Chapter 4: Share Capital and Debentures - Test 2: answer key

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

Scenario. Pragati Robotics Limited, an unlisted public company, has paid-up equity share capital of ₹20 crore divided into ordinary equity shares of one class. The company proposes to reward its Chief Technology Officer and two whole-time directors for transferring proprietary algorithms, manufacturing know-how and other value additions developed for its industrial automation business. The proposed consideration is entirely non-cash. The Board proposes to issue the sweat equity shares in the existing class as well as create a new Class B equity series carrying different dividend rights, although no Class B shares have previously been issued. