Nadt Allotment & Tranfer Of Shares Chp-7

C H A P T E R

Allotment & Transfer of Shares

S E V E N

7

DR. V. K. JAIN M.Com., LL.M., M.Phil., Ph.D(Tax), FCS

Allotment of Shares (Sections 69 to 79A) What you should know : 

7.1 Allotment of shares

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7.2 Underwriting and brokerage

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7.3 Purchase of its own shares by company / Buy back of shares.

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7.4 Issue of share at a premium / Discount

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7.5 Calls on shares

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7.6 Forfeiture

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7.7 Surrender of shares

7.1 ALLOTMENT OF SHARES a. What is allotment?

59 Allotment may be defined to mean the appropriation by the Board of Directors of the company out of the previously unappropriated capital of the company of a certain number of shares to persons who have made applications for shares. Allotment results in a binding contract ,since it amounts to acceptance of offer . Prospectus Invitation to offer  Application for shares Offer  Acceptance of application Allotment resulting in a binding contract  Allotment of shares gives a subscriber a right to demand shares and acquire shareholders rights. Re-issue of forfeited shares does not constitute appropriation out of unappropriated capital and therefore does not amount to allotment. An allotment to be valid  should be made by proper authority, namely, the board of directors or a committee authorised by the Board.  should be against application in writing,  should not be in contravention of any other law and  must be made within a reasonable time and  must be communicated to the applicant.  must be absolute and unconditional b) Conditions to be complied with by a public company before allotment of shares Statutory restrictions on allotment of shares: Sections 69 to 75 of the Companies Act, provides for a number of statutory requirements with regard to allotment of shares: these are also sometimes termed as “restrictions on allotment”. 1. Conditions to be complied with when a prospectus is issued No allotment of shares to the public can be made by a public company, which has issued a prospectus unless the following conditions are satisfied: i. Registration of prospectus: A copy of prospectus is duly filed with the Registrar of Companies (section 60) ii. Application money: The amount received on application money is not less than 5% of the nominal amount of the shares (section 69(3)). As per SEBI guidelines 25% of the nominal value of a share must be called by way of application money except were issue size exceed Rs. 500 crores. iii. Moneys to be kept deposited in separate bank account: section 69(4) Share application money collected should be kept deposited in a separate account with bankers to issue. (a) until the certificate to comment business has been obtained u/s 149, (b) where such certificate has already been obtained, until the entire amount payable on application for shares in respect of minimum subscription has been received by the company. iv. Minimum subscription section 69(1): A company cannot allot the shares unless the minimum subscription as specified in a prospectus has been subscribed and the application money on them has been received. As per SEBI guidelines, a company making public issue of shares must receive a minimum of 90% subscription against the entire issue before making an allotment of shares to the public. As per section 69(5) minimum subscription is to be received before the expiry of 120 days after the first issue of the prospectus. In case of failure, the entire amount is to be repaid within 130 days after the issue of prospectus. If the money is not repaid within 130 days as aforesaid, the directors become liable to repay the same along with interest at the rate of 6 per cent per annum payable from the expiry of the 130th day. However, as per SEBI guidelines in case of issue of shares by a company, if minimum subscription as stated in the prospectus has not been received within 60 days of the closure of the issue, directors shall be personally liable to return the money without interest, in case application money is repaid within 78 days of the closure of the issue and with interest @15% per annum for the delayed period beyond 78 days.

Allotment can be made only from the beginning of the 5th day after the date of issue of prospectus section 72(1). Where shares are issued in terms of a prospectus issued generally, allotment cannot be made before the beginning of the 5th day after the issue of prospectus. Prospectus is issued generally by issue of a newspaper advertisement. The subscription list for public should be kept open for atleast three working days and disclosed in the prospectus. vi. Listing of shares on one or more recognised stock exchange(s) (section 73): Allotment shall be void, where permission for listing has not been applied, or if applied the same has not been granted by a stock exchange or all the stock exchanges before the expiry of 10 weeks from the date of the closing of the subscription list. Thus, if a single stock exchange refuses to grant permission, the entire allotment becomes void, unless the refusal of the stock exchange is set aside on appeal. v.

60 The company shall repay the moneys received from the applicants, within 78 days from the closure of the subscription list, without interest. If the money is not so repaid on the expiry of 78th day, the company and every officer who is in default is liable to repay that money to the applicants with interest at the rate of 15 per cent per annum. vii. Basis of allotment and minimum no. of share holders: In case the issue is over subscribed, the applicant will have to be allotted lesser no. of shares than applied for. In such a case allotment will be done pro-rata in consultation with the stock exchange authorities and as per SEBI guidelines in this regard As per the listing agreement of the stock exchange there shall be atleast 5 public shareholders for every 1 lakh of fresh issue of capital. This has been done as per the direction of SEBI. viii. Resolution for allotment: The Board of Director shall then pass resolution regarding allotment of shares and authorise the issue of letters of allotment and letter of regret. ix. Refund of excess of application money: Section 73(2A) SEBI guidelines disallow retention of over subscription under any circumstances. Accordingly, all monies in excess of the application money on shares allotted must be repaid forthwith without interest. Section 73(2A) provides that if such money is not repaid within 8 days from the day the company becomes liable to pay (i.e. 10 weeks), the company and every director of the company, who is an officer in default, shall be jointly and severally liable to repay the same with interest @ 15% p.a. x. Issuance of share certificates: as per section 113, the company should deliver the share certificates within 3 months after the allotment of shares. xi. Return of allotment: After allotment, the company must file with the Registrar a return of allotment within 30 days of the allotment of shares. It may be noted that as per latest SEBI guidelines, a company shall not be allowed to make a fresh issue of its capital to the public unless partly paid shares, if any, are made fully paid-up or are forfeited. [E.T., 13.8.1997]

