Understanding Share and Share Capital – Definitions | Types | Legal Framework

Table of Contents

1. Meaning and nature of a share
2. Share v. Share certificate
3. Share v. Stock
4. Kinds of shares
5. Raising of capital/Issue of shares
6. Public issue of shares

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1. Meaning and nature of a share

1.1 Meaning

The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as ‘shares’. According to section 2(84) of the Companies Act, 2013, a share is a share in the share capital of a company, and includes stock. The Supreme Court of India in CIT v. Standard Vacuum Oil Co. [1966] Comp. LJ 187 observed

“By a share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holders by the articles of the Company which constitute a contract between him and the Company”.

In another case Supreme Court defined a share as “a right to participate in the profits made by a company, while it is a going concern and declares a dividend, and in the assets of the company when it is wound up [Bucha F. Guzdar v. Commissioner of Income-tax, Bombay LR 617 (SC)].

In short, a ‘share’ does not merely represent an interest of a shareholder in a company, it carries with it certain rights and liabilities while the company is a going concern or while the company is being wound up. It thus represents a ‘bundle of rights and obligations’.

¹1.2 Nature of a share

A ‘share’ is not a sum of money but is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual ‘covenants’ entered by all the shareholders inter se [Borland’s Trustees v. Steel Bros. & Co. Ltd. [1901] 1 Ch. 279 (Ch.D.)]

A share is a chose-in-action. A chose-in-action implies the existence of some person entitled to the rights, which are rights in action as distinct from rights in possession, and until the share is issued no such person exists.²

In India, a share is regarded as ‘goods’. Section 2(7) of the Sale of Goods Act, 1930 defines ‘goods’ to mean any kind of movable property other than actionable claims and money and includes stock and shares. However, section 44 of the Companies Act, while recognising shares as movable property, suggests that they shall be transferable only in the manner provided by the articles of the company.

In Vishwanathan v. East India Distilleries [1957] 27 Comp. Cas. 175, it was observed:

“A share is undoubtedly movable property but it is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to a totally different category or property. It is incorporeal in nature, and it consists merely of a bundle of rights and obligations.”

A share is not a negotiable instrument

A share is an expression of proprietary relationship between a shareholder and the company [CIT v. Associated Industrial Development Co. [1969] 2 Comp. LJ 19].

Certain interesting and comprehensive observations were made regarding nature of a share in Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.). The learned Judge observed :

The statutory meaning of share covers the three phases of the share, share when it is a part of the share capital still remaining unexploited by the company; share when it is exploited by the company finding a shareholder and lastly, when the share is converted into stock. The first phase arises because under the company law every company limited by shares has nominal or authorised or registered share capital. This capital is one of the essential features in the company’s constitution. It is to be mentioned in the memorandum of association and the capital so mentioned is to be divided into shares of a fixed amount. The capital is usually fixed at some round figures according to the requirements of the company assessed by the promoters of the company. Therefore, it seems that the first part of the definition of the word ‘share’ refers to the share in this limited sense when the share is still in the womb of the company or in the shell of the company and has no shareholder. The second phase arises when it attracts section 44. Therefore, the share when it becomes associated with a member becomes a movable property. It is, however, not a movable property whose transfer is solely regulated by the Sale of Goods Act. Its transfer is also governed by the Companies Act and/or Articles of the Company. Each share again bears a distinguishing number. It may be noticed that certificate of shares is not the shares or a share. Under section 46 a certificate, under the common seal of the company, specifying any share or stock held by any member, shall be a prima facie evidence of the title of the member to the shares or stock therein specified. Hence, a share certificate is not the share; it is only a prima facie evidence of the title to the share. Therefore, it is necessary to consider what the character of a share is? Section 44 says it is a movable property. It is, however, not a tangible property for it is not the share certificate; it only consists of a bundle of rights and obligations. A share can be either in the first phase or stage or in the second phase or stage. It remains either in its shell as a part of the capital or resides in a shareholder. It cannot be suspended in any intermediate phase or stage.

