Corporate Finance: June 2017

Tuesday 13 June 2017

SEBI and RBI control over Corporate Finance

SEBI and RBI control over Corporate Finance

Role	Name	Affiliation
Principal Investigator	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University
Content Reviewer	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University

Description of Module

Items	Description of Module
Subject Name	Law
Paper Name	Corporate Finance
Module Name /Title	SEBI and RBI control over corporate Finance
Module No.	X

SEBI and RBI control over corporate Finance

Objective: After reading this module, the learners will have a clear picture of :

It is the duty of the Board to protect the interests of the investors in securities and to promote the development and regulate the securities market.

Learning Outcomes:

The acceptance of deposits by companies is regulated by Reserve Bank of India, SEBI and control over the deposit acceptance activity of non financial companies is vested in Department of Company affairs.

Introduction:

Prior 1992 there are three principal act governing to the securities Market were:

1. The Capital issue control Act 1947 which restricted the issuer’s access to the securities market and controlled the pricing of issues.

2. The companies act 1956 which set out the code of conduct for the corporate sector in relation to issue allotment and transfer of securities.

3. The securities contract Regulation act 1956 which provides for regulation of transactions in securities through control over stock exchanges.

In addition a number of other Acts I’e The Public Debt act 1944, The income tax act 1961, the Bnaking Regulation act 1949 etc.

The Securities and Exchange Board of India (SEBI), which was established on april 12,1988 through an extraordinary notification of the Government of India. The Ordinance was replaced by the SEBI Act 1992. The Board consist of a chairman and five other members: One each from the Ministry of Finance, One from Ministry of Law and Justice and company affairs and one from the Reserve Bank of India and two others to be appointed by the Central Government. The duty of the Board to protect the interests of the investors in securities and to promote the development and regulate the securities market.

Power and function of the Securities and Exchange Board of India (SEBI):

I. Regulating the business in stock exchanges and any other securities markets.

ii Registering and regulating the working of stock Brokers,sub-Brokers,Share transfer agents, Registrar to an issue, Merchant Bankers, Portfolio managers etc.

iii Registering and regulating the working of collective investment schemes including Mutual fund

Iv.Promoting and regulating self regulatory organizations.

V.Prohibiting fraudulent and unfair trade practices in securities market.

Vi.Promoting investors education and training of intermediaries in securities market.

Vii.Prohibiting insider trading in securities.

viii. Regulating substantial acquisition of shares and takeover of companies.

ix. Calling for information, undertaking inspection, audit of the stock exchanges etc.

x levying fees or other charges for carrying out of this section.

xi.Conducting research for the above purpose

xii performing such other functions as may be prescribe by the Government.

Power of the Board:

1.The Board shall have the same powers as are vested in a Civil Court under the code of Civil procedure 1908 while trying suit in following matters namely:-

i. The Discovery and production of books of account and other documents at such place and such time as may be specified by the board.

Ii. Summoning and enforcing the attendance of persons and examining them on oath.

Iii Inspection of any books, register and other documents of any person I;e stock-broker, share transfer agent etc at any place.

iv. Inspection of any book, or Register or other document or record of the company I;e listed public company or any recognized stock exchange.

V Issuing commissions for the examination of witness or documents.

vi. Suspend the trading of any security in a recognized stock exchange

Vii. Restrain persons from accessing the securities market and prohibit any person associated with securities market to Buy, sell or deal in securities.

Viii. Suspend any office- Bearer of any stock exchanges.

Ix Board to regulate or prohibit issue of prospectus, offer document or advertisement soliciting money for issue of securities.

X power to issue direction and investigation.

RBI Regulation:

1. RBI Empowered: Deposits of non-banking companies attracted official attention only in 1964 when the RBI was empowered to regulate the quantum of company deposits.

2. Objective: The primary objective of exercising control over deposit acceptance on companies is to regulate the growth of deposits outside the banking system as also afford a degree of indirect protection to the depositors.

3. Acceptance of Deposits: The acceptance of deposits by companies is regulated by Reserve Bank of India and control over the deposit acceptance activity of non financial companies is vested in Department of Company affairs.

4. Celling of Interest: Restrictions on quantum and tenure of deposits and ceiling of interest rates.

5. Mantain Liquid assets: They require certain type of companies to maintain liquid assets and all companies to submit returns/Balncesheet etc.

