UNIT-3
Table of Contents
Individual Shareholder Rights and Corporate Membership Rights: An Overview
In the corporate framework, shareholders are the owners of a company, while corporate members include shareholders and other entities such as guarantors or nominees who fulfill specific roles. The distinction between individual shareholder rights and corporate membership rights lies in their scope, purpose, and application. Understanding these rights is critical to ensuring fairness, accountability, and transparency in corporate governance.
Individual Shareholder Rights
Individual shareholders are the equity owners of a company and have rights defined under The Companies Act, 2013, as well as the Articles of Association (AOA) and Shareholder Agreements. These rights can be classified as basic, statutory, and derivative rights.
Key Individual Shareholder Rights
- Right to Ownership and Dividend
- Shareholders are entitled to a proportionate share in the company’s profits in the form of dividends.
- Dividends must be declared by the board and approved in the general meeting.
- Right to Attend and Vote at General Meetings
- Shareholders have the right to attend Annual General Meetings (AGMs) and Extraordinary General Meetings (EGMs).
- They can vote on important matters like the election of directors, changes to the AOA, and approval of major transactions.
- Right to Transfer Shares
- Shareholders can transfer their shares to others, subject to restrictions outlined in the company’s AOA.
- Right to Inspect Books and Records
- Under Section 94 of the Companies Act, shareholders have the right to inspect statutory registers and other records during business hours.
- Right to Legal Action
- Shareholders can file legal actions if their rights are infringed. This includes derivative suits to address wrongdoings by directors or management.
- Right to Participate in Decisions Affecting Capital
- Shareholders must be consulted on matters involving share capital, such as issuing new shares or altering the capital structure.
- Preemptive Right
- Existing shareholders have the right of first refusal when the company issues new shares, protecting their proportional ownership.
- Right to Residual Claims
- Upon liquidation, shareholders have the right to claim the residual assets after all liabilities have been settled.
Corporate Membership Rights
Corporate membership rights encompass broader powers and obligations than individual shareholder rights. These rights apply to the entity as a member of the company, which may include shareholders, guarantors, or nominees acting in an official capacity.
Key Corporate Membership Rights
- Right to Participate in Corporate Governance
- Members are involved in decision-making processes, such as amendments to the Memorandum and Articles of Association.
- Right to Elect and Remove Directors
- Members collectively have the power to appoint or remove directors, ensuring accountability of the management.
- Right to Call for Meetings
- Members holding a minimum percentage of shares (usually 10% as per the Companies Act, 2013) can requisition a meeting to address specific issues.
- Right to Approve Major Transactions
- Corporate members collectively approve mergers, acquisitions, and other significant business activities.
- Right to Winding-Up Decisions
- Members have the authority to decide on voluntary winding up of the company under specified conditions.
- Right to Ratify Acts of Directors
- Members may ratify acts of directors that require their collective approval, such as transactions beyond the board’s authority.
Differences Between Individual Shareholder Rights and Corporate Membership Rights
| Aspect | Individual Shareholder Rights | Corporate Membership Rights |
|---|---|---|
| Scope | Personal to each shareholder. | Collective rights exercised by members as a group. |
| Decision-Making Power | Limited to voting rights in general meetings. | Includes governance, such as amending AOA or approving mergers. |
| Ownership and Profits | Focused on dividends, shareholding, and residual claims. | Broader powers influencing overall corporate policy. |
| Legal Standing | Shareholders can pursue legal action individually or derivatively. | Members act collectively in legal matters or major decisions. |
| Control | Limited influence on day-to-day operations. | Members can exercise significant control over governance and strategy. |
| Voting Weight | Depends on shareholding percentage. | Collective influence as defined by corporate structure and law. |
Legal Provisions Governing Shareholder and Membership Rights
- The Companies Act, 2013
- Sections 43 to 72 detail the rights and liabilities of shareholders and members.
- Section 47 specifies voting rights for equity and preference shareholders.
- Section 101 to 122 governs meetings, voting, and member-related procedures.
- SEBI Guidelines
- Regulates the rights of shareholders in listed companies, ensuring transparency and accountability.
- Case Laws
- ICICI Bank v. Official Liquidator of APS Star Industries Ltd. (2010): Highlighted shareholder rights in insolvency situations.
- Cyrus Mistry v. Tata Sons Ltd. (2017): Emphasized the role of members in corporate governance disputes.
Importance of Shareholder and Membership Rights
- Protection of Minority Shareholders: Ensures minority interests are safeguarded against oppressive actions by the majority.
- Corporate Governance: Strengthens accountability by balancing individual and collective rights.
- Transparency: Promotes trust by mandating disclosure and voting rights.
- Dispute Resolution: Provides mechanisms to address grievances effectively.
Conclusion
While individual shareholder rights ensure that the personal interests of investors are protected, corporate membership rights enable collective participation in shaping the company’s strategic direction. Both sets of rights are essential for maintaining a balance of power, ensuring transparency, and fostering trust in corporate governance. The Companies Act, 2013, and judicial interpretations provide a robust framework to safeguard these rights.
QUESTION-2 What do you mean by consolidation and reorganization of shares? Define various types of reconstruction
Consolidation and Reorganization of Shares
Consolidation of Shares
Consolidation of shares refers to the process of combining a company’s existing shares into a smaller number of shares with a proportionally higher nominal value. This action does not change the company’s overall share capital but reorganizes the share structure.
