Capital, Shares and Shareholders


The term "capital', in connection with company formation, may mean any one of the following things :

1. Nominal Capital or Authorised Capital

Nominal Capital or Authorised Capital is the total face value of the shares which the company is authorised to issue by its memorandum of association. The total share capital of a company is also called its Registered Capital.

The full authorised capital may not be needed by a company at the time it commences business. A company may issue less than the authorised capital, reserving the right to raise further moneys by the sale of the unissued shares at a later time.

2. Issued Capital

Issued Capital is that part of authorised capital which is actually offered to the public for sale.

3. Subscribed Capital

Subscribed Capital is that part of issued capita( which is taken up and accepted by the public.

4. Paid up Capital

Paid up Capital is the amount of money actually paid by the subscribers or credited as so paid.

5.. Uncalled Capital

The unpaid portion of the subscribed capital is called Uncalled Capital. A limited company may by special resolution determine that a portion of the share capital, which has not been

called up, shall not be called up except in case of Liquidation. Such uncalled capital is called Reserve Capital.



The shareholders are the proprietors of the company. Therefore a "Share" may be defined as an interest in the company entitling the owner thereof to receive proportionate part of the profits, if any, and of a proportionate part of the assets of the company upon liquidation. A shareholder has certain rights and liabilities. Formerly it was thought that the shareholders' are the proprietors of the company. Nowadays, however, there has emerged a new concept of company. The views of the Supreme Court, in the case of National Textile Workers' Union v. P. R. Ramakrishnan are quoted in p. 542 subject to the control of the Government and social objectives of the nation.

Features and Characteristics

The main characteristics of shares are stated below.

1. `A share is not a sum of money, but is an interest measured in a sum of money and made up of various rights, contained in the contract.'-Farwell J. in Borland's Trustee v. Steel Bros. & Co.

2. A share is an interest having a money value and made up of diverse rights specified under the Articles of Association. Commissioner of Income Tax v. Standard vacum Oil Co.

3. The holder of a share has certain rights, duties and liabilities, as stated in the Companies Act and in the Memo and Articles of a company:

4. A share is transferable and heritable subject to regulations framed in the Articles of Association of the company.

5. The shares or 4 her interest of a member in a company is movable property, transferable in-the manner provided by the articles of the company.-Sec. 82.

6. The shares must be numbered so as to distinguish them from one another.-Sec. 83.

Classification of Shares

The Companies Act of 1956 provides that after the commencement of the Act, there can be only two types of shares capital, viz.,

(a) Equity Shares Capital, and

(b) Preference Share Capital. Preference Shares

Preference shares are those shares which are given, by the articles of the company, two privileges viz.,

(i)                   priority in the payment of dividends over other share, and

(ii)                  priority as regards return of the capital in the event of liquidation.-Sec.85.

The holder of a preference share is entitled to receive dividend (at rates fixed by the articles) before any dividend is declared on the other shares.

In the event of winding up, if surplus assets are available, the preference shareholders must first be given back the amount which they paid on the share. The balance is available for distribution to the other shareholders. The voting power of a preference shareholder is limited.

Preference Shares can be classified as stated below.

1. Cumulative or Non-Cumulative: In the case of cumulative preference shares, if the profit made by the company in a particular year is not sufficient to pay dividend at the prescribed rate, the shortage must be made up out of the profits of succeeding years. The dividends accumulate. In non-cumulative preference shares such shortages are not required to be made up. Dividends which are not paid, do not accumulate but lapse.

2. Participating Preference Shares or Non-Participating Preference Shares : In the former type of shares the shareholder gets a part of the surplus profits beyond the amount or rate prescribed for them, if such surplus profits are available. Sometimes such preference shareholders are given the right to share in the surplus asset upon liquidation if any such assets are available. In the latter type of preference share, the shareholder cannot participate in the surplus profits or in the assets in liquidation.

3. Convertible Preference Shares or Non-convertible Preference Shares : The former types of shares can be converted into equity shares, provided there is provision of such conversion

in the Articles of a company. The latter types of shares do not have the right of such conversion.

4. A preference share may be redeemable or irredeemable. The former could be redeemed i.e., purchased back by the company, subject to the conditions laid down in the articles and in the Act. All irredeemable preference share is one-which cannot be purchased back. New Section 80-A inserted by the Amendment Act, ,1988 makes provision for redemption of irredeemable preference shares already issued by companies within a period of five years.

Equity Shares

All shares other. than preference shares are called Equity Shares. The rights and privileges of equity shareholders are laid down in the articles subject to the provisions of the Act.


An equity shareholder is entitled to vote on every resolution,placed before the company. This right cannot be curtailed by the Articles. The number of votes a shareholder can cast is proportional to his-share of the paid up equity capital of the company.-Sec. 87(1).