6 The RBI Regulation of Public Deposits has six main aspects:

1. Ceilling of Quantum Deposits: There is a ceiling on the quantum of deposits in terms of paid-up capital and reserves by the company because undue accumulation of short-term liabilities in the form of deposits can lead a company into financial difficulties.

i. Deposits: Any money received by a non banking company by way of deposits or loan or in any other form but excludes money raised by way of share capital or contributed as capita by proprietors.

2. Limit on Period: The Reserve bank Regulation is the limit on the period of such deposits. Formerly in order to avoid direct competition with short-term public deposits, companies were prohibited from accepting deposits for a period of less than 12 months. But the amendment of 1973 reduced the period to less than 6 months. The short term deposit is now pegged down to 10% of the aggregate to the paid-up capital.

3. Information about Repayment: The Reserve Bank has made obligatory on the part of the companies accepting deposits to regularly file returns giving detailed information about them their repayment etc.

4. While issuing Newspapers: The Reserve Bank has stipulated that while issuing newspaper advertisement certain specified information regarding the financial position and the working of the company must accompany.

5. Auditors: The RBI has entrusted the auditors of the companies with additional responsibility of reporting to it that the provisions under the Act had been strictly followed by the company.

6. Issued Brochure: The RBI has issued brochure RBI directives and company Deposits in order to clarify its role in protecting depositors.

Invitation and Acceptance of Deposits

Invitation and Acceptance of Deposits

Role	Name	Affiliation
Principal Investigator	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University
Content Reviewer	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University

Description of Module

Items	Description of Module
Subject Name	Law
Paper Name	Corporate Finance
Module Name /Title	Invitation and Acceptance of Deposits
Module No.	IX

Invitation and Acceptance of Deposits

Objective: After reading this module, the learners will have a clear picture of :

Deposit includes any receipt of money by way of deposit or loan or in any other form by a company. A deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions.

Learning Outcomes:

A company may accept deposits from its members, subject to passing of a resolution in General Meeting, on such terms and conditions including the provision of security, if any, or the repayment of such deposits with interest as may be agreed upon between the company and its members on fulfillment of the conditions.

Introduction:

Acceptance of Deposits: Chapter V of the Act deals with Acceptance of Deposits by companies. It contains four sections viz. sections 73 to 76. Of which, section 73, 74(1) and 76 are operative from April 01, 2014. The Companies (Acceptance of Deposits) Rules, 2014 (Rules) have also been notified and they have come into force on 1/4/2014. These Rules are framed in consultation with RBI. It may be noted that these sections and the Rules apply to Public and Private Companies.

Deposit: A deposit is that there must be a liability to return it to the party by whom or on whose behalf it is made on the fulfillment of certain conditions. Section 2(31) of the Companies Act 2013, Deposit includes any receipt of money by way of deposit or loan or in any other form by a company, But does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India. A deposit is voluntarily placed in the hand of an indifferent person a pledge and security are required from the parties who are interested.

Acceptance of Deposit from public by certain companies (eligible companies):

I Turnover: Section 76(1) provides that, a public company, having net worth of Rs. 100/- Crores or more or turnover of Rs. 500/- crores or more may accept deposits from public on the condition that the prior consent of the company in general meeting by a special resolution has been obtained and the said resolution has been filed with the ROC before making any invitation to the public for acceptance of deposit.

Ii charge on its assets: Every company accepting secured deposits from the public shall within thirty day of such acceptance create a charge on its assets.

Prohibition on Acceptance of Deposits from Public

I Resolution: Section 73(2) provides that a company may accept deposits from its members, subject to passing of a resolution in General Meeting, on such terms and conditions including the provision of security, if any, or the repayment of such deposits with interest as may be agreed upon between the company and its members on fulfillment of the conditions.

Ii Financial Position: Issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rate obtained the total number of depositors and the amount due towards deposits in respect of any previous previous deposits accepted by the company.

Iii Filing of copy: Filing of copy of the circular along with such statement with the Registrar within thirty days.

Iii Deposits maturing: Deposit such sum which shall not be less than fifteen percent of the amount of deposits maturing during the financial year kept in a separate bank.

Iv Certifying: Certifying that the company has not committed any default in the repayment of deposits accepted.

Preference in Payment:

Windup: It is generally understood that the Company faces winding-up proceedings when its financial position is not good or it has become insolvent. most of the cases it may be true that only insolvent companies are wound-up in accordance with the provisions of the Companies Act, 1956. But, it is also true that a Company may be wound-up due to the serious difference of opinion among the groups in the Company.

Official Liquidator: when a Company is to be wound-up, the procedure for initiating winding-up proceedings, the role of the managerial personal if the company is wound-up by the Company Court and the liquidation process to be conducted by the Official Liquidator appointed by the Company Court.

