This article is written by Monesh Mehndiratta, of Graphic Era Hill University, Dehradun. This article gives an overview of Section 62 of the Companies Act, 2013, which gives provisions for the further issue of share capital in a company. In this article, the author has discussed the meaning, nature and kinds of shares. Further, it outlines the procedure for increasing the subscribed share capital of a company and discusses recent case laws. 

It has been published by Rachit Garg.

Introduction 

Have you ever invested in a company or bought its shares?

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If the answer to the above question is yes, then you might be aware of the meaning of “shares” and their importance in a company. You must also be aware of the fact that shares and debentures play a significant role in a company, as people holding shares in a company are its members and are known as the shareholders. But if you do not know, you need not worry because this article will help you understand the meaning of shares and how these are issued in a company. 

There are two kinds of companies: private and public. Private companies invest their own money in the venture or business. On the other hand, public companies raise funds or capital by way of shares and debentures. They ask the public to invest their money and with the help of that investment, they carry on their business. You might have come across news like ‘X’ company has opened up 100 shares of, say, Rs. 1000 each for the public. In this way, they raise capital for their company. The Companies Act, 2013 (“the Act”) deals with the functioning of companies and their administration. It also deals with the issuance of shares, debentures, and other provisions related to any kind of investment in a company. In the present article, we will learn about the meaning and nature of shares and the procedure for further issuing share capital. The article will specifically explain provisions related to the further issue of share capital. 

Meaning and nature of shares

The company’s capital is divided into a number of indivisible units. These units are of a fixed amount and termed as shares. Section 2(84) of the Act gives the definition of the term “shares.” According to the Section, a share is a share in the share capital of the company. The Supreme Court, in the case of CIT v. Standard Vacuum Oil Co. (1966), held that shares in a company mean that interest is measured by a sum of money and is made up of diverse rights that are conferred on the shareholders by the articles of the company, resulting in a contract between them and the company. 

In another case, i.e., Bucha F. Guzdar v. Commissioner of Income Tax, Bombay (1954), the Supreme Court defined the term ‘shares’ as a right to participate in the profits made by a company. It can be said that shares represent a bundle of rights and obligations in a company. In India, shares are considered as goods. According to Section 2(7) of the Sale of Goods Act, 1930, goods mean any movable property, which includes stock and shares except actionable claims and money. However, Section 44 of the Act provides that, though shares are considered  movable property, they can only be transferred in the manner outlined under the articles of association of the company. 

Kinds of shares

The Act under Section 43 specifically provides that there are two kinds of shares in a company. These are:

  • Equity share capital 
    • With voting rights or
    • With differential rights with respect to dividend or voting in accordance with the prescribed rules. 
  • Preference share capital or preference shares which are further divided into:
    • Participating and non-participating shares
    • Cumulative and non-cumulative shares
    • Redeemable and irredeemable preference shares. 

Overview of Section 62 of Companies Act, 2013

Section 62 of the Act deals with the further issue of share capital in the company. A company that is limited by shares can increase its capital by issuing new shares according to the Articles of Association of the company. The companies usually do not issue all of their shares at once. They do so whenever there is a need for additional funds for the expansion, diversification, or modernization of the company. However, the directors of the company cannot issue shares at their discretion. If this power is given to them, they may misuse it by issuing and allotting the shares to their family members and relatives. In order to curtail this misuse, the Act under Section 62 provides certain conditions for the issuance of shares. 

This Section provides for the further issue of shares that are to be first offered to the existing members of the company. These are known as right shares, and this right of the members is known as the right of preemption. It also provides the procedure for the issuance of these shares, which is discussed in detail below. 

Increase in subscribed capital

According to Section 62(1), when a company having a share capital wants to increase its subscribed capital by issuing further shares, it can be done so following the procedure given therein. It provides a procedure for the issuance of rights shares, shares under the ESOP Scheme and shares that are given on the basis of preference. 