2. Share v. Share certificate³

A common man uses ‘share’ and ‘share certificate’ to mean one and the same thing. It is, therefore, important to note the exact difference between the two. Section 44 of the Companies Act, 2013 in this regard describes a share as a movable property transferable in the manner provided by the articles of the company. Section 46, on the other hand, describes a ‘certificate of shares’, to mean a certificate, under the common seal⁴ of the company, specifying any shares held by any member. Section 46 further suggests that a share certificate shall be prima facie evidence of title of the member to such shares. Thus, whereas ‘share’ represents property (movable), ‘share certificate’ is an evidence (prima facie) of the title of the member to such property.

Thus, the share certificate being prima facie evidence of title, it gives the share-holder the facility of dealing more easily with his shares in the market. It enables him to sell his shares by showing at once marketable title⁵.

Also, a share certificate serves as an estoppel as to payment against a bona fide purchaser of the shares from alleging that the amount stated as being paid on the shares has not been paid. However, a person who knows that the statements in a certificate are not true cannot claim an estoppel against the company [Crickmer’s case [1875] 46 L.J. Ch. 870].

An elaborate distinction between ‘share’ and ‘certificate of shares’ was made out in the case of Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.). The learned Judge observed:

“It may be noticed that ‘Certificate of shares’ is not the shares or a share. Under section 46 a certificate, under the common seal of the Company, specifying any share or stock held by any member shall be prima facie evidence of the title of the member to the shares or stock therein specified. Hence, a share certificate is not the share; it is only a prima facie evidence of the title to the share. Therefore, it is necessary to consider what the character of a share is? Section 44 says it is a movable property. It is, however, not a tangible property for it is not the share certificate; it only consists of a bundle of rights and obligations.

Each share bears a distinctive number and it is not the same as share certificate number; the two are different. In fact, a single certificate may be an evidence of many shares, say 50, 100 or even 1 lakh. Thus, whereas there will be only one number as the share certificate number for one certificate, there will be as many distinctive numbers in respect of shares as are evidenced by the share certificate.”

3. Share v. Stock

Once again, these two expressions need to be distinguished for clarity. As already noted, a share represents a unit into which the capital of a company is divided. Thus, if the share capital of the company is Rs. 5 lakhs divided into 50,000 units of Rs. 10, each unit of Rs. 10 shall be called a share of the company.

The term ‘stock’ on the other hand may be defined as the aggregate of fully paid-up shares of a member merged into one fund of equal value. It is a set of shares put together in a bundle. The ‘stock’ is expressed in terms of money and not as so many shares. Stock can be divided into fractions of any amount and such fractions may be transferred like shares.

A company cannot make an original issue of the stock. A company limited by shares may, if authorised by its Articles, by a resolution passed in the general meeting, convert all or any of its fully paid-up shares into stock [Section 61]. On conversion into stock, the register of members must show the amount of stock held by each member instead of the number of shares. The conversion does not affect the rights of the members in any way.

Following are the main points of difference:

4. Kinds of shares

As per the Companies Act, 2013, only two kinds of shares can be issued by a company. Section 43 of the Act provides that the share capital of a company limited by shares shall be of two kinds only*, namely :

• equity share capital—
  1. with voting rights, or
  2. with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed⁶;

• preference share

Besides, a company may also issue Global Depository Receipts (GDRs) under section 41.

4.1 Preference Shares or Preference Share Capital

Preference share capital means that part of the share capital of the company which fulfils both the following requirements:

• During the life of the company it must be assured of a preferential  The preferential dividend may consist of a fixed amount (say, one lakh rupees) payable to preference shareholders before anything else is paid to the equity shareholders. Alternatively, the amount payable as preferential dividend may be calculated at a fixed rate, e.g., 10% of the nominal value of each share.
• On the winding-up of the company it must carry a preferential right to be paid, e., amount paid up on preference shares must be paid back before anything is paid to the equity shareholders.

4.2 Types of Preference shares

• Participating or non-participating – Participating preference shares are those shares which are entitled to a fixed preferential dividend and, in addition, carry a right to participate in the surplus profits along with equity shareholders after dividend at a certain rate has been paid to equity  For example, after 20% dividend has been paid to equity shareholders, the preference shareholders may share the surplus profits equally with equity shareholders. Again, in the event of winding-up, if after paying back both the preference and equity shareholders, there is still some surplus left, then the participating preference shareholders get additional share in the surplus assets of the company. Unless expressly provided, preference shareholders get only the fixed preferential dividend and return of capital in the event of winding-up out of realised values of assets after meeting all external liabilities and nothing more. The right to participate may be given either in the memorandum or articles or by virtue of their terms of issue.
• Cumulative and non-cumulative shares – With regard to the payment of dividends, preference shares may be cumulative or non-cumulative. A cumulative preference share confers a right on its holder to claim dividend fixed at a sum or a percentage for the past and the current years out of future profits. The fixed dividend keeps on accumulating until it is fully paid. The non-cumulative preference share gives right to its holder to a fixed amount or a fixed percentage of dividend out of the profits of each  If no profits are available in any year or no dividend is declared, the preference shareholders get nothing, nor can they claim unpaid dividend in any subsequent year. Preference shares are cumulative unless expressly stated to be non-cumulative.⁷ Dividends on preference shares, like equity shares, can be paid only out of profits and on declaration of dividend for preference shares.
• Redeemable and Irredeemable Preference shares – As per Section 55 of the Companies Act, 2013:
  1. No company limited by shares can issue any preference shares which are irredeemable.
  2. A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue.

However, a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders. Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014, in this regard, provides that a company engaged in the setting up of infrastructure projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum 10% of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.

Conditions for issue of Redeemable Preference Shares

• No such shares shall be redeemed except out of the 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 purposes of such redemption;
• no such shares shall be redeemed unless they are fully paid;
• where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account;
• the capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
• The premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed.
• the issue of further redeemable preference shares or the redemption of preference shares shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company.

Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014, inter alia, provide:

• A company having a share capital may issue preference shares only if so authorized by its articles.
• A special resolution in the general meeting of the company must have been passed authorizing the issue.
• The company, at the time of such issue of preference shares, must not have any subsisting default in the redemption of preference shares issued earlier or in payment of dividend due on any preference shares.
• The Register of Members maintained under section 88 must contain the particulars in respect of such preference shareholder(s).
• A company intending to list its preference shares on a recognized stock exchange shall issue such shares in accordance with the Securities and Exchange Board of India (Issue and Listing of Non-convertible Redeemable Preference Shares) Regulations, 2013.
• A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act. The preference shares may be redeemed:
  1. at a fixed time or on the happening of a particular event;
  2. anytime at the company’s option; or
  3. anytime at the shareholder’s

Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths in value of such preference shares and with the approval of the Tribunal, on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares. On the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

However, the Tribunal shall, while giving the approval, order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

It may be further noted that notice of redemption of preference shares must be sent to the Registrar under Section 64 of the Act.

4.3 Equity shares [Sec. 43]

The equity shares are those shares which are not preference shares. In other words, shares which do not enjoy any preferential right in the matter of payment of dividend or repayment of capital, are known as equity shares. After satisfying the rights of preference shares, the equity shares shall be entitled to share in the remaining amount of distributable profits of the company. The dividend on equity shares is not fixed and may vary from year to year depending upon the amount of profits available. The rate of dividend is recommended by the Board of directors of the company and declared by shareholders in the annual general meeting.

Every member of a company limited by shares and holding equity share capital therein, shall have:

• a right to vote on every resolution placed before the company; and
• his voting rights, on a poll, shall be in proportion to his share in the paid-up equity share capital of the company.

As compared to this, the holders of preference shares can vote only on such resolutions which directly affect the rights attached to the preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital. However, if the preference dividend is not paid for two years or more, the preference shareholders shall also get voting right on every resolution placed before the company (Section 47).

Voting rights of a preference shareholder, on a poll, shall be in proportion to his share in the paid-up preference share capital of the company.

Where members of unincorporated association become members of company – Where company was incorporated to take over as going concern unincorporated association and enroll its members of all categories as members of company, as long as names of members of the unincorporated association were entered in register of members of company, they would have right to vote under section 87 [Now section 47] and restrictions, if any, on their rights as members of the unincorporated association would not haunt their rights as members of company – C.P. Singhania v. Garware Club House [2003] 46 SCL 659 (Bom.).

4.4 Preference shares compared with equity shares

1. Preference shares are entitled to a fixed rate/amount of dividend. The rate of dividend on equity shares depends upon the amount of net profit available after payment of dividend to preference shareholders and the fund requirements of the company for future expansion etc.
2. Dividend on the preference shares is paid in preference to the equity  In other words, the dividend on equity shares is paid only after the preference dividend has been paid.
3. The preference shares have preference in relation to equity shares with regard to the repayment of capital on winding-up.
4. If the preference shares are cumulative, the dividend not paid in any year is accumulated and until such arrears of dividend are paid, equity shareholders are not paid any dividend.
5. Redeemable preference shares are redeemed by the company on expiry of the stipulated period, but equity shares cannot be redeemed.
6. The voting rights of preference shareholders are restricted. An equity shareholder can vote on all matters affecting the company but a preference shareholder can vote only when his special rights as a preference shareholder are being varied or their dividend is in arrears for at least two
7. A company may issue rights shares or bonus shares to the company’s existing equity shareholders whereas it is not so allowed in case of preference shares (Section 62).

4.5 Non-voting shares

‘Non-voting shares’ as the term suggests are shares which carry no voting rights. These are contemplated as shares which may carry additional dividends in lieu of the voting rights. Section 43 allows issue of equity shares without voting rights [See Para 9.4].

4.6 Par Value of Shares

SEBI Regulations permit the companies to issue shares of any par value subject only to the value being not less than Re. 1 or being other than multiple of Re. 1. Thus, different companies may now issue shares of different par value. For instance, XYZ Ltd. can issue shares to the public at say, Rs. 3, while ABC Ltd. can issue at Rs. 5.

Further, companies whose shares are dematerialised or who have applied for it would be eligible to alter the par value of shares indicated in the Memorandum and Articles of Association.

However, at any given time there shall be only one denomination for the shares of a company.

4.7 Global Depository Receipts [Section 41]

Meaning of Global Depository Receipt

A depository receipt is a foreign currency denominated instrument, listed on an international exchange, issued by a foreign depository to a domestic custodian and includes Global Depository Receipts (GDRs)

According to Section 2(44) of the Companies Act, 2013, Global Depository Receipt” means any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorised by a company making an issue of such depository receipts.

Section 41 read along with Companies (Issue of Global Depository Receipts) Rules, 2014 allows a company which is eligible to do so in terms of the Scheme and relevant provisions of the Foreign Exchange Management Rules and Regulations to issue depository receipts in any foreign country. The depository receipts can be issued by way of public offering or private placement or in any other manner prevalent abroad and may be listed or traded in an overseas listing or trading platform.

Conditions for issue of GDRs, inter alia, include passing of a resolution by the Board as well as special resolution at a general meeting; the GDRs shall be issued by an overseas bank appointed by the company and the underlying shares shall be kept in the custody of a domestic custodian bank; the company shall appoint a merchant banker or a practising chartered accountant/practising cost accountant/practising company secretary to oversee all the compliances relating to issue of depository receipts and take the compliance report from them.

The provisions of the Act and any rules issued thereunder insofar as they relate to public issue of shares or debentures shall not apply to issue of depository receipts abroad.

