Companies Act 2013 : Section 62 – Issue of rights shares

Section 62 of the 2013 Act was notified and has been in effect from 01-04-2014,except Sub-sections(4) to (6) which have not been notified ,at the time of going to press.Section 62 of the 2013 Act,like Section 81 of the 1956 Act,provides for issuance of shares to employees under Employee’s Stock Opinion Scheme and issue of shares on preferential basis.Sub-sections(4) to (6) of the Section 62 which have not been notified relate to conversion of loans granted/debentures subscribed by the central government into shares of the company.

Applicability to provide company – Issue of  shares

In reply  a suggestion for exclusion of private companies from the purview of section 62 of the Act,the Parliamentary Committee,in its report on the Companies Bill,2011,did not suggest exclusion of private companies and stated that the provisions have been taken from the Companies Bill,2009 and therefore,be retained.At this point,it is relevant to consider the powers granted to the Central Government under section 462 to exempt class or classes of companies from any of the provisions of the Act by way of notification.Accordingly,MCA has issued draft notification (Draft Notification dated om 24th June,2104,circulated for public comments) providing exemptions to private companies from certain requirements of section 62 ofthe 2013 Act.The suggested relaxations are:

  1. The time frame for sending notice for further issue of shares  under sub-clause(1) of clause (a) of section 62(1) has been relaxed – private companies may give a minimum time of seven days  and a maximum of 15 days to the offeree for accepting the offer.
  2. Further shares may be issued to employees under a scheme of employee’s Stock option,subject to an ordinary resolution passed instead of special resolution in case of public companies.

Issue of shares – Section 62 of the Companies Act 2013 : Changes made

Section 62 of the 2013 Act substantially corresponds to section 81 of the 1956 Act with the following changes:

  • As per section 81 of the Companies Act,1956,the provision relating to proportionate offer was applicable for further issue of shares made after two years of incorporation or one year after the first allotment was made after incorporation .Now for all further issue of shares,proportionate offer of shares have to be made to the existing shareholders.
  • Unlike the 1956 Act,now in case of further issue of shares even by a private limited company,shares have to be offered to the existing shareholders on a proportionate basis,i.e., Section 62 of the 2013 Act does not differentiate between a public company or a private company.
  • Shares can be offered to employees under a scheme of employee’s stock option after passing a special resolution and subject to prescribed conditions.The 1956 Act does not explicitly allowed issue of shares to employees under ESOP;however,SEBI regulations contains provisions pertaining to ESOP.
  • As per section 62 of the 2013 Act,shares can be issued to any person other than equity shareholders and employees,after passing a special resolution,if the price is determined by the valuation report of registered valuer,subject to the prescribed conditions.

See also discussion below,in the notes to this section under the heading “Analysis of Relevant Provisions of Companies Act,1956 which is similar to the companies Act,2013”.where both the 1956 position and 2013 provision have been provided together to aid analysis.If a company having a share capital,at any time,wishes to increase its subscribed capital by the issue of further shares ,then the company has to comply with the section 62 of the Companies Act,2013.Section 81 of the 1956 Act,attracted only when company wished to increase its subscribed capital after one year of the first allotments of shares or after two years from the formation of the company,whichever is earlier ,by the allotment of the further shares (popularly referred to as ‘rights shares’).

Increase of share capital:Offer to equity shareholders:[Section 62(1)(a) of the Companies Act 2013]

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Section 62(1)(a) of the 2013 Act provides that when company,having share capital ,decided to increase its subscribed capital at any time by the issue of further shares,such fresh shares shall be offered to persons who are holders of equity shares of the company,at the date of the offer.The shares should also be offered in proportion to the paid-up share capital on those shares.The offer is to be made by sending a letter of offer subject conditions,outlined in Section 62(1)(a),

  • the number of shares offered shall be specified,and the time limit between 15-30 days shall be offered.If the shares are not accepted in this time,they shall be deemed to have been declined.
  • The offer shall include a right exercisable by the person concerned to renounce the shares in favor of any other person.The notice of offer shall contain a statement of this right.However,this is applicable only if the articles of association of the company does not contradict such a right to renounce.
  • If the shares are declined (either by expiry or time,or an express denial) the Board of Directors may dispose of the shares in a manner not disadvantageous to the shareholders and the company.
Issue of offer to employees or non-equity shareholders:[Section 62(1)(b) and (c) of Companies Act,2013]

Special resolution is required in the following two cases:

