or agreement for payment of commission to be delivered to Registrar along with prospectus or statement in lieu of prospectus.-A copy of the contract or agreement, for the payment of commission should be delivered to the Registrar simultaneously with the filing of the prospectus or the statement in lieu of the prospectus. Where a circular or notice is issued inviting subscription for shares or debentures, the amount/rate per cent of the commission should be mentioned in that notice and circular and a statement in Form No. 4 must be filed with the Registrar before the commission is paid.

4. Commission to be paid out of proceeds of shares/ debentures issue.-Pursuant to the provisions of section 76, commission may be paid out of capital, i.e., out of the proceeds of the shares/debenture issue, and the 'payment' out of capital would not exclude payment of commission out of profits as well: Madanlal F. Dudhediya v. Changdeo Sugar Mills Ltd., (1958) 60 Bom. L.R. 254, confirmed by the Supreme Court on appeal, (1962) 32 Corn Cases 604 (SQ.

5. The underwriting agreement.-As per Regulation 14 of the SEBI (Underwriters) Re ' yulations, 1993, every underwriter is required to enter into an agreement" referred to in clause (b) of Rule 4 of the SEBI (Underwriters) Rules, 1993, with each body corporate on whose behalf the underwriter is acting. The said agreement should provide for the following inter alia :

(i) the period for which the agreement shall be in force;

(ii) the amount of underwriting obligations;

(iii) the period, within which the underwriter has to subscribe to the issue after being intimated by or on behalf of such body corporate;

(iv) the amount of commission or brokerage payable to the underwriter;

(v) details of arrangements, if any, made by the underwriter for fulfilling the underwriting obligations.

6. Penalty for default.-If default is made in complying with the provisions of section 76, the company, and every officer of the company who is in default will be punishable with fine of upto Rs. 5000/.

238

Approval of underwriting contracts

S. 76- Approval of underwriting contracts-Board Resolution

WHEREAS the underwriting offers received from financial institutions, banks, merchant bankers and brokers aggregating Rs . ……….in respect of equity share s/debentures along with a list setting out the name of such underwriters and their respective underwriting commitments for the consideration of the Board;

AND WHEREAS the Board considered the offers and decided to accept all the offers of the underwriters so received;

"NOW THEREFORE IT IS RESOLVED that the underwriting offers received by the company from the financial institutions, banks, merchant bankers and brokers, whose names, addresses and respective underwriting commitments are set out in the list of underwriters tabled at the meeting, along with their respective underwriting letters, be and are hereby accepted upon the terms and conditions as set out in their respective underwriting letters.

RESOLVED FURTHER that Mr ……….. Managing Director and Mr ……….. Secretary be and are hereby severally authorised to accept and convey on behalf of the company the acceptance of the said underwriting offers upon the terms and conditions contained in the respective underwriting letters of the said underwriters and to do all such acts, deeds and things which may be necessary for the purpose of concluding and giving effect to the said underwriting offers."

PRACTICE NOTES

See under Resolution 237.

239

Approval of underwriting agreement with Financial Institutions

S. 76- Approval of underwriting agreement with IDBI- Board Resolution.

"RESOLVED that the offer of the Industrial Development Bank of India to underwrite 15,00,000 equity shares of Rs. 10/-each out of the proposed issue of 50,00,000 equity shares of Rs. 10/-each offered to the company to the public at a commission of 2% on the terms and conditions as set out in the letter of the Industrial Development Bank of India be and is hereby approved.

RESOLVED FURTHER that the Managing Director of the company be and is hereby authorised to convey to the IDBI the acceptance on behalf of the company of the said offer of underwriting and also execute the agreement with the IDBI and to do all acts and things as may :-)e necessary for the purpose."

PRACTICE NOTES

1. Authority must exist in Articles.-The payment of underwriting commission should be authorised by the articles of association of the company; authority in the memorandum is not sufficient.

2. Rate of underwriting commission.-The commission should not exceed 5% in the case of shares and 21/2% in the case of debentures, as per section 76(l)(b)(ii).

3. Disclosure in prospectus or statement in lieu of prospectus.-The commission should be disclosed in the prospectus or statement in lieu of prospectus, as the case may be or in a statement filed with the Registrar of Companies concerned before the payment of commission.

4. Underwriting agreement a contract.-The underwriting agreement being a contract that the underwriter will either himself purchase or procure purchasers for the shares underwritten by him, it is no concern of the company as to how the underwriter procures the purchasers. 28

5. Word "Commission"-Meaning.- The word 'commission' is not restricted to payment of money out of capital only; it includes payments from profits as well"

6. Underwriting insurance against inadequate subscription.-Underwriting is in the nature of an insurance against the possibility of inadequate subscription.

7. Filing of copy of contract and Form No. 4 with Registrar.-A copy of the contract is to be filed at the time of delivery of prospectus and form No. 4 before payment of commission with the Registrar of Companies concerned. If default is made is complying with the provision of section 76, the company and every officer of the company who is in default will be punishable with fine of upto Rs. 5000/.

238. Stock Brokers and Sub-Brokers (S. 76)

By Notification No. S.O. 627(E), dated 20-8-1992 the Central Government made the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Rules, 1992.

Under the said Rules 'stock broker' means a member of a stock exchange and 'sub-broker' means any person not being a member of a stock exchange who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock broker.

The said Rules prohibit stock-broker or sub-broker from buying, selling, dealing in securities, unless he holds a certificate granted by the Board under the Regulations, provided that such person may continue to buy, sell or deal in securities if he has made an application for such registration till the disposal of such application. (R.3).

The said Rules also provide that the SEBI may grant a certificate to a stock-broke subject to the following conditions namely:

(a) he holds the membership of any stock exchange;

(b) he shall abide by the rules, regulations and bye-laws of the stock exchange o stock exchanges of which he is a member; ,

(c) in case of any change in the status and constitution, the stock broker shall obtain prior permission of the Board to continue to buy, sell or deal in security in any stock exchange;

(d) he shall pay the amount of fees for registration in the manner provided in the regulations; and

(e) he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board it formed about the -number, nature and other particulars of the complaints received from such investors. (RA).

The said Rules further provide for the SEBI to grant a certificate to a sub-broker subject to the following conditions, namely:

(a) he shall pay the fees in the manner provided in the regulations;

(b) he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received; and

(c) in case of any change in the status and constitution, the sub-broker shall obtain prior permission of the Board to continue to buy, sell or deal in securities in any stock exchange;

(d) he is authorised in writing by a stock-broker being a member of a stock exchange for affiliating himself in buying, selling or dealing in securities:

Provided such stock-broker is entitled to buy, sell or deal in securities. (R.5).

240

Appointment of bankers/brokers to the issue and payment of brokerage commission

S. 76- Appointment of bankers/brokers to the Issue-Board Resolution

"RESOLVED that the bankers/brokers to the issue mentioned hereinbelow be and are hereby appointed as the bankers and brokers to the public issue:

Bankers :

1. State Bank of India New Delhi

2. Bank of Baroda Mumbai

3. Bank of India Mumbai

Brokers:

1. Jalan & Company New Delhi

2. C.L. Chokshi & Co. Mumbai

3. Raj Kumar and Co. Mumbai

RESOLVED FURTHER that brokerage at the rate of 1.5% shall be paid to the abovementioned bankers and the brokers to the issue in respect of allotment made against applications procured by them provided that the relative forms of applications bear their respective stamps in the brokers column.

RESOLVED FURTHER that brokerage at the same rate may also be paid in respect of allotments made against applications bearing the stamp of any of the brokers who are members of any recognised Stock Exchange in India".

PRACTICE NOTES

1. Expression brokerage meaning thereof.-The expression "brokerage as it has hitherto been lawful for a company to pay" points only to the payment to such brokerage as has been recognised as usual for companies to pay to brokers, i.e., brokers who deal in shares and whose business includes the procuring of subscribers for shares. The payment of such brokerage by companies has been recognised as lawful for long time past and it is only such payment that is saved by sub-section (3) of section 76. Paying any commission to other persons for procuring subscribers for shares cannot come within the expression "brokerage", as used in the sub-section, as it cannot be said to be "such brokerage as it has hitherto been lawful for a company to pay".

2. Payment of brokerage to share brokers.-If the company employs a broker to act as broker in the issue of its capital, the payment by the company to such broker of a proper commission or brokerage for placing shares is legitimate, and it is not necessary to look into the memorandum for authority to pay it. [Metropolitan Coal Consumers' Association v. Scrimgeour, (1895) 2 QB 604 (CA)]. The company is required to pay a fixed brokerage of 1.5% whether the issue is underwritten or not. However the expenses incurred by the broker for procuring of subscribers etc. will be borne by tile share broker himself.

3. Payment of brokerage by listed companies.-The listed companies can only pay brokerage of5% on private placement of capital.

4. No brokerage allowed on promoters' quota.-No brokerage is to be paid on the amount to be subscribed in respect of promoters' quota.

5. No brokerage on right issue or shares renounced.-The brokerage is also not reqUired to be paid on right issue or on shares renounced.

6. Application by financial institutions.-Similarly no brokerage is to be paid on applications for shares by financial institutions against underwriting quota.

241

Resolution accepting underwriting offer of Director

S. 76- Accepting Director-'s underwriting offer-Board Resolution

"RESOLVED that the offer of Mr. A.B, a director of the company, to Underwrite ……….equity shares of the aggregate face value of Rs ………. out of the total issue of equity share capital of Rs .. by the company be and is hereby accepted on the terms and conditions set out in his letter of offer dated and that Mr. A.B. being interested in item No.... of business did not take part in the discussion or vote thereat."

PRACTICE NOTES

1. Board Resolution.-This resolution will have to be passed at a meeting of the Board and not by circulation.

2. Board sanction required when Directors interested.-As per section 297 of the Act, without the sanction of the Board, a Director, or his relative, a firm in which he or his relative is a partner, any other partner in such a firm or a private company of which the Director is a member or Director, cannot inter alia enter into an underwriting contract with the company, except where the aforesaid people regularly do business with the company and the value of the service does not exceed Rs. 5,000/-In the aggregate to transactions or a calendar year as between two parties contracting.

3. Board's consent within three months.-Where the contract is entered into out of necessity or urgency without the sanction of the Board then the consent of the Board should be obtained within 3 months of the contract.

4. Interested directors excluded.-The interested Director will not be counted for the propose of quorum, nor can he vote on the resolution.

5. Previous approval of Central Government.-Where the company has a paid-Lip capital of Rs. I crore, than the previous approval of the Central Government, would be required under section 297. The application has to be made in Form 24-A.

6. Professional services of Solicitors/ Advocates.-Services such as that of a legal practitioner cannot be bracketed with a contract for supply of goods, since they are not based on the lowest tender, likewise the provisions of section 297 will not apply to a contract of employment of a Director as Managing or Whole-time Director.

7. Contracts entered at prevailing market price exempt.-Contracts entered into for cash at prevailing market prices are exempt from the provision of the section.

A cheque may be treated as the equivalent of a cash payment for the purpose of this provision.

8. Separate application under section 297 not necessary.-There are other specific provisions under the Companies Act prescribing for applications being made to the Central Government for approval of contracts, viz., sections 269, 294AA and 314 (113). Where the company applies to the Central Government under those provisions, a separate application under section 297 is not necessary.

239. Purchase of Company's Own Shares (S. 77)

Section 77 puts restrictions on purchase by company or loans by company for purchase of its own shares or its holding company's shares. Restriction on purchase of its own shares by company is imposed under this section as such purchase either amounts to trafficking in its own shares thereby enabling the company in an unhealthy manner to influence the price of its own shares on the market or it operates as a reduction of capital which can only be effected with the sanction of the court. Sub-section (2) prohibits public companies and private companies which are their subsidiaries giving financial assistance to persons purchasing their shares. Proviso to sub-section (2) gives three exemptions from the aforesaid restrictions. They are lending of money by a banking company in the ordinary course of its business, providing of moneys for the acquisition of fully paid-up shares in the company or its ‘holding company in accordance with an employers' stock option scheme and providing loans to employees with a view enable them to purchase or subscribe for fully paid-up shares in the company or its holding company to be held by themselves as beneficial owners. Sub-section (3) provides that loans given to employees as aforesaid should not exceed the amount of their salaries and wages act that time for a period of 6 months. Sub-section (5) also provides exemption from the operation of the restrictions to redemption of preference shares although it is the same thing as a company buying its own shares, Sub-section (4) provides that if a company acts in contravention of sub-section (1) to (3), the company, and every officer of the company who is in default will be punishable with fine of upto Rs. 10,000/. Provisions of section 77 do not control the provisions of section 391 to 394. New Vision Laser Centres (Rajkot) Pvt. Ltd., In re, (2002) 111 Com Cases 756 (Guj).

242

Purchase by Company of its own shares to the trustees of the Employees Benefit and Welfare Trust by preferential allotment

S. 77-Purchase by Company of its own shares to the trustees of the Employees Benefit and Welfare Trust by preferential allotment-Board Resolution

RESOLVED that a sum of Rs …….. (Rupees only be given to the Trustees of the Employees' Benefit and Welfare Trust for the purchase of the fully paid up shares in the company by them and to be held by and for the benefit of the employees of the company in accordance with the 'Employees' Welfare Scheme' approved by the Board vide Resolution dated ....................

PRACTICE NOTES

1. No purchase of own shares.-Section 77(l) prohibits a company limited by shares and a company limited by guarantee and having a share capital from buying its own shares, unless the consequent reduction of capital is given effect to as per provisions of sections 100 to 104 or section 402 of the Act.

2. Financial help prohibited.-Public companies and private companies which are subsidiaries of public companies, are prohibited from giving financial assistance to any one for buying of the company's own shares or for buying of any shares of any of their holding companies. But a company can give financial help to any person for buying of shares of any of its subsidiary companies.

3. Exception.- There are five exceptions to the provisions of purchase of its own shares by a company and they are the following : (i) The first exception is that a banking company can lend money in the ordinary course of business. (ii) The second exception is that a company can, in accordance with any scheme for the time being in force, give money for the purchase of fully paid up shares of the company or its holding company to the trustees of some employees benefit and welfare trust to be held by and for the benefit of the employees of the company. (iii) The third exception is that a company can give money for subscription of its fully paid up shares or for the subscription of fully paid-up shares of holding company to the trustees of some employees benefit and welfare trust to be held by and for the benefit of the employees of the company. (iv) The fourth exception is that a company can give loans with a certain limit to persons other than directors or managers of the company who are bonafide in the employment of the company with a view to enabling those persons to purchase or subscribe for fully paid up shares in the company or its holding company to be held by themselves by way of beneficial ownership. (v) The fifth exception is that a company can buy back its own shares subject to certain conditions under section 77A. The above resolution is passed under the second exception.

4. Purchase of own shares under Amalgamation.-A company can buy its own shares where it is necessary part of a scheme of amalgamation as sanctioned by the court. Himachal Teleniatics Ltd. v. Himachal Futuristic Communications Ltd., (1996) 86 Com Cases 325 (Del).

5. Penalty.-Contravention of provisions of section 77 of the Act will attract punishment by way of fine of upto rupees ten thousand for the company and for every officer of the company who is in default.

6. Compounding of offence.-The fine of rupees ten thousand for contravention of provisions of section 77 is compoundable per Section 621-A(l)(b).

243

Purchase by company of its own shares to the trustees of the Employees Benefit and Welfare Trust on firm allotment

S. 77(2) proviso (b) -Purchase by company of its own shares to the trustees of the Employees Benefit and Welfare Trust on firm allotment-Board Resolution

RESOLVED that a sum of Rs ……... (Rupees ) only be given to the Trustees of the Employees' Benefit and Welfare Trust for subscription by them to the fully paid up equity shares of the company reserved for firm allotment pursuant to the General Body Resolution dated and to be held by and for the benefit of the employees of the Company in accordance with the 'Employees' Welfare Scheme' approved by the Board vide Resolution dated ....................