Provisions related to right issue or rights shares

Whenever a company wishes to increase its subscribed capital, it can do so by offering the shares first to the existing members of the company or to its members holding equity shares in proportion to the paid-up shares. These are known as “rights shares” and are given under Section 62(1)(a). In order to do so, the following conditions must be satisfied:

  • The offer must be made by issuing a notice which specifies the number of shares offered. 
  • It must contain a limiting time period which must not be less than 15 days and not exceed 30 days from the date of the offer. If the offer is not accepted within this time period, it will be deemed to have been declined. 
  • The existing shareholder has the right to renounce the shares that are offered to him in favour of any other person unless the articles otherwise provide and so the notice will also contain a statement regarding this right as mentioned under Section 62(1)(a)(ii) of the Act. 
  • After the expiry of the above-mentioned time period or if the shareholder declines to accept the shares offered to him, the board of directors will dispose of them in a manner which is not harmful or disadvantageous to the shareholder and the company. This is provided under Section 62(1)(a)(iii). 

Exception 

When 90% of the members of the private companies have given their consent either in writing or in electronic mode then the lesser periods shall be applicable than those which are mentioned under these provisions.

In the case of R. Khemka v. Deccan Enterprises (P) Ltd. (1998), it was held by the Andhra High Court that if a member or shareholder does not respond to the offers made by the company, it means that he is not inclined to subscribe to additional shares offered to him and thereby gives implied consent for the allotment of shares to others. Further, in the case of M.S. Madhusoodanan v. Kerala Kaumudi (P.) Ltd. (2003), the Supre Court held that if shareholders are not given the notice to apply for allotment of shares, then subsequent allotment of shares to others is invalid. 

Issue of shares under ESOP Scheme

Section 62(1)(b) provides for the issuance of shares under the ESOP Scheme i.e., to employees under a scheme of employees’ stock option. This can be done by passing a special resolution in this regard or by fulfilling the prescribed conditions. 

Issue of shares on preferential basis

Section 62(1)(c) provides for the issuance of shares to any persons authorised by a special resolution whether or not it includes those referred to in the above clauses. This is done either for cash or consideration other than cash. The price of such shares is determined with the help of a valuation report prepared by a registered valuer. This report is further subject to prescribed conditions under the Act. This is also provided under Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014. 

Modes of dispatching notice issued

Section 62(2) of the Act provides that the notice issued in Section 62(1) must be delivered at least 3 days before the opening of the issue and can be dispatched through the following modes:

  • Registered post; or
  • Speed post; or
  • Electronic mode; or
  • Courier
  • Any other mode which can have proof of delivery to the existing shareholders. 

Conversion of debentures into shares

The company has the option to issue shares to its lenders and debenture holders as well, who can convert their loans or debentures into shares. According to Section 62(3), the provisions will not apply to the increased subscribed capital that is caused by exercising the option to convert the loans or debentures into shares that are attached to these debentures or loans raised by the company. However, it can be done only if such conversion has been approved before the issuance of debentures or loans by passing a special resolution in the general meeting. 

Appeal to tribunal 

Section 62(4) further provides that where a company has taken loans from the Central Government by issuing debentures or in any other way, the Government may convert such debentures or loans into shares of the company if it is in the public interest. This conversion will be done on terms and conditions that are reasonable depending upon the circumstances. 

It also provides that if the company is not satisfied with the terms and conditions, it may appeal to the tribunal within 60 days from the date of communication of this order. The tribunal then, after hearing the application and the parties, passed the necessary order. Section 62(5) provides that while determining the terms and conditions of conversion, the government must consider the following:

  • The financial condition of the company.
  • Terms of issue of such debentures.
  • Payable rate of interest.
  • Any other necessary matter. 

Share capital to stand increased

Section 62(6) of the Act provides that where the Government has directed to convert the debentures or loans into shares of the company and no appeal has been filed to the tribunal in this regard or it has been dismissed, the memorandum of the company must be changed or altered. It must include the authorised share capital of the company, which is now increased by an amount equal to the amount of value of the share which such debentures or loans converted into shares in the company. 