Key Features of Share Consolidation
- Purpose:
- Simplifies the shareholding structure.
- Increases the per-share market price, making the shares more attractive to investors.
- Legal Provisions:
- Governed by Section 61(1)(b) of the Companies Act, 2013, which allows companies to consolidate and divide their share capital with shareholder approval.
- Effects:
- Reduction in the number of issued shares.
- Enhanced perceived value of each share.
- Example:
A company consolidates 10 shares of ₹1 each into one share of ₹10 each. Shareholders holding 100 shares before consolidation will hold 10 shares afterward, with no change in their overall investment value.
Reorganization of Shares
Reorganization of shares involves altering the structure of a company’s share capital to meet specific objectives, such as capital optimization, better management of shareholder interests, or compliance with regulatory requirements.
Forms of Reorganization:
- Subdivision of Shares:
- Splitting existing shares into smaller denominations.
- Example: One ₹100 share is split into ten ₹10 shares.
- Reduction of Share Capital:
- A company decreases its share capital by reducing the nominal value of shares or canceling unissued shares.
- Governed by Section 66 of the Companies Act, 2013.
- Conversion of Shares:
- Converting equity shares into preference shares or vice versa.
- Common in restructuring to meet financial needs.
- Cancellation of Unpaid Share Capital:
- Shares not fully paid for can be canceled to reorganize the shareholding structure.
Types of Reconstruction in Corporate Finance
Reconstruction is a process undertaken by a company to reorganize its financial structure to address operational inefficiencies, financial distress, or to align with strategic goals. There are two primary types of reconstruction: internal and external.
1. Internal Reconstruction
Internal reconstruction involves restructuring within the existing company without forming a new entity. This is usually undertaken to resolve financial issues or improve the company’s operations.
Key Features:
- Involves adjustments like reducing share capital, reorganizing liabilities, or writing off accumulated losses.
- Governed by Sections 66 and 230 of the Companies Act, 2013.
Methods of Internal Reconstruction:
- Reduction of Capital:
- Reducing paid-up capital to eliminate accumulated losses.
- Example: If a company has ₹1 crore in losses, it might reduce its share capital to offset these losses.
- Revaluation of Assets and Liabilities:
- Adjusting the book value of assets and liabilities to reflect their current market values.
- Alteration of Shareholders’ Rights:
- Modifying the terms associated with equity or preference shares to meet financial objectives.
Example Case:
- Re Hindustan Lever Ltd. (1957): Internal reconstruction through asset revaluation and capital reduction to revitalize the company.
2. External Reconstruction
External reconstruction involves the formation of a new company to take over the assets and liabilities of an existing company. This typically happens when the company faces severe financial difficulties or when a merger or acquisition is planned.
Key Features:
- The existing company transfers its assets and liabilities to a new entity.
- Shareholders of the old company become shareholders of the new company.
Methods of External Reconstruction:
- Merger or Amalgamation:
- Combining two or more companies into a single entity for operational efficiency.
- Example: The merger of Vodafone India and Idea Cellular in 2018.
- Demerger:
- Splitting a company into two or more independent entities to focus on core competencies.
- Example: The demerger of Larsen & Toubro (L&T) and L&T Infotech.
- Acquisition or Takeover:
- One company acquires control of another, either through asset purchase or share acquisition.
Example Case:
- Reliance Industries and Reliance Petroleum Merger (2002): External reconstruction through amalgamation.
Comparison Between Internal and External Reconstruction
| Aspect | Internal Reconstruction | External Reconstruction |
|---|---|---|
| Nature | Restructuring within the same entity. | Creation of a new entity. |
| Involvement | Limited to the existing company. | Involves old and new companies or merging entities. |
| Regulatory Compliance | Sections 66 and 230 of the Companies Act, 2013. | Sections 232 to 234 of the Companies Act, 2013. |
| Examples | Capital reduction, revaluation of assets. | Mergers, demergers, and takeovers. |
| Objective | Improve financial position without external intervention. | Address insolvency or restructure through a new entity. |
Legal Provisions Governing Share Reorganization and Reconstruction
- The Companies Act, 2013:
- Section 61: Alteration of share capital, including subdivision and consolidation.
- Section 66: Reduction of share capital.
- Sections 230-234: Provisions for compromise, arrangement, and amalgamation.
- SEBI Regulations:
- Ensure transparency and protect shareholder interests during restructuring.
- Judicial Interpretations:
- Miheer H. Mafatlal v. Mafatlal Industries Ltd. (1996): Laid down principles for fairness in schemes of arrangement.
Importance of Share Reorganization and Reconstruction
- Financial Optimization: Improves the capital structure and financial health of the company.
- Operational Efficiency: Aligns resources with business goals, ensuring sustainable growth.
- Regulatory Compliance: Ensures adherence to laws governing corporate governance and financial reporting.
- Shareholder Value Creation: Enhances investor confidence through transparent and equitable processes.
By facilitating financial and operational restructuring, share reorganization and reconstruction play a vital role in ensuring the long-term sustainability and success of corporate entities.