A preference shareholder is entitled to vote only on resolutions which directly affect the rights attached to his preference shares and resolutions for winding up of the company. But if the dividend due on such capital or any part of it remains unpaid, the preference shareholder become entitled to vote on every resolution.-Sec. 87(2).

The number of votes which a preference shareholder can cast, shall be in the same proportion as the capital paid up in respect of the preference shares bears to the total paid up equity capital of the company.-Sec. 87(3).

After the commencement of the Act of 1956, no, equity shares can be issued with voting rights in excess of those mentioned above.-Sec. 88.

The rules regarding voting rights, stated above, do not apply to private companies, other than private companies which are subsidiaries. of public companies.-Sec. 90.

The articles of a company may provide that a member shall not exercise voting power in respect of a share on which a call, or any other sum due to the company, has not been paid. No other restrictions on voting right can be imposed.-Sections 181, 182.

Legal Decisions :

In English courts under the Companies Act of U. K. the following decisions were given :

(1) The holder of a share and whose name is included in the register of members, is the only person entitled to vote at the general meeting. Such a person is entitled to vote at a company meeting, even though, the person is a bankrupt. Wise v. Landsell

(2) When exercising the right of voting, the question of voter's motive is irrelevant. Pender v. Lushingtion


The Companies Act gives various rights to the shareholders of a company. The important rights are mentioned below.

l. A shareholder can attend and vote in the general meetings of the company. He is entitled to receive notice of all such meetings. (Voting Rights.-See above).

2. The holder of a Share Warrant does not ordinarily possess the right to vote, but the article of a company may give him that right.       .

3. A shareholder has certain rights i» respect of accounts. (Sec. 219. See chapter 8). A shareholder must be given a copy of the balance sheet and the "statutory report" in the caseof the "statutory meeting".

4. A shareholder is entitled to inspect the minutes of the proceedings of any general meeting without any charge.

5. A shareholder has the right to inspect the register and index of members and debenture holders and the annual returns, without any charge. He can also take extracts from any of them.

6. If the name of any member is, without sufficient cause, omitted from the register of members, he can apply to the court for rectification of the register.

7. A shareholder can transfer his share, subject to any restrictions that may be contained in the articles.

8. A shareholder can apply for the winding up of the company under certain circumstances, e.g., if default is made in holding the statutory meeting and delivering the statutory report or if the number of members of the company is reduced to below seven (in the case of a public company) and below two (in the case of a private company).

9. If surplus assets are available after winding up, they are to be distributed among shareholders.

10. Preference shareholders are entitled to get dividends.

11. Shareholders have the right to apply to the Central Government for relief and redress under certain circumstances, e.g.. if the annual general meeting is not held ; if there is mismanagement and oppression by the majority etc. In the latter case, the shareholder can also apply to the court under Section 397. (See ch. 10).

12. A shareholder, jointly with certain other members, can call an Extraordinary General Meeting on Requisition.

13. A shareholder can avoid the contract of share and can claim damage, if there is any misstatement or deliberate secrecy of a material fact in the prospectus.

14. The Articles of Association of a company may give various other rights and privileges to the shareholders. Classification

The rights of members, as explained above, can be classified in the following manner :

(1) Rights given from the Companies Act.

(2) Rights given by the ordinary laws of the country, i.e.,

legal rights, proprietary rights and remedial rights.

(3) Contractual rights, i.e., rights given by the Memorandum and Articles of Association.


Liabilities :The liability of a shareholder depends on the type of the company. In a Company Limited by Shares, the shareholder is not liable to pay anything more than .the nominal value of the share, whatever may be the liabilities of the company. (n a Company Limited by Guarantee, the shareholder is liable to pay up to the amount of the guarantee and the nominal value of the share, if there is a share. In an Unlimited Company, the shareholder is liable to an unlimited extent for the debts of the company. The Capital clause of the Memorandum of Association contains provisions regarding the liability of shareholders. (See also, ch. 11 : Liability of Contributories, Sec. 426, Companies Act.)

Duties and Obligations : A shareholder has certain duties and obligations. They are summarised below :

l. A shareholder must pay the unpaid amount due on the share, when calls are made.

2. In case of liquidation of a company the shareholders are to be placed in the list of contributories.-Sec. 426.

3. In certain cases a transferor of a share is still liable for the unpaid shares of a company

4. The memo and the articles constitute a binding contract between the shareholder and the company.-Sec. 36.

5. All the shareholders are bound to follow the decision of the majority of the shareholders, unless the majority are guilty of mismanagement and oppression.-Secs. 397, 398.

6. Cases of unlimited liability-

(a) Under the Articles, directors and managers can be made liable to an unlimited extent. (See ch. 6.)