2. Conditions to be complied with when prospectus is not issued Statement in lieu of prospectus: Where prospectus is not issued, a public company shall not allot any shares unless it files a statement in lieu of prospectus with the Registrar atleast 3 days before the first allotment of shares. c. What is irregular allotment? If an allotment of shares is made in contravention of the provisions of Secs. 69, 70 or 73 (discussed in the previous pages), then the allotment is termed as irregular. Thus, an allotment will be considered irregular in the following cases: a. where minimum subscription has not been received; b. where prospectus or a statement in lieu of prospectus has not been filed with the Registrar; c. where subscription list is opened before the beginning of the 5th day from the date of the issue of prospectus; d. where a minimum of 5 p.c. payable on application has not been received; e. where the application money is not kept in a separate account with a scheduled bank; and f. where stock exchange has either not listed shares within ten weeks or has refused permission. d. Effect of irregular allotment 1. Allotment valid but punishment of fine: (section 60) Where the irregularity results in failure to deliver a copy of the prospectus to the Registrar, the company and every person who is knowingly a party to the issue of the prospectus shall be punishable with fine which may extend to Rs. 50,000. 2. Allotment voidable: (section 71(1)) If a company without complying with the provisions relating to: (i) minimum subscription, or ii) application money, or iii) the filling of a statement in lieu of prospectus, make an allotment, it, though irregular, is nonethelss an allotment. But an applicant may, if he so desires, avoid the allotment: a) within 2 months of the statutory meeting where it was made before that meeting; b) within 2 months of allotment, if it was made after the statutory meeting was required to be held. It should be noted that an irregular allotment can be avoided only within the time limits indicated above, but within the time limit it can be avoided even if the company goes into liquidation. The allottee must inform the company within the time limits that he avoids the allotment. 3. Liability of Directors: (section 71(3)) In the event of non-compliance with the provisions of section 69 and section 70, the allotment is rendered voidable at the option of the applicant. Besides, any director who has knowledge of the fact of the irregularity shall be liable to compensate the company and the shareholder respectively for any loss, damage or costs which the company or the allotee may have sustained or incurred thereby.

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Fine In case allotment is made before the beginning of the 5 day: from the date of issue of the prospectus. (section 72(3)) In such a case the company and every officer of the company shall be punishable with fine which may extend to Rs. 50,000. However, the allotment will remain valid. 5. Failure to get listing-Allotment void: (section 73) In case of company’s failure to apply for listing of its share on a stock exchange to list its shares or permission having not been granted before the expiry of ten weeks from the date of closing of the subscription list, the allotment before void. Besides, the entire money received by way of application money must be refunded forthwith. In case it is not repaid within 8 days of becoming due, the company and every director who is an officer in default shall be jointly and severally liable to repay that money with interest at the rate of 15% per annum. Further, the company and every officer of the company who is in default shall be punishable with fine up to RS. 50,000 and where the repayment is delayed beyond six months, also with imprisonment for a term up to one year. e) Return as to allotment A return of allotment in the prescribed form is required to be filed with the Registrar of Companies within 30 days of the allotment. In case of allotment of the shares against cash, the return must state the number and nominal amount of the shares allotted; the names, address and occupation of the allottees; and the amount paid or payable on each share. Failure to file the return as aforesaid renders every officer of the company who is in default punishable. 4.

7.2 Underwriting Underwriting is in the nature of an insurance against the possibility of inadequate subscription. Underwriting is a contract by which a person (known as underwriter) agrees that if the shares/debentures about to be offered for subscription are not, within a specified time taken up by the public, he will himself take them up and pay for what the public do not take up. A company may pay underwriting commission to any person in consideration of his(a)subscribing to or agreeing to subscribe or (b) to procure subscription for shares/ debentures. Underwriting of shares or debentures is not compulsory . Conditions: Section 76 permits the payment of underwriting commission subject to the following conditions: 1. The payment of commission should be authorised by the Articles. 2. The names and addresses of the underwriters and the number of shares or debentures underwritten by each of them should be disclosed in the prospectus. 3. The amount of commission should not exceed, in the case of shares, 5% of the price at which the shares have been issued or the amount or rate authorised by the Articles whichever is less and in the case of debentures it should not exceed 2.5%. 4. The rate should be disclosed in the prospectus, or in the statement in lieu of prospectus and should be filed with the Registrar along with a copy of the underwriting contract before the payment of the commission. 5. The number of shares or debentures which persons have agreed to subscribe absolutely or conditionally for commission should be disclosed in the manner aforesaid. 6. A copy of the contract for the payment of the commission should be delivered to the Registrar along with the prospectus or the statement in lieu of prospectus for registration. 7. Section 76(4A) clarifies that commission to the underwriters is payable only in respect of these shares or debentures which offered to the public for subscription

7.2a Brokerage Brokerage is different from underwriting commission inasmuch as a broker does not undertake to subscribe for shares in case the same are not subscribed by the public. Brokerage is essentially the reward paid to middle man who brings about a bargain between the company and the purchaser of shares or debentures. the amount of brokerage paid or payable should be disclosed in the prospectus or statement in lieu of prospectus. However, brokerage can be paid only to professional brokers.

7.3 Purchase of its own shares by company Section 77 prohibits a company limited by shares or a company limited by guarantee having a share capital from buying its own shares. the section further disallows the public company and a private subsidiary of a public company to give loan or provide financial assistance to any person to enable him to purchase or subscribe to company’s own shares or shares of a holding company. The aforesaid restrictions are however subject to certain exceptions which include:  lending of money by a banking company in the ordinary course of its business;

62 the lending of money or purchase of shares for the benefit of its employees;  giving loans to employees to purchase fully paid shares of the company but not exceeding his six months’ salary or wages. However, buy back of shares by the company can be done subject to the provisions of 77A and 77B. 

7.3a Buy Back of Shares Buy-back can be described as a procedure, which enables a company to go back to the holders of its shares and offer to purchase from them the shares that they hold. (Sec. 77A) Why buy-back? : There are three main reasons why a company opt for buy-back:  To improve shareholder value, since buy-back provides a means for utilising the company’s surplus funds which have unattractive alternative investment option and since a reduction in the capital base arising from buy-back would generally result in higher earning per shares (E. P. S).  As a defence mechanism, in an environment where the threat of corporate take-over has become real, buyback provides a safeguard against hostile take-overs by increasing promoters’ holdings.  Management signalling The decision to buy-back articulates management’s’ view that the company’s future prospects are good and hence investing in its own shares is the best option Power of Company to purchase its own Shares (Securities) section 77A/ 77B A company can buy back its own shares or securities subject to the provisions of sec. 77A , 77B and the buy back rules and regulations. The buy-back by a listed company is to be made in accordance with SEBI (Buy-Back of Securities) Regulations, 1998, and by an unlisted company in accordance with Private Limited Company and Unlisted Public Limited Company (Buy-back of Securities) Rules, 1999. A. Pre- conditions for buy-back 1. The buy-back is permitted only if the articles of the company so authorise. 2. The buy-back of shares/securities is restricted to 25% of the total paid-up capital and free reserve. ( in any financial year it cannot exceed 25% of the paid-up capital and free reserve) 3. Debt-Net worth ratio is not more than 2:1 after buy-back 4. Shares/Securities for buy-back are fully paid-up. The shares are not subject to any lock - in period. B. Restrictions imposed for buy - back [section 77B ] A company shall not buy-back its shares or other specified securities.  through any subsidiary company, including its own subsidiary company.  through any investment company or group of investment companies                     

63             

if default subsists in repayment of deposit or interest payable thereon, redemption of debentures or preference shares, or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or bank  if the company has not complied with the provisions of sections 159,207, and 211 i.e. when it has failed to file the annual return with the Registrar, or failed to pay dividend within 42 days from the date of declaration, or failed to prepare the balance sheet and profit and loss account as per requirements of Schedule VI C. Sources of funds for buy-back [section 77A(1)] Buy-back may be out-of (I) its free reserves (ii) the securities premium account (iii) the proceeds of any shares/securities Capital Redemption Reserves Account: If buy-back is out of free reserves a sum equal to nominal value of shares so purchased shall be transferred to capital redemption reserves account Section 77AA D. From whom can company purchase its shares [section 77A(5)] The buy-back may be : (a) from existing securities holders on a proportionate basis (tender method) or (b) from open market (through stock exchange or book building process) or (c) from holders of odd lots of shares or (d) from employees pursuant to Employees Stock Option Scheme (ESOS) / Sweat Equity. E. Procedure of buy-back of shares /securities Before buy-back 

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The buy-back is authorised by its Articles.(Otherwise articles will have to be amended)

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A special resolution is passed in Genera Meeting authorising the buy-back (within twelve months of special resolution buy- back should be completed). According to the amendment in November 2001 where the buy-back is 10% or less of the paid-up capital and free reserves of the company, a Board resolution authorising the buy-back is sufficient instead of special resolution

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The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating – a.) a full and complete disclosure of the all material facts; b.) the necessity for the buy –back ; c.) the class of security intended to be purchased under the buy-back d.) the amount to be invested under the buy-back; e.) the time limit for completion of buy -back

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Declaration of solvency: Before making buy-back file with ROC, SEBI a declaration of solvency - that is capable of meeting liabilities. The declaration of solvency need not be filed with SEBI in case of non- listed company.

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Time limit for completion of buy back: Every buy back shall be completed within 12 months from the date of passing of special resolution

After the buy-back 1 1 Verification and payment .The company shall after the closure of the offer, verify the offers received within 15 days of such closure , and the shares so lodged by the members and make payment to the shareholders.

64 2. 3. 4. 5. 6. 7.

Extinguishment of securities. The company shall extinguish & physically destroy the securities so bought-back within 7 days of completion of buy-back. Public adv. of completion of buy-back. The company shall, within two days of the completion of buyback issue a public advertisement in a national daily regarding such buy-back Applicable to a listed company. Return of buy-back. The company shall file of Return of buy-back with ROC, SEBI within 30 days of such completion Register of buy-back. The company shall maintain register of buy-back mentioning the details of the securities bought Cooling period. After completion of buyback there is a prohibition of new issue of shares within 6 months of buy-back (except bonus, conversions) Penalty for default : Non- compliance of the provisions relating to buy-back shall be punishable with 2 years imprisonment or fine upto Rs. 50,000/- or both.

7.4 Issue of Shares at a Premium The Companies Act is silent with regard to issue of shares at a premium except that section 78 enumerates the uses to which the securities premium amount can be put. Any amount of securities premium collected by a company on issue of securities is required to be transferred to the “Securities Premium Account “ This account should be used only for the following purposes:  for issue of fully paid bonus shares;  for writing off preliminary expenses,  for writing off commission or discount allowed or expenses incurred on issue of shares or debentures,  for payment of premium payable on redemption of preference shares or debentures. Due to the free pricing of shares a company can charge any amount of premium subject to the guidelines of SEBI. The SEBI guidelines lay down that existing private/ closely held and other unlimited companies which do not have three-year track record of consistent profitability are disallowed to make their issues at premium. Besides, the justification for the premium must be spelt out in the prospectus.