QUESTION-3-What do you mean by Rights of a Member? Difference between Individual Membership rights and corporate membership right
Rights of a Member in a Company
A member of a company refers to any person or entity that has agreed to become a part of the company by purchasing its shares or otherwise acquiring membership. Membership rights are conferred by the company’s articles of association, the Companies Act, 2013, and general principles of corporate law.
Key Rights of a Member
- Right to Transfer Shares:
Members can transfer their shares according to the procedure specified in the company’s articles. - Right to Dividend:
Members are entitled to receive a proportion of the company’s profits when the board declares dividends. - Right to Attend Meetings:
Members have the right to attend general meetings and participate in discussions and voting. - Voting Rights:
Members can vote on company resolutions, with voting power proportional to their shareholding. - Right to Inspect Company Documents:
Members can inspect statutory registers, financial statements, and other records of the company. - Right to Petition:
Members can petition the Tribunal for relief in case of oppression or mismanagement under Section 241 of the Companies Act, 2013. - Right to Bonus and Rights Issues:
Members are entitled to additional shares during bonus issues or the first right to purchase shares during a rights issue. - Right to Share Surplus Assets:
In the event of company liquidation, members have a residual claim over the company’s assets after liabilities are paid.
Individual Membership Rights vs. Corporate Membership Rights
Membership rights vary depending on whether the member is an individual or a corporate entity. Here’s a comparative analysis:
| Aspect | Individual Membership Rights | Corporate Membership Rights |
|---|---|---|
| Definition | Rights held by natural persons who own shares in the company. | Rights held by corporations or entities owning shares. |
| Voting Representation | Individuals vote directly in meetings. | Votes are cast by an authorized representative of the entity. |
| Participation in Meetings | Members personally attend and vote in meetings. | Entities send authorized representatives to act on their behalf. |
| Rights in Dividend | Entitled to receive dividends in their name. | Dividends are credited to the corporate entity’s account. |
| Shareholding | Shares are held in the name of an individual. | Shares are held in the corporate name, often for investment. |
| Access to Relief | Can directly petition for relief under applicable laws. | The corporate body can file grievances through its legal entity. |
| Role in Management | Typically limited to shareholder voting or non-executive roles. | May influence management decisions if they hold significant shares. |
Legal Provisions Governing Member Rights
- Companies Act, 2013:
- Section 2(55): Defines the term “member.”
- Section 47: Grants voting rights to equity and preference shareholders.
- Section 88: Mandates the maintenance of a register of members.
- Sections 241-246: Provide remedies for oppression and mismanagement.
- Articles of Association:
- Dictate specific rights, limitations, and obligations for members.
- Case Laws:
- Bharat Insurance Co. Ltd. v. Kanhaya Lal (1935): Clarified the rights of members to inspect company records.
- CIT v. Standard Vacuum Oil Co. (1966): Defined the extent of corporate membership rights in dividend distribution.
Conclusion
Membership rights are fundamental for safeguarding the interests of both individual and corporate members in a company. While individual membership rights center around personal participation and benefits, corporate membership rights emphasize representation and investment returns. This differentiation ensures that both natural persons and corporate entities can effectively contribute to and benefit from the company’s operations.
QUESTION-4-What do you mean by Reorganization of shares? Discuss various types of Reconstruction.
Reorganization of Shares: Definition
Reorganization of shares refers to the process by which a company modifies its share capital structure. This may involve altering the number of shares, the nominal value of shares, or their classification. The primary aim is to align the company’s capital structure with its financial strategies, improve liquidity, and optimize shareholder returns.
Under the Companies Act, 2013, reorganization of shares may include actions such as consolidation, subdivision, conversion, and cancellation of shares.
Types of Reorganization of Shares
- Consolidation of Shares:
- Involves combining smaller shares into larger ones with higher nominal value.
- Example: Ten shares of ₹10 each consolidated into one share of ₹100.
- Legal Basis: Governed by Section 61(1)(b) of the Companies Act, 2013.
- Objective: To reduce the number of shares, improve trading volume, or achieve parity with the company’s market value.
- Subdivision (Split) of Shares:
- Involves dividing existing shares into smaller units with lower nominal value.
- Example: One share of ₹100 split into ten shares of ₹10 each.
- Legal Basis: Permitted under Section 61(1)(d) of the Companies Act, 2013.
- Objective: To enhance liquidity and make shares more affordable for small investors.
- Conversion of Shares:
- Equity shares may be converted into preference shares or vice versa.
- Objective: To adapt the company’s share capital to meet its financial needs or investor preferences.
- Cancellation of Shares:
- Involves canceling unissued shares or shares bought back by the company.
- Objective: To reduce the company’s share capital and improve its financial health.
- Legal Basis: Sections 66 and 68 of the Companies Act, 2013.
Reconstruction: Definition
Reconstruction refers to significant changes in the company’s structure, operations, or assets to improve financial performance or address legal issues. This is typically carried out under a comprehensive scheme approved by stakeholders and authorities.
Reconstruction can be broadly categorized into internal and external reconstruction.
Types of Reconstruction
1. Internal Reconstruction
Internal reconstruction involves restructuring the company’s existing financial structure without liquidating the company. It usually includes adjustments to capital, reserves, or liabilities.