Depository Receipts Scheme 2014

The Securities and Exchange Board of India (SEBI) has introduced a framework for issuance of Depository Receipts (DRs) by companies listed or to be listed in India (DR Framework), by its circular dated October 10, 2019. Highlights of the Scheme include:

• Only listed companies are permitted to issue DRs on the back of equity shares or debt securities listed in India. SEBI said that listed firms are allowed to issue such securities provided their promoters, directors and selling shareholders are not barred from the capital markets. Besides, they should not be wilful defaulters or economic offenders.
• Companies undertaking a domestic Initial Public Offering (IPO) are also permitted to simultaneously set up a DR programme (subject to successful completion of the IPO).
• The DR Framework also permits existing shareholders to exit by way of a DR
• Where the initial listing of DRs includes such secondary sales, the issuer is required to provide an opportunity to all its shareholders to tender their shares to participate in such DR issuance.
• Listed firms will be allowed to issue permissible securities for the purpose of issue of DRs only in permissible jurisdictions and such DRs will be listed on specified international bourses, including Nasdaq, NYSE, Hong Kong Stock Exchange and London Stock Exchange.
• The DR offer document must now be filed by an intermediary with the SEBI and the stock exchanges for their review at the time of initial listing of
• Whilst SEBI and the stock exchanges are to provide comments within prescribed Issuers may need to factor in the time for such review into their issue timelines.
• Further, Indian residents and Non-Resident Indians (NRIs), are not permitted to be permissible holders or their beneficial owners.
• Listed company shall ensure that the aggregate of permissible securities which may be issued or transferred for the purpose of issue of DRs, along with permissible securities already held by persons resident outside India, shall not exceed the limit on foreign holding of such permissible securities under the applicable regulations of FEMA.
• In case of a simultaneous listing of such securities on Indian stock exchange pursuant to a public offer and DRs on the overseas bourse, SEBI said the price of issue of DRs by foreign depository should not be less than the price for the public offer to domestic investors.

5. Raising of capital/Issue of shares

According to section 23-

(1) A public company may issue securities—

• to public through prospectus (herein referred to as “public offer”); or
• through private placement; or
• through a rights issue or a bonus issue in accordance with the provisions of this Act and the provisions of the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder.

(2) A private company may issue securities—

• by way of rights issue or bonus issue in accordance with the provisions of this Act; or
• through private placement

Further, as per the Companies (Amendment) Act, 2020, the Central Government may allow certain class of public companies to issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign or other prescribed jurisdictions.

5.1 Private placement of shares [Section 42 read along with the Companies (Prospectus and Allotment of Securities) Rules, 2014 as amended vide Second (Amendment) Rules, 2020 and vide Amendment Rules dated 5 May 2022]

Explanation I to section 42 defines “private placement” to mean any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum- application.

If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall be governed accordingly.

A private placement may be made subject only the following conditions:

• A company may, subject to the provisions contained in section 42, make a private placement of securities.

(1A) A company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations.⁸ However, in case of offer or invitation of any securities to qualified institutional buyers, it shall be sufficient if the company passes a previous special resolution only once in a year for all the allotments to such buyers during the year.*

• A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed, 200, as per the Rules, [excluding the qualified institutional buyers⁹ and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed:

Provided that no offer or invitation of any securities shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.

Where offer of unsecured Fully Convertible Debentures (FCDs) was made only to shareholders of company and none else, it was not a private placement.

In Canning Industries Cochin Ltd. v. Securities and Exchange Board of India, Mumbai [2020] 115 taxmann.com 379 (SAT – Mumbai) an unlisted company sought to raise Rs. 4.82 crores. Company had passed a special resolution under section 62(3) read with section 71 in respect of issuance of Fully Convertible Debentures(FCDs). Prospectus and explanatory statement clearly stated that only members holding equity shares of company were eligible for allotment. It was clear that offer of FCDs was made to existing shareholders of company. Held company was required to ensure compliance with respect to limit of allottees, i.e., 200 persons, as applicable in case of private placement of securities.