(b) If the number of membership of the company falls to below 7 in public companies and below 2 in private company, the existing members become liable for the debts of the company to an unlimited extent.-Sec. 45 (See p. 555)


Section 80 of the Act provides that a company limited by shares may, if so authorised by the articles, issue preference shares which are, or at the option of the company are to be liable, to be redeemed. The rules regarding redemption are stated below :

I. Such shares shall not be redeemed except out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of the redemption.

2. Such shares shall not be redeemed unless they are fully paid up.

3. The premium, if any, payable on redemption shall be provided for out of the profits of the company or out of the company's share premium account.

4. Where any such shares are redeemed otherwise than out of the proceeds of a fresh issue of shares, they shall be transferred to an account, to be called "the capital redemption reserve account, a sum equal to the nominal amount of the shares redeemed.

5. The capital redemption reserve account may, not withstanding anything in this section, be applied by the company, in paying up unissued shares of the company to be issued to members of tile company as fully paid bonus shares.-Sec. 80(5). Subject to the aforesaid rules, the redemption of preference shares may be effected on such terms and in such manner as may be provided for by the articles of the company.

The redemption of preference shares under Section 90 of the Act, shall not be taken as reducing the amount of the authorised share capital of the company.

Where in accordance with the aforesaid provisions, a company has redeemed or is about to redeem any preference j" shares it shall have power to issue shares up to the nominal ; amount of the shares redeemed or to be redeemed as if those ; shares had never been issued. The issue of such new shares shall not be taken into account for the purpose of calculating the fees payable under Section 611, if the old shares are redeemed within one month after the issue of the new shares.

Section 80 has been amended and 80(SA) provides that no Company limited by shares shall issue any preference share which is irredeemable or is redeemable after the expiry of a period of ten years from the date of its issue. Company (Amendment) Act, 1988.


There are two methods of increase of capital :

(1) further issue of capital and

(2) conversion of Government loans into shares.

Further issue of Capital

After the formation of a company, further shares may be issued. The rules regarding such issues are as follows.-Sec. 81(1).

Where at any time after the expiry of two years from the formation of a company or at any time after one year from the first allotment of shares, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, the following procedure must be adopted :

l. Such new shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date.

2. The offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days from the date of the offer within which the offer if not accepted, will be deemed to have been declined.

3. The offeree of tile shares may renounce the offer in favour of' any other person, unless the articles of the company provide otherwise.

4. After the expiry of the time specified in the notice aforesaid or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner as they think most beneficial to the company. Shares, issued under this Section are called "Rights" shares. however, in issuing shares to public companies are required to follow the SEBI guidelines.


1. Section 81(1 A) provides that further shares may be offered m any person in any manner whatsoever in the following cases :

(a) if a special resolution to that effect is passed by the company in general meeting; or

(b) if a proposal to that effect is passed by the majority of members in a general meeting and the Central Government is satisfied that the proposal is most beneficial to the company.

2. Section'81(3) provides that the rules contained in Section 91(1) shall not apply.

(a) to a private company ; or

(b) where the subscribed capital of a public company is increased because debenture holders or creditors were given an option (by a special resolution passed by the company in general meeting and approved by the Central Government) to convert the debentures or loans into shares of the company.


When any debentures have been issued to, or loans have been obtained from, the Government by a company, the Central government may direct that such debentures or loans, or any Imo thereof shall be converted into shares of the company .­sec 81(4) to (7).

The Government will issue such orders if, in its opinion, a necessary in the public interest. The terms and conditions

of such conversion are to be determined by the Government. Due attention is to be given to the financial position of the Company, the terms of the debenture or loan etc. A copy of the order is to be laid before Parliament. If the Company is dissatisfied with the terms of conversion, it can appeal to the Court whose decision will be final.

Share capital will stand increased where an order is made under section 81(4).-Sec. 94A, Companies (Amendment) Act 1974.



The share certificate is a certificate issued under the common seal of the company specifying the number of shares held by any member. A share certificate must be issued and delivered within 3 months from date of allotment. However, Company Law Board (CLB) can extend the period up to 9 months. In case of default, CLB can order the company concerned to make good the default and to pay all costs incidental to the application. Rules

The rules regarding share certificates are stated below.

1. A company must prepare the share certificates and have them ready for delivery, within two months of the allotment of shares and/or registration of any transfer of shares unless the

conditions of the issue of the shares provide otherwise.-Sec. 113. The Company Law Board may, on being satisfied, extend the above periods to nine months.-Sec. 113(l).

2. The share certificate is prirna facie evidence of the title of the member of such shares.-Sec. 84(1).

3. Duplicate : A certificate may be renewed or a duplicate issued if it (a) is proved to have been lost or destroyed, or (b) having been defaced or mutilated or torn, is surrendered to the company.-Sec. 84(2).

4. If a company renews a certificate or issues a duplicate with intent to defraud, it shall be punished with a fine and every officer in default shall be punished with a fine or imprisonment .­Sec. 84(3).

