In some situations, a company would consider it economically viable to increase its subscribed capital after its incorporation. This is because such a further issue would substantially increase its financial reserve and incentivize the shareholders of the company, thereby ensuring the healthy functioning of the company. Such a company which is desirous of increasing its subscribed capital by the further issue of shares is required to comply with the procedure laid down in section 62 of the Companies Act, 2013.

A company (including Private company) having a share capital can increase its subscribed capital by issue of further shares to persons who are holders of equity shares of the company in proportion to the paid up share capital on those shares, by sending a letter of offer.

Further Issue of Share Capital

Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the shareholders and the company;

(b) to employees under a scheme of employees’ stock option, subject to [special resolution] passed by company and subject to such conditions, or

Comment:

Provision of Money by Company for Purchase of its Own Shares by Employees or by Trustees for the Benefit of Employees

(1) The company shall not make a provision of money for the purchase of, or subscription for, shares in the company or its holding company, if the purchase of, or the subscription for, the shares by trustees is for the shares to be held by or for the benefit of the employees of the company, unless it complies with the following conditions, namely:-

(a) the scheme of provision of money for purchase of or subscription for the shares as aforesaid is approved by the members by passing special resolution in a general meeting;

(b) such purchase of shares shall be made only through a recognized stock exchange in case the shares of the company are listed and not by way of private offers or arrangements;

(c) where shares of a company are not listed on a recognized stock exchange, the valuation at which shares are to be purchased shall be made by a registered valuer;

(d) the value of shares to be purchased or subscribed in the aggregate together with the money provided by the company shall not exceed five per cent. of the aggregate of paid up capital and free reserves of the company;

(2) The explanatory statement to be annexed to the notice of the general meeting to be convened pursuant to section 102 shall, in addition to the particulars mentioned in sub-rule (1) of rule 18, contain the following particulars, namely:-

(a) the class of employees for whose benefit the scheme is being implemented and money is being provided for purchase of or subscription to shares;

(b) the particulars of the trustee or employees in whose favor such shares are to be registered;

(c) the particulars of trust and name, address, occupation and nationality of trustees and their relationship with the promoters, directors or key managerial personnel, if any;

(d) the any interest of key managerial personnel, directors or promoters in such scheme or trust and effect thereof;

(e) the detailed particulars of benefits which will accrue to the employees from the implementation of the scheme;

(f) the details about who would exercise and how the voting rights in respect of the shares to be purchased or subscribed under the scheme would be exercised;

(3) A person shall not be appointed as a trustee to hold such shares, if he-

(a) is a director, key managerial personnel or promoter of the company or its holding, subsidiary or associate company or any relative of such director, key managerial personnel or promoter; or

(b) beneficially holds ten percent or more of the paid-up share capital of the company.

(4) Where the voting rights are not exercised directly by the employees in respect of shares to which the scheme relates, the Board of Directors shall, inter alia, disclose in the Board’s report for the relevant financial year the following details, namely:-

(a) the names of the employees who have not exercised the voting rights directly;

(b) the reasons for not voting directly;

(c) the name of the person who is exercising such voting rights;

(d) the number of shares held by or in favour of, such employees and the percentage of such shares to the total paid up share capital of the company;

(e) the date of the general meeting in which such voting power was exercised;

(f) the resolutions on which votes have been cast by persons holding such voting power;

(g) the percentage of such voting power to the total voting power on each resolution;

(h) whether the votes were cast in favour of or against the resolution.

(c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions.

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.

(3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:

Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.

(4) Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion:

Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.

(5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary.

(6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.

Note:

Sub-section (4), (5) and (6) has been notified as on 01/06/2016.

Comment: Exceptions

1. In case of private company-  In Sub-clause (i) of clause (a) of Sub-section (1) and Sub-section (2) of Section 62  the following proviso shall be inserted

Provided that notwithstanding anything contained in this sub-clause and sub-section (2) of this section, in case ninety percent, of the members of a private company have given their consent in writing or in electronic mode, the periods lesser than those specified in the said sub- clause or sub-section shall apply.  – Inserted by notification dated 5th june, 2015.

2. In case of private company – In clause (b) of Sub-section (1) of Section 62 for the words “special resolution”, the words “ordinary resolution” shall be substituted . – Notification dated 5th june, 2015.

3. In case of Nidhi company – Section 62 shall not apply – Notification dated 5th june, 2015.

4.In case of Specified IFSC Public Company – In clause (a) of sub-section (1), the following proviso shall be inserted, namely:-

“Provided that notwithstanding anything contained in sub-clause (i), in case of a Specified IFSC public company, the periods lesser than those specified in the said sub-clause shall apply if ninety per cent. of the members have given their consent in writing or in electronic mode.”. – Notification Date 4th January, 2017

5. In case of Specified IFSC Public Company –  Clause (b) of Sub- section (1) of section 62 for the words “special resolution” read as “ordinary resolution”. – Notification Date 4th January, 2017

Disclaimer: The entire contents of this document have been prepared on the basis of relevant and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. In no event shall I shall be liable for any direct, indirect, special or incidental damage resulting from arising out of or in connection with the use of the inform. We hope that our readers will find this write-up useful in having a better understanding of the background & core aspects. Happy Reading!

THE AUTHOR – CS DEEPAK SETH CAN BE REACHED AT CSDEEPAKSETH@GMAIL.COM or 9953025911

Author Bio

Qualification: CS
Company: HELPINGHANDS PROFESSIONALS LLP
Location: NEW DELHI, New Delhi, IN
Member Since: 12 Jun 2018 | Total Posts: 73
CS Deepak Seth is an Associate Member of Institute of Companies Secretaries of India having good experience in legal and secretarial matters. He is graduate from Delhi University and Post graduate from IGNOU University. He is also MBA in Finance and LLB Deree holder. He possesses professional experi View Full Profile

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