Preferential Payment: The Companies Act, 1956 provides for a preferential payment to the secured creditor and for making a payment, their due is to be ascertained by the Official Liquidator normally.

Recover the Amount: These are payments or transfers of assets that gives a creditor a preference or advantage over other creditors. Any payments or transfers made to a creditor prior to the liquidation may be recovered by liquidators in certain circumstances. Preferences are usually payments of money, though a variety of transactions could be deemed preferential.

Order of a Court: In corporate insolvencies, only liquidators may recover preferential payments; however it may require an Order of a Court to perfect the entitlement to recovery. Recovering preferences is within the ambit of the liquidator and is not available to provisional liquidators, voluntary or deed administrators or receivers and managers.

What are the elements of a preferential payment?

Before a Court will Order the recovery of a preferential payment, it must be satisfied that:
    (a) a transaction was entered into (this is usually a payment of monies);
    (b) it was between the company and a creditor of the company;
    (c) it occurred at a time when the company was insolvent;
    (d) it occurred within the statutory period before the liquidation commenced;
    (e) the transaction gave the creditor an advantage over other creditors; and
    (f) the creditor suspected or had reason to suspect that the company was insolvent

Rights in making company decisions affecting creditor’s interest:

The Administration of a company is vested in the Board of Directors and other officials who are answerable to the shareholders. In all meeting the decision taken by the majority is final and it is binding to all. But sometimes the majority view may affect the interests of the remaining minority shareholders. Than minority shareholders can protect their interests through law.

1. Illegal or Ultra Vires Act: A shareholder is entitled to bring an action against the company and its officers in respect of matter which are ultra vires.

2. Prevention of oppression and mismanagement: A member who complaints that the affairs of the company are being conducted in a manner injury to public interest or any shareholders interest he may apply to tribunal for relief on the ground of mismanagement of the company under sec 241 of the companies Act.

3.Class Action Sec 245:Member or number of members, depositors or any class of them are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner injury to the interests of the company or its members or depositors file an application before the Tribunal on behalf of the members. Or depositors

1. To restrain the company from committing an act which is ultra vires the articles or memorandum.

2. To restrain the company from committing breach of any provision of the company’s memorandum.

3. To declare a resolution altering the memorandum or articles.

4. To restrain the company from taking action contrary to any resolution passed by the members.

Payment of Dividends:

1. The payment of dividends is having two fundamental principles. The first dividends must never be paid out of capital.

2. The dividends shall be paid only out of profits.

Case: K.Madhava v Popular Bank,(AIR 1970 Ker.131): It has been held that payment of dividend out of capital is a breach of trust.Howerver the directors may recover indemnity from he shareholders who have received the dividends out of capital.

Case: Flitcroft’s case (i.e in re Exchange Banking Co,(1882) 21 Ch D 519) certain bad debts were credited to the accounts and not real profit created were paid away as dividends. The directors were held responsible.

Statutory Provisions for Dividends:

Declaration of Dividend (Sec.123)

1. No dividend shall be declared or paid by a company for any financial year out of profit of the company for that year arrived at after providing for depreciation.

2. The Board of directors of a company may declare interim dividend during any financial year out of surplus in the profit and loss account.

3. The amount of the dividend including interim dividend shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

4. Dividednd shall be paid by a company in respect of any share therein except to the registered shareholders.

Debentures

Role	Name	Affiliation
Principal Investigator	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University
Content Reviewer	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University

Description of Module

Items	Description of Module
Subject Name	Law
Paper Name	Corporate Finance
Module Name /Title	Debentures
Module No.	VIII

Debentures:

Objective: After reading this module, the learners will have a clear picture of :

To meet the financial requirements a company resort to borrowings. Such borrowings may be short-term and long term. Long term borrowings may be debentures, bonds, term loan from banks, public deposits etc. Issue of debentures is very common source to raise borrowings.

Learning Outcomes:

Thus the debenture holders are the creditors of the company and get interest at a fixed rate, whether the company makes a profit or not. They have no concern with the management and control of the company.

Introduction:

Quite often the money raised through the issue of shares is found inadequate to meet the growing financial requirements of business. Hence, to meet the financial requirements a company resort to borrowings. Such borrowings may be short-term and long term. Short term borrowings are overdraft, bills payable etc. Long term borrowings may be debentures, bonds, term loan from banks, public deposits etc. Issue of debentures is very common source to raise borrowings.