Procedure for issuance of rights shares: a summary 

In order to issue rights shares, the companies are bound to follow the procedure given under Section 62 of the Act along with the regulations issued by the Securities and Exchange Board of India (SEBI) in this context. The procedure can be summarised as follows:

  • The first step is to observe whether the rights issue is within the authorised share capital of the company. If not, then it must be increased to that share capital. 
  • If these are to be issued from unclassified shares, steps must be taken to amend the capital clause in order to classify them as equity or preference shares. 
  • The stock exchange must be notified of the date of the board meeting where rights issues will be proposed and taken into consideration. 
  • If the issue is proposed to be made at a premium, it must be fixed after consulting the lead manager. However, they can charge a differential premium. For example, a higher premium can be charged from a foreign investor in comparison to other shareholders. 
  • The next step is the appointment of a registrar and underwriters. However, the appointment of underwriting according to SEBI regulations is optional. 
  • It must be noted that there can be no preferential allotment with respect to rights issue except in favour of employees but for this, the value of allotment must not exceed two lakh rupees. 
  • Record the date of the proposed issue must be fixed after consulting the stock exchange. If it is proposed that the shares must be offered to persons other than the existing shareholders then a general meeting must be convened and a special resolution be passed in this regard according to Section 62(1)(c). 
  • If the rights shares or issue is withdrawn after the announcement of the record date, no permission will be given by the regional stock exchange for making an application for a minimum period of 12 months from the said date. 
  • Arrangements must be made with the bankers for acceptance of share application forms. 
  • Letters of offers must be dispatched to the shareholder and must comply with the requirements mentioned in the section. It is not required to file a letter of offer with SEBI for review for an amount less than rupees fifty crores. It is only submitted for the purpose of maintaining records. 
  • The company must ensure that the issue is kept open for a minimum period of 15 days to maximum 30 days. 
  • A specific bank account must be opened to keep the subscription received against rights issues. This money cannot be utilised until the company receives approval from the regional stock exchange. Earlier, if the company fails to receive 90% of the issue amount within 60 days from the date of closure, all the received subscription amount must be refunded but the recent amendment has waived this minimum subscription. 
  • A scheme of allotment must be prepared after consulting the stock exchange and a board meeting must be convened to make the allotments. 
  • Return of allotment must be filed with the registrar of the company within 30 days of allotment in the prescribed form. Other formalities like refund of excess application money, issue of allotment letters, etc must be completed. 
  • A report must be given to SEBI within 15 days from the date of finalising the allotment or within 15 days of refund in case the company fails to receive the required amount. 

Difference between right issue of shares and preferential allotment of shares 

S.no. Right issue Preferential allotment 
It is given under Section 62(1)(a) of the Act. It is given under Section 62(1)(c) of the Act. 
Shares are first offered to the existing members or the shareholders in the company according to their proportional interest in the company. Shares are offered to both shareholders and people who are authorised by special resolution. 
Approval from the board is necessary. A special resolution must be passed in this regard, and the approval of the board must be taken. 
The offer is given for a limited time period, which is minimum 15 days and maximum 30 days. No such time period is specified. 
It is necessary to fill form PAS-3 with the registrar of the company. Forms like PAS-3, MGT-14, GNL-2 are filled out and submitted to the registrar of the company. 
Shareholders can exercise their right to renounce or reject the shares offered to them. No such right is available to them. 
There is no need to prepare a valuation report. It is mandatory for companies to prepare a valuation report. 

Recent case laws

The Canning Industries Cochin v. SEBI (2020)

Facts of the case

The appellant in this case was an unlisted company known as Canning Industries Cochin. When the company suffered losses, it proposed to issue 1,92,900 unsecured fully convertible debentures to 1929 shareholders in its 68th Annual General Meeting by passing a special resolution under Section 62(3) and Section 71 of the Act. However, the shareholders were not given the right to renounce the offer to any other person. One of the shareholders raised objections to this proposal and filed an application before the Company Law Board, but no action was taken, and as a result, complaints were filed in SEBI and with the registrar of the company. SEBI issued directions against the directors and the company, which were discharged by another order that stated that the company had not violated any provisions of the Companies Act, 2013. This was, however, appealed by the shareholder. 

Issues involved in the case

Whether the company in this case has complied with the provisions of Section 62 of the Act?

Judgement of the case

The appellate tribunal observed in this case that Section 62(1)(c) is applicable in the present case as the case is not related to the issuance of preference shares but deals with an increase in the subscribed capital of the company. The shareholders in the present case passed a special resolution that contained a condition that this right cannot be renounced. This shows that the increase in subscribed capital was caused by exercising an option by way of condition that the debentures issued cannot be renounced in favour of any third person. Thus, the company has complied with the provisions of Section 62(3) of the Act. Moreover, the prospectus clearly states that the said offer was made to the existing members or shareholders of the company. As a result of this, the impugned order passed by the Whole-time member cannot be sustained and so the order and directions issues against the company are quashed. 