PRACTICE NOTES

1. Special resolution.- General body resolution should be passed as a special resolution and the said special resolution should be filed with the concerned Registrar of companies within thirty days in Form No. 23. Default for not. filing the special resolution within thirty days is fine of up to Rs. 200/- for every day during which the default continues.

2. Public issue/p referential allotment.-The aforesaid resolution is passed in two circumstances:

(i) When the money is given to the trustees of the employees benefit and welfare trust for subscription by them to the fully paid up equity shares of the company out of a public issue and

(ii) When the money is given to the trustees of the employees benefit and welfare trust for subscription by them to the fully paid up equity shares of the company when it is made so as a part of preferential allotment.

244

Purchase by company of its own shares by way of loan to employees

S. 77(2) proviso (c)-Purchase by company of its own shares by way of loan to employees-Board Resolution

RESOLVED that a sum of Rs ……... (Rupees……..) only be given as loan to the bonafide employees, including managing director and whole-time director, of the company to enable them to purchase/subscribe to the fully paid-up equity shares of the company and to be held by each of them by way of beneficial ownership, in accordance with the 'Employees' Capital Participation Scheme' approved by the Board vide Resolution dated ....................

RESOLVED FURTHER that the loan granted to each of the employees shall not exceed the amount of his/her salary or wages for a period of six months.

PRACTICE NOTES

1. Eligibility.- Managing/whole time director is eligible for the loan under the "Employees Capital Participation" only if the terms and conditions of the loan are the same as applicable to loans to other employees.

2. Penalty.- Contravention of provisions of section 77 of the Act will attract punishment by way of fine of upto rupees ten thousand for the company and for every officer of the company who is in default.

3. Loan not to exceed salary for 6 months.-No loan made to any person should exceed in amount his salary or wages at that time for period of 6 months. [Section 77(3)].

240. Buy Back of Securities (S. 77A, 77AA and 77B)

The Companies Amendment Act 1999 has inserted a new section 77A relating to the power of the company to purchase its own securities with effect from 31^st October, 1998. The said purchase of a company's own securities referred as 'Buy Back' can be done by a company either from its free reserves or from its securities premium account or from the proceeds of any shares or other specified securities. A company cannot buy back any kind of shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or some kind of other specified securities.

The conditions laid down in sub-section (2) of section 77A for buying back a company's shares or other specified securities are the following:

(i) The said buy back should be authorised by the Articles of Association of the company;

(ii) a special resolution must be passed by the company in a general meeting authorising such buy back;

(iii) the buy back should be either 25 per cent of the total paid up share capital and free reserve of the company or less than that;

(iv) the ratio of debt owned by the company should not be more than twice the capital and its free reserves after such buy back except a higher ratio is prescribed by the Central Government for a class or classes of companies.

If the proposed buy-back is less than 10% of the total paid-up equity capital and free reserves of the company then such buy-back can be made just by passing a board resolution at a meeting of the Board.

In case buy back is made of equity shares in any financial year, such buy back should not exceed 25 per cent of the total paid up equity capital in that financial year.

The buy back of shares or other specified securities of a company should be fully paid up and in case such shares or specified securities proposed to be bought back by a company are listed on any recognised Stock Exchange, buy-back of securities should be made in accordance with the Regulations" framed by SEBI for the purpose. If the shares or other specified securities proposed to be bought back are not listed with any recognised Stock Exchange the said buy back should be made in accordance with the Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999, prescribed by the Central Government being the Department of Company Affairs.

A listed company may buy-back its shares either from the existing shareholders or from open market or from odd-lot holders. An unlisted company may buy-back its shares either from its existing shareholders or by purchasing the securities issued to its employees pursuant to a scheme of stock option or sweat equity.

Section 77AA requires every company going for buy-back out of free reserve to transfer to the capital redemption reserve account a sum equal to the nominal value of shares so bought back. Section 77B prohibits purchase of a company's own shares or other specified securities through any subsidiary company or through any investment company or its group or if default is made in repayment of deposit, redemption of debentures, preference shares or term loan to any financial institution or bank or in payment of dividend.

245

Power of company to purchase its own securities

S. 77A-Power of company to purchase its own securities-Board Resolutions

WHEREAS the company has Rs …….. in its securities premium account; AND WHEREAS the company is authorised by Article ……..to buy back its own shares;

AND WHEREAS there is …….. number of shares of the company in odd lots being similar to the market lots specified by the Stock Exchange;

NOW, THEREFORE, IT IS RESOLVED that subject to the passing of a special resolution in the general meeting of the company pursuant to section 77A of the Companies Act, 1956 ............ number of equity shares of the company which are in odd lots be bought back from the open market at a price of Rs ___per share;

RESOLVED FURTHER that a draft of the declaration of solvency prepared in the prescribed form and placed before this meeting be and is hereby approved for filing with the ROC and the SEBI after having its verified by an affidavit and be signed by Messers ABC and XYZ, the managing director and director of the company;

RESOLVED FURTHER that an Extra ordinary General Meeting of the company be called and held for the aforesaid purpose on ........... at …….. as per the draft notice and the explanatory statement placed before the meeting and initialed by the chairman for purpose of identification;

RESOLVED FURTHER that the Secretary of the company be directed to issue the notice to all the members of the company and take every step needed in connection therewith or ancillary or incidental thereto.

PRACTICE NOTES

1. Pre-requisites of buy back of shares-Companies are allowed to buy-back their own shares or other specified securities upto 25% of paid up capital and free reserves, provided that the buy back of equity shares should not in any financial year exceed 25% of total paid up equity capital in that financial year. The Companies (Amendment) Act, 2001 with effect from 23rd October, 2001 relaxes this requirement and provides that where he buy-back is less than 10% of the total paid-up equity capital and free reserves of the company, it can do so just by passing a board resolution at a board meeting. Buy-back of shares can be done out of company's free reserves, securities premium account or proceeds of any shares or other specified securities. Buy-back is permitted only if the Articles of Association of the company authorised the same and a special resolution is passed in a general meeting of the company. Buy-back of shares will not be allowed if the companies have defaulted in repayment of deposits, redemption of debentures/preference shares and repayment to financial institutions. The buy-back process will have to be completed within 12 months from the date of passing the special resolution. The companies shall not make any further issue of same kind of shares including allotment of further shares under section 8 1 (1)(a) within a period of 24 months from the date they complete the process of buy-back of its securities, except by way of bonus issue, conversion of warrants stock opting, sweat equity preference shares/debentures. Shares bought back shall be extinguished and physically destroyed within 7 days from the date of buy-back.

2. Filing of declaration of solvency-Once the special resolution is passed for buying back of shares or other securities under section 77A the company should, before making such purchases, file with the Registrar of Companies and the Securities and Exchange Board of India a declaration of solvency in the prescribed Form No. 4A verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which it is capable of meeting its liabilities and will not be rendered insolvent with in a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any.

The register mentioned in sub-section (9) to be maintained by a company for securities bought back should be in Form No. 4B and the return relating to the buy-back of securities mentioned in sub-section (10) should be in Form 4C.

3. Regulations and guidelines prescribed by SEBI-Only listed company opting for buy-back of shares should also comply with the regulations and guidelines prescribed by the Securities and Exchange Board of India for this purpose.

4. Rules made by the Department-The Department of Company Affairs has issued the Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999 enforced from 6th July, 1999. All private companies and unlisted public companies opting for buy-back of shares should follow these Rules.

5. Complete disclosure in the notice- The notice of the company calling a general meeting proposing buy back of shares must make full and complete disclosure of all material facts in the special resolution proposed to be passed for the purpose of buy-back under section 77A(2)(b). These disclosures should include the necessity for the buy-back, class of securities intended to be purchased, amount to be invested for the buy-back and the time limit for completion of the buy-back.

6. Explanatory statement to include certain things-The notice of the general meeting at which the special resolution is proposed to be passed for buy-back of shares must be accompanied by an explanatory statement specifically stating the following

(a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased under the buy-back; (d) the amount to be invested under the buy-back; (e) the time limit for completion of buy-back.

7. Freezing of FII limit of Investment-Where after buy-back of shares or other specified securities, the limit of 24% or 30% is exceeded, then the excess limit will be frozen by SEBI and further investments by FII's will be prohibited. FII's will not be forced to revert to the permitted limit by dis-investing. Fresh FII investments will be permitted only when FII investment levels fall below the specified limits.

The aforesaid limit was enhanced to 40% pursuant to Finance Minister's budget speech 2000-2001. [PIB Press Release, New Delhi, dated 1-3-2000]

8. Stamp duty.-According to the Chamber of Income tax Consultants, Mumbai, stamp duty is not payable on buy-back of shares under section 77A by maintaining that buy-back is not transfer of shares and stamp duty is required to be paid on transfer shares.

9. Penalty.-Under sub-section (11) of section 77A, default in complying with the provisions of section 77A or any Rules or Regulations made there under is punishable with imprisonment upto 2 years or fine tip to Rs. 50,000/- or both.

10. Compliance Certificate.-Companies (Compliance Certificate) Rules, 2001, requires obtaining of a Compliance Certificate from secretary in the whole-time practice to be filed with the Registrar of Companies mentioning therein inter alia that the company has bought back its shares during the financial year after complying with the provisions of the Act as per paragraph 20 of the Form of Compliance Certificate appended to the aforesaid Rules under section 383-A(l) proviso. This will be necessary only when the company's paid-up share capital is less than Rs. 2 crores but is equal to or more than Rs. 10 lakhs.

246

Transfer of sums to Capital Redemption Reserve Account

S. 77A-Company purchasing own shares out of free reserves to transfer amount to capital redemption reserve account-Board Resolution

WHEREAS the company purchased …….. equity shares of its own at Rs . …….. per share;

AND WHEREAS such purchase has been made out of the free reserves of the company to the tune of Rs……..;

AND WHEREAS under section 77AA of the Companies Act, 1956, the company is required to transfer a sum equal to the nominal value of the shares so purchased to the capital redemption reserve account of the company;

NOW THEREFORE IT IS HEREBY RESOLVED that Rs …….. be and is hereby transferred to the capital redemption reserve account.

PRACTICE NOTES

1. Companies (Amendment) Act, 1999.-Section 77AAA has been inserted by the Companies (Amendment) Act, 1999 to provide for transfer to the capital redemption reserve account an equivalent amount of shares bought back by a company where the buyback of shares is effected out of free reserves of the company.

2. Details of transfer.-Disclose in the balance-sheet of the company prepared for the financial year details of the transfer of the amount transferred to the capital redemption reserve account.

241. Application of premium received on shares (S. 78)

Share premium is a new class of capital .30 The transfer to the share premium fund envisaged by sub-section (1) of section 78 is obligatory .31 A company is not bound to issue shares at a premium. Issue of shares at par even when premium could have been realized cannot be said to have been done at the cost of the company's capital. Where a company issues share at a premium, even though the consideration may be other than cash, a sum equal to the amount or value of the premium must be transferred to the securities premium account .

The effect of this section is to create a new class of capital of a company which is not share capital but not distributable as income and more than any other capital asset. On a winding up the surplus monies in the share premium account will be returned to the shareholders as capital and so long as the company is a going concern the same monies can never be returned to the shareholders except through the medium of a reduction petition."

Monies in the securities premium account cannot be treated as free reserves as they are in the nature of capital reserves.

A writ petition filed seeking certain directions including the direction to prohibit the company from utilising the premium for any purpose other than that stated in section 78, to be given to SEBI was demissed on the ground that the court cannot on its writ Jurisdiction issue such type of general directions to respective bodies of the Government of India who are regulating the sale and purchase of shares of public limited companies. Huridhar Sodani v. SEBI, (2001) 105 Com Cases 815 (MP).

242. Issue of shares at a discount (S. 79)

The shares issued at a discount should be of a class already issued. The approval of the Company Law Board has to be obtained for issue of shares at a discount.

Where partly paid shares are forfeited for non-payment of further call, if they are reallotted for less than the amount remaining unpaid on them, the reallotment will amount to allotment at a discount and will, therefore, be invalid. Company Law Board has allowed discount upto 25% in a matter where heavy losses were suffered by a company and the directors were unable to save this situation and had take recourse to discount funding which was technically feasible and economically viable. Mare Steel Castings (P) Ltd. Re, (1994) 79 Corn Cases 485 (CLB-Mad).

243. SEBI (DIP) Guidelines 2000 for Share Issues and Matters related thereto

Highlights

1. New companies can freely price issues subject to a few conditions.

2. Underwriting made optional, for shares offered to the public.

3. Unlisted companies eligible to make a public issue may freely price its equity shares or any securities convertible at a later date into equity shares.

4. Adequate disclosures to be made to SEBI.

5. No bonus issue pending conversion of FCDs/PCDs unless similar benefit is extended to them.

6. Deployment of issue proceeds to be monitored.

7. Promoter's contribution fixed at 20 per cent irrespective of the issue size.

8. Bonus issue in lieu of dividend or from revaluation of assets prohibited.

9. Issuer company to decide on premium amount and time of conversion of FCD/PCD.

10. Infrastructure companies and companies in Information Technology sector granted specific relaxations for public issues.

11. Credit rating is compulsory for all debt instruments irrespective of the period of maturity.

The guidelines lay great emphasis on the disclosures to be made by the issuer to SEBI and also in monitoring of the issue and the advertisement norms to be followed.

The StBI (DIP) Guidelines, 2000, consist of 18 Chapters and 27 Schedules. These Guidelines are a departure from the old Guidelines of 1992 in many a matter. These Guidelines apply to the following types of companies

(i) Public issue by listed companies;

(ii) Public issue by unlisted companies;

(iii) Offer for sale by listed companies;

(iv) Rights issue by listed companies of value exceeding Rs. 50 lakhs.

A recently added Chapter XIA in the said Guidelines provides for requirements to be complied with on initial public offer through the stock exchange on line system.

247

Issue of shares at a premium

S. 78- Issue of shares at a premium-Board Resolution

"RESOLVED that pursuant to section 78 of the Companies Act, 1956 and subject to such modifications and conditions as the Securities and Exchange Board of India may impose, the Directors of the Company be and are hereby authorised to issue 30,00,000 equity shares of Rs. 51- each at such premium not exceeding Rs. 501- per share in consultation with the lead managers to the issue."

PRACTICE NOTES

1. Transfer of sum equivalent to amount of premium to share premium account.-Pursuant to section 78(l), for the issue of shares at a premium, even though the consideration may be other than cash, a sum equivalent to the amount or value of the premium must be transferred to the share premium account.

2. Disclosure in Annual Accounts.-The annual balance-sheet must disclose the amount of share premium as a separate item and if it is partly or wholly disposed of, must indicate how it was disposed of.

3. Retention of share premium in a separate account.-Any share premium collected by a company on issue of shares is required to be retained in a separate account. This amount cannot be utilised for any purpose, other than the ones specified in subsection (2). If the amount lying in the share premium account is used for any other purpose(s), it would tantamount to reduction in share capital, attracting the provisions of sections 100 to 105.

4. Application of the share premium account.-The share premium account may be applied for the following purposes:

(1) The paying up of fully paid Bonus Shares to be issued by the company to its members.

(2) The writing-off of preliminary expenses of the company.

(3) The writing-off of the expenses of, or underwriting commission paid or discount allowed on, any issue of shares or debentures of the company.

(4) The providing of a premium payable by the company on redemption of redeemable shares or redemption of debentures of the company.

5. Compliance Certificate.-A company whose paid-up share capital is less than Rs. 2 crores but is equal to or more than Rs. 10 lakhs must obtain a Compliance Certificate from a secretary in whole-time practice to be filed with the Registrar of Companies mentioning therein inter alia that the company has issued shares during the financial year and complied with the provisions of the Act as per paragraph 19 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001 prescribed under section 383-A(l) proviso.

6. Penalty for default.-No penalty has been specifically provided in the section for the violation of its provisions. Accordingly, the company and every officer, who is in default, shall be punishable under section 629A with a fine upto Rs. 50001- and where the contravention is a continuing one with a further fine upto Rs. 500/- for every day after the first during which the contravention continues. The offence, however, is compoundable under section 62 IA.