7.4a Issue of shares at a discount Issue of shares at a discount is regulated by provisions contained in section 79. The conditions are: 

Only existing companies having commenced its business at least one year hence can make their issue at a discount.

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Only existing class of shares are allowed to be issued at a discount.

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The discount issue should be approved by general body meeting and the CL B accords its sanction.

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The maximum discount should not exceed 10% unless the Company Law Board permits a higher rate.

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Every prospectus must contain particulars of the discount allowed on the issue of the shares or so much of that discount as has been written off at the date of the issue of prospectus. Any default in this requirement will render the company, and every officer liable and punishable with fine extending to Rs.50.

Directors liability in respect of improper issue of shares at a discount : If the directors have improperly issued the shares at a discount, the directors render themselves liable to compensate the company to the extent of the amount of discount.

7.5 Calls on shares A call may be defined as a demand by the company for payment of part of the issue price of shares or debentures which has not been paid. The power to make calls is exercised by the Board in its meeting by means of a resolution (section 292(1)(a)). Requisite of valid call: i) In accordance with the Articles. The call must be made in accordance with the provisions of the Articles of Association and the Companies Act.

ii) Properly constituted Board Meeting: To be valid must be made by the directors duly appointed and duly qualified; against a resolutions passed at the meeting of the Board of directors in which proper quorum must have been present.

iii) Uniform Basis: (section 91) It must be made on uniform basis and bonafide in the interest of the company. iv) Notice of call: Notice of call must specify the exact amount and the time of payment. For each call atleast 14 days notice must be given to members. An interval of 30 days is required between 2 calls and not more than 25% of the nominal value of shares can be called up at a time. (Table A, Reg. 13). However, SEBI guidelines require entire amount to be called along with application in case of issues upto Rs. 50 crores. v)

Payment of calls in advance: (section 92) Calls may be collected in advance and interest paid thereon as per the provisions in the articles. Table A allows the payment of interest on calls in advance not beyond 6% per annum.

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Any company offering shares to the public must ensure that the shares issued are made fully paid-up within 12 months of the date of allotment, where the size of the issue is up to 500 crores.

7.6. Forfeiture of shares A company’s articles usually contain a provision to forfeit shares of a member who fails to pay his calls due. Forfeiture to be valid must fulfill the following conditionsi) In accordance with the articles: The Articles of Association must empower the company to forfeit the shares. As per Reg. 29 of ‘Table A’, shares can be forfeited only for non-payment of calls. The Articles of a company may, however, lawfully incorporate any other grounds of forfeiture. ii) Proper notice: Before the shares of a member are forfeited, a proper notice to that effect must have been served. Regulation 30 of Table A provides that a notice requiring payment of the amount due together with any interest accrued must be served mentioning a further day (not less than 14 days from the date of service of the notice) on or before which the payment is to be made. The notice must also mention that in the event of non-payment, the shares will be liable to be forfeited. iii) Resolution for Forfeiture: If the defaulting shareholder does not pay the amount within the specified time as required by the notice, the directors may pass a resolution forfeiting the shares (Article 31 of Table A) iv) Power of forfeiture must be exercised bonafide and in good faith: The power to forfeit is in the nature of the trust and must therefore be exercised bonafide and for the benefit of the company. Effect of forfeiture i) A forfeiture has the effect of termination of membership. ii) However, a person whose shares have been forfeited continues to remain liable as a past member in case liquidation takes place within one year forfeiture. iii) Liability for unpaid calls remains even after forfeiture of shares. Re-issue of forfeited shares Normally, forfeited shares are re-issued. In case they are not re-issued it may amount to reduction of share capital and therefore require the approval of the Court. The forfeited shares may be re-issued at par or premium or at a discount. However, the discount on re-issue should not exceed the amount forfeited on those shares. The Board of directors, may, on a request of a shareholder whose shares have been forfeited, cancel the forfeiture.

7.7 Surrender of shares Surrender of shares means voluntary return of shares to the company for cancellation. There is no provision for the surrender of shares either in the Companies Act or in Table A, but the Articles of some companies may allow it as a short-cut to the long procedure of forfeiture. Surrender of shares shall be valid only a. When there is a provision to this effect in the Articles of Association of the company. b. Surrender of shares is an alternative to forfeiture. Surrender of shares shall be valid only where their forfeiture is otherwise justified. However, In any other circumstances, surrender of shares cannot be accepted without sanction of the court since it would amount to reduction of capital. Surrendered shares may be re-issued in the same way as forfeited shares.

Transfer of Shares (Sections 108 to 112) What you should know? 

7.8 Right to transfer shares

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7.9 Procedure of transfer of shares

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7.10 When can company refuse transfer of shares

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7.11 Forged transfer and blank transfer

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7.12Transmission of shares

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7.13 Transfer of shares under the depositories system

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7.14 Nomination of shares

7.8 RIGHT TO TRANSFER SHARES

66 Transfer of shares means a change in the ownership of shares. One of the important features of a company is that its shares are transferable. This provides liquidity to the investors and also contributes to a growing a capital market. Shares of a company are freely transferable subject to the restrictions contained in the Companies Act, any other statutes and the provisions of the Memorandum and Articles of Association of the company (section 82). However, in case of private company, by its very definition, there has to be restrictions on the transfer of shares. But in the case of a listed company / unlisted public company, after the enactment of Depositories Act, 1996, the securities have become freely transferable. Even the Board of Directors cannot refuse transfer of shares on any ground.

7.9 PROCEDURE OF TRANSFER OF SHARES a.

b.

c.

d.

e.

f. g. h.