5. The Government may prescribe rules regarding the issue, renewal etc. of share certificates–Sec. 8-1(4).

6. Estoppel : A share certificate issued by persons authorised by the company, binds the company regarding title and payment.


(i) The company cannot deny the title of the certificate holder. Dixon v. Kennaway.

(ii)If the certificate states that the shares are fully paid up the company cannot plead that they are not so. Bloomenthal v. Ford.

(iii) A share certificate is the only legal documentary evidence of title in possession of the shareholder. Societe Generale de Paris v. Walker.

(iv) A share certificate, being a document of title, is essential for the purpose of transfer by way of sale, mortgage or pledge. It provides marketable title and a shareholder can sue the company for a certificate. Burdett v. Standard Exploration Co.

(v) Forgery cannot displace the real shareholder, Barron v. L & N. J1! Rly. Co.


A share warrant is a document issued by a company, stating that its bearer is entitled to the shares therein specified. It is a substitute for the share certificate. Share warrants may be issued for fully paid up shares, if the articles so provide and if the _ approval of the Central Government has been obtained. A share warrant may have attached coupon's on the production of which the dividends due on the shares will be paid. Shares may be transferred by delivery of the warrant-Sec. 114.

When a share warrant is issued, the name of the holder of the share certificate concerned shall be removed from the Register of Members and the number and date of the share warrant shall be noted there. Any holder of the warrant can, if he so desires, surrender the warrant and take a share certificate, whereupon his name shall be recorded in the Register of Members. The holder of a share warrant does not ordinarily possess the right to vote and exercise other right of membership, but the articles may give him that right.-Sec. 115. Conditions for issue of share warrants.

(1) The shares shall be fully paid-up.

(2) The Articles shall authorise the issue of share warrants.

(3) Prior approval of the Central Government shall be obtained.

(4) The share warrants shall be issued under the common seal of the company.­Sec. 114(l).

Examples :

(i) A share warrant can be transferred by delivery of possession. C3echuanaland Exploration Co. Ltd. v. London Trading Bank'

(ii) In the case of a stolen share warrant the transferee in good faith gets a good title to it. Webb Hale & Co. v. Alexandria Water Co.


The differences between a share warrant and a share certificate are summarised below.

1 . A share warrant states that a bearer is entitled to the shares specified therein. it is a substitute of the share certificate.

2. Share warrant is issued only with fully paid up shares. The share certificate may be issued even though the share is partly paid.

3. A share and the share certificate are transferred by the procedure stated in the Companies Act and the articles of the company. A share warrant can be transferred by the delivery of the warrant.

4. A shareholder is paid dividend by the procedure stated – in the Articles of the Company. (It is usually paid by cheque, sent by registered post). A share warrant may have attached

coupons on the production of which dividends due on the shares will be paid.

5. The holder of a share warrant does not ordinarily possess the right to vote and to exercise other rights of membership. The holder of a share certificate exercises the right of all the membership, including, the right of voting.

6. The holder of a share certificate has his name included in the Register of Members. When a share warrant is issued, the name of the holder of the share Certificate is removed and only the number and date of the warrant are noted.


When all the shares of a company have been fully paid up, they may be converted into stock if so authorised by the articles.-Sec. 94( l )(c).

Conversion into stock is made because it is a convenient method of denoting the capital of the company and the interest of the members. It does not effect the rights of the members in any way.

When shares are converted into stock, notice must be given to the Registrar. The register of members must thereafter show the amount of stock held by each member instead of the amount of shares.-Sec. 150.

The provisions of the Act relating to shares only, cease to apply to shares which have been converted into stock.-Sec. 96. "The use of the term 'stock' merely denotes that the company have recognised the fact of the complete payment of the shares, and that the time has come when these shares may be assigned in fragments, which for obvious reasons could not be permitted before.''-Per Lord Cairns in Morris v. Aylmer.

Distinction between Shares and Stocks

Shares and Stock are two methods of denoting the interest of a member of a company. According to Sec. 2(46) of the Act, the term share includes a stock, except where a distinction between them is expressed or implied.

The differences between Shares and Stock are stated below.

1. The shares of the same company are of equal nominal value. But stock may be divided into unequal amounts. Thus Its. 100 worth of st11Ck can be divided into two parts of Rs. 50 each.

2. Shares cannot be issued or transferred in fragments. Thus o member cannot hold half a share. But a stock can be transferred w fragments.     .

3. Shares may be partly paid. Shares can be converted into stock only when fully paid up.    ,

4. Stock cannot be issued when a company is initially formed. Shares are issued when a company is formed.

5. Shares are numbered c consecutively.. Stocks are not numbered. But the names of the stock-holders are recorded in the Books of the Company.

