Introduction
Surrender of shares is a concept in which the existing shareholder willingly hands back the shares to the company itself, due to the inability of such shareholder to spend on the remaining amount of money that would be demanded upon future calls of such shares. Thus, it absolves the liability of the shareholder to pay the leftover amount in lieu of holding such shares. The end result of surrendering is similar to that of forfeiture of shares whereby it results in non-allotment of the shares. However, forfeiture is legally regulated by the Companies Act (“Act”), as opposed to surrender. Moreover, the company derives its power to accept the surrendering of shares by virtue of its Articles of Association (AOA), which gives adequate powers to directors of the company to do the same. The surrender of shares, as the term itself suggests, occurs when there is no consideration involved in exchange of such shares. There is an established jurisprudence in English courts with respect to surrender of shares, which is relied upon in the present Indian cases. However, there is a dearth of statutory regulation as well as precedential authorities with respect to the current concept.
Case Laws
Madras Court In Re: Mirza Ahmed Namazi; In Re: The … vs Unknown on 14 March, 1924 Equivalent citations: 83IND. CAS.94 held that a company can only accept a surrender under conditions and limitations under which shares can be forfeited. Further, it was held in Commissioner of Income-Tax v. Jasrup Baijnath and Sons (P.) Ltd., 1969 SCC OnLine Cal 138 that sanction of the court was not required to effectuate surrender of shares, which ultimately resulted in reduction of share capital. The court in Vasant Investment Corporation Ltd., In re, 1978 SCC OnLine Bom 151 also recognized the effective nature of surrendering of shares, which can help in avoidance of formalities of forfeiture of shares. Moreover, the Securities Appellate Tribunal in Khoday India Ltd. And Others vs Sebi in Appeal No. 148 of 2017 on 4 September, 2019 held that the act of surrendering shares was not a case of “buy back” which is prohibited under Section 67 of the current Act. In ICAP IL (India) (P) Ltd., In re, 2021 SCC OnLine NCLT 17936, there was a need to have a approval by special resolution of members of such reduction of capital, which was then to be approved by NCLT. Additionally, the stamp duty is to be paid on the event of surrender of shares, as decided in Allianz Biosciences Private Limited, In re, 2018 SCC OnLine NCLT 2006.
Conclusion
Surrender of shares in India, being a minute aspect of corporate governance, is usually governed by the Articles of Association of the company, as formulated under the Companies Act, 2013. Though not specifically provided under the Act, the surrender is considered akin to forfeiture with the approval of the same by the Board of Directors. This helps the companies to deal with their share capital in an organized manner and is many times resorted to when the shares have been issued for wrong purposes or for restructuring purposes. Legal clarity and adherence to the procedural requirements have the effect of steering the court away from disputes and ensuring the surrender procedure is fair, open, and within the legal framework. The shares which are surrendered must be perceived to be forfeited in future if no surrender took place. Another pertinent factor can be re-issuing such shares to other shareholder, thereby not going further in the complexities of the legal ramifications of reduction of share capital. The act of surrendering shares does not amount to either issuance or redemption of such shares, but may have an effect on reduction of share capital.
Author Bio
Very well researched, informative and crisp article.