• A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed:

However, the private placement offer and application shall not carry any right of renunciation.

In Mrs. Proddaturi Malathi v. SRP Logistics (P.) Ltd. [2018] 96 taxmann.com 565 (NCL-AT), respondent directors increased share capital of company and further allotted shares of company to R2-director and to outsider at par by preferential allotment/private placement without following necessary procedure, said increase in share capital and subsequent allotment of shares was held to be invalid and thus same was to be set aside.

• Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash:

Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).

• No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company:

Provided that, subject to the maximum number of identified persons under sub-section (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

• A company making an offer or invitation under this section shall allot its securities within sixty days from the date of receipt of the application money for such securities and if the company is not able to allot the securities within that period, it shall repay the application money to the subscribers within fifteen days from the expiry of sixty days and if the company fails to repay the application money within the aforesaid period, it shall be liable to repay that money with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day:

Provided that monies received on application under this section shall be kept in a separate bank account in a scheduled bank and shall not be utilised for any purpose other than—

• • for adjustment against allotment of securities; or
  • for the repayment of monies where the company is unable to allot
• No company issuing securities under this section shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public at large about such an issue.
• A company making any allotment of securities under this section, shall file with the Registrar a return of allotment within fifteen days from the date of the allotment in such manner as may be prescribed, including a complete list of all allottees, with their full names, addresses, number of securities allotted and such other relevant information as may be prescribed.
• If a company defaults in filing the return of allotment within the period prescribed under sub-section (8), the company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh
• Subject to sub-section (11), if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest as specified in sub-section(6) to subscribers within a period of thirty days of the order imposing the penalty.
• Notwithstanding anything contained in sub-section (9) and sub-section (10), any private placement issue not made in compliance of the provisions of sub-section(2) shall be deemed to be a public offer and all the provisions of this Act and the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be applicable.

In Rose Valley Real Estates & Construction Ltd. v. Securities and Exchange Board of India [2014] 42 taxmann.com 188 (SAT – Mumbai), Appellant-company issued debentures to employees and their relatives/associates on private placement basis. Adjudicating Officer held appellant guilty of not furnishing information/records as required and imposed penalty of Rs. 1 crore on appellant. Held, since appellant had issued debentures on private placement basis, question of furnishing documents which were applicable to issuance of debentures through public did not arise at all; and as such appellant could not be held guilty of not furnishing documents. Besides, since appellant was willing to furnish documents relating to issuance of debenture through private placement from time to time and had, in fact, fully furnished particulars, though belatedly, in adjudication proceedings which were also initiated belatedly, it would be just and proper to restrict penalty to Rs. 10 lakhs.

A Public Company can also raise its capital by placing the shares privately and without inviting the public for subscription of its shares or debentures. In this kind of arrangement, an underwriter or a broker finds persons, normally his clients who wish to buy the shares. He acts merely as an agent and his function is simply to procure buyer for the shares, i.e., to place them. Since no public offer is made for shares, there is no need to issue any prospectus. As per the regulations issued by SEBI, private placement of shares should not be made by subscription of shares from unrelated investors through any kind of market intermediaries. This means promoters’ shares should not be contributed by subscription of those shares by unrelated investors through brokers, merchant bankers, etc. However, subscription of such shares by friends, relatives and associates is allowed.

5.2 By an offer for sale

Under this arrangement, the company allots or agrees to allot shares or debentures at a price to a financial institution or an Issue-House for sale to the public. The Issue- House publishes a document called an offer for sale, with an application form attached, offering to the public shares or debentures for sale at a price higher than what is paid by it or at par. This document is deemed to be a prospectus [Section 25]. On receipt of applications from the public, the Issue-House renounces the allotment of the number of shares mentioned in the application in favour of the applicant purchaser who becomes a direct allottee of the shares.