6. Shares can be directly issued to the public whereas stack cannot be issued directly.


A Company may find it necessary to settle or compromise ; with its creditors or with particular groups of shareholders. For this purpose it may be necessary to recognise its structure or

to amalgamate with another Company. Sections 391 to 396A of the Companies Act lay down the procedure for such re- – organisation and amalgamation. The procedure is summarised below.

I. Schemes for Arrangement

The expression "Arrangement" includes a re-organisation of the share-capital of the Company by the consolidation of shares of different classes or by the division of shares into shares of different classes or by both these methods.

A compromise or arrangement may be proposed

(a) between the company and its creditors or any class of them; or

(b) between a company and its members or any class of them. ,

Upon such a proposal being made, the company, or any ' creditor, or any member, or the liquidator (if the company is in . the process of being wound up) may apply to the court for an order directing the holding of a meeting of the members or the creditors concerned.

If in such a meeting the proposed scheme or arrangement is accepted by a majority representing at least ¾ hrs  in value of the creditors or members concerned, and if thereafter, the scheme is sanctioned by the court, it becomes binding on the company and all parties concerned and the scheme must be given effect to.

The court will not sanction any compromise or arrangement unless it is satisfied That all material facts relating to the company (e.g., its latest financial position) has been disclosed to the Court.

A certified copy of the Court's order is to be filed with the Registrar and annexed to every copy of the memorandum issued subsequently.

When a scheme is sanctioned by the High Court, it shall have power to supervise the carving out of the arrangement and to issue directions concerning the same.

Information of the arrangement shall be given to all persons concerned.

Case Law :

(1) A scheme sanctioned by the Court does not operate as a mere agreement between the parties. It becomes binding on the company, the creditors and the shareholders and by statutory force. But it does not mean that the scheme becomes part of the constitution of the company. J K. Private Ltd. v. New  Kaiser-l-Hind Sp. & Wvg. Co.

(2) Who can apply ? The Court can take action under S. 392 on the application of any person interested in the affairs of the company. Such an application is not limited or restricted to a member, the liquidator or the creditor of the company. The Court can also act suo motu. S. K. Gupta and another v. K. P. Jain and another 2

II. Amalgamation through the Court

A scheme of compromise or arrangement may involve the amalgamation of one company with another by the transfer of the whole or par of any company to another. In such cases the scheme must be approved by holders of three-fourths in value of the shares concerned and sanctioned by the court. The procedure is the same as that outlined in l above. While sanctioning the scheme the court can facilitate the amalgamation by passing order for any of the following purpose :

(a) the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company ;

(b) the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which under the compromise or arrangement are to be allotted or appropriated by that company to or for any person ;

(c) the continuation by or against the transferee company (it any proceedings pending by or against any transferor company) ;

(d) the dissolution, without winding up, of any transferor company ;

(e) the provision to be made for any person who, within such time and in such manner as the Court directs, dissents from the compromise or arrangement ; and

(f) such incidental, consequential and supplemental matters n+ we necessary to secure that the reconstruction or amalgamation i shall be fully and effectively carried out.

No compromise or arrangement in connection with a scheme for the amalgamation of a company (which is being wound up) with another company will be sanctioned unless the court receives a report from the Company Law Board or the Registrar that the affairs of the company have rot been conducted in a manner prejudicial to the interest of the members or to public interest. A similar report, from the Official Liquidator, is necessary before the court orders dissolution without  winding up of any transferor company. (See (d) above].

The court shall give to the Central Government. notice of all applications for sanction of schemes of arrangement, composition and amalgamation. The court shall take into consideration the representation of the Central Government, if any-Sec. 394A.

III. Compulsory purchase of the shares of dissenting shareholders. (Sec. 395)

Scheme for – 'take over' of shares : Where a scheme or contract involving; the transfer of shares of one company to another has been approved by the holders of not less than nine­ tenths in value of the shares involved within four months of the date of making the offer, the transferee company may, at any time within two months after the expiry of the said four months, give notice to any dissenting shareholders that it desires to acquire his share. The offer must be sent with full and detailed information.

Upon such notice being given, the transferee company becomes entitled and bound to acquire the shares, within one month of the date of notice, on the same terms as those on which the shares of the approving members are being acquired under the scheme.

A dissenting shareholder may apply to the court within one month of the notice, for an order prohibiting the purchase. The court may do so if sufficient grounds are shown.

The right of compulsory purchase can be exercised when the transferee company already holds a certain proportion of the shares in question.

After the formalities have been complied with and the instrument of transfer has been executed by the shareholders or by any person appointed by the transferee company, the purchase price of the shares together with instrument- of transfer is to be

deposited with the transferor company. Thereupon the transferor company shall record the name of the transferee company as the holder of the shares and within one month inform the dissenting shareholders, the fact of such registration and the receipt of the money. The purchase price paid is to be held in trust for payment to the persons entitled to it.

