Chapter 4: Share Capital and Debentures - Test 1: answer key

Question 1 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. Anekta Garments Limited is an unlisted public company with a paid-up equity capital divided between ordinary voting shares and an existing class of equity shares carrying differential voting rights. The Articles of Association expressly authorise further issue of such shares. At a meeting held on 15 November 2026, the Board considered allotting a new class, Class D, which would carry three votes per share but would have no preferential right to dividend or repayment of capital. The company’s working paper shows that, immediately after the proposed allotment, total voting power would be 10,00,000 votes: 2,60,000 votes attached to ordinary equity shares and 7,40,000 votes attached to all differential-rights shares, including Class D. Members of this unlisted public company passed an ordinary resolution at a general meeting with 62% of votes cast in favour. The company filed its annual accounts and annual returns for each of the three financial years preceding FY 2026-27. It has no subsisting default in payment of declared dividend, repayment of matured deposits, redemption of preference shares or debentures, or payment of interest. However, it had defaulted on a term-loan instalment payable to a scheduled bank on 30 September 2024. The arrears and interest were fully paid on 15 January 2025, during FY 2024-25. The company has not been penalised by a Court or Tribunal for a specified regulatory offence during the last three years, and management states that all other Rule 4 conditions are satisfied. The Board wants to allot Class D shares immediately and has asked whether the voting structure, member approval and cured loan default permit the proposed issue.

How should the proposed Class D shares be classified under Section 43 of the Companies Act, 2013?

1. Equity share capital with differential voting rights, since the new class lacks preferential dividend and repayment rights. (correct answer)
2. Preference share capital, because any class receiving additional voting power becomes preference capital automatically.
3. Equity share capital with ordinary voting rights, because the dividend and capital rights are unchanged.
4. Preference share capital, because three votes per share creates a preferential right over equity shareholders.

Answer: A — Equity share capital with differential voting rights, since the new class lacks preferential dividend and repayment rights.

Explanation. Section 43 classifies share capital into equity share capital and preference share capital. Preference shares carry preferential rights regarding payment of dividend and repayment of capital. Class D has differential voting rights but no preferential dividend or capital repayment entitlement. Therefore, it is equity share capital with differential voting rights. The primary trap is treating every differential right as a preferential right, although Rule 4 specifically permits differential equity rights.

Where it goes wrong. Confusing differential voting rights with the preferential dividend and capital repayment rights defining preference shares.

Authority. Section 43(a) read with Explanation (i) and (ii) to the Companies Act, 2013; Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014

Question 2 · 2 marks · Chapter 4: Share Capital and Debentures · hard

What is the legal position regarding the proposed differential-rights voting power of 74% of the company's total voting power?

1. The issue is invalid because differential-rights voting power must remain strictly below 74% at all times.
2. The issue satisfies the voting-power ceiling because 74% is permitted by the words 'shall not exceed'. (correct answer)
3. The issue is invalid because the existing DVR shares must not exceed 50% after the fresh allotment.
4. The issue satisfies the ceiling only if each differential-rights share carries one vote rather than three.

Answer: B — The issue satisfies the voting-power ceiling because 74% is permitted by the words 'shall not exceed'.

Explanation. Rule 4(1)(c) prescribes that voting power in respect of shares with differential rights must not exceed 74% of the company's total voting power at any point of time. The proposed structure reaches exactly 74%, which satisfies the statutory ceiling. The expression 'shall not exceed' includes equality. The primary distractor incorrectly treats 74% as a strictly lower-than threshold, whereas the Rule expressly permits reaching the prescribed maximum.

Where it goes wrong. Interpreting 74% as a strict maximum that cannot be reached, instead of a limit that cannot be exceeded.

Authority. Rule 4(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014

Question 3 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Can Anekta Garments Limited issue the differential-rights shares immediately, considering that its scheduled-bank term-loan default was fully made good during FY 2024-25?

1. It may issue immediately because the loan default has been fully cured and no subsisting default remains.
2. It may issue after three years from the payment date, because the delay is no longer outstanding.
3. It must wait until the expiry of five years from the end of FY 2024-25. (correct answer)
4. It must wait until five years from the proposed issue date have elapsed.

Answer: C — It must wait until the expiry of five years from the end of FY 2024-25.

Explanation. Rule 4 contains a five-year restriction where the relevant default has been made good. The period is calculated from the end of the financial year in which the default was made good, not from the actual payment date. The default was cured in FY 2024-25, which ended on 31 March 2025. The five-year period expires on 31 March 2030; the company can issue only after that expiry.

Where it goes wrong. Calculating the five-year period from the actual date of repayment rather than the end of the financial year.

Authority. Rule 4(1)(f)(ii) and proviso to Rule 4(1) of the Companies (Share Capital and Debentures) Rules, 2014; Companies (Share Capital and Debentures) Third Amendment Rules, 2016

Question 4 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Was the company's approval mechanism for the proposed differential-rights shares appropriate, considering its status as an unlisted public company?