Prescribed share transfer form: Section 108 provides that transfer cannot be registered unless there is proper instrument of transfer duly stamped and executed by transferor and transferee. The share transfer form should be in form no. 7B and must be accompanied by the relevant share certificates. However in the case of shares, which are transferred through a depository, neither the approval of the company would be necessary nor the instrument of transfer will be required. Stamping of presentation date: The instrument of transfer should be presented to the Registrar of Companies or the prescribed authority before it is signed by the transferor and transferee who shall stamp or otherwise endorse the instrument with the date on which it is presented. Submission of transfer form: The instrument of transfer together with the related share certificate should be submitted by the transferor or transferee to the company or the share transfer agent. The duly filled transfer form should be submitted: - in case of listed companies within 12 months of the presentation date or before the closure of register of members, whichever is later, - In any other case, within 2 months from the date of such presentation. Verification and scrutiny of transfer form: The share transfer form will be checked and verified. The specimen signature will be tallied. The guidelines of Stock Exchange and SEBI will have to be followed for scrutinizing the share transfer form. Intimation to transferee/ transferee: In the case of partly paid of shares, intimation should be sent to the transferee especially when the transfer deed is submitted by the transferor. In case no objection is received from the transferee within 2 weeks, the company may proceed to register the transfer. It is customary to send intimation to the transferor if the documents are lodged by the transferee. Board resolution: A board resolution should be passed for approving the transfer of shares and authorising issue of share certificates to the transferees. Endorsement and entry in register of members: At the back of the share certificate endorsement will be made and the name of transferee will be entered in the register of members. Delivery of share certificates to the transferee: The share certificates after endorsement will be delivered to the transferee within 2 months of lodgement of transfer. In the case of listed company, share transfers should be effected within 1 month of lodgement of transfer deeds. The various steps involved in the transfer of shares is described below:

SHARE TRANSFER PROCEDURE Obtain prescribed share transfer form (Form No. 7B) with the presentation date ↓ Fill up the share transfer form ↓ Get the deed signed by transferor and transferee, duly witnessed and attested ↓ Attach the share certificate with the deed and affix share transfer stamps and cancel it ↓ Deliver the deed and the certificate to the company with an application for transfer within the prescribed time ↓ The company gives notice to the transferee in the case of partly paid up shares ↓ The company board considers the application and orders for, or refuses, registration ↓ If transfer is refused, the company notifies the transferor and the transferee, Returns the documents

67 ↓ When transfer is in order, the transferee is registered as member and the share certificate is sent to him after endorsement of title

Certification of Transfer U/s 108, transfer of shares shall not be registered unless the transfer deed is accompanied with share certificate. However, sometime attaching the original certificate may not be possible e.g. in cases where the shareholder want to sell only part of his holding or wishes to sell them to two or more persons. In such cases, the member can submit original shares to the company. The company will make endorsement on the transfer form itself that the original share certificate has been lodged with the company, specifying the number of shares. This is called certification of transfer. The Company will issue “balance ticket” for remaining shares. The person can sell the shares on the basis of endorsement made by the company and get balance share certificates on submitting the “balance ticket”. (Since the shares are issued in marketable lots and with the introduction of Depository system this system has become irrelevant)

7.10 WHEN CAN THE COMPANY REFUSE TRANSFER OF SHARES? A) In case of a public company listed or unlisted (Sec. 111A). Shares of public company freely transferable. The Board of Directors of such company does not have any discretion to refuse or withhold transfer of any security. The transfer has to be effected immediately and automatically by the company/ depository.  Appeal to CLB/NCLT An aggrieved transferee may seek remedy by filing an appeal before Company Law Board / NCLT if the transfer is refused by the company within two months from the date of lodgement without sufficient cause.

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Rectification of register of members Section 111A, provides that rectification of register of members or record of depository can be done by an order of Company Law Board / NCLT, on an application by an aggrieved depository, company, investor or depository participant or SEBI if any transfer is made in contravention of any of the provisions of the SEBI Act, 1992, Sick Industrial Companies Act, 1985 or any other law. The application should be moved within two months of the transfer. After inquiry, if the CLB/NCLT is satisfied of the contravention, it can direct the company/depository to rectify ownership records of securities. However, before completion of enquiry, the CLB/NCLT can suspend voting rights in respect of securities so transferred.

B) In case of private company Sec. 111 Board resolution and notice of refusal. In case a private company refuses to register a transfer, it shall within two months from the date of the lodgement of transfer, send notice of refusal to the transferee and the transferor, giving REASONS for such refusal. A board resolution should be passed for refusing to transfer the shares. Appeal Against Refusal To Register Transfer. First Remedy - Appeal to CLB/NCLT. In case the company refuses to register a transfer, an appeal may be made to the Company Law Board within two months of the receipt of notice of refusal and where no notice is received, within four months from the date the instrument of transfer was delivered to the company.Sec.111(2),(3). Second Remedy - Appeal for Rectification of register of members. [Sec. 111(4)]. If a)

b)

the name of any person i) is, without sufficient cause, entered in the register of members of a company, or ii) after having been entered in the register, is without sufficient cause omitted there from; or default is made, or unnecessary delay takes place, in entering in the register the fact of any person having become, or ceased to be, a member [including a refusal under sub-section (1)], the person aggrieved, or any member of the company, or the company, may apply to the Company Law Board for rectification of the register. The CLB/NCLT after such inquiry as it thinks fit either dismiss the petition or direct the registration of transfer. It is also empowered to pass interim orders or grant injunction regarding dividend /bonus shares / right shares and award of costs. Compliance with the order of CLB/NCLT – The order of CLB/NCLT to effect registration of transfer should be duly complied with within 10 days of receipt of order. Private companies are free to enforced the restrictions as may be contained in the Articles of Association against the right to transfer their shares.