Through the procedure provided by Section 395, it is possible to carry through a scheme of amalgamation, without the assistance of the court.

IV .Amalgamation by Order of Central Government (Sec. 396)

Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, it may, by order notified in the official Gazette, provide for the amalgamation of those companies into a single company with such constitution ; with such property, power, rights, interests,  authorities and privileges ; and with such liabilities and obligations ; as may be specified in the order.

The order' of the Central Government may contain such consequential, incidental and supplemental provisions as may be necessary to give effect to the amalgamation.

Members and creditors (including debenture-holders) of the original companies shall have, against the new company, as nearly as possible the same rights as they had against the original companies. If the rights and interests of any member or creditor is affected prejudicially by the amalgamation, he will be entitled to compensation. the amount of which will be determined by such authority as may be prescribed. The compensation will be paid by the new company.

Before issuing the order of amalgamation, the Central Government will send a copy of the proposed order in draft to each of the companies concerned and will consider their suggestions and objections if any.

Copies of the order of amalgamation must be laid before both houses of Parliament.

Books and papers of a company amalgamated with or acquired by another company under sections 391 to 396 shall not be disposed of without the prior permission of the Central Government. They may be examined for evidence of any offence.-Sec. 396A.


A company "may issue shares at a premium L e., at a value greater than its face value. If it does so, it must transfer an amount equal to the aggregate value of the premium received to an account to be called, "the share premium account". Section 78 provides that the share premium account may be applied 5y the company for any of the following purposes :

(a) in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares;

(b) in writing off the preliminary expenses of the company ;

(c) in writing off the expenses of or, the commission paid or discount allowed on, any issue of shares or debentures of the company; or

(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company.

Except for the purposes mentioned above, the share premium is to be considered part of the capital of the company. The provisions of the Act relating to reduction of capital are applicable to the share premium.


Under Sec. 79 a company can issue shares at a discount, i.e., at a value less than its face value if the following conditions are fulfilled :

(a) the issue of the shares at a discount is authorised by a resolution passed by the company in general meeting, and sanctioned by the Company Law Board;

(b) the resolution specifies the maximum rate of discount at which the shares are to be issued ;

'(Provided that no such resolution shall be sanctioned by the Company Law Board if the maximum rate of discount specified in the resolution exceeds ten per cent, unless the Board is of . opinion that a higher percentage of discount may be allowed in the special circumstances of the case.)

(c) 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 ; and,

(d) the shares to be issued at a discount are issued within two months after the date on which the issue is sanctioned by  the Court or within such extended time as the Court may allow.

Every prospectus, relating to the issue of shares, shall contain particulars of the discount allowed and so much of the discount as has not been written off.

The proviso added in clause (b) was inserted in the Companies (Amendment) Act, 1974.



A company can pay commission to a person subscribing to the shares or (debentures) or procuring subscription for them, provided the following conditions are fulfilled.-Sec. 76.

l. The payment must be authorised by the article.

2. The rate of commission must not exceed in the case of shares : 5% of the issue price or the rate prescribed in the articles, whichever is less ; and in the case of debentures : 2.5% of the issue price or the rate prescribed in the articles, whichever is less.

3. The amount or rate of commission payable, and the number of shares and debentures which have been a0reed to be subscribed at a commission must be disclosed in the prospectus or statement in lieu of prospectus.

4. A copy of the contract for the payment of commission must be delivered to the Registrar at the time of delivery of the prospectus, or statement in lieu of it, for registration.

No commission shall be paid on shares or debentures which air not offered to the public for subscription, except where they weir subscribed or agreed to be subscribed before the issue of the prospectus or the statement in lieu of it and that fact together ' with the amount of commission payable is disclosed in the prospectus or statement.


A broker is one who brings buyers and sellers into contract With one another. The rules stated in. Sec.76 do not apply to brokerage paid for the sale of share or debentures. A company is free to pay such brokerage, "as it has heretofore been lawful to pay".-Sec. 760).


A company limited by shares or by. guarantee cannot purchase its own shares because such a purchase amounts to a reduction of capital.-Sec. 77(1).

No public company and no private company which is a subsidiary of a public company can give by loan or otherwise any financial assistance for the purchase of its own shares or. the shares of its holding company.-Sec. 77(2).

Exceptions : The rule that a company cannot purchase its own shams, is subject to the following exceptions :

1. A company may purchase its own shares if the consequent reduction of capital is effected and sanctioned in accordance with the rules prescribed in the Act for reduction of capital.

2. A company can redeem its redeemable preference shares where it can lawfully do so.

3. This rule does not prevent forfeiture or surrender of shares where lawfully made.

4. The court can direct purchase of shares under section 402; when necessary for protection of the interest of the minority.