1. No, because every issue of differential-rights equity shares requires a special resolution of members.
2. No, because an unlisted public company must approve the issue through postal ballot.
3. Yes, but only if the Board first obtains approval from the Tribunal in addition to the members.
4. Yes, an ordinary resolution at a general meeting is sufficient for an unlisted public company. (correct answer)

Answer: D — Yes, an ordinary resolution at a general meeting is sufficient for an unlisted public company.

Explanation. Rule 4(1) requires the Articles of Association to authorise the issue and shareholder approval through an ordinary resolution at a general meeting. The Rule separately requires a listed public company to pass the resolution through postal ballot. Anekta Garments Limited is an unlisted public company; therefore, an ordinary resolution at its general meeting is sufficient. The primary trap is incorrectly imposing the postal-ballot requirement on every public company.

Where it goes wrong. Confusing the special approval mechanism applicable to listed public companies with the ordinary general-meeting requirement.

Authority. Rule 4(1)(a) and (b) of the Companies (Share Capital and Debentures) Rules, 2014

Question 5 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. Vayu Renewables Limited is executing a grid-storage and transmission project that is expressly included in the infrastructure projects specified in Schedule VI to the Companies Act, 2013. To finance the project, the company proposes to issue 12,00,000 redeemable preference shares of ₹100 each carrying an 8% preferential dividend and preferential repayment of paid-up capital. Its Articles of Association authorise the issue of redeemable preference shares. The Board has prepared draft terms providing for a redemption period of 28 years from the date of issue. The terms also state that at least 10% of the preference shares will be redeemed each year from the twenty-first year onwards, or earlier on a proportionate basis, at the option of the preference shareholders. The CFO has nevertheless proposed that the company may defer all redemption until the end of year 28 because the project has a long gestation period. The company has no subsisting default in redemption of any existing preference shares or payment of dividend due on any preference shares. A Board resolution approving the draft issue has been passed, but no special resolution has yet been placed before the members. The finance team has also asked whether the 20-year general ceiling applies even to a Schedule VI infrastructure project, whether the annual 10% redemption is calculated with reference to the original issue, and whether Board approval alone is adequate. The issue is proposed as preference capital rather than debt, and the company intends to comply with the prescribed particulars and explanatory statement requirements.

What is the appropriate classification of the 8% shares proposed by Vayu Renewables Limited?

1. Preference share capital, because the shares carry priority for dividend and repayment of paid-up capital. (correct answer)
2. Equity share capital with differential rights, because the preference dividend is calculated at a fixed rate.
3. Equity share capital with ordinary voting rights, because the issue does not carry any voting restriction.
4. Debenture capital, because the shares carry a fixed annual return and a repayment date.

Answer: A — Preference share capital, because the shares carry priority for dividend and repayment of paid-up capital.

Explanation. Explanation (ii) to Section 43 defines preference share capital as issued share capital carrying preferential rights regarding payment of dividend and repayment of capital in winding up or repayment of capital. Vayu Renewables Limited's proposed shares carry both rights. A fixed preferential dividend and priority repayment establish their preference-share character. The primary distractor incorrectly treats the fixed dividend as merely a differential equity right, overlooking the accompanying preferential capital repayment entitlement.

Where it goes wrong. Ignoring the preferential repayment right while classifying shares based only on the fixed dividend.

Authority. Explanation (ii) to Section 43 of the Companies Act, 2013

Question 6 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Is the proposed 28-year tenure legally permissible for Vayu Renewables Limited's preference shares?

1. No, because preference shares cannot be issued for more than twenty years under any circumstances.
2. Yes, because the project is a Schedule VI infrastructure project and the term is within thirty years. (correct answer)
3. No, because only government companies may issue preference shares for an extended infrastructure period.
4. Yes, but only if the company obtains prior approval from the Central Government for each issue.

Answer: B — Yes, because the project is a Schedule VI infrastructure project and the term is within thirty years.

Explanation. Section 55(2) generally limits the tenure of redeemable preference shares to twenty years. However, its first proviso permits a longer period for infrastructure projects specified in Schedule VI, subject to the prescribed annual redemption requirement. The maximum extended tenure is thirty years. Since the stated project qualifies under Schedule VI and the proposed tenure is 28 years, it falls within the statutory exception.

Where it goes wrong. Applying the general twenty-year limit without considering the specific infrastructure-project exception.

Authority. Section 55(2), first proviso, of the Companies Act, 2013; Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014; Schedule VI to the Companies Act, 2013

Question 7 · 2 marks · Chapter 4: Share Capital and Debentures · medium

What is the minimum number of preference shares that must be redeemed annually from the twenty-first year onwards under the proposed issue?

1. 60,000 shares, calculated as 5% of the original issue and redeemable at year 21.
2. 1,00,000 shares, calculated as a rounded 8.33% of the original issue each year.
3. 1,20,000 shares, representing at least 10% of the 12,00,000-share issue each year. (correct answer)
4. 2,40,000 shares, representing 10% of the issue in each of the final five years only.

Answer: C — 1,20,000 shares, representing at least 10% of the 12,00,000-share issue each year.

Explanation. For qualifying infrastructure projects, preference shares exceeding twenty years but not exceeding thirty years must be redeemed to the extent of at least 10% annually, beginning from the twenty-first year onwards or earlier on a proportionate basis at the option of preference shareholders. Ten per cent of 12,00,000 shares equals 1,20,000 shares. The primary distractor treats the ten-year extended period as allowing redemption to be postponed until the final years.

Where it goes wrong. Treating the 10% requirement as a cumulative ten-year target instead of a minimum annual redemption requirement.

Authority. Section 55(2), first proviso, of the Companies Act, 2013; Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014

Question 8 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Can Vayu Renewables Limited proceed with the issue on the strength of its existing Board resolution, considering that the Articles authorise the issue and there is no subsisting default?

1. Yes, because the Board may approve the issue when the Articles authorise redeemable preference shares.
2. Yes, because the absence of any existing default is sufficient to dispense with member approval.
3. No, because all existing shareholders must consent in writing before any preference issue.
4. No, because Rule 9 requires a special resolution, alongside the absence of specified subsisting defaults. (correct answer)

Answer: D — No, because Rule 9 requires a special resolution, alongside the absence of specified subsisting defaults.

Explanation. Rule 9(1) requires a special resolution in the general meeting for issue of preference shares. It also requires that, at the time of issue, the company should not have a subsisting default in redemption of preference shares or payment of dividend due on any preference shares. The company satisfies the no-default condition but has only passed a Board resolution. Consequently, it cannot proceed until the required special resolution is passed.

Where it goes wrong. Assuming that Articles authorisation and Board approval together replace the statutory special-resolution requirement.

Authority. Section 55(2) of the Companies Act, 2013; Rule 9(1) of the Companies (Share Capital and Debentures) Rules, 2014

Question 9 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. Coral Components Limited has 80,000 redeemable preference shares of ₹100 each. Of these, 60,000 shares are fully paid-up and 20,000 shares are paid-up to ₹75 per share. The terms of issue permit redemption of the fully paid-up shares in December 2026. The company proposes to redeem 50,000 fully paid-up preference shares at a premium of ₹10 per share. Of the nominal redemption amount, 30,000 shares will be redeemed out of profits otherwise available for dividend, while the remaining 20,000 shares will be redeemed from proceeds of a fresh issue of equity shares made specifically for this purpose. The company has sufficient distributable profits to meet the premium as well. The CFO proposes transferring the nominal value of all 50,000 shares to the Capital Redemption Reserve (CRR), reasoning that the entire series is being redeemed. The auditor has advised that the reserve calculation must be linked to the source used for redemption, not merely the total number of shares redeemed. Separately, the Board proposes to include 5,000 of the partly paid-up preference shares in the same redemption batch, arguing that the unpaid balance can be adjusted against the redemption proceeds. The finance team seeks confirmation of the permissible sources of redemption, the fully paid-up requirement, and the precise amount to be transferred to CRR, including whether the redemption premium forms part of that reserve.

Which principle should Coral Components Limited apply while calculating the Capital Redemption Reserve arising from the proposed redemption?

1. Transfer to CRR the nominal amount of shares redeemed out of profits otherwise available for dividend. (correct answer)
2. Transfer to CRR the entire nominal value of all preference shares, even those redeemed from fresh issue.
3. Transfer to CRR the redemption premium in addition to the entire nominal amount of shares redeemed.
4. Transfer to CRR only the amount of cash left after paying dividend and redemption premium.

Answer: A — Transfer to CRR the nominal amount of shares redeemed out of profits otherwise available for dividend.

Explanation. Section 55(2)(c) requires the company to transfer a sum equal to the nominal amount of preference shares redeemed out of profits otherwise available for dividend to the Capital Redemption Reserve Account. The requirement is connected to the source of redemption. Shares redeemed from fresh issue proceeds do not generate an additional CRR transfer under this clause. The primary trap is calculating CRR on the entire series without considering the funding source.

Where it goes wrong. Calculating CRR on the entire nominal redemption amount rather than only the portion financed from profits.

Authority. Section 55(2), second proviso, clause (c), of the Companies Act, 2013

Question 10 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Which combination correctly identifies the statutory sources from which Coral Components Limited may redeem its preference shares?

1. Any source permitted by Articles, including borrowings and asset-sale proceeds, may be used for redemption.
2. Only distributable profits or proceeds of a fresh issue of shares made for redemption may fund it. (correct answer)
3. Only a fresh issue of equity shares may be used, because profits cannot fund redemption.
4. Only profits after tax may be used, because fresh share proceeds are not a permitted source.

Answer: B — Only distributable profits or proceeds of a fresh issue of shares made for redemption may fund it.

Explanation. The second proviso to Section 55(2) permits redemption only out of profits of the company which would otherwise be available for dividend or out of proceeds of a fresh issue of shares made specifically for redemption. Borrowings are not an alternative statutory source under this provision. The two permitted sources are independent alternatives, and a company may use both for different portions of the redemption.