7.11 FORGED TRANSFER AND BLANK TRANSFER Forged transfer does not confer any title. Signature of the transferor is forged. The original owner of the shares continuous to be the share holder. Blank transfer

68 Where a share holder signs a share transfer form without filling in the name of the transferee and hands it over along with the share certificate to the transferee thereby enabling him to deal with the shares, he is said to have made a “blank transfer”. Ills of blank transfer - Loss of stamp duty - Loss of Income-tax. Restrictions on blank transfer - Sec. 108(1A), (1B) a) Share transfer form to be presented to prescribed authority for stamping the date thereon. b) The duly filled transfer form should be sent for transfer within 12 months of the presentation date or before the closure of register of members, whichever is later, in case of listed shares. In any other case, within 2 months from the date of such presentation.

7.12 TRANSMISSION OF SHARES Transmission of shares may be referred to as the involuntary transfer of shares. It takes place in the event of death or insolvency of a shareholder. A simple letter of request accompanied by proof of succession entitles the legal representative for registration of the same in his name .No stamp duty is accordingly payable on transmission. The following are the main points of difference between the transfer of shares and transmission of shares : i) Nature of Act: Transfer of shares is the effect of deliberate voluntary act of the parties; while transmission of shares is the result of operation of law on the happening of some relevant event such as the death of the shareholder, insolvency or lunacy of a shareholder or purchase in a court sale. ii) Consideration: There must be some consideration for the transfer of shares in all cases except where the shares are transferred by way of gift, whereas the question of consideration does not arise in cases of transmission of shares. iii) Instrument of transfer: A validly exempted instrument of transfer is required in the case of transfer of shares, but for the purposes of transmission of shares , exemption of any instrument of transfer is not required and only a written request to that effect is sufficient. However, an evidence showing the entitlement of the transferee (e.g., legal representative) may be required by the company such as succession certificate etc. iv) Stamp Duty: In case of transfer stamp duty is payable on the amount of the market value of shares ; while no stamp duty is payable in case of transmission of shares. v) Liability of the transferor: The liability of the transferor ceases as soon as the transfer is complete. Whereas shares continue to be subject to all original liabilities and any dues on the shares may be enforced against the person to whom the shares have been transmitted in his capacity as legal representative of the deceased shareholder no matter that he did not get the shares registered in his name.

7.13 DEPOSITORY What is a Depository? The system of depositories have revolutionized stock markets. The most single important development in the Indian Capital Market in the last decade is the emergence of the Depositories System. A depository is a company where securities of investors are held in electronic accounts. Just as the banks holds money, in the same way a depository holds securities. A depository in India, must have a net worth of 100 crores and must obtain a certificate of commencement of business from SEBI. 

Depository vs Bank A depository is similar to a bank. Just as you leave money in banks rather than holding it in cash, you leave shares in the depository instead of holding them in physical form. As proof of you holdings, you get a statement from the depository, just as you get a statement from a bank giving you the balance in your account. For withdrawing cash from bank you issue a cheque. In the depository when you sell the shares you have to issue a debit instruction for delivery of securities from your account. Similarly to receive securities into your account, you have to issue a credit instruction similar to a pay -in-slip used for crediting money to your bank account. The depository, thus is to shares what a bank is to money. C o n s t it u t e n t s o f t h e D e p o s it o r y S y s t e m Depository Bank - Holds securities in Accounts Holds funds in Accounts D e p o s ito ry - Transfers securities between Accounts - Transfers funds between Accounts - Transfers without handling securities - Transfers P a r t ic ip a n t s ( D P ) Is s u e r ( C o m p a n y ) without handling money - Safe keeping of securities Safe B anks C u s to d ia n s Keeping of money

Constituents : There are four constituents in the depositories system: a) The depository

S h a r e H o ld e r s B ro k e rs

N B F C

C le a rin g C o rp s .

F in .In s ts .

In v e s t o r s

69 b) c) d)

The depository participants The beneficial owner The issuer

a) The depository: The depository holds the securities of the investors in the form of electronic book entries (dematerialised form). It maintains ownership records of securities and effects transfer ownership through book entry.

b) The depository participant: The depository cannot deal with millions of investors directly. It appoints agents called depository participants who open and maintain accounts. It is similar to the branch of a bank. You can open account in any branch of a bank. A depository participant (DP) acts as an agent of a depository. A DP could be a public financial institution, bank, custodian, broker, NBFC etc. having a net wroth of Rs. 1 crore. It is required to be registered with SEBI. An investor who wants to avail the services of a depository must open an account with a depository participant. The investor has to enter into an agreement with the DP after which he is issued a client ID number. The Stock Holding Corporation of India Ltd. was the first depository participant registered with SEBI. The number of DPs operational till June 2002 was around 212 with 1649 service centers across the country.

c)

Beneficial owner: By fiction of law, the depository is registered owner of the securities held with it with the limited purpose of effecting transfer of ownership at the behest of the owner. The name of the depository appears in the records of the issuer as registered owner of securities. The name of actual owner appears in the records of the depository as beneficial owner. The beneficial owner has all the rights and liabilities associated with the securities. The owner of securities intending to avail of depository services opens an account with a depository through a depository participant (DP). The securities are transferred from one account to another through book entry only on the instructions of the beneficial owner.

d) The issuer: It is the company which issues the security. Models of depository : There are two models of depository – Immobilisation and dematerialisation. In the immobilization model, physical scrips are held in the depository vaults, supporting the book entry records kept on the computer. It means storage of scrips in the vaults of the depository so that the physical movement of scrips is frozen. In contrast, in dematerialisation, there is no physical scrip in existence and the scrips are held in dematerialised form (electronic form). India has adopted dematerialisation model of depository system. Why Depository? The depository system was introduced to eliminate the ills associated with paper based securities system such as delay in transfer, bad delivery, theft, fake and forge shares etc. Before the introduction of the depository system the following problems were faced by the investors and the companies : Forged and fake share certificates Bad deliveries Loss of certificates in transit Mutilation of certificates Delays in transfer Long settlement cycles Mismatch of signatures Delay in refund and remission of dividend interest etc. Due to these problems large scale irregularities took place in the capital market and a securities scam broke in 1992. Benefits of a depository : Eliminates bad deliveries. The problems of signature differences, deficiencies in the share transfer form associated with the physical shares which causes bad delivery is eliminated. Improves liquidity : Immediate transfer of shares Low cost of public Issue - No stamp duty in case of transfer within the depository. Eliminates the scope of theft, forgery etc. risks associated with physical form. Entitles the transferee to all rights immediately and settlement of transaction. Reduction in handling large volumes of paper Reduction in transaction cost Convenient method of consolidation of folios/accounts Holding investments in equity, debt instruments and Government securities in a single account Lower rate of interest for loan against pledged demat shares. Key concepts of depository : Depository facilitates paperless trading and electronic book entry transfer of securities. The following are its key concepts : Concept of FREE TRANSFERABILITY of shares. Concept of FUNGIBILITY of shares Concept of DEMATERIALISATION Concept of REMATERIALSATION Concept of FREE TRANSFERABILITY of Shares The system of depository requires the free transferability of shares. Since there is immediate transfer of shares through computers one cannot wait for the Board of Directors approval for transfer of 

70 shares ( which is the necessary condition in case of transfer of shares in the paper based transfer system). For implementing the depository system the Companies Act was amended to provide for free transfer of shares in case of public companies. Concept of FUNGIBILITY of shares: Shares are held in the depositories in electronic form(dematerialized form) These shares are fungible i.e., all shares in electronic form are alike and same. This is in contrast to the paper form where the shares are identified by certificate number or distinctive number. Under a depository, shares do not have distinctive numbers, this means that shares, like currency are fungible meaning exchangeable for any other. The concept of fungibility permits book entry transfer without attribution to specific scrips or distinctive numbers. All securities held in a depository are fungible implies that all certificates of the same security are inter changeable and of same value having equal rights and privileges. Share certificates shall become interchangeable. Investors will not get the same share certificates bearing same distinctive numbers which they surrendered at the time of entry into depository Concept of DEMAT or DEMATERIALISATION: is the process of transferring physical scrips into computerised ledger A/c maintained by Depository. Demat securities are in fungible form i.e. they do not carry distinctive numbers. Dematerialisation Process

1

In dematerialisation process, investor surrenders defaced certificates along with Dematerialisation Request Form to the depository participant. 2 Depository participant intimates NSDL of the request through the system. 3 Depository participant submits the certificates to the registrar. 4 Registrar confirms the dematerialisation request from NSDL. 5 After dematerialising certificates, registrar updates accounts and informs NSDL of the completion of dematerialisation. 6 NSDL updates its accounts and informs the depository participant. 7 Depository participant updates its accounts and informs investor. Concept of REMATERIALISATION: The conversion of dematerialised holdings back into certificates is called rematerialisation. If the investor wishes to get back his securities in physical form, all he has to do is to request his depository participant for rematerialisation of the same by filing up Rematerialisation Request Form. Depository Participant will then forward the request to the depository after verifying that the investor has necessary balances. Depository, in turn will intimate the registrar who will print the certificates and dispatch the same to the investor. The entire process of rematerialisation usually takes a maximum of 30 days. Facilities offered by Depository There are two depositories operating in India. These are NSDL (National Securities Depository Limited) and CDSL (Central Depository Services (India) Limited). NSDL is the first depository in India. It was set up in 1996 by IDBI, UTI, NSE and SBI. By 2002 it had around 40 lakh client accounts. The CDSL is the second depository set up by the Bombay Stock Exchange (BSE) and co-sponsored by the State Bank of India, Bank of India, Bank of Baroda and HDFC Bank. BSE has a 45 per cent stake in CDSL while the banks have a 55 per cent stake. CDSL commenced operations on March 22, 1999. Functions: The functions of depository include account opening, dematerialisation, rematerialisation, settlement and clearing, pledge and hypothecation etc. Depository participant is the key player in the system who acts as an agent of the depository and is in fact the customer interface of depository. It opens the accounts of the investors, facilities dematerialisation, settles trades and effects corporate actions. Depository also provides electronic credit in new issued wherein investor opens an account with the depository participant, submits application with depository giving DP-Id and client-Id, the registrar uploads list of allottees to the depository and depository credits allottee account with depository participant (DP). The refunds, if any, are sent by registrar as usual in any public issue. The following facilities are offered by a depository: • • • • • • • • • • •

Dematerialisation i.e., converting physical certificates to electronic form; Rematerialisation i.e., conversion of securities in demat form into physical certificates; Facilitating repurchase/redemption of units of mutual funds; Electronic settlement of trades in stock exchanges connected to depository; Pledging/hypothecation of dematerialised NSDL 2 securities against loan; Depository Participant (depository) Electronic credit of securities allotted in 6 public issued, rights issue; 1 5 Receipt of non-cash corporate benefits such as bonus, in 3 electronic form; Freezing of demat accounts, so that the 4 7 debits from the account are not permitted; Registrar Investor Nomination facility for demat accounts; Services related to change of address; Effecting transmission of securities;

71 • • •

Instructions to your DP over Internet through SPEED-e facility. Account monitoring facility over Internet for clearing members through SPEED facility; Other facilities viz. Holding debt instruments in the same account, availing stock lending/borrowing facility etc.