248

Transfer of premium received on shares

S. 78-Transfer of premium received on shares-Board Resolution

"RESOLVED that pursuant to the provisions of section 78 of the Companies Act, 1956, an amount of Rs. 50,00,000 equal to the aggregate of the amount of premium received on shares by the company on the issue and allotment of 5,00,000 equity shares of Rs. 10/-each @ of Rs. 10/-per share be and is hereby transferred to the Share Premium Account of the company and the said money be applied for purposes permitted by sub-section (2) of section 78 of the Companies Act, 1956."

PRACTICE NOTES

1. Object of section 78.- The object of the section is to preserve as a class of capital the amount of premium received by the company for the issue of the ' shares so that the same is not flittered away by the company in expenditure or distributed by way of dividend etc. by treating it as income.

2. New Class of Capital.-It is a new class of capital .

3. Transfer to Share premium fund obligatory.-The transfer to the share premium fund envisaged by sub-section (1) of section 78 is obligatory.

4. Company not bound to issue shares at premium.-A company is not bound to issue shares at a premium. Issue of shares at par even when premium could have been realised cannot be said to have been done at the cost of the company's capital .

5. Transfer to share premium Account.-Where a company issues share at a premium, even though the consideration may be other than cash, a sum equal to the amount or value of the premium must be transferred to the share premium account.

6. Nature of Share Premium Account.-The effect of this section is to create a new class of capital of a company which is not share capital but not distributable as income any more than any other capital asset. On a winding up the surplus monies in the Share Premium Account will be returned to the shareholders as capital and so long as the company is a going concern the same monies can never be returned to the shareholders except through the medium of a reduction petition.

7. Monies not to be treated as free reserves.-Monies in the Share Premium Account cannot be treated as free reserves, as they are in the nature of capital reserves

249

Transfer to Share Premium Account

(Another format)

S. 78-Transfer to Share Premium Account-Board Resolution

"RESOLVED that pursuant to the provisions of section 78 of the Companies Act, 1956, the sum of Rs. 4 lakhs being the aggregate amount of the premium received on the issue and allotment of 100,000 equity shares of Rs. 10/- each be and is hereby transferred to "the Share Premium Account" of the company maintained with the State Bank of India, Parliament Street, New Delhi."

PRACTICE NOTES

1. Nature of Share Premium Account.-The effect of this section is to create a new class of capital of a company which is not share capital but not distributable as income any more than any other capital asset.

2. Surplus money in Share Premium Account to be returned to shareholders as Capital.-On a winding up the surplus money in the Share Premium Account will be returned to the shareholders as capital and so long as the company is a going concern, the same money can never be returned to the shareholders except through the medium of a reduction petition or in other words except under exactly the same condition as those under which any other capital asset can reach the shareholder's hands

3. Distribution of Share Premium amount as dividend not permitted.-The distribution of share premium amount as dividend is not permitted and it is taken out of the category of divisible profits.

250

Issue of Bonus Securities out of share premium account

S. 78(2)(a)-Issue of Bonus securities out of share premium account- Board Resolution

RESOLVED, pursuant to the provisions of clause (a) of sub-section (2) of section 78 read with proviso to sub-section (3) of section 205 of the Companies Act, 1956, that a sum of Rs …….. out of the share premium account in which a sum of Rs . …….. is lying unutilized, be and is hereby utilized in paying up unissued securities of the company in the authorised capital of Rs ……... by issuing fully paid bonus security in the proportion of 1 bonus security for every security held in the company as on being the record date.

PRACTICE NOTES

1. Special resolution.- Once the Board decides the issue of bonus securities out of the share premium account, the said bonus issue should be approved by the security holders of the company by passing a special resolution under section 81(1 -A) of the Act. The said special resolution should be filed with the concerned Registrar of Companies within thirty days from the date of passing of the resolution in Form No. 23.

2. SEBI (DIP) Guidelines, 2000.-If the company concerned is a listed company and is issuing bonus shares out of the share premium account then it should follow the guidelines issued by SEBI in Chapter XV of its Guidelines.

Salient features of SEBI Guidelines

(i) No company shall pending conversion fully convertible debentures/partly convertible debentures, issue any shares by way of bonus unless similar benefit is extended to the holders of such fully convertible debentures/ partly convertible debentures, through reservation of shares in proportion to such convertible part of FCDs or PCDs.

(ii) The shares so reserved may be issued at the time of conversion of such debentures on the same terms on which the bonus issues were made.

(iii) The Bonus issue is made out of free reserves built out, of the genuine profits or share premium collected in cash only.

(iv) Reserves created by revaluation of fixed assets are not capitalised.

(v) The declaration of bonus issue, in lieu of dividend, is not made.

(vi) The bonus issue is not made unless the partly-paid shares, if any existing, are made fully paid-up.

(vii) The company

(1) has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof; and

(2) has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity, bonus etc.

(viii) A company which announces its bonus issue after the approval of the Board of Directors must implement the proposals within a period of six months from the date of such approval and shall not have the option of changing the decision.

(ix) There should be a provision in the Articles of Association of the company for capitalisation of reserves, etc. and if not, the company shall pass a Resolution at its General Body Meeting making provisions in the Articles of Association for capitalisation.

(x) Consequent to the issue of Bonus share, if the subscribed and paid-up capital exceed the authorised share capital, a Resolution shall be passed by the company at its General Body Meeting for increasing the authorised capital.

3. Free reserves.- Moneys in the share premium account. cannot be treated as free reserves as they are in the nature of capital reserves. (Circular No. 3/77 dated 15-4-1977).

251

Writing off the preliminary Expenses

S. 78(2)(b)-Writing off the preliminary expenses of the company- Board Resolution

"RESOLVED that a sum of Rs. 500,000 from the Share Premium Account be applied by the company in writing off the preliminary expenses of the company".

PRACTICE NOTES

1. Expression "Premium".-The expression "premium" is not defined. It may be that if, over and above the cash payment on the shares, some further advantage measurable in terms of money is conferred on the Company the value of such advantage will have to be regarded as in the nature of a premium.

2. Application of share premium account.- Sub- section (2)(b) of section 78 provides that the share premium account may be applied by the Company in writing off the preliminary expenses of the Company, that is, the expenses incurred in the formation of the company.

252

Approval and acceptance of pre-incorporation and pre operative expenses made by promoters

S. 78(2)(b)-Approval of pre- incorporation and pre-operative expenses Board Resolution

"RESOLVED that the liability for an amount of Rs. 100,000/-incurred towards pre-incorporation expenses and Rs. 2,70,000/-estimated to be incurred up to 31st March, 2002 by the promoters as set out in the statements placed before the meeting and reproduced below be and is hereby approved and accepted by the company:

1. Statement of pre-incorporation expenses.

2. Statement of pre-operative expenditure likely to be incurred up to 31^st March, 2002".

PRACTICE NOTES

1. Provision in the Memorandum of Association.-For accepting pre-incorporation and pre-operative expenses after the formation of the company, it is necessary the power to do so is given in the objects clause of the memorandum of association of the company.

2. Writing off preliminary expenses.-Pre- incorporation and pre-operative expenses known as preliminary expenses can be written off by the company later on by utilising profits of the company and its share premium account.

253

Writing off the expenses of, and the commission paid and the discount allowed on the issue of securities and debentures of the company out of share premium account

S. 78(2)(c)-Writing off the expenses of, and the commission paid and the discount allowed on the issue of securities and debentures of the company out of share premium account-Board Resolution

RESOLVED, pursuant to the provisions of clause (c) of sub-section (2) of section 78 read with section 76 and 79 of the Companies Act, 1956, that a sum of Rs …….. out of the share premium account in which a sum of Rs . …….. is lying unutilized, be and is hereby utilized in writing off the expenses of and the commission paid and the discount allowed on the issue of securities and debentures made by the Company on ……..and on ……..

PRACTICE NOTES

1. Relevant provisions.- Provisions of sections 76 and 79 of the Act should be kept in mind before utilising the unutilised portion of the share premium account of the company in writing off the expenses of the company and the commission paid and the discount allowed on the issue of securities and debentures made by the company.