Where it goes wrong. Assuming that the company may freely use borrowings or any available cash merely because payment to preference shareholders is possible.

Authority. Section 55(2), second proviso, clause (a), of the Companies Act, 2013

Question 11 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Can Coral Components Limited include 5,000 partly paid-up preference shares in the proposed December 2026 redemption batch?

1. Partly paid shares may be redeemed if holders agree to forego the unpaid amount.
2. Partly paid shares may be redeemed after netting the unpaid amount against the premium.
3. Only fully paid shares may be redeemed, so the partly paid shares must first be made fully paid. (correct answer)
4. Partly paid shares may be redeemed if the company has adequate distributable profits and no defaults.

Answer: C — Only fully paid shares may be redeemed, so the partly paid shares must first be made fully paid.

Explanation. Section 55(2), second proviso, clause (b), expressly provides that no preference shares shall be redeemed unless they are fully paid. Coral Components Limited's partly paid shares cannot be included in the redemption batch merely by adjusting the unpaid amount against redemption proceeds. The company must first ensure that those shares become fully paid. Availability of profits or shareholder agreement cannot override this statutory prerequisite.

Where it goes wrong. Assuming that the unpaid portion can simply be deducted from the redemption consideration.

Authority. Section 55(2), second proviso, clause (b), of the Companies Act, 2013

Question 12 · 2 marks · Chapter 4: Share Capital and Debentures · hard

What amount must Coral Components Limited transfer to its Capital Redemption Reserve Account in respect of the proposed redemption of 50,000 preference shares?

1. ₹50,00,000, being nominal amount of all 50,000 shares redeemed from all sources.
2. ₹35,00,000, including the ₹5,00,000 redemption premium payable on all shares.
3. ₹20,00,000, being the nominal amount only of shares funded by the fresh issue.
4. ₹30,00,000, being nominal amount of 30,000 shares redeemed from profits. (correct answer)

Answer: D — ₹30,00,000, being nominal amount of 30,000 shares redeemed from profits.

Explanation. Only 30,000 preference shares are being redeemed from distributable profits. Their nominal value is 30,000 × ₹100 = ₹30,00,000. Section 55(2)(c) requires this nominal amount to be transferred to CRR. The remaining 20,000 shares are funded by a fresh issue, and the ₹5,00,000 redemption premium is not included in the CRR calculation. The primary trap is including all shares redeemed irrespective of their funding source.

Where it goes wrong. Including fresh-issue-funded shares and redemption premium in the Capital Redemption Reserve calculation.

Authority. Section 55(2), second proviso, clauses (a), (b) and (c), of the Companies Act, 2013

Question 13 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. Meridian Textiles Limited has two classes of preference shares: Class A, comprising 4,00,000 issued 8% cumulative preference shares, and Class B, comprising 2,00,000 issued 10% non-cumulative preference shares. Its Articles of Association expressly provide that class rights may be varied in accordance with Section 48 of the Companies Act, 2013, and the terms of issue do not prohibit the proposed variation. The company proposes to make the dividend rights of Class A non-cumulative and also alter the relative priority between Class A and Class B on repayment of capital. Holders representing 80% of the issued Class A shares provide written consent to the variation. For Class B, only holders representing 72% of the issued shares provide written consent. No separate class meeting has been convened as an alternative approval process. A group of Class A shareholders holding 10.5% of the issued shares did not consent and files an application before the National Company Law Tribunal on the eighteenth day after the consent was obtained. The Board proposes to implement the revised dividend and capital-priority terms immediately, contending that the Class A consent crossed the three-fourths threshold and the dissenting group is too small to stop implementation. The company’s legal team must assess the separate-class approval requirement, the significance of the affected Class B rights, the dissenters’ eligibility and the effect of the pending Tribunal application.

Has the written consent obtained from Class A preference shareholders satisfied the statutory threshold for variation of their rights?

1. Yes, because the 80% written consent exceeds the statutory 75% issued-share threshold for Class A. (correct answer)
2. No, because approval requires 90% of the issued shares of the class.
3. No, because the threshold is calculated by number of individual members rather than issued shares.
4. Yes, but only if every Class A member signs the consent letter regardless of holding size.

Answer: A — Yes, because the 80% written consent exceeds the statutory 75% issued-share threshold for Class A.

Explanation. Section 48(1) permits variation of class rights with written consent of holders of not less than three-fourths of the issued shares of that class, provided the constitutional or issue-related conditions are satisfied. Class A holders representing 80% of its issued shares have consented in writing. Therefore, the required threshold for Class A is satisfied. The relevant measurement is the proportion of issued shares, not the number of individual members.

Where it goes wrong. Calculating the required majority by counting shareholders instead of considering the proportion of issued shares.

Authority. Section 48(1) of the Companies Act, 2013

Question 14 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Can the proposed variation proceed despite the fact that only 72% of the issued Class B preference shares have provided written consent?