- Key Methods:
- Alteration of Share Capital:
Includes consolidation, subdivision, or reduction of share capital under Section 66 of the Companies Act, 2013. - Reduction of Share Capital:
Involves reducing the unpaid capital, canceling shares, or writing off losses.
Example: Writing off accumulated losses to present a healthier balance sheet. - Capital Restructuring:
Restructuring shareholding patterns or swapping debt for equity.
- Alteration of Share Capital:
- Objective:
To improve the financial stability of the company, address losses, and gain investor confidence.
2. External Reconstruction
External reconstruction involves winding up an existing company and transferring its assets and liabilities to a new company. This usually occurs when a company is facing severe financial difficulties or merging with another company.
- Key Processes:
- Mergers and Amalgamations:
Two or more companies combine to form a single entity.
Legal Basis: Governed under Sections 230-232 of the Companies Act, 2013. - Takeovers and Acquisitions:
One company acquires control of another company, either by purchasing shares or assets.
Example: Reliance acquiring Future Group’s retail business. - Demerger or Spin-Offs:
A division of a company is split to operate as an independent entity.
Objective: To focus on core businesses and create value for shareholders.
- Mergers and Amalgamations:
Key Differences Between Internal and External Reconstruction
| Aspect | Internal Reconstruction | External Reconstruction |
|---|---|---|
| Nature | Involves restructuring within the company. | Involves creation of a new company. |
| Legal Process | Relatively simpler and requires board approval. | Requires court or tribunal approval under Sections 230-232. |
| Continuity | The same company continues operations. | The existing company is wound up, and a new entity is formed. |
| Examples | Reduction of capital, cancellation of shares. | Merger, amalgamation, or takeover. |
Significance of Reorganization and Reconstruction
- Addressing Financial Distress:
Helps companies recover from financial difficulties and sustain operations. - Improving Shareholder Value:
Restructuring often leads to increased profitability and higher returns for investors. - Adapting to Market Changes:
Companies can adjust their structure to align with changing regulatory, financial, or market environments. - Attracting Investors:
A well-reorganized capital structure may appeal to potential investors and creditors. - Ensuring Compliance:
Reconstruction ensures that companies meet the requirements of regulatory bodies like SEBI, RBI, or the Ministry of Corporate Affairs.
Case Laws and Examples
- Saraswati Industrial Syndicate Ltd. v. CIT (1990):
Defined the concept of amalgamation as a corporate process where two or more entities merge. - Seth Industries Ltd. v. CIT (2012):
Highlighted the significance of internal restructuring in addressing accumulated losses.
Conclusion
Reorganization of shares and reconstruction are essential tools for corporate entities to remain competitive, address financial challenges, and adapt to evolving business environments. The right approach to restructuring ensures financial stability and enhances shareholder value while complying with statutory provisions.
QUESTION-5 -What do you mean by Right under Company Law
Rights under Company Law
Under company law, rights refer to the legal entitlements and privileges granted to members (shareholders), creditors, and other stakeholders of a company. These rights are established under the Companies Act, 2013, and other applicable laws, as well as the company’s Articles of Association (AOA) and Memorandum of Association (MOA).
Rights under company law aim to protect the interests of stakeholders, maintain fairness in governance, and ensure compliance with statutory obligations.
Types of Rights under Company Law
1. Rights of Members (Shareholders)
Shareholders are the owners of the company and enjoy various rights, which can be categorized as follows:
A. Statutory Rights
Rights explicitly provided under the Companies Act, 2013:
- Right to Receive Notice of General Meetings
- Members have the right to be informed about the date, time, and agenda of general meetings.
- Governed by Section 101.
- Right to Attend and Vote at General Meetings
- Shareholders can attend meetings in person or by proxy (Section 105) and cast votes on resolutions.
- Right to Receive Dividends
- Members are entitled to a share of the company’s profits, as declared by the company’s board and approved by members (Section 123).
- Right to Receive Financial Statements
- Members can access the company’s financial statements and auditor’s reports under Section 136.
- Right to Inspect Company Records
- Shareholders can inspect statutory registers, minutes of general meetings, and other documents as per Sections 94 and 128.
- Right to Apply for Oppression and Mismanagement
- Shareholders can file complaints for redressal under Sections 241 and 242 if they believe the company’s affairs are being conducted in a manner prejudicial to their interests.
B. Contractual Rights
Rights that arise from the company’s Articles of Association (AOA) or specific shareholder agreements. Examples include:
- Preferential rights attached to preference shares.
- Rights regarding the transfer or transmission of shares.
C. Minority Shareholders’ Rights
Special rights granted to protect minority shareholders, such as:
- Right to Oppose Certain Resolutions
- Minority shareholders can oppose resolutions that require special majority approval.
- Right to File Class Action Suits
- Governed by Section 245, allowing members to seek relief for mismanagement or fraud.
2. Rights of Directors
Directors are responsible for the management and administration of the company. Their rights include:
- Right to Participate in Board Meetings
- Directors are entitled to receive notices and participate in meetings under Section 173.
- Right to Access Company Records
- Directors can access financial and operational records to make informed decisions.
3. Rights of Creditors
Creditors, especially secured creditors, have rights to recover debts and enforce securities:
- Right to Claim Payments
- Creditors have the right to receive payment as per the terms of the debt agreement.
- Right to Initiate Insolvency Proceedings
- Under the Insolvency and Bankruptcy Code, 2016 (IBC), creditors can file claims against a company for default.
