Unit 3: Share capital & company management

Share capital is the capital raised by issuing shares. Section 43 recognises two kinds.

• Equity with differential rights (DVR) as to dividend or voting are allowed under conditions.
• Divisions of capital: authorised (nominal), issued, subscribed, called-up and paid-up capital.
• Sweat equity shares (Section 54): issued to employees or directors at a discount or for consideration other than cash for know-how or value additions.

With an ordinary resolution (if authorised by articles), a company may:

• Increase authorised capital.
• Consolidate shares into larger denominations.
• Sub-divide shares into smaller denominations.
• Convert fully paid-up shares into stock and vice versa.
• Cancel unissued shares.
• Reduction of capital (Section 66): requires special resolution and confirmation by the NCLT.

• Book building: price discovery through bids within a price band.
• Issue at premium allowed; issue at discount prohibited except sweat equity (Section 53).

Allotment is the appropriation of a specific number of shares to a person in response to an application.

General principles

• Made by a proper authority (board), within a reasonable time, absolute and unconditional, and communicated.

Statutory rules (Sections 39 and 40)

• Minimum subscription must be received within 30 days of issue of the prospectus (or as SEBI specifies — 90% in public issues); otherwise money refunded within 15 days.
• Application money at least 5% of nominal value (SEBI may prescribe higher).
• Return of allotment (Form PAS-3) filed with ROC within 15 days (30 days for private placement).
• Shares to be dealt on a recognised stock exchange if offered to the public.
• Money kept in a separate bank account until allotment.
• Irregular allotment is voidable at the option of the applicant.

Section 2(34): a director is a person appointed to the board of a company. The board is the collective body of directors.

• Minimum: public company 3, private 2, OPC 1; maximum 15 (more by special resolution).
• At least one resident director (stayed in India 182 days in the previous calendar year).
• Listed companies and specified public companies: at least one woman director; listed companies — at least one-third independent directors.

DIN (Director Identification Number)

• Unique number allotted by the Central Government (MCA) to an individual intending to be a director — Sections 152–159.
• Applied in Form DIR-3 (or through SPICe+ for first directors); valid for life; KYC (DIR-3 KYC) filed periodically.
• One person can hold only one DIN.

Appointment

• First directors: named in the articles; otherwise subscribers to the MOA (individuals) are deemed directors.
• By shareholders in general meeting (ordinary resolution); retirement by rotation — at least two-thirds of directors of a public company are rotational and one-third of them retire at each AGM.
• By the board: additional, alternate, casual vacancy.
• By third parties (nominee) and proportional representation.
• By the Tribunal/Central Government in cases of oppression and mismanagement.
• Consent in Form DIR-2; appointment filed in DIR-12.

Disqualification (Section 164)

• Of unsound mind declared by a court; undischarged insolvent.
• Convicted of an offence with imprisonment of 6 months or more (7 years or more — disqualified for life).
• Order of disqualification by a court or Tribunal.
• Unpaid calls for 6 months.
• Convicted for related party transactions in last 5 years.
• No DIN.
• Director of a company that has not filed financial statements or annual returns for 3 years, or failed to repay deposits — disqualified for 5 years from other appointments.

Legal position of directors

Powers

• General powers (Section 179): the board may exercise all powers the company can, except those requiring a general meeting.
• Powers exercised only at board meetings (Section 179(3)): make calls, authorise buy-back, issue securities, borrow money, invest funds, grant loans, approve financial statements, diversify business, approve amalgamation or takeover.
• Powers with consent of shareholders (Section 180, special resolution): sell undertakings, borrow beyond paid-up capital + free reserves + securities premium, give time for repayment of debts.

Duties (Section 166)

• Penalty for breach: ₹1 lakh to ₹5 lakh.
• Liability: for breach of trust, ultra vires acts, negligence, fraud, misstatements in prospectus.

Key managerial personnel (KMP) — Section 2(51)

• CEO, managing director or manager.
• Company secretary.
• Whole-time director.
• Chief financial officer (CFO).
• Such other officer not more than one level below the directors in whole-time employment, designated KMP by the board, and any other officer prescribed.
• Section 203: every listed company and specified public companies (paid-up capital ₹10 crore or more) must appoint a whole-time KMP — MD/CEO/manager (or WTD), CS and CFO.