The rule that a company cannot finance the purchase of its own shares [Sec. 77(2)) does not imply a prohibition of the following types of transaction

(a) the lending of money by -a banking company in th4 ordinary course of its business ;

(b) the provision of money, in accordance with a scheme for the time being in force, for the purchase of fully paid all shares in the company or its holding company, by trustees of employees or for the benefit of employees (the term employee, includes a director holding a salaried employment under the company) ; and

(c) the-making of loans to employees (not exceeding ~ months' wages) for the purchase of purchasing shares in company or its holding company. (The clause does not apply loans to directors and manager.)

However. Section 77A of the Companies (Amendment Ordinance 1998 permits a company to purchase its own share (buy back) subject to certain conditions. 4n the other hand Sec.

77B prohibits buy back in certain cases. Buy Back Notwithstanding anything certained in the Companies Act, 1956 a company may purchase its own shares or other specified securities. This is subject to provisions of Section 77A (2, and Sec. 77I3). Thus a company may purchase its own shares or other specified securities from­

(1) out of its free reserves

(2) out of the securities premium account : or

(3) out of the proceeds of a6 earlier issue other than fresh issue of shares made specifically for buy back purpose [Sec. 77A( t )].

Conditions for Buy Back

No company shall purchase its own shares or other specified securities as referred to above unless­

(a) the buy back is authorised by its Articles;

(b) a special resolution has been passed in general meeting of the company authorising the buy back ;

(c) the buy back does not exceed 25 per cent of the total paid up capita! and free reserves of the company purchasing its own shares or other specified securities.

(d) the ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy back ;

(e) all the shares or other specified securities are fully paid up.



Every company is bound to keep a Register of Members in which particulars are entered regarding the name, address, and occupation of the members : the number of shares held by each :

the date of commencement and cessation of membership; and similar particulars regarding ownership of stock, where the shares have been converted into stock: –Sec. 150.


Every company having more than SO members, shall keep , an Index of Members, unless the Register of Members is kept ' in the farm of an index.-Sec. 151.

No notice of any trust, express, implied or constructive, shall be entered in the Register of Members.-Sec. 153.

A company may after giving not less than 7 days' notice by advertisement in some local newspaper, close the Register of Members for a period of not more than 45 days in the year and not more than 30 days at a time.-Sec. 154.

Rectification of the Register of Members. (Sec. 155)

In respect of rectification of -register the provisions for private company and public company are entirely different. In case of a private company, if name of a person is entered into register of members or deleted from the register of numbers the person to aggrieved or any other member of the company or company itself can apply to the Company Law Board (CLP) for rectification of the register. As the powers of the CLP (Company Law Board) are wirder it can order to rectifications for any reason.

In case of public company, company must register transfer within two months. Transfer cannot be refused without sufficient cause. But rectification can be applied only when transfer is in violation of any law.

The Foreign Register

A company may, if so authorised by the articles, keep in a country outside India, a branch Register of members resident in that country. Such a register is called the Foreign Register.

A duplicate of the Foreign Register must be kept in India and a copy of all changes made in the entries must be transmitted to the registered office in India.-Sections 157. 158.


Public Trustee

Sections 153A and 1538 provide for the appointment of a Public Trustee to whom all persons holding company shares or debentures in trust are to make a declaration. However, under SEBI guidelines, appointment of trustees is mandatory if debenture maturity is 18 months or more.

Voting rights in the company are exercisable, at his option, ~by the Public Trustee.–Sec. 187B.

Declaration as to shares and debentures held in trust

The holder of a share in, or debenture of,. a company, but who does not hold the beneficial interest in such share or debentures, shall within such time and such form as may be prescribed, make a declaration to the company specifying the name and particulars of the persons who hold the' beneficial interest of such a share or debentures.

The holder shall declare to the company whenever there occurs a change of beneficial interest of the shares or debentures. The company shall make a note of such declaration in its Register of Members and shall file the declaration of the Registrar within 30 days -from the date of receipt.

If any person required to make a declaration under the above rules and fails to do so without any reasonable excuse, he shall be punishable (fine up to Rs. 1000 per day). If a company or its officer fails to comply with the above provision, who is in default, shall be punishable (fine up to Rs. 100 per day).

If any charge, promissory note or any collateral agreement is created, executed or entered into in relation to any share or debentures by the ostensible owner, or any hypothecation by the ostensible owner of the shares or debentures, when there was no declaration required under the rules, it shall not be enforceable by the beneficial owner or any person claiming through hint.

Nothing in this section shall be deemed to prejudice the obligation of a company to pay dividend under sec. 206. The obligation, on such payment stands discharged.-Sec. 187C, Companies (Amendment) Act, 1974.

The Central Government may investigate the beneficial ownership in such cases.-Sec. 187D. Companies (Amendment) Act, 1974.