5.3 By inviting public through prospectus

This is the most common method by which a company seeks to raise capital from the public. The company invites offers from members of the public to subscribe for the shares or debentures through prospectus. An investor is expected to study the prospectus and if convinced about the prospects of the company, may apply for shares.

5.4 Issue of shares to existing shareholders

Further capital is also raised by issue of rights shares to the existing shareholders (Section 62). In this case, the shares are allotted to the existing equity shareholders in proportion to their original shareholding, e.g., one share against every two shares held by a member.

6. Public issue of shares

Public Issue of shares means the selling or marketing of shares for subscription by the public by issue of prospectus. For raising capital from the public by the issue of shares or debentures, a public company has to comply with the provisions of the Companies Act, the Securities Contracts (Regulation) Act, 1956 including the Rules made thereunder and the regulations and instructions issued by the concerned Government authorities, the Stock Exchange and the Securities and Exchange Board of India (SEBI), etc. Management of a public issue involves coordination of activities and cooperation of a number of agencies such as managers to the issue, underwriters, brokers, registrars to the issue, solicitors/legal advisors, printers, publicity and advertising agents, financial institutions, auditors and other Government/statutory agencies such as Registrar of Companies, Reserve Bank of India, Stock Exchange, SEBI etc.

6.1 Book Building*

Book Building is defined to mean a process by which demand for the securities proposed to be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement or other document.

Thus, in case of a public issue through the process of book-building, though the total size of the issue is known, the number of shares is not known. It is because the price at which shares will be allotted is not known, it’s determined through the process of book-building only. The prospectus only mentions the price band [i.e., the lowest (floor price) and the highest (maximum price)]. As per SEBI Regulations, 2009 the maximum price cannot be more than 20% of the floor price. As part of the process, bids are invited from the prospective investors and final price determined (that is, the price at which the issue is likely to be fully subscribed). By dividing the total issue size by the price so determined, the number of shares to be issued is arrived at.

As per SEBI Regulations, 2009, an issuer company may make an issue of securities to the public through a prospectus by making 100% of the net offer to the public through book-building process.

1. Vishwanath v. East India Distilleries [1957] 27 Comp. Cas. 175
2. See Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp. Cas. 862 (SC).
3. For a detailed discussion on share certificate, see Para 2
4. As per Companies (Amendment) Act, 2015, share certificate may be issued under the signatures of two directors and the company secretary, if the company has appointed a
company secretary.
5. Cockburn, C.J in Bhia & Sons Francis Co. Rly. In re, [1868] L.R. 3 Q. B. 584 (Ch.D)
* Memorandum of Association or Articles of Association of a private company may provide for any other kind of shares to be issued.—Vide MCA Notification dated 5 June, 2015.
6. With respect to issue of shares with differential voting rights, the Ministry of Company Affairs has notified the Companies (Share Capital and Debentures) Rules, 2014. As per Rule 4 of these rules, no company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with, inter alia, the following conditions:

(a) the articles of association of the company authorizes the issue of shares with differential rights;
(b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders:
Provided that where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
(c) As per Notification dated 16th August, 2019, the voting power in respect of shares with differential rights of the company shall not exceed seventy- four per cent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.
(d) omitted;
(e) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
(f) the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;
(g) the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;
A company may, however, issue equity shares with differential voting rights upon expiry of five years from the end of the financial year in which such default was made good*.
(h) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies are being regulated by sectoral regulators;
(i) the company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.
(j) As per Notification dated 16th August, 2019, the voting power in respect of shares with differential rights of the company shall not exceed seventy- four per cent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.

* MCA Notification No. G.S.R. 704(E) dated 19.7.2016

7. Henry v. Great Northern Rly. Co. [1857].
8. “Qualified institutional buyer” means the qualified institutional buyer as defined in the
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009, as amended from time to time, made under the Securities and Exchange Board of India Act, 1992.
9. Inserted vide the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 w.ef. 7.8.2018
* Vide MCA Notification dated 16.10.2021