2. Balance sheet.-In the balance sheet of the concerned company it must be properly shown how much of the share premium account has been utilised for writing off the expenses of issue of shares and debentures of the company and how much of the share premium account has been utilised for commission paid and discount allowed on the issue of shares and debentures of the company.

3. Passing resolution by circulation.-Such board resolution need not be passed at a meeting of the Board of Directors but can be passed by circulation in the manner provided in section 289.

254

Providing for the premium payable on the redemption of redeemable preference securities and debentures of the company out of share premium account

S. 78(2)(d)-Providing for the premium payable on the redemption of redeemable preference securities and debentures of the company out of share premium account-Board Resolution

RESOLVED, pursuant to the provisions of clause (d) of sub-section (2) of section 78 read with section 80 and 80-A of the Companies Act, 1956, that a sum of Rs ……..- out of share premium account in which a sum of Rs …….. is lying unutilized, be and is hereby utilized in providing for the premium payable on the redemption of redeemable preference shares to be made on …….. and also on …….. the redemption of debentures to be made on ……..

PRACTICE NOTES

1. Relevant provisions.-Provisions of sections 80 and 80-A of the Act should be kept in mind before utilising the unutilised portion of the share premium account of the company for paying premium on the redemption of redeemable preference securities and debentures of the company.

2. Balance sheet.-In the balance sheet of the concerned company it must be properly shown how much of the share premium account has been utilised for paying premium on the redemption of redeemable preference shares and debentures of the company.

255

Issue of shares at a discount

S. 79- Issue of shares at a discount-Board Resolution

"RESOLVED that subject to the approval of the Company in General Meeting and sanction of the Company Law Board, the Board of Directors be and is hereby authorised to issue 1,00,000 equity shares of the company of the nominal value of Rs. 10/-each in the Capital of the company at a discount of Rs. 2/- per share, that is, at Rs. 8/-."

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to file necessary application with the Company Law Board and take all steps that may be needed in connection with the obtaining of the order of the Company Law Board.

PRACTICE NOTES

1. Authorisation in the Articles.-Ensure that the Articles of Association of the Company provide for the issue of shares at a discount. If not, first amend Articles of Association.

2. Board Meeting.- Hold a Board Meeting and decide about the number of shares to be issued at a discount and the rate of discount at which the shares are to be issued. Fix up the date, time and place of holding the general meeting.

3. General Meeting.- Issue notice of the general meeting as per section 171 and pass a resolution for issue of shares at a discount subject to the approval of the Company Law Board.

4. Rate of discount.- The resolution must specify the maximum rate of discount allowed. Company Law Board has allowed discount upto 25% in Mare Steel Castings (P) Ltd., Re, (1994) 79 Com Cases 485 (CLB-SR)

5. Resolution.- When the shares are to be issued to the public then Special Resolution is required to be passed; otherwise ordinary resolution. However, the provisions of the Articles of Association of the company must be checked up in this regard.

6. Shares which can be issued at a discount.-The company may issue shares at a discount of a class already issued by the company.

7. Time within which discount shares be issued.-Ensure that not less than one year has at the date of the issue elapsed since the date on which the company was entitled to commence business.

8. Company Law Board's order.-When the maximum rate of discount exceeds ten per cent, the proposal will not be sanctioned by the Company Law Board unless it is of the opinion that a higher percentage of discount may be allowed in the special circumstances of the case as allowed in the above matter mentioned in item 4.

9. Shares at a Discount-Meaning thereof.-Where shares are issued at a price lower than the market price but not below the nominal value of the shares such an issue is not an issue at a discount. At a discount means at a price less than the nominal value of the shares.

10. Re-allotment of forfeited shares.-Where partly paid-up shares are forfeited for non-payment of further calls, if they are reallotted not as partly paid shares but as fully paid shares, the reallotment will amount to allotment at a discount and will therefore be invalid. (Biochemical and Synthetic Products Ltd. v. Registrar of Companies, AIR 1962 AP 459).

11. Debentures.- The section does not apply to debentures which may be issued at a discount. Debentures do not form part of a company's capital.

12. Filing of special resolution.-When a special resolution is passed, then file No. 23 with the Registrar of Companies within 30 days after paying the requisite filing fee.

13. Prospectus.- Every prospectus relating to the issue of shares shall specify particulars of the discount allowed on the issue of shares or of so much of that discount as had not been written off at the date of the issue of the prospectus.

14. Petition to Company Law Board.-For obtaining sanction of the Company Law Board for issue of shares at a discount, petition has to be made to the Bench of the Company Law Board within whose jurisdiction the Registered Office of the Company is situated. The petition has to be made under the Company Law Board Regulations, 1991 by paying a fee of Rs. 1000/-.

15. Documents to be attached with the petition.-The following documents should accompany the petition:

1. Certified true copy of the memorandum and articles of association.

2. Documents showing the terms of issue of the existing preference shares.

3. Certified true copy of the and resolution of general meeting for issue of further redeemable preference shares.

4. Copy of the latest audited balance-sheet and profit and loss account of the company with auditor's report and directors' report.

5. Affidavit verifying the petition.

6. Bank draft evidencing payment of application fee.

7. Memorandum of appearance with copy of the or the executed Vakalatnama, as the case may be.

16. Liability when issue of shares not in conformity with provisions of the Act.- Where shares are issued at a discount contrary to the provisions of the section, not only the directors authorising the unauthorised issue but the allottees, if they have been entered in the register of members and have accepted the allotment, will be liable to the company for the full amount of the shares.

17. Action to be taken on receipt of Company Law Board's order.

(a) On receipt of the order of the Company Law Board, file the same along with Form No. 21 with the Registrar of Companies concerned after paying the requisite filing fee.

(b) Issue the shares within two months after the date of sanction by the Company Law Board.

(d) Every prospectus relating to the issue of the shares should contain the particulars of the discount allowed or of the amount not written off.

(e) Get the shares enlisted as per the terms of issue on the recognised stock exchange.

(f) It is not necessary to disclose the issue of such shares or the particulars of the discount allowed in the balance-sheet issued subsequent to the issue of the shares.

18. Appeals.- An appeal will lie to the High Court under section 10F, against the order of the Company Law Board passed under this section.

19. Penalty for default.- Every prospectus relating to the issue of shares should contain particulars of the discount allowed on the issue of the shares or if so much of that discount as has not been written off at the date of the issue of the prospectus. If default is made in complying with this requirement the company, and every officer of the company who is in default will be punishable with fine of Rs. 5001.

244. Issued Sweat Equity Shares (S. 79A)

The Companies (Amendment) Act, 1999 has inserted a new section 79A with effect from 10th October 1998 allowing companies to issue sweat equity shares to employees or directors at a discount or for consideration other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions. All the limitations, restrictions and provisions relating to equity shares will be applicable to the issue of such sweat equity shares. Listed companies should follow guidelines framed by SEBI and also be administered by SEBI and unlisted company should follow guidelines prescribed by the Department of Company Affairs and also be administered by it. SEBI has framed SEBI (Issue of Sweat Equity) Regulations, 2002 issued vide Notfn. No. S.O. 103 1 (E), dt. 24-9-2002 on this subject.

256

Sweat Equity Shares

S. 79A- Sweat Equity Shares-Board Resolution

RESOLOVED that subject to the authorisaton by the company in the general meeting and pursuant to section 79A of the Companies Act 1956 number of shares of Rs …….. be and are hereby issued at a discount of 10% to number of employees a list of which is placed before this meeting and initialed by the Chairman for the purpose of identification.

RESOLVED FURTHER that the said shares be issued in accordance with the Regulations made by the Securities Exchange Board of India in this behalf.

RESOLVED FURTHER that an Extraordinary General Meeting of the company be called and held for the aforesaid purpose on ............... at …….. as per the draft notice and the explanatory statement placed before the meeting and initialed by the Chairman for the purpose of identification.

PRACTICE NOTES

1. Meaning of Sweat Equity Shares- Explanation 11 to sub-section (1) of section 79A of the Act defines Sweat Equity Shares as equity shares issued at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

2. Pre-requisites to the issue of Sweat Equity Shares-Before issuing Sweat Equity Shares a company should have commenced business at least one year before and the said issue should be authorised by passing a special resolution of a general meeting of the company. The resolution should specify the number of shares their current market price, consideration, if any and the class or classes of directors or employees to whom such equity shares are proposed to be issued. The regulations made by SEBI should be followed before issuing such shares.