Depository Process How does an investor operate in the depository system? Just as in case of banks, he has to first open an account with a depository through a depository participant (DP). For this purpose the investor has to enter into an agreement with the DP after which he is given a client ID number. To convert his physical holdings into dematerialised form, the investor makes an application to the DP in a dematerialisation request form (DRF). To convert his security from demat form into physical form he has to make a rematerialisation request through rematerialisation request form (RRF). The investors have the option to hold the securities in physical or dematerialised form or to rematerialize securities previously held in dematerialised form. But the trading in the specified scrips can take place only in demat form, as the investors right is limited to holding of securities only. The following diagram explains the structure of a depository. How to trade in electronic shares? Buying and selling shares in the electronic form is just like buying and selling physical shares, the only difference is trading in securities in the electronic form is simpler and safer. If investor wish to sell his shares, he places an order with his broker and instruct his depository participant by way of a delivery instruction (which is a cheque like instrument) to debit his account with the number of shares sold by him. When he buys shares he must inform his broker about his depository account number so that the shares bought by him are credited into his account and instruct his participant by way of Receipt instruction to receive credit in his account. Payment for electronic shares either bought or sold is made in the same way as in the case of physical securities. The shares thus bought are transferred in the investors’ name the very next day of pay out. No formalities of filling transfer deeds, affixing share transfer stamps and applying to the company for registering the shares in investor’s name are required to be observed as in case of physical transfer of securities. 



Initial offer to be in demat form in certain cases (Section 68B) Section 68B provides that every listed public company, making initial public offer of any security for a sum of rupees ten crores or more, shall issue the same only in dematerialised from by complying with the requisite provisions of the Depositories Act, 1996 (22 of 1996) and the regulations made thereunder. Days to come: SEBI has notified certain scrips for compulsory demat trading by all investors. The details of some forthcoming are given below : Securities to be mandatorily dealt in electronic form Public issue only in demat form Dividend distribution Securities lending and borrowing Increased participation by international investors. Faster settlement cycle – rolling settlement.

7.14 NOMINATION OF SHARES /DEBENTURES/DEPOSITS (section 109A, 109B) Earlier, there was no provision for making nomination by the holders of shares/ debentures/ deposits. In the event of death of a shareholder/ debenture holder/ deposit holder, the formalities of transmission had to be completed by producing succession certificate, letter of probate, affidavit, indemnity bond, etc. To simplify this time consuming process, sections109A, 109B introduced nomination facility Provisions in respect of nomination are as follows: 1. For what can nomination be made? Nomination can be made for: (i) shares (ii) debentures and (iii) fixed deposits 2. Who can make nominations? Nomination can be made byi) Individuals only applying or holding shares or debentures on their own behalf, either singly or jointly, and ii) A minor can be nominated by a holder of shares or debentures or deposits and in that event the name and address of the guardian should be given by the holder. iii) A non-resident Indian can be nominated on repatriable basis  The nomination, as aforesaid, will hold good against any legal successor (whether by will or status). The nomination overrides any provision in respect of transmission by operation of law or by will. Thus, if a person has been appointed as nominee, the shares will be transferred in his/ her name, irrespective of any provision in will or succession certificate or probate [ section 109A(3)] Nomination can be varied or cancelled in prescribed manner, but nomination prevails over any provision of law of succession, will etc. 3. Who cannot be a nominee? Facility of nomination is available only to individual’s i.e. natural persons (who can die). Nomination by non-individuals like trust, society, body corporate, partnership firm, karta of HUF or a power of attorney holder is not permissible.

72 Similarly, the following cannot be a nominee: (i) trust, (ii) society, (iii) body corporate, (iv) partnership firm, (v) Karta of Hindu Undivided Family or (vi) a power-of-attorney holder. 4. How to make a nomination An investor is required to file nomination in duplicate prescribed form no. 2B with company or registrar and share transfer agents of the company who will return one copy thereof to the investor. The form should be signed by two witnesses. If nominee is minor, name and address of guardian shall be given by holder. If shares/ debentures are held jointly, all joint holders must sign the nomination form. In case of joint holding, the title passes to the nominee only if all joint holders die. [if one of the joint holder dies, the shares are transferred in name of surviving joint holders] 5. Rights of nominee holder i. The nominee is entitled to all rights of deceased member / debenture holder like dividend and bonus. However, he will not be eligible for voting rights or other rights as a member, unless he makes application in writing and is registered as a member in respect of the shares / debentures. ii. If nominee becomes entitled to any shares/ debentures by virtue of nomination, he will apply to company along with proof of death of holder/ joint holders. He can either a. request Board to register himself as the share holder/ debenture holder or b. transfer the shares / debentures of deceased share/ debenture holder. [section 109B(1)]. Thus, the nominee can either register his name or directly transfer the debentures/ shares in some other’s name. If he elects to be registered holder of shares / debentures, he will have to send a written notice to the company stating that he elects to be the registered holder. Such notice should be accompanied by death certificate of share / debenture holder. [Section 109B(2)]. Default of the nominee The nominee must either register himself as member or transfer the shares/ debentures is some other’s name. If he does neither, company can send him a notice to elect either to become a member or transfer the shares/ debentures. if the nominee does not comply within 90 days, Board can withhold payment of dividends, bonuses or other money payable, till the requirement of notice is complied with – section 109A(4). 6. When does nomination stand rescinded? Nomination will stand rescinded upon (i) transfer of share or (ii) transfer of debenture or (iii) repayment of deposits or (iv) renewal of deposits. 7. Valid Discharge by company Transfer of share or debenture in favour of a nominee and repayment of amount of deposits to nominee shall be a valid discharge by a company against the legal heir.

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