4. Rights of Employees
Employees of a company have specific statutory rights under labor and company laws:
- Right to Gratuity and Provident Fund
- Governed by respective labor laws.
- Right to Participate in ESOPs
- Employees may receive shares under Employee Stock Option Plans (ESOPs).
5. Rights of Other Stakeholders
Other stakeholders, such as debenture holders and deposit holders, have rights to receive interest payments, redemption of securities, and access to information about their investments.
Difference Between Individual and Corporate Membership Rights
| Aspect | Individual Membership Rights | Corporate Membership Rights |
|---|---|---|
| Definition | Rights enjoyed by individual shareholders. | Rights exercised by corporate entities holding shares. |
| Voting | Individuals vote directly or by proxy. | Corporate members vote through an authorized representative. |
| Representation | Personal attendance at meetings. | Representation through nominees or delegates. |
| Scope | Limited to personal shareholding. | May include collective voting power in group companies. |
Importance of Rights under Company Law
- Protect Stakeholder Interests: Ensures fair treatment and protection of stakeholders.
- Promote Corporate Governance: Encourages transparency and accountability in operations.
- Foster Investor Confidence: Clearly defined rights attract investors and promote trust.
- Dispute Resolution: Provides mechanisms for addressing grievances and disputes.
- Compliance: Ensures that companies follow statutory provisions and safeguard legal entitlements.
Relevant Provisions of the Companies Act, 2013
- Section 42: Governs private placement and rights related to issue of securities.
- Section 47: Specifies voting rights for equity and preference shareholders.
- Section 101-122: Outlines provisions for general meetings, resolutions, and voting rights.
- Section 241-246: Covers rights related to oppression, mismanagement, and class actions.
Conclusion
Rights under company law form the backbone of corporate governance, ensuring that companies operate transparently, equitably, and in compliance with the law. Whether for individual shareholders, corporate members, or other stakeholders, these rights promote accountability and safeguard interests, thereby fostering a sustainable corporate ecosystem.
QUESTION-6- Define the law relafed to Transfer and Transmission of Securities.
Transfer and Transmission of Securities: Definition and Legal Framework
The concepts of transfer and transmission of securities relate to the legal processes through which ownership of shares or other securities of a company changes hands. These processes are governed primarily by the Companies Act, 2013, the Securities Contracts (Regulation) Act, 1956, and the rules and regulations framed by regulatory bodies such as SEBI (Securities and Exchange Board of India).
Transfer of Securities
Definition:
The transfer of securities refers to the voluntary transfer of ownership of shares or other securities by a shareholder to another person. It is initiated by the transferor and is typically effected through a sale, gift, or other means.
Key Provisions under the Companies Act, 2013:
- Section 56:
- Requires proper execution of a transfer deed (Form SH-4) for the transfer of securities.
- The instrument of transfer must be:
- Duly stamped and executed by or on behalf of the transferor and transferee.
- Delivered to the company along with relevant share certificates within 60 days from the date of execution.
- Section 58:
- Governs the refusal of registration of a transfer.
- If the company refuses to register a transfer, the transferee can appeal to the Tribunal.
- Section 59:
- Provides remedies in case of wrongful refusal to register a transfer of securities.
- Provisions for Listed Companies:
- SEBI regulations mandate that transfer requests for listed securities must be processed within 15 days.
Procedure for Transfer of Securities:
- Execution of Transfer Deed:
- The transferor fills and signs Form SH-4.
- Stamping:
- Transfer deed must be affixed with appropriate stamp duty.
- Submission to Company:
- The transferor or transferee submits the transfer deed along with the original share certificate to the company.
- Verification and Registration:
- The company verifies the documents and registers the transfer in the Register of Members.
Transmission of Securities
Definition:
Transmission refers to the transfer of securities by operation of law upon the death, insolvency, or lunacy of a shareholder. Unlike transfer, transmission is involuntary.
Key Provisions under the Companies Act, 2013:
- Section 56(2):
- Governs the process of transmission of securities.
- Requires the legal representative or successor to provide the necessary documents (e.g., death certificate, succession certificate, probate, or letter of administration).
- Section 58:
- Covers the registration of transmission in the company’s records.
- Schedule I (Table F):
- Provides model articles for companies, outlining provisions related to transmission of shares.
Procedure for Transmission of Securities:
- Submission of Documents:
- Legal heirs or representatives submit the following to the company:
- Death certificate of the shareholder.
- Succession certificate, probate, or letter of administration.
- Relevant share certificates.
- Legal heirs or representatives submit the following to the company:
- Verification by the Company:
- The company verifies the submitted documents.
- Registration of Transmission:
- Upon satisfaction, the company registers the transmission and updates the Register of Members.
Distinction Between Transfer and Transmission
| Aspect | Transfer | Transmission |
|---|---|---|
| Nature | Voluntary | Involuntary |
| Initiated by | Transferor (seller/giver of shares) | Legal heir, nominee, or legal representative |
| Consideration | Typically involves consideration (e.g., sale price) | No consideration is involved |
| Legal Document Required | Transfer deed (Form SH-4) | Death certificate, probate, or succession certificate |
| Company’s Role | Registers the transfer upon compliance with rules | Registers the transmission upon legal verification |
Recent Amendments and SEBI Regulations
- SEBI has mandated that transfer of securities for listed companies can only take place in dematerialized (demat) form as of April 1, 2019.