Proddaturi Malathi v. SRP Logistics Pvt. Ltd. (2018)

Facts of the case

The company or the respondent, in this case, is an incorporated private company having an authorised share capital of five lakh rupees. The appellant was inducted as assistant director in the company. In 2015, a notice was issued to convene a board meeting to further increase the share capital to forty lakh rupees. Further, in 2016 a general and board meeting was conducted to allot the shares. In 2017, a notice was served to conduct an extraordinary general meeting with an agenda to remove the appellant from the post of director in the company. As a result, she moved to a tribunal which passed an interim order against the appellant. Aggrieved by the order, the appellant challenged the allotment of shares on the grounds that Section 62 of the Act has been violated by the company. 

Issues involved in the case

Whether there has been a violation of Section 62 of the Act and whether the order passed by the tribunal is correct?

Judgement of the court

While discussing the validity of the order passed by the tribunal, it was observed that earlier Section 62 was not applicable to private companies. But now it is applicable and requires that the offer of shares must be first made to the existing members or shareholders of the company holding equity shares in the company. They must be given time to either accept or reject the offer along with a right to renounce the offer in favour of another person as given under the section. The issuance of shares to any other person will be done at a fair value which is determined by the valuation report of the registered valuers. 

In the present case, it was observed that the company was running into profits and increased its authorised share capital twice and paid capital thrice since the time it was incorporated. It was argued by the appellant that the funds were raised again to suppress her by reducing her shareholding to a minority in the company as there was no need to increase the share capital. The appellant has also objected that the order of the tribunal has not dealt with certain acts of the company. The meetings of the company have been challenged and the tribunal failed to deal with it. Further, it has only dealt with the removal of the appellant from the position of director and not any other contentions made by the appellant. The National Company Law Appellate Tribunal (NCLAT) observed that according to Section 62, shares must be first offered to the existing members and when they reject it or the offer declines then only they can be distributed among others. The appellate tribunal thus, ordered to remand back the matter to the tribunal to deal with the case on merits and also hear the other pending issues which have not been dealt with so far. 

Conclusion

In order to expand its business, the company has to invest a lot of capital. The private companies do not demand or ask for capital from the public, but the public companies, on the other hand, issue shares to the public and use their money for expansion and modernization in the business. This is because public companies work largely for the benefit and welfare of the public. The funds, or capital, can be raised by issuing rights shares to the existing shareholders according to provisions given under Section 62 of the Act. This Section was available in the Companies Act, 1956, under Section 81 which was earlier not applicable to private companies but now, after the 2013 amendment, the provisions under Section 62 are also applicable to private companies. The Act further provides another option to increase the share capital of a company by issuing bonus shares according to Section 63 of the Act. 

Under Section 62, the shares are first offered to the existing shareholders of the company because they are already its members and hold equity shares in the company and thus, must be preferred. These shareholders also have the right to renounce the shares offered to them in favour of any other person. On the other hand, preferential allotment includes the allotment of shares to outsiders or people for whom a special resolution is passed in the company by issuing fresh shares to them. This is done to get experts on the board of directors so that better strategies could be planned for the company.  

Frequently Asked Questions (FAQs)

What do you mean by a stock? How is it different from a share in a company?

A stock is a set of shares issued together in a company. It is the aggregate of fully paid-up shares combined and merged into one fund. On the other hand, a company’s capital is divided into small units known as shares. For example, if the share capital of a company is one lakh rupees, which is divided into 100 units of thousand rupees each, then Rs. 1000 is a share of the company and 100 units of thousand rupees each are together known as a stock of the company. 

Is there any exemption to private companies under Section 62 of the Act?

Private companies can issue shares to their employees under the Employees stock option scheme by passing an ordinary resolution while public companies have to pass a special resolution in this regard. 

What is a share certificate?

It is a document given to the allottee of shares by the company that certifies he is the holder of a specific number of shares of the company. It acts as evidence that the allottee is a member of the company. 

References

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