Page 272 - DMGT407Corporate and Business Laws

Unit 11: Prospectus, Shares and Share Capital

5. The shares to be issued at a discount must be issued within two months of the sanction by Notes
the Central Government or within such extended time as it may allow; and
6. Every prospectus at the date of its issue must mention particulars of the discount allowed
on the issue of shares, or the exact amount of the discount as has not been written off. In
case of default, the company and every officer of the company who is in default shall be
punishable with fine which may extend to fifty rupees.

11.3.11 Bonus Shares

A company may, if the articles so provide, capitalise profits by issuing fully paid-up shares to
the members thereby transferring the sums capitalised from the profit and loss account or
Reserve Account to the Share Capital [s.205 (3)]. Such shares are known as bonus shares and are
issued to the existing members of the company free of charge.

The issue of bonus shares is regulated not only by the Companies Act, 1956 but also by the
guidelines issued by SEBI in this regard.

11.3.12 Rights Shares

The existing members of the company have a right to be offered shares, when the company
wants to increase its subscribed capital. Such shares are known as “right shares” but they are not
issued free of charge.
Section 81 provides that where at any time after the expiration of two years from the date of
incorporation of the company or after one year from the date of the first allotment of shares,
whichever is earlier, a public company limited by shares, issues further shares within the limits
of the authorised capital, its directors must first offer these shares to the existing holders of
equity shares in proportion, as nearly as circumstances admit, to the capital paid up on their
shares at the time of the further issue. The company must give notice to each of the equity
shareholders, giving him the option to buy the shares offered to him by the company. The
shareholders must be informed of the number of shares he has the option to buy. He must be
given at least fifteen days to decide whether he would exercise his option or not. If the shareholder
does not inform the company of his decision, he shall be deemed to have declined the offer.
Unless the articles of the company otherwise provide, the directors must state in the notice of
offer the fact that the shareholder has also the right to renounce the offer, in whole or part, in
favour of some other person who need not be member of the company. If the shareholder
declines or is deemed to have declined or if the person in whose favour the renunciation is made
declines to buy the shares, the company’s directors may dispose of those shares in such manner
as they may think fit.
Exceptions: However, the company may, by special resolution in general meeting, decide that
the directors need not offer the shares in the further issue to the existing equity shareholders and
that they may dispose them off in any manner whatsoever. But where, it has been possible to
muster ordinary majority only, the directors may not offer the shares to the existing equity
shareholders, if permission is obtained from the Central Government. Further, s.81 does not
apply to a private company. Thus, a private company need not offer its further issue first to
existing shareholders. Directors are free to offer them in the manner they deem fit. Further, s.81
is not applicable in the case of issue of shares against conversion of loans or debentures.
SEBI has issued guidelines regarding Rights Issues.

Duty of transferor to transferee in respect of rights shares. There may be pending transfers at the
time when a rights issue takes place. This raises the question whether the transferor of an
unregistered transfer is under any obligation towards his transferee to apply for the rights

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