- Transmission of securities in physical form is permitted, but SEBI encourages dematerialization for better transparency.
Case Laws on Transfer and Transmission
- Bajaj Auto Ltd. v. N.K. Firodia (1971):
- The Supreme Court held that the right to transfer shares is not absolute and can be subject to reasonable restrictions in the Articles of Association.
- Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965):
- Emphasized that refusal to register a transfer must be for valid and reasonable grounds.
- Larsen & Toubro Ltd. v. State of Gujarat (1998):
- Clarified that transmission is a legal consequence and does not involve transferor or transferee rights.
Importance of Transfer and Transmission
- Facilitates Liquidity:
- Transferability is crucial for shareholders to monetize their investments.
- Ensures Smooth Succession:
- Transmission ensures seamless transfer of ownership in unforeseen events like death.
- Compliance with Legal Framework:
- These provisions uphold corporate governance and transparency.
- Investor Confidence:
- A clear mechanism for transfer and transmission reassures investors about their rights.
Conclusion
The processes of transfer and transmission of securities ensure that ownership of shares can change hands while maintaining compliance with legal and regulatory frameworks. They are essential for safeguarding the rights of shareholders and ensuring smooth functioning of the corporate structure. The Companies Act, 2013, and SEBI regulations provide a comprehensive framework to address these aspects effectively.
QUESTION-7-What do you mean by Dematerialisation and Rematerialisation?Explain the role of dipository.
Dematerialization and Rematerialization: Concepts and Processes
Dematerialization (Demat)
Definition:
Dematerialization refers to the process of converting physical share certificates or securities into an electronic formatheld in a Demat account. It eliminates the need for physical certificates, making securities easier to trade, transfer, and manage.
Key Features:
- Conversion: Physical certificates are surrendered and converted into digital form.
- Electronic Holding: Securities are held electronically in a Demat account with a depository participant (DP).
- SEBI Regulation: Mandated by SEBI to ensure transparency, reduce fraud, and promote efficiency in trading.
Process of Dematerialization:
- Open a Demat account with a depository participant (DP), such as a bank or brokerage.
- Submit a Demat Request Form (DRF) along with physical certificates.
- The DP forwards the request to the concerned company and the depository.
- Once approved, the physical certificates are destroyed, and securities are credited electronically to the Demat account.
Rematerialization
Definition:
Rematerialization is the reverse process of dematerialization, where electronic securities in a Demat account are converted back into physical share certificates.
Key Features:
- Reconversion: Involves converting digital holdings into tangible certificates.
- Rare Usage: Used only in specific cases where physical certificates are preferred.
- SEBI Oversight: Subject to SEBI guidelines and company approval.
Process of Rematerialization:
- Submit a Rematerialization Request Form (RRF) to the DP.
- The DP forwards the request to the company and depository.
- The company issues physical certificates corresponding to the securities in the account.
Role of Depositories
A depository is a financial institution responsible for holding securities in electronic form and facilitating their transactions. In India, the two major depositories are:
- National Securities Depository Limited (NSDL)
- Central Depository Services Limited (CDSL)
Functions of Depositories:
- Safeguarding Securities:
- Maintain and secure electronic records of securities.
- Facilitating Transactions:
- Enable seamless buying, selling, and transferring of securities.
- Dematerialization and Rematerialization:
- Execute the processes of converting securities between physical and electronic formats.
- Corporate Actions Management:
- Handle dividends, bonuses, stock splits, and rights issues directly into Demat accounts.
- Eliminating Risks of Physical Certificates:
- Prevent fraud, theft, forgery, and damage associated with physical certificates.
- Settlement of Trades:
- Work with clearing corporations to ensure smooth settlement of trades.
- Nomination Facility:
- Allow investors to nominate individuals to inherit securities.
Advantages of Dematerialization
- Efficiency:
- Streamlines trading and reduces paperwork.
- Safety:
- Minimizes the risk of loss, theft, or forgery of physical certificates.
- Transparency:
- Enhances accountability in securities transactions.
- Convenience:
- Simplifies corporate actions like dividend payments and rights issues.
- Cost-Effectiveness:
- Reduces transaction costs associated with physical certificates.
Advantages of Rematerialization
- Flexibility:
- Enables shareholders to revert to physical certificates if needed.
- Preference for Physical Holdings:
- Useful in specific situations where physical ownership is required.
SEBI Guidelines and Regulations
- SEBI mandates that securities of listed companies be traded only in Demat form.
- Dematerialization is mandatory for large-value transactions to reduce fraud and inefficiencies.
- Depositories must comply with SEBI regulations to protect investors’ interests.
Conclusion
Dematerialization and rematerialization are essential processes in modern securities markets. While dematerialization promotes efficiency, transparency, and safety, rematerialization provides flexibility for specific investor preferences. Depositories like NSDL and CDSL play a pivotal role in facilitating these processes, ensuring smooth transactions, and safeguarding investor interests. These mechanisms have transformed the Indian securities market, aligning it with global standards.