1. Yes, because Class A consent is sufficient even when Class B's relative rights are affected.
2. No, because at least 75% of issued Class B shares must also consent to the variation. (correct answer)
3. Yes, because a majority of 72% is enough for every separate class-rights variation.
4. No, because the affected second class must unanimously approve the proposed variation.

Answer: B — No, because at least 75% of issued Class B shares must also consent to the variation.

Explanation. The proviso to Section 48(1) states that where variation of one class's rights affects another class, consent of three-fourths of the affected other class must also be obtained. Here, Class B's relative priority on repayment of capital is affected. Its written consent is only 72%, which is below the required 75%. Therefore, the proposed variation cannot validly proceed on the existing approvals. The primary trap is treating approval of Class A as sufficient for every affected class.

Where it goes wrong. Ignoring the separate consent requirement where variation of one class affects the rights of another class.

Authority. Section 48(1), proviso, of the Companies Act, 2013

Question 15 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Are the dissenting Class A shareholders eligible to apply to the National Company Law Tribunal against the proposed variation?

1. No, because a Tribunal application may be made only by holders of at least 25% of issued shares.
2. No, because the application must be made within fourteen days after the consent date.
3. Yes, because the 10.5% dissenting holders meet the threshold and applied within twenty-one days. (correct answer)
4. Yes, but only if all dissenting shareholders personally sign one joint application before the Tribunal.

Answer: C — Yes, because the 10.5% dissenting holders meet the threshold and applied within twenty-one days.

Explanation. Section 48(2) allows holders of not less than 10% of the issued shares of a class who did not consent or vote in favour of the variation to apply to the Tribunal for cancellation. The proviso requires the application to be made within 21 days after the consent or resolution. The dissenters hold 10.5% and filed on day 18, satisfying both conditions. They may appoint one or more persons in writing to apply on their behalf.

Where it goes wrong. Confusing the 10% minimum holding threshold with the percentage required to approve the variation.

Authority. Section 48(2), proviso, of the Companies Act, 2013

Question 16 · 2 marks · Chapter 4: Share Capital and Debentures · medium

What is the effect of the qualifying Class A shareholders' application pending before the NCLT?

1. It may be implemented immediately because approval by 80% of Class A shares makes it effective.
2. It may be implemented after 21 days even if the NCLT has not heard the application.
3. It remains effective unless the Tribunal cancels it after the final hearing.
4. It has no effect unless and until the Tribunal confirms it after a qualifying application. (correct answer)

Answer: D — It has no effect unless and until the Tribunal confirms it after a qualifying application.

Explanation. Section 48(2) expressly provides that where an eligible application is made by dissenting shareholders, the variation shall not have effect unless and until it is confirmed by the Tribunal. Since the Class A dissenters satisfy the 10% threshold and applied within 21 days, Meridian Textiles Limited cannot implement the variation while confirmation remains pending. The primary distractor incorrectly assumes that the initial three-fourths approval alone makes the variation immediately operative.

Where it goes wrong. Assuming that class approval automatically makes the variation effective despite a timely qualifying Tribunal application.

Authority. Section 48(2) of the Companies Act, 2013

Question 17 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. An unlisted public company proposes to issue equity shares with differential rights. Its Articles authorise the issue, the ordinary resolution has been approved, the voting-power ceiling is satisfied, and all relevant filings are current. However, 2 years and 10 months before the proposed issue, a Tribunal imposed a penalty on the company for an offence under the SEBI Act, 1992. The directors contend that the issue remains permissible because the penalty was not imposed under the Companies Act. Which conclusion follows from Rule 4?

An unlisted public company proposes to issue equity shares with differential rights. Its Articles authorise the issue, the ordinary resolution has been approved, the voting-power ceiling is satisfied, and all relevant filings are current. However, 2 years and 10 months before the proposed issue, a Tribunal imposed a penalty on the company for an offence under the SEBI Act, 1992. The directors contend that the issue remains permissible because the penalty was not imposed under the Companies Act. Which conclusion follows from Rule 4?

1. No; a recent Tribunal penalty under the SEBI Act within three years disqualifies the company under Rule 4. (correct answer)
2. Yes; only penalties imposed under Companies Act itself are relevant for this condition.
3. Yes; the three-year period applies only to penalties imposed by a criminal court.
4. No; but only a subsisting penalty for non-filing of annual accounts creates disqualification.

Answer: A — No; a recent Tribunal penalty under the SEBI Act within three years disqualifies the company under Rule 4.

Explanation. Rule 4(1)(g) requires that the company must not have been penalised by a Court or Tribunal during the preceding three years for an offence under the specified regulatory enactments, including the SEBI Act, 1992. The Tribunal imposed the penalty only 2 years and 10 months before the proposed issue. Consequently, the company does not satisfy this eligibility condition. The provision is not confined to penalties imposed under the Companies Act.

Where it goes wrong. Overlooking penalties under specified sectoral regulatory laws when evaluating eligibility for differential-rights shares.