Definition of "Member"

According to Section 41 of the Act, the term "member" of :r company means­

(I) the subscribers of the memorandum of the company, and

(2) every other person who agrees in writing to become a member of a company and whose name is entered in its register of members.

How is membership created ?

A person can become member of a company in any one of the following ways­

1. Signature : By signing the memorandum of association before it is presented for registration.

2. Allotment :By getting an allotment of shares and having his name included in the register of members.

3. Transfer : By getting a transfer of shares from an existing member and having the transfer recognised by the company. d. 4.Transmission : By obtaining shares by inheritance from a decreased member and getting his name included in the register of members.

5. Acquiescence : By allowing his name to remain in the register of members under such circumstances that he cannot later on plead that he is not a member. A right to disclaim the ownership of shares on legal grounds must be exercised within a reasonable time. If a shareholder makes inordinate delay he will be prevented from doing so on the doctrine of holding out. Lord Cairns in Sewell s case.

Member and Shareholder

In companies having a share capital, a shareholder is also a member of the company. In companies, not having a share capital, there are members but no shareholders. "The terms 'member' and 'shareholder' are synonymous, apart from the now exceptional case of the bearer of a share warrant who is shareholder but is not a member because he is not registered in the register of members." (Palmer's Company Law, 21st ed.. p. 439)

The words, *'member*'. "shareholder", and "holder of a share­ have been used interchangeably in the Companies Act. The expression, "holder of a share" denotes, in so far as the company is concerned. only a person who, as a shareholder, has his name entered in the register of members. Howrah Trading Co. v. l. T. Commissioners.

Transfer and Transmission of Shares

When shares pass from one person to another by a voluntary act sale, gift or otherwise, it is called transfer. When

shares pass by operation of law from one person to another, e.g., by inheritance, it is called transmission.

On the death of a member. his shares vest in his executors or administrators or other legal representatives, and such shares are liable for calls if the shares remain partly paid. baird's Case.

Who can be a member ?

The Companies Act does not prescribe any qualification for membership of a company. But since membership is created by agreement, it may be argued that persons incapable of entering into contracts cannot be members.

Minor: An agreement by a minor is void in India. Therefore :v minor cannot apply for ~ and be a member of a company. If :+ minor has, by mistake, been recorded as a member, the company can rescind the transaction and remove the name from the register. The minor can also repudiate the transaction and get his name removed, from the register. But where a minor was made a member and, after attaining majority, he received and accepted dividends, lie will be estopped from denying that he is a member.

company : A company can be a member of a company. But a subsidiary company cannot be a member of its holding company, except where the subsidiary company comes in as the legal representative of a deceased member. Sec. 42-.

Creditor : A person to whom shares have been transferred by way of security: becomes a member of the company and is liable as such.

Fictitious person : !t is a punishable offence to apply for allotment of shares, or for the registration of transfer of shares, or for the registration of transfer in a fictitious name.-Sec. 68A.

Trustee : A company will not register notice of any trust. A trustee who buys shares will be treated as a member in his individual capacity.-Sec. 153. But see 'Trust of Shares', pp. G34-G35.

how membership ceases

The membership of a person in a company may terminate in arty one of the following ways :

1. By death: When a member dies the ownership of the shares passes to his successors. The successors will, on production of evidence of ownership, be registered as members in place of

the deceased member. But a company may have, under the articles, a right to refuse to recognise the successors as members.

2. By insolvency: Upon insolvency of a member, the shares vest in the Official Assignee or the Official Receiver.

3. By rescission : The contract to purchase shares may be rescinded. A person who has purchased shares may under certain circumstances have the contract rescinded, e.g., when there are untrue statements in the prospectus. Upon rescission, he ceases to be a member.

4. by forfeiture : Shares may be forfeited according to the provisions of the articles.

5. by a surrender: Shares may be surrendered where surrender is permitted.

6. by transfer: Shares may be transferred.

7. By sale : Shares may be sold in execution of a decree of the court.

8. by power of lien : Shares may be sold by the company in exercise of u power of lien over~ it for the dues of the company: 9.

9.By a mortgage: Where shares are mortgaged and according to the terms of the mortgage, the shares have been transferred to the mortgagee, the latter can have his name registered as a member. It he does so the original member loses his membership.

10. By redemption: Preference shares may be redeemed.

11. By winding up: When the company is wound up according to the provisions of the Act, membership ceases to exist.


Shares may be transferred in the manner provided for the purpose in the articles of the company and subject to the restrictions contained in the articles. The Companies Act contains the following provisions regarding transfer of shares.

1. Documents

[Section 103 (1)] A company shall not register a transfer unless the following documents are produced before it :

(a) a proper instrument of transfer duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee and specifying the name, address and occupation,. if any, of the transferee, and

(b) the certificate relating to the share, or if no certificate is in existence, the letter of allotm