Definitions of Debentures:

The word ‘debenture’ is used to signify—”A written acknowledgement of a debt by a company under its seal, and generally containing a provision as to payment of interest and repayment of principal.” Debentures carry interest at a certain percent. As it is a loan taken by company, it is repaid after a specified period or at the option of the company as per terms of the issue.

Debenture: According to Tophan Debenture is a document given by a company as evidence of a debt to the holder, usually arising out of a loan and most commonly secured by the charge.

According to Section 2(30) of the companies Act 2013 debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on assets of the company or not.

Characteristics or Features of Debentures:

Following are the main features of debentures:

(i) A debenture is a written acknowledgement of debt taken by the company.

(ii) Debentures are issued in the form of a certificate.

(iii) Debentures are issued under the seal of company.

(iv) A debenture holder is promised periodic payment of interest at a fixed rate and repayment of principal amount after specific period.

(v) Debentures are generally secured by a fixed or floating charge on assets of the company.

(vi) Funds raised by the issue of debentures are of long term.

(vii) It carries the promise to pay interest at a definite rate at regular intervals.

(viii) Debenture holders do not have right to vote in the meetings.

Purpose of issuing debentures:

As stated above companies raise huge amount of long term loans by issuing the debentures.

According to guidelines issued by Security Exchange Board of India (SEBI) a company can issue the debentures for the following objectives:

(a) For meeting expenditure on modernization of plant.

(b) Expansion and diversification of plant.

(d) For setting up new projects.

Features or Characteristics of Debenture:

1. Form of Certificate: Debenture is usually in the form of certificate issued under the seal of the company. It is an instrument in writing.

2. Acknowledgement: The certificate of debenture is generally an acknowledgement of indebtedness.

3. Seal:it issued the companies seal.

4. Series of issued: It is one of a series issued to a number of lenders.

5. Period: It usually specifies a particular period or date as the date of repayment.

6. Create Charge: It generally create a charge on the some part of property.

7. Voting Right: Debenture carries no voting Rights.

Kinds or classes of Debentures:

1. Classification according to negotiability: On the basis of transferability, debentures can be classified into two types namely bearer debentures and registered debentures.

i. Bearer Debentures: These debentures are also known as unregistered debentures. As these debentures are payable to bearer they are called bearer debentures. These can be transferred. And value is not affected. These are regarded as negotiable instruments,

Case:Callcutta safe deposit co ltd v Ranjit Mathurdas Sampat (1971) in Calcutta high court that a person to whom a bearer instrument is transferred becomes its holder. If the payment is denied to him he will be entitled to all the rights of a creditor.

Ii Registered Debentures: Debentures which are payable only to registered holders are called registered debentures. A holders is one whose name appears both on the debenture certificate and in the company’s register of debentures.

2. Classification according to security:

i. Unsecured Debentures: These securities are also called Simple or naked debentures. Debentures which are not secured by any charge on the assets of the company are called unsecured debentures.

Ii Secured Debenture: Debentures which are issued with a charge on the assets of the company are called secured debentures. These are also called mortgage debentures. The charge may be fixed charge or a floating charge.

3. Classification according to permanence:

I Redeemable Debentures: Debentures which are repayable after a certain period are called redeemable debentures. On the expiry of the term of the loan.

Ii Irredeemable Debentures: Those debentures which are not repayable at the end of a definite period. Usually these debentures are repayable. When the company goes into liquidation.

4. Classification according to convertibility:

Convertible Debentures: These debentures are given an option to the holders to convert them into preference or equity shares at stated rates of exchange after certain period.

a. Fully convertible debentures: Fully convertible debentures are those debentures are converted into equity shares of the company.

b. Partly conversion is optional at the discretion of debenture holders.

5. Classification according to priority:

a. First debenture: These are debentures which are to be repaid in priority to other debentures.

B.Second Debenture: These are the debentures which are to be paid after the first debentures have been redeemed.

Nature of Debentures: The debenture in a company shall be moveable property and transferable.

6. Debenture v Share:

i. share are part of capital where debenture constitute a loan.

ii. Shareholders are the owners of the company whereas debenture holders are creditors of the company.

IiiShareholders enjoy voting rights whereas debenture holders do not have any voting right

iv Dividends can be paid to the share holders only out of the profits of the company but interest on debentures is payable even if there are no profits.

V Debentures generally have a charge on the assets of the company but share do not carry any such charge.

Vi The rate of interest is fixed in case of debentures where as an equity shares the dividend may vary from year-to-year.

Vii Interest on debentures gets priority over dividend on shares.

Transfer and Transmission of Shares

Role	Name	Affiliation
Principal Investigator	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University
Content Reviewer	Dr.Gyanendra Kumar sahu	Asst.Professor Utkal University

Description of Module

Items	Description of Module
Subject Name	Law
Paper Name	Corporate Finance
Module Name /Title	Transfer and Transmission of Shares
Module No.	VII

Transfer and Transmission of Shares:

Objective: After reading this module, the learners will have a clear picture of :

A shareholder is free to transfer shares to a person of his own choice and that the articles cannot put a complete ban or unreasonable restriction on the transfer

Learning Outcomes:

Transfer of shares is a transaction resulting in a change of share ownership. A shareholder, whether in public or private company, has a property in his share which he has a right to dispose of, subject only to any express restriction which may be found in the articles of the company. In other part Transmission is the automatic process; when a shareholder dies, his shares immediately pass to the personal representatives or, if a member is declared bankrupt, their shares will vest in the trustee in bankruptcy.

Introduction:

Shares are like any other goods. Section 82 states that the share shall be a movable property and transferable in a manner provided by the articles of the company. It has, however, been consistently held by the courts that subject to restrictions imposed by the articles, a shareholder is free to transfer shares to a person of his own choice and that the articles cannot put a complete ban or unreasonable restriction on the transfer. While shares in a private company are not freely transferable and are subject to the restrictions imposed by the articles of the company, shares in a public company are freely transferable. There are different types of transfer such as transfer of share by gifts, in case of joint holdings and transfer in private companies.

Transfer of shares: Transfer of shares is a transaction resulting in a change of share ownership. A shareholder, whether in public or private company, has a property in his share which he has a right to dispose of, subject only to any express restriction which may be found in the articles of the company.

Transmission is the automatic process; when a shareholder dies, his shares immediately pass to the personal representatives or, if a member is declared bankrupt, their shares will vest in the trustee in bankruptcy.

Transfer Of Shares – Procedure And Scope

"When joint stock companies are established, the great object was that the shares should be capable of being easily transferred.”

1.1 Need for an Instrument of Transfer

Shares are moveable goods. The ownership of moveable goods may be transferred by delivery of possession, but as per section 36 there is a contractual relationship between the members and the company. When shares are transferred the contractual relationship is assigned to the transferee which requires an instrument of transfer. Transferring a share involves a series of steps, first an agreement to sell, then execution of a deed of transfer and finally registration of the transfer. Section 108 lays down the procedure for transfer.

1.2Procedure for Transfer of Shares

1) Instrument of transfer must be executed by both transferor and transferee.

2) It must be duly stamped

3) It must be delivered to the company along with certificate relating to shares transferred

4) Must be in the prescribed form and presented to prescribed authority.

Transfer Form’ Section 108 requires the transfer to be in a proper instrument of transfer known as ‘Share Transfer Form’ which is required to be presented to the Registrar of Companies before it is signed and filled up by the transferor .

Any instrument of transfer which is not in agreement with these provisions shall not be accepted by the company. The transferee becomes a member of a company only when the transfer is registered by the company.

In Prafulla Kumar Rout v. Orient Engg. Works (P.) Ltd it was observed that all that section 108 requires is that before delivery, the stamps should be affixed. However, in Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd . the Kerala High Court observed that instrument is unstamped if the it is not properly executed. Cancellation of the stamps by the staff of the company does not make the transfer instrument duly stamped . Provisions of Section 108 are inapplicable to transfer where transferee or transferor are entitled as beneficial owners in the records of depository.

1.3Demat Shares

In the case of fresh issue (IPO), the investor would indicate his choice in the application form, if he opts to hold the security in the depository mode, commonly known as 'demat' mode. An investor, who opts for a depository mode may at any time, opt to choose out of it and claim share certificate from the company by substituting his name as the registered owner in the place of the depository. Ownership changes in the depository system will be made automatically on the basis of delivery vs. payment. The provisions of section 108 are inapplicable to transfer where transferee and transferor are entered as beneficial owners in records of depository.

1.4Time Limit

As per section 113, a company is required, within 2 months after the application for transfer, to deliver the share certificates duly transferred. In Re, Reliance Industries Ltd. the company failed to deliver shares within the prescribed time of 2 months. CLB fined the company and share transfer agents. The default under section 113 is a continuing offence and, therefore, shall not be subject to limitation.

1.5 Board Of Directors- Power Of Refusal

Where the AoA of a Company give power to the Board to refuse registration of a transfer of shares, such power must be exercised by a resolution of the Board. The Board may refuse to register the transfer as long as they are acting in the interests of the Company, but if they exercise their discretion to refuse malafide, i.e. they act oppressively or corruptly, the CLB or the Court will now interfere and order registration.

1.6rights Of Transferees

Till the company has registered the transfer, the name of the transferor continues to appear in the register of members and thus he continues to be the lawful owner but transferee is the beneficial owner (cestui que trust). In order to protect the interest of the transferees; section 206A was added by the Amendment Act, 1988 which provides that where any instrument of transfer of shares has been delivered to the company for registration and transfer has not been registered, the right to dividend, rights shares and bonus shares will be kept on hold.

1.7Blank Transfer

Where a shareholder 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 transfer ‘in blank’ or a ‘blank transfer’. It is not a negotiable instrument because it may be transferred by mere delivery.

1.8Right To Pre-Emption

It is a common practice to provide in the articles that any member intending to transfer his shares must offer the shares first to other members of the company. Such restrictions are not invalid. The conditions imposed and the formalities prescribed by the articles are mandatory. The pre-emption clause does not, however, completely bar transfers to outsiders .

1.9 Restrictions On Transfer Of Shares

I General Grounds

Malafide instrument of transfer, inadequacy of reasons, irrelevant considerations and bad delivery of transfer documents, contravention of law, prejudicial to company or public interest and stay order by Court are the reasons when transfer of shares can be restricted.

II Special Circumstances

1) On transfer with regard to the company's borrowing

2) Under SEBI Guidelines shares allotted to certain categories of shareholders such as promoters, employees, etc are subject to condition of non-transferability for a period of 3-5 years accordingly.

Transmission Of Shares

Transmission of shares takes place, when the registered shareholder dies; or when he is adjudicated an insolvent; or where the shareholder is a company it goes into liquidation. On the death of a shareholder, his shares vest in his legal representative. The legal representative may transfer the shares devolved upon him by transmission.

Transmission of shares in favour of a member of a private company who is engaged in a competing business cannot be refused. In S.M. Hagee Abdul Hye Sahib v. KNS Hajee Shaik Abdul Kadar Labbai Sahib Co. (P.) Ltd ., the CLB held that a transfer of shares in a private company may be refused in case the transferee is engaged in a competing business but transmission cannot be refused on that ground. Succession certificate covering shares held by a deceased member on the date of his death would cover subsequent issue of bonus shares and no fresh succession certificate would be required .

3.1Transmission V Transfer

Transfer is by the act of the parties. Transmission is by devolution of law, i.e. death or bankruptcy. In transmission of shares no procedures are required to be followed unlike in transfer of shares.

Sweat Equity Shares:

Sweat equity shares means such equity shares as are issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Employee means –

(a) a permanent employee of the company who has been working in India or outside India, for at least the last one year; or

(b) a director of the company, whether a whole time director or not; or

(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.

(a) The normal remuneration payable under the contract of employment, in the case of an employee; and/or

(b) Monetary consideration payable under any other contract, in the case of non-employee.

CONDITIONS AND PROCEDURE FOR ISSUING SWEAT EQUITY SHARES [SECTION 54]

Conditions:

A company can issue sweat equity shares only of a class of shares already issued subject to fulfillment of conditions prescribed below:

General meeting and Special Resolution

· A special resolution should be passed by the members of the company authorizing the issue of sweat equity shares containing details as specified below in the Checklist and Procedure.

· The special resolution should be acted upon within a period of 12 months from the date of passing else it will become invalid and a fresh resolution will have to be passed again.

Limit on quantum of issue

· The company shall not issue sweat equity shares for more than 15% of the existing paid up equity share capital in a year or shares of the issue value of Rs. 5 crores, whichever is higher.

· The issuance of sweat equity shares in the Company shall not exceed 25% of the paid up equity capital of the Company at any time.

Pricing and valuation

· The sweat equity shares to be issued shall be valued at a price determined by a registered valuer as the fair price giving justification for such valuation.

Register of Sweat Equity Shares

· The company shall maintain a Register of Sweat Equity Shares in Form No. 4.3 and shall forthwith enter therein the particulars of Sweat Equity Shares issued under section 54.

· The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.

· Entries in the register shall be authenticated by the Secretary of the company or by any other person authorized by the Board for the purpose.

· Disclosure in Board Report – Details regarding the sweat equity issue need to be disclosed in the Board’s Report of the year in which issue is made. The details to be disclosed are stated in the procedure below.