Authority. Rule 4(1)(g) of the Companies (Share Capital and Debentures) Rules, 2014

Question 18 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Scenario. A company proposes to issue a new class of equity shares with differential voting rights. After the issue, the total voting power of the company will be 2,00,000 votes, of which 1,48,800 votes will be attached to shares carrying differential rights. The Articles authorise the issue, all relevant filings are current and there are no disqualifying defaults. The Board argues that the issue remains valid because the differential-rights voting power is below 75%. Which conclusion follows from Rule 4?

A company proposes to issue a new class of equity shares with differential voting rights. After the issue, the total voting power of the company will be 2,00,000 votes, of which 1,48,800 votes will be attached to shares carrying differential rights. The Articles authorise the issue, all relevant filings are current and there are no disqualifying defaults. The Board argues that the issue remains valid because the differential-rights voting power is below 75%. Which conclusion follows from Rule 4?

1. Permissible, since differential-rights voting power may be up to 75%.
2. Not permissible, since 74.4% crosses the maximum permitted 74% total voting power. (correct answer)
3. Permissible, provided the issue is approved by a special resolution instead of an ordinary resolution.
4. Permissible, because the 74% limit applies only to shares issued by listed companies.

Answer: B — Not permissible, since 74.4% crosses the maximum permitted 74% total voting power.

Explanation. The differential-rights voting power is 1,48,800 ÷ 2,00,000 × 100 = 74.4%. Rule 4(1)(c) imposes a maximum ceiling of 74% of total voting power at any point of time. Therefore, the proposed issue breaches the limit. Approval by a stronger shareholder resolution cannot override this prescribed ceiling. The primary distractor incorrectly uses 75% as the permissible threshold, which is associated with other provisions of company law.

Where it goes wrong. Confusing the 74% DVR voting-power ceiling with the 75% majority appearing in other statutory provisions.

Authority. Rule 4(1)(c) of the Companies (Share Capital and Debentures) Rules, 2014

Question 19 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. A public company decides on 12 August 2026 to issue equity shares with differential rights. It has filed all annual accounts for FY 2023-24, 2024-25 and 2025-26, but its annual return for FY 2024-25 was filed late and the company had committed a filing default during the relevant period. The directors contend that timely filing of accounts is sufficient because the delayed annual return was subsequently filed. All other Rule 4 conditions are satisfied. Is the company eligible to proceed with the issue on the decision date?

A public company decides on 12 August 2026 to issue equity shares with differential rights. It has filed all annual accounts for FY 2023-24, 2024-25 and 2025-26, but its annual return for FY 2024-25 was filed late and the company had committed a filing default during the relevant period. The directors contend that timely filing of accounts is sufficient because the delayed annual return was subsequently filed. All other Rule 4 conditions are satisfied. Is the company eligible to proceed with the issue on the decision date?

1. Eligible, because the annual return was eventually filed before the issue date.
2. Eligible, because the requirement tests only annual accounts and not annual returns.
3. Ineligible, because a filing default during any of the three preceding financial years breaches Rule 4. (correct answer)
4. Eligible, because one late annual return can be ignored if every other condition is satisfied.

Answer: C — Ineligible, because a filing default during any of the three preceding financial years breaches Rule 4.

Explanation. Rule 4(1)(d) requires that the company must not have defaulted in filing annual accounts and annual returns for the three financial years preceding the year in which it decides to issue differential-rights shares. The condition expressly covers both filings. A default in filing the annual return for FY 2024-25 therefore disqualifies the company for the proposed issue, notwithstanding its subsequent filing. The primary trap is considering timely annual accounts sufficient while ignoring annual returns.

Where it goes wrong. Ignoring the annual-return filing requirement or treating subsequent filing as proof that no default occurred.

Authority. Rule 4(1)(d) of the Companies (Share Capital and Debentures) Rules, 2014

Question 20 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Scenario. A listed company had defaulted on interest payable on a term loan from a scheduled bank. The default was made good on 28 December 2021, during FY 2021-22. The company proposes to issue equity shares with differential rights on 1 April 2027; all three preceding years’ accounts and returns are filed, the Articles authorise the issue, and no other disqualification subsists. The Board says that the five-year period should be counted from the date on which the payment was made, not from the end of that financial year. Is the proposed date permissible?

A listed company had defaulted on interest payable on a term loan from a scheduled bank. The default was made good on 28 December 2021, during FY 2021-22. The company proposes to issue equity shares with differential rights on 1 April 2027; all three preceding years’ accounts and returns are filed, the Articles authorise the issue, and no other disqualification subsists. The Board says that the five-year period should be counted from the date on which the payment was made, not from the end of that financial year. Is the proposed date permissible?

1. No, because the company must wait five years from the default date of 28 December 2021.
2. No, because the five-year period begins only from the next issue date after default.
3. No, because the five-year period runs five full years after the allotment of the previous shares.
4. Yes, because the five years expire on 31 March 2027, after the FY in which default was made good. (correct answer)

Answer: D — Yes, because the five years expire on 31 March 2027, after the FY in which default was made good.