3. Meaning of company for section 79A(l)- For the purposes of sub-section (1) of section 79A the expression "a company" means the company incorporated, formed and registered under this Act and includes its subsidiary company incorporated in a country outside India.

4. The Companies (Second Amendment) Act, 1999.-New section 55A has been inserted by the Companies (Second Amendment) Act, 1999 making the provisions of section 79A to be administered by SEBI in case of listed public companies and public companies which purport to be listed.

5. Compliance Certificate.-A company whose paid-up share capital is less than Rs. 2 crores but is equal to or more than Rs. 10 lakhs must obtain a Compliance Certificate from a secretary in whole-time practice to be filed with the Registrar of Companies mentioning therein inter alia that the company has issued sweat equity shares during the financial year and complied with the provisions of the Act as per paragraph 19 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001 prescribed under section 383-A(l) proviso.

245. Issue of redeemable preference shares (S. 80)

Issue of irredeemable preference shares or shares which are redeemable after the expiry of the period of more than twenty years is not now permissible. If any issue of preference shares is to be converted into redeemable preference shares, the roper course is to effect a reduction of capital to be followed by a subsequent increase. The provisions of contained in section 80(l) are to protect the preference shareholders and their interest from any unilateral action of the company and the equity shareholders. When the company unilaterally, without the participation of the preference shareholders decides to redeem their stake under a scheme of amalgamation, naturally it shall be in terms of section 80(l) and not otherwise. PSI Data Systems Ltd., Re, (1999) 98 Com Cases I at 2 (Ker).

246. Redemption of irredeemable preference shares (S. 80-A)

The section provides for the compulsory redemption of redeemable preference shares within a period of five years from the date of the commencement of the Companies (Amendment) Act, 1988. Therefore, the shares are to be compulsorily redeemed. The issue of irredeemable preference shares or shares which are redeemed after a period of more than twenty years has been completely prohibited by this Act. The provision for compulsory redemption of the existing redeemable preference shares or of shares redeemable after the expiry of more than ten years, is therefore a corollary to this policy of the Central Government. Redemption have to be done in accordance with section 8016 of the Act by payment of redemption amount out of such profits as would be available for payment of dividend or by issue of fresh equity if it is available for such allotment or by increase in the authorised Capital for facilitating issue of fresh equity, after obtaining permission of the Controller of capital Issues wherever it is necessary.

247. Issue and redemption of preference shares (Ss. 80(5A), 80A)

After the commencement of the Companies (Amendment) Act, 1996, no company limited by shares shall issue any preference share which is irredeemable or is redeemable after the expiry of a period of twenty years from the date of issue. All existing irredeemable preference shares will be compulsorily redeemed within five years after the commencement of the Amendment Act, 1988, and preference shares redeemable after ten years from the date of issue will either be redeemed as per terms of issue or within ten years from the date of commencement of Amendment Act, 1988, whichever is earlier.

248. Redemption of preference shares-Articles must authorize issue of Redeemable preference Shares

A company may issue redeemable preference shares, if its Articles of Association so authorise. Redeemable preference shares may be issued stipulating a date on which they would be redeemed, or in the alternative they may be made redeemable at the option of the company. The period of redemption, however, cannot exceed twenty years from the date of issue of such shares by virtue of provisions of sub-section (5A).

249. Conditions governing redemption of shares

The redemption can be effected only on the following conditions.

(i) Redemption of such shares must be effected on such terms and in such manner as laid down in the Articles of Association of the company;

(ii) Such shares can be redeemed out of the profits or out of proceeds of a fresh issue of shares made for this purpose;

(iii) Such shares must be fully paid-up;

(iv) Premium, if any, payable on redemption of such shares should be provided from out of the profits or out of company's share premium account; and

(v) An amount equal to redemption amount must be transferred to 'capital redemption reserve account', where the redemption is effected out of profits, otherwise available for distribution as divided.

250. On redemption of preference shares authorised share capital not reduced

The redemption of preference shares does not tantamount to reduction of its authorised share capital nor does it amount to purchasing of its own shares by a company under section 77(5).

251. Redeemable preference shareholder not a creditor

It must be remembered that a preference shareholder is only a shareholder and cannot as a matter of course claim to exercise the rights of a creditor. Preference shareholders are only shareholders and not in the position of creditors. They cannot sue for the money due on the shares undertaken to be redeemed, and cannot, as of right, claim a return of their share money except in a winding up. In Lalchand Surana v. Hyderabad Vanaspati Ltd., (1990) 68 Com Cases 415 (AP).

252. Redemption of preference shares

The redemption of preference shares can be effected out of the profits of the company available for distribution as dividend or from the proceeds of a fresh issue of capital. Where there preference shares are redeemed otherwise than out of a fresh issue the company must build up a capital redemption reserve under proviso (d) to Section 80(l).

253. Notice of and extension of time for redemption

When Preference Shares have been redeemed, notice must be given to the Registrar within 30 days of the redemption.

254. Penalty for default (Sub-section (6))

For non-compliance with the provisions of this section, the company, and its every officer who is in default, is punishable with fine which may extend to ten thousand rupees.

255. Rate of Dividend on Preference Shares

As per paragraph 10A.6 of Foreign Exchange Management Manual, the rate of dividend on preference shares issued by an Indian company to a person resident outside India should not exceed 300 basis points over State Bank of India's prime lending rate.

257

Redemption of preference shares by fresh issue of preference shares

S. 80-Redemption of preference shares from the proceeds of fresh issue of preference shares-Board Resolution

"RESOLVED that pursuant to section 80 (4) of the Companies Act, 1956, 10,000 eight per cent redeemable preference shares of Rs. 100/each be issued upon such terms and conditions and are set out in the statement submitted to this meeting and the proceeds of this new issue be utilised for the purpose of redeeming the existing 10,000 eight per cent redeemable preference shares of Rs. 100/- each."

PRACTICE NOTES

1. Provision in the Articles.-Articles of Association should contain provisions for issue and redemption of preference shares. Terms and conditions of redemption should be such as provided in the Articles.

2. Redemption out of profits.-Redemption of preference shares can also be made out of the profits of the company which would otherwise be available for dividend.

3. Reduction of capital.-Redemption of preference shares will not amount to reducing the amount of authorised share capital of the company as per section 80(3) of the Act.

4. Redeemable within ten years.-The fresh issue of redeemable preference shares should be redeemable within twenty years of the issue.

5. Compliance Certificate.-A company whose paid-up share capital is less than Rs. 2 crores but is equal to or more than Rs. 10 lakhs must obtain a Compliance Certificate from a secretary in whole-time practice to be filed with the Registrar of Companies mentioning therein inter alia that the company has redeemed preference shares during the financial year and complied with the provisions of the Act as per paragraph 21 of the Form of Compliance Certificate appended to the Companies (Compliance Certificate) Rules, 2001 prescribed under section 383-A(l) proviso.

258

Redemption of Preference Shares by issue of rights shares

S. 80M proviso (a)-Redemption of preference shares from the proceed of rights issue-Board Resolution

"RESOLVED that 5000 thirteen per cent redeemable preference shares of Rs. 100/-each bearing distinctive numbers …….. to ............... be redeemed and such redemption be made out of the sum of rupees one lakh received by the company from the rights issue of 50000 equity shares of Rs. 10/- each made for the purposes of such redemption."

PRACTICE NOTES

1. Reissue where unable to redeem.- Where the company proved its inability to redeem, it was allowed to make a fresh issue of preference shares including accrued dividend whether declared or not. The number of shares was thus to increase upon reissue, but to save the company from additional burden the percentage of dividend was so reduced that every shareholder would get his originally reserved amount by way of dividend. Coledonian Jute and Industries Ltd., Re, (1996) 85 Comp Cas 180 (CLB-Eastern Region Bench).