  • ESOP: Section 62(1)(b) of the 2013 Act,provides for issue of further shares to employees under a scheme of employee’s Stock Option,subject to conditions prescribed under the rules to Chapter 6 of the 2013 Act.The 1956 Act did not expressly provide for issue of shares under ESOP; however,SEBI has framed SEBI(Employee Stock Option Scheme and Employee Stock Purchase Scheme),guidelines,1999.Section 62(1)(b) of the 2013 Act should be read with Rule 12 of the Companies (Share capital and debentures) Rules,2014 which provides for additional conditions to issuing shares under ESOP. 
  • Persons other than equity shareholders and employees: Section 62(1)(c) of the 2013 Act,provides that issue of further shares can be made to persons other than equity shareholders and employees ,provided a special resolution is passed; The price of such shares is determined by the valuation report of the registered valuer;and conditions specified under the rules issued under Chapter 4 of the 2013 Act are met.At the time of going to press ,SEBI has made certain regulations for all schemes by Companies for their employees,involving dealing in shares,directly or indirectly,with a few to facilitate smooth operation of such schemes.These are the SEBI (Share Based Employee benefits)Regulations,2014.

Letter of offer to Equity Shareholders and manner of sending notice [Section 62(2) of Companies Act,2013]

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Rights issue to existing equity shareholders shall be made by sending a letter of offer.[Section 62(1)(a)].Such notice or offer shall be dispatched  through registered post or speed post through electronic mode to all the existing shareholders at least three days before the opening of the issue i.e., section 62(2).It should be observed that section 62(2) of the 2013 Act provides specifically for three modes of notice-speed post,registered post or electronic mode.

Exceptions as to conversion of debentures and loan into shares [Section 62(3) of Companies Act,2013] 

Section 62(3) of the 2013 Act excludes increase in the subscribed capital of the company pursuant to an option attached to the debentures issued or loans raised by the company for the conversion of such debentures or loans into shares of the company ,on the condition that the terms of issue of such debenture or raising of loan have been approved by the means by the means of special resolution.

Power of Government to convert loans into capital [Section 62(4) of Companies Act,2013]

Section 62(4) of the 2013 Act Corresponds to section 81(4) of the 1956 Act.The 2013 Act in consonance with the 1956 Act,allow the company to make special appeal to the Tribunal [in the 1956 Act the Court] in case the terms and conditions of conversion laid down by the Government are not acceptable to the company.The appeal shall be made within sixty days[under 1956 Act,within thirty days]of the date of communication of the order of the Government.However,section 62(4) of the 3013 Act has not bee notified at the time of going to press.

Terms and conditions of conversion of loans: Section 62(5) of the Companies Act,2013

Sub-section(5) of section 62 of the 2013 Act corresponds to sub-section (5)of section 81 of the Companies Act,1956.Section 62(5) of the 2013 Act has not been notified.At the time of going to press.In determining the terms and conditions of conversion of loans etc., The Central Government is mandated to take into account the following factors:

  • financial position of the company
  • terms of issue of debentures or the terms of loans,as the case may be;
  • rate of interest,payable on such loans or debentures;
  • such other matter as it may consider necessary [Section 81(5) of the 1956 Act also specified certain other factors.For example,the capital structure of the company including its loan liabilities  and its reserves;profits of the company during the proceeding five years;and the current market price of the shares of the company]
Consequent increase in the authorized capital of the company [Section 62(6) of Companies Act,2013]

In case the order of the Central Government for conversion of loans or debentures results in an authorized capital of the company,then memorandum of the company and authorized share capital of the company shall be stand altered accordingly.Section 62(6) of the 2013 Act corresponds to section 94 A ((1) of the 1956 Act,This provision is of a procedural nature and dispenses with the necessity of passing a resolution for alteration of memorandum in certain cases.It is,however,required by section 64 that the Registrar shall be informed by the company in such cases,so that the registrar carry out the necessary alteration in the memorandum of the company showing the increase of share capital.Section 62(6) of the 1023 Act is not notified,at the time of going to press.

Provisions to be administered by SEBI

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The provisions of this section are to be administered by SEBI by means of regulations,in respect of companies already listed or companies which intend to get listed.In respect of other companies,the administration shall be by the Central Government.The purpose of section 24(1)(a) seems to be that the power to issue regulations pertaining to issue of securities,and other administrative powers in connection with matters of issue of securities etc.,are to be exercised by SEBI,as SEBI is the securities regulator.

Inspection of books of account and other books and papers  In case of listed public companies and companies which intend to get listed,the power to inspect books of account and the other books and papers in respect of issue and transfer of securities and non-payment of dividend has been vested in SEBI. SEBI has been empowered to authorize any person to file complaints for offences relating to issue and transfer of securities and non-payment of dividend.

Relevant Rules issued under companies Act,2013

Rules 12 and 13 of the Companies (Share Capital and debentures)Rules,2014 relate to section 62 of the 2013 Act.While rule 12 deals with the issue of employees stock options by unlisted companies;Rule 13 is concerned with the issue of shares on the preferential basis. For more details about Company registration in Bangalore, Kindly visit our site and feel free to contact us. We Solubilis assisting you in a right way to reach your goal. Thanks for reading!!!

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