Explanation. The default was made good during FY 2021-22. The proviso to Rule 4(1) permits issue of differential-rights shares upon expiry of five years from the end of the financial year in which the default was made good. That financial year ended on 31 March 2022, and the five-year period expired on 31 March 2027. Therefore, 1 April 2027 is after the expiry and is a permissible proposed date, assuming all other conditions remain satisfied.

Where it goes wrong. Starting the five-year computation from the date of actual repayment rather than the end of the relevant financial year.

Authority. Rule 4(1), proviso, of the Companies (Share Capital and Debentures) Rules, 2014; Companies (Share Capital and Debentures) Third Amendment Rules, 2016

Question 21 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Scenario. An unlisted public company proposes to issue 9% redeemable preference shares for 21 years to fund a large technology campus. The company argues that the project is strategically important and involves substantial fixed assets, so it should qualify for the longer infrastructure tenure. However, the project is not one of the infrastructure projects specified in Schedule VI to the Companies Act, 2013. Its Articles authorise redeemable preference shares and the other conditions under Rule 9 are satisfied. What is the maximum permissible tenure for this issue?

An unlisted public company proposes to issue 9% redeemable preference shares for 21 years to fund a large technology campus. The company argues that the project is strategically important and involves substantial fixed assets, so it should qualify for the longer infrastructure tenure. However, the project is not one of the infrastructure projects specified in Schedule VI to the Companies Act, 2013. Its Articles authorise redeemable preference shares and the other conditions under Rule 9 are satisfied. What is the maximum permissible tenure for this issue?

1. Twenty years, because the extended tenure is confined to infrastructure projects specified in Schedule VI. (correct answer)
2. Twenty-five years, because large fixed-asset investment qualifies as infrastructure by its economic nature.
3. Thirty years, because any public company may use the extended tenure with a special resolution.
4. Twenty-one years, because a non-infrastructure issue can exceed twenty years by one additional year.

Answer: A — Twenty years, because the extended tenure is confined to infrastructure projects specified in Schedule VI.

Explanation. Section 55(2) establishes twenty years as the general maximum period for redeemable preference shares. The extended period exceeding twenty years is specifically available for infrastructure projects specified in Schedule VI, subject to prescribed conditions. Merely describing a project as strategically important or capital-intensive does not satisfy the statutory definition. As the technology campus is not a specified Schedule VI infrastructure project, its preference shares cannot have a 21-year tenure.

Where it goes wrong. Treating every commercially important or capital-intensive project as a qualifying Schedule VI infrastructure project.

Authority. Section 55(2) and Explanation to Section 55 of the Companies Act, 2013; Schedule VI to the Companies Act, 2013; Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014

Question 22 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. A company has issued 6,00,000 preference shares for a 30-year period to finance a qualifying Schedule VI infrastructure project. The terms provide for redemption in the extended period, and the preference shareholders may exercise the option for redemption earlier on a proportionate basis. The finance director proposes to redeem only 5% of the original issue in each of years 21 to 30, stating that the 10% rule is merely a cumulative target over the entire ten-year extension. Is this interpretation correct?

A company has issued 6,00,000 preference shares for a 30-year period to finance a qualifying Schedule VI infrastructure project. The terms provide for redemption in the extended period, and the preference shareholders may exercise the option for redemption earlier on a proportionate basis. The finance director proposes to redeem only 5% of the original issue in each of years 21 to 30, stating that the 10% rule is merely a cumulative target over the entire ten-year extension. Is this interpretation correct?

1. 10% in total over years 21 to 30, with no mandatory annual redemption.
2. At least 10% each year from year 21, or earlier proportionately at the preference holders' option. (correct answer)
3. 10% annually only after year 25, provided all holders unanimously agree.
4. 10% of the remaining balance each year, only at the company's unilateral discretion.

Answer: B — At least 10% each year from year 21, or earlier proportionately at the preference holders' option.

Explanation. The infrastructure-project exception requires redemption of at least 10% of the preference shares annually, beginning from the twenty-first year onwards or earlier on a proportionate basis at the option of the preference shareholders. It is not merely a cumulative requirement for the entire extended period. The company's proposed 5% annual redemption does not meet the prescribed minimum. The primary trap is confusing an annual statutory requirement with a cumulative target.

Where it goes wrong. Treating the statutory 10% annual redemption requirement as a cumulative ten-year redemption target.

Authority. Section 55(2), first proviso, of the Companies Act, 2013; Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014

Question 23 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Scenario. A company is due to redeem 40,000 fully paid preference shares. It has adequate distributable profits and is also arranging a fresh issue of equity shares. The CFO suggests using a bank overdraft for part of the redemption and the proceeds of the fresh issue for the balance, while the company's Articles contain no special restriction. The Board asks whether the source of funds is unrestricted so long as the company can pay holders on time. Which statement correctly identifies the permitted statutory sources for redemption?

A company is due to redeem 40,000 fully paid preference shares. It has adequate distributable profits and is also arranging a fresh issue of equity shares. The CFO suggests using a bank overdraft for part of the redemption and the proceeds of the fresh issue for the balance, while the company's Articles contain no special restriction. The Board asks whether the source of funds is unrestricted so long as the company can pay holders on time. Which statement correctly identifies the permitted statutory sources for redemption?

1. Profits of any kind or bank borrowings, provided the company is solvent at redemption.
2. Existing securities premium or any loan proceeds, if the Articles permit the source.
3. Profits otherwise available for dividend or proceeds of a fresh issue made for that redemption. (correct answer)
4. Share application money pending allotment or surplus from a revaluation reserve.

Answer: C — Profits otherwise available for dividend or proceeds of a fresh issue made for that redemption.

Explanation. Section 55(2)(a) permits redemption of preference shares only out of profits of the company that would otherwise be available for dividend or proceeds of a fresh issue of shares made specifically for redemption. A bank overdraft is not a permitted statutory source under this provision. The existence of sufficient liquidity does not expand the permissible funding methods. The primary trap is confusing the company's ability to pay with the statutory conditions governing redemption.

Where it goes wrong. Assuming that financial capacity or Articles authorisation can override the statutory restrictions on redemption sources.

Authority. Section 55(2), second proviso, clause (a), of the Companies Act, 2013

Question 24 · 2 marks · Chapter 4: Share Capital and Debentures · medium

Scenario. A company will redeem 10,000 fully paid preference shares of ₹100 each. It plans to fund 5,000 shares from profits otherwise available for dividend and the other 5,000 from a fresh issue made for redemption. The shares carry a redemption premium of ₹15 each, which will be met from available profits. The CFO proposes crediting ₹10,00,000 to CRR, including the nominal value funded by the fresh issue. What amount must be transferred to CRR?

A company will redeem 10,000 fully paid preference shares of ₹100 each. It plans to fund 5,000 shares from profits otherwise available for dividend and the other 5,000 from a fresh issue made for redemption. The shares carry a redemption premium of ₹15 each, which will be met from available profits. The CFO proposes crediting ₹10,00,000 to CRR, including the nominal value funded by the fresh issue. What amount must be transferred to CRR?

1. ₹10,00,000, because CRR must include every share redeemed regardless of funding source.
2. ₹6,50,000, because premium must be added to the nominal amount funded from profits.
3. ₹4,00,000, because CRR is based on only 40% of the shares redeemed.
4. ₹5,00,000, because only nominal value of shares redeemed out of profits is transferred. (correct answer)

Answer: D — ₹5,00,000, because only nominal value of shares redeemed out of profits is transferred.

Explanation. CRR is calculated by reference to the nominal value of shares redeemed out of profits otherwise available for dividend. Here, 5,000 shares are funded from profits. Their nominal value is 5,000 × ₹100 = ₹5,00,000. Shares funded from fresh issue proceeds are excluded, and redemption premium is not part of the CRR calculation. Therefore, ₹5,00,000 must be transferred.

Where it goes wrong. Including the nominal value funded by a fresh issue or the redemption premium in the CRR calculation.

Authority. Section 55(2), second proviso, clause (c), of the Companies Act, 2013

Question 25 · 2 marks · Chapter 4: Share Capital and Debentures · hard

Scenario. A company is unable to redeem its preference shares on the due date and cannot pay the dividend accrued on them. Holders representing 76% in value of the unredeemed preference shares agree to accept further redeemable preference shares equal to the amount due, including dividend. The company proposes to issue those further shares without approaching the Tribunal, arguing that the required majority has already consented. Which additional statutory step is necessary, and what happens to holders who did not consent?

A company is unable to redeem its preference shares on the due date and cannot pay the dividend accrued on them. Holders representing 76% in value of the unredeemed preference shares agree to accept further redeemable preference shares equal to the amount due, including dividend. The company proposes to issue those further shares without approaching the Tribunal, arguing that the required majority has already consented. Which additional statutory step is necessary, and what happens to holders who did not consent?

1. It needs consent of three-fourths in value and Tribunal approval; non-consenting holders must be redeemed forthwith. (correct answer)
2. Consent of three-fourths by number suffices; Tribunal approval is unnecessary.
3. The Board may issue further shares without majority consent if dividend arrears exist.
4. NCLT approval alone suffices; dissenters must remain invested under the replacement issue.

Answer: A — It needs consent of three-fourths in value and Tribunal approval; non-consenting holders must be redeemed forthwith.

Explanation. Section 55(3) provides a statutory mechanism where the company cannot redeem preference shares or pay dividend according to their terms. It may issue further redeemable preference shares equal to the amount due, including dividend, only with consent of holders of three-fourths in value of the unredeemed shares and approval of the Tribunal on the company's petition. The Tribunal must order forthwith redemption of shares held by persons who did not consent.

Where it goes wrong. Assuming that the three-fourths consent independently authorises replacement shares without the Tribunal's approval.

Authority. Section 55(3) of the Companies Act, 2013