2. Reissue refused.- Where the company's annual accounts showed that the amounts available in the profit and loss account were more than sufficient to cover the value of the preference shares, the Company Law Board held that it could not be said that the company was not in a position to redeem and, therefore, the permission for reissue was not granted. Kettlewell Bullen & Co. Ltd., Re, (1995) 84 Comp Cas 757 (CLB-Eastern Region).

3. Objections raised by shareholders.-A company consistently incurred losses and was, therefore, not able to redeem. Some shareholders objected to the scheme of reissue because they did not want to have any new shares in the company. The Company Law Board ordered settlement of the objectors' claims by paying them out and reissue of the remaining shares including shares for accumulated arrears of dividend. Eastern Investments P. Ltd. Calcutta, Re, (1994) 4 Comp LJ 555 (CLB-Cal).

259

Redemption of Preference from profits at par

S. 80(l) proviso (a)-Redemption of preference shares from profits of the company at par-Board Resolution

"RESOLVED that the 13.5% redeemable preference shares of Rs. 100/-each which are due for redemption on 31-7-2002, be redeemed on that date from the profits of the company by paying off 15000 preferences shareholders of the company at par.

RESOLVED FURTHER that the Secretary of the company be and is hereby authorised to take all steps for the purpose of redeeming the shares in accordance with the provisions of the article of Articles ……..of Association of the company/terms of issue of the shares.

RESOLVED FURTHER that dividend for the current year at 13.5% per annum be paid on the shares so redeemed up- to the date of redemption."

PRACTICE NOTES

1. Redemption of preference shares as per articles.-The redemption of preference shares will have to be in accordance with the Articles of Association of the company. This form has been drafted on the assumption that the articles provide for redemption at par. However, where the articles are in accordance with Article 22 of Chapter IV, the redemption will have to be according to the terms laid down in the issuing the shares.

2. Stipulations laid down by Section 80.-Section 80(l) proviso of the Companies Act, 1956, has laid down certain stipulations within which the redemption should be effected. Briefly they are:

(a) Redemption should be out of the profits of the company.

(b) Only fully paid shares can be redeemed.

(c) The premium, if any, payable on redemption, should have been provided from out of the profits of the company or out of the Share Premium Account before the shares are redeemed.

(d) Where the shares are redeemed out of profits, an amount equal to the nominal value of the share redeemed should be transferred to a capital redemption reserve account.

(e) Where the company has redeemed or is about to redeem preference shares, it can issue shares up to the nominal value of the shares redeemed or to be redeemed. However, the redemption should be within one month of the issue of the new shares.

3. Filing of Form No. 5 with Registrar.-The company will have to file a return in Form 5, with the Registrar of Companies concerned within 30 days of redemption on payment of prescribed filing fee.

260

Redemption of preference shares from profits at premium

S. 80-Redemption of preference shares at premium-Board Resolution

RESOLVED, pursuant to the provisions of section 80 of the Companies Act, 1956, that a sum of Rs ……..lying in the profit and loss account of the company be and is hereby utilized for the redemption of 13% preference shares issued by the company with option of redemption at a premium of Rs. 10/- per share and that the said 13% preference shares of Rs. 100/- each be and are hereby redeemed at a premium of Rs. 10/- per share and that the sum of Rs . ..................... out of the profits of the company be and is hereby transferred to the Capital Redemption Reserve Account.

PRACTICE NOTES

1. Provision in articles of association.-A company may redeem preference shares only when there is power to do so in its articles of association. The redemption of preference shares must be given effect to by the company on such terms and in such manner as may be provided in the articles of association of the company.

2. No reduction of authorised shared capital.-The redemption of preference shares made by the company under section 80 of the Act will not reduce the amount of its authorised share capital.

3. Capital redemption reserve Account.-A sum equal to the nominal amount of the preference shares proposed to be redeemed is to be transferred to capital redemption reserve account from the profit and loss account of the company. The premium, if any, proposed to be paid on such redemption can be utilised either from the profit and loss account of the company or from the share premium account of the company. Transferring of the nominal amount of preference shares proposed to be redeemed to capital redemption reserve account from the profit and loss account of the company is not required to be made when such redemption is made out of the proceeds of a fresh issue of shares made only for the purposes of such redemption.

4. Fully paid shares.-The preference shares pro posed to be redeemed must be fully paid up and partly paid up preference shares cannot be redeemed under section 80(l)(b) of the Act.

5. Penalty.- Contravention of provisions of section 80 of the Act will attract punishment by way of fine upto rupees ten thousand for the company and for every officer of the company who is in default.

6. Compounding of offence.-The fine of rupees one thousand for contravention of provisions of section 80 is compoundable by the Company Law Board concerned as per section 62 1 -A.

261

Redemption of irredeemable preference shares

S. 80A-Redemption of irredeemable preference shares-Board Resolution

RESOLVED that pursuant to section 80-A(l) proviso and subject to the consent of the Company Law Board 13% redeemable preference shares of Rs. 100/- each being equal to the amount due including the dividend thereon in respect of the …….. unredeemed preference shares be and are hereby issued to the preference shares holders who are holding the said unredeemed pref6rence shares.

RESOLVED FURTHER that the secretary of the company be authorised to file the petition with the Company Law Board and to do anything and everything in connection therewith or incidental or ancillary thereto.

PRACTICE NOTES

1. Deemed redemption.-On issue of further redeemable preference shares equal to the amount of the old unredeemed preference shares, the said unredeemed shares shall be deemed to have been redeemed.

2. Petition to Company Law Board.-A petition should be filed with the concerned regional bench of the Company Law Board where the registered office of the company is situated in Form No. I given in Annexure 11 to the Company Law Board Regulations, 1991 along with a fee of upto Rs. 1000/- by way of demand draft.

3. Conditional approval of CLB-Company Law Board has power to impose condition while granting permission to issue fresh preference shares in lieu of existing preference shares at a higher rate of dividend than that prevailing and such condition is justified and not arbitrary. Raja Rain Corn products (Punjab) Ltd. v. CLB, (2001) 106 Corn Cases 563 (P&H-DB).

4. Penalty for default.-If any default is made in complying with the provisions of section 80A, the company making such default will be punishable with fine of upto Rs. 10,000/-t for every day during which such default continues and every officer of the company who is in default will be punishable with imprisonment for a term of 3 years and will also be liable to fine.

256. Further issue of capital (S. 81)

This section provides that further issue of capital should ordinarily be offered to the existing holders of equity shares in proportion to their existing shareholdings. The Board is fully empowered to issue further capital strictly as right issue to the existing shareholders and if this offer is accepted nothing further is to be done. The shareholders to whom the offer is made can either accept the same in part or in full. They may renounce the offer in favour of one or more other persons. If the offer is declined either in part or in full, the Board is free to allot the balance shares in any manner at its discretion. If the Board is of the opinion that the further issue of the capital should be made in a different manner, then the company will have to pass a special resolution at the General Meeting.

The power of the shareholders to allot shares by passing a Special Resolution with requisite majority is un-restricted. The shareholders can also provide for allotment privately at the sole discretion of the Board of Directors if the resolution is passed with ¾th majority. This section is not applicable to the sale of forfeited shares for which no allotment is necessary.

The one year specified in section 81 is to be counted from the date on which the company has allotted any share for the first time. Any issue or allotment of shares within two years of the formation of a company or within one year after the first allotment whichever event occurs earlier will not be affected by the provisions of section 81.

The existing shareholders cannot object to increase on the ground that the worth of the present shares would be thereby reduced. The provisions of this section will not apply to the allotment of any shares made in payment of the amounts due to Directors or other persons.

When a shareholder renounces any of the rights share offered to him in favour of third person, it is not in the nature of a transfer of such shares and the Board of Directors cannot refuse to allot the shares to the third person unless the articles provide therefor.

Where the employees are granted loans by the company for the purposes of buying shares under 'Stock Option Scheme for Employees of Public Limited Companies', these shares may be allowed to be hypothecated against such loans to the companies themselves.

Allotment of further shares to the majority group to the total exclusion of the minority group as the company was in real need of more capital is not violative of section 81 with the assurance given by the company that the original percentage of minority shareholding would be restored. Suryakant Gupta v. Rajaram Corn Products (Punjab) Ltd., (2001) 108 Corn Cases 133 (CLB).