QUESTION-8 Explain the following: ( a ) American Depository Receipt (b) Global Depository Receipt
(a) American Depository Receipt (ADR)
Definition:
An American Depository Receipt (ADR) is a negotiable financial instrument issued by a U.S. bank that represents shares of a foreign company. ADRs are traded on U.S. stock exchanges like the NYSE, NASDAQ, or over-the-counter (OTC) markets, enabling American investors to invest in foreign companies without dealing in foreign exchanges.
Key Features:
- Representation of Shares: ADRs represent ownership in a certain number of shares of a foreign company.
- Denomination: They are denominated and traded in U.S. dollars.
- Dividend Payments: Dividends are paid in U.S. dollars after conversion from the foreign company’s currency.
- Facilitated by Depository Banks: A U.S. bank holds the shares in the foreign company and issues the corresponding ADRs.
Types of ADRs:
- Sponsored ADRs:
- Issued in collaboration with the foreign company.
- The company bears the costs and complies with U.S. regulations.
- Unsponsored ADRs:
- Issued without the involvement of the foreign company.
- Managed solely by the depository bank.
Advantages:
- Easier access for U.S. investors to invest in foreign companies.
- Eliminates the need to deal with foreign stock markets and currencies.
- Enables foreign companies to raise capital from U.S. markets.
Examples:
- Companies like Infosys and Tata Motors have issued ADRs.
(b) Global Depository Receipt (GDR)
Definition:
A Global Depository Receipt (GDR) is a negotiable financial instrument issued by a foreign depository bank representing shares of a company that are traded in international markets (outside the company’s home country). GDRs allow companies to raise funds in multiple global markets.
Key Features:
- Representation of Shares: GDRs represent ownership in shares of a company listed in its home country.
- Multi-Market Trading: GDRs are traded on international stock exchanges, such as the London Stock Exchange or Luxembourg Stock Exchange.
- Currency: Denominated in a freely convertible currency, often the U.S. dollar or Euro.
- Depository Bank: The bank issues GDRs and holds the underlying shares of the company.
Types of GDRs:
- Rule 144A GDRs:
- Can be privately placed with qualified institutional buyers (QIBs) in the U.S.
- Regulation S GDRs:
- Offered to institutional investors outside the U.S.
Advantages:
- Provides companies access to global capital markets.
- Broadens the investor base beyond the domestic market.
- Helps foreign investors invest in companies without directly dealing in the local market.
Examples:
- Indian companies like Reliance Industries and Wipro have issued GDRs.
Differences Between ADRs and GDRs
| Aspect | ADR | GDR |
|---|---|---|
| Market | Issued and traded in the U.S. markets. | Traded in multiple global markets. |
| Currency | Always in U.S. dollars. | Generally in USD or Euros. |
| Investors | U.S.-based investors. | Global investors, excluding the U.S. |
| Regulations | Governed by SEC regulations. | Governed by multiple international regulations. |
| Example Exchanges | NYSE, NASDAQ. | London, Luxembourg Stock Exchange. |
Conclusion
Both ADRs and GDRs provide opportunities for companies to raise capital from foreign investors and for investors to diversify their portfolios internationally. ADRs cater primarily to U.S. markets, while GDRs have a broader global reach. These instruments have significantly contributed to the globalization of financial markets, enabling seamless cross-border investments.
Question- Write procedure for Dematerialization and Re- materializaion of securities.
Procedure for Dematerialization and Re-materialization of Securities
1. Procedure for Dematerialization
Dematerialization refers to the process of converting physical share certificates into electronic form held in a Demat account.
Steps Involved:
- Open a Demat Account:
- The investor must open a Demat account with a registered depository participant (DP), such as a bank or brokerage firm, affiliated with depositories like NSDL or CDSL.
- Submit a Demat Request Form (DRF):
- Obtain and fill out the Demat Request Form (DRF) from the DP.
- Surrender the physical share certificates with the DRF to the DP.
- Each certificate must be defaced with the words “Surrendered for Dematerialization.”
- Verification by the DP:
- The DP verifies the details on the DRF and the physical certificates.
- If any discrepancies are found, the documents may be returned to the investor for correction.
- Forwarding to the Depository and Company:
- The DP forwards the request and physical certificates to the concerned company through the depository (NSDL or CDSL).
- The company verifies the authenticity of the certificates.
- Approval by the Company:
- Upon verification, the company updates its records and confirms dematerialization to the depository.
- The depository credits the Demat account of the investor with the equivalent number of securities.
- Completion of Process:
- The entire process typically takes 15–30 days.
- The investor can view and manage their securities electronically in their Demat account.
2. Procedure for Re-materialization
Re-materialization is the reverse process, where securities held in electronic form in a Demat account are converted back into physical share certificates.
Steps Involved:
- Submit a Rematerialization Request Form (RRF):
- Obtain and fill out the Rematerialization Request Form (RRF) from the DP.
- Ensure that all details are correctly entered and submit the form to the DP.
- Verification by the DP:
- The DP verifies the RRF for accuracy and completeness.
- Forwarding to the Depository and Company:
- The DP forwards the request to the depository (NSDL or CDSL).
- The depository, in turn, forwards it to the company’s registrar or transfer agent.
- Processing by the Company:
- The company verifies the records and initiates the printing of new physical share certificates.
- Once printed, the certificates are sent to the investor’s registered address.
- Updating Records:
- The company updates its records to reflect the rematerialized securities.
- Completion of Process:
- The process typically takes 30 days.
- The investor receives the physical share certificates by courier or registered post.
Key Points to Remember:
- Eligibility: Only fully paid-up shares can be dematerialized or rematerialized.
- Nominal Charges: Depositories and DPs may charge nominal fees for both processes.
- SEBI Guidelines: The process must comply with SEBI’s regulations.
- Fraud Prevention: These processes eliminate risks such as loss, theft, or forgery associated with physical share certificates.
Advantages
Dematerialization:
- Easy and secure storage of securities.
- Efficient transfer and trading.
- Eliminates risks of physical certificates (e.g., loss or damage).
Re-materialization:
- Provides a tangible asset for investors preferring physical certificates.
- Useful in situations where electronic holdings are not ideal.
Conclusion
Both dematerialization and rematerialization are regulated processes designed to cater to different investor preferences. While dematerialization facilitates modern trading and minimizes paperwork, rematerialization serves investors who value physical securities. The role of depositories and depository participants is crucial in ensuring the seamless execution of these processes.
Question – Explain the conditions for Conversion, Consolidation and Reorganisation of shares of Companies.
Conversion, Consolidation, and Reorganization of Shares in Companies
The processes of conversion, consolidation, and reorganization of shares are governed by the Companies Act, 2013and related rules. These actions are typically undertaken to optimize the company’s capital structure, improve shareholding patterns, or comply with regulatory requirements.
1. Conversion of Shares
Definition:
Conversion of shares involves altering the nature of the company’s existing shares, such as converting preference shares into equity shares or vice versa.
Conditions for Conversion:
- Articles of Association (AoA):
- The company’s Articles of Association must authorize the conversion of shares.
- Approval by Shareholders:
- A special resolution must be passed in a general meeting approving the conversion.
- Compliance with Provisions:
- The conversion must comply with Section 61 and Section 62 of the Companies Act, 2013, if applicable.
- Regulatory Approval (if required):
- For listed companies, approval from SEBI and stock exchanges may be necessary.
- Intimation to Registrar of Companies (RoC):
- The company must file the required forms with the RoC, such as MGT-7 (annual return) and SH-7 (change in share capital).
Examples of Conversion:
- Convertible Preference Shares: Converting preference shares into equity shares as per the terms of the issuance.
- Stock Splits: Converting high-value shares into smaller denominations to make them more affordable.
2. Consolidation of Shares
Definition:
Consolidation of shares refers to combining several smaller shares into a smaller number of shares with a higher face value. For example, consolidating ten shares of ₹10 each into one share of ₹100.
Conditions for Consolidation:
- Authority in AoA:
- The AoA must authorize the consolidation of shares.
- Approval by Shareholders:
- A special resolution must be passed in a general meeting.
- Proportionate Rights:
- The rights of shareholders must remain proportional to their holdings before and after consolidation.
- Regulatory Compliance:
- Listed companies must comply with stock exchange regulations and inform SEBI.
- No Default on Minimum Shareholding:
- The consolidation should not result in any shareholder’s holding dropping below the prescribed minimum lot size for listed shares.
Purpose of Consolidation:
- Improve share trading efficiency.
- Reduce the administrative burden of managing numerous small-value shares.
- Align the company’s share value with market trends.
3. Reorganization of Shares
Definition:
Reorganization of shares involves restructuring the share capital of a company to include actions such as the alteration of the rights of shareholders, conversion of shares, or the creation of new classes of shares.
Types of Reorganization:
- Alteration of Share Capital:
- Includes increasing, reducing, or restructuring authorized share capital.
- Reduction of Share Capital:
- Under Section 66 of the Companies Act, 2013, the company can reduce its capital with a special resolution and approval from the National Company Law Tribunal (NCLT).
- Change in Share Rights:
- Modification of the rights attached to specific classes of shares (e.g., voting or dividend rights).
- Sub-division of Shares:
- Splitting a high-value share into multiple shares of lower denomination to increase liquidity and affordability.
Conditions for Reorganization:
- Approval by Shareholders and Board:
- Requires the approval of the Board of Directors and shareholders through a special resolution.
- Authority in AoA:
- The AoA must allow reorganization activities.
- Court or Tribunal Approval:
- In cases involving reduction of share capital, court or tribunal approval may be required.
- Compliance with SEBI Regulations:
- Listed companies must comply with SEBI’s guidelines.
- Intimation to RoC:
- Necessary filings, such as SH-7, must be made with the RoC.
Comparison of Conversion, Consolidation, and Reorganization
| Aspect | Conversion | Consolidation | Reorganization |
|---|---|---|---|
| Definition | Changing the nature of shares. | Combining multiple shares into fewer. | Comprehensive restructuring of shares. |
| Key Purpose | Align shares with market needs. | Increase share value or efficiency. | Adapt to strategic goals. |
| Legal Approval | Special resolution by members. | Special resolution by members. | May require tribunal or SEBI approval. |
Conclusion
The processes of conversion, consolidation, and reorganization of shares enable companies to maintain a flexible and efficient capital structure. These provisions under the Companies Act, 2013 ensure that such changes protect the rights of stakeholders while allowing businesses to adapt to market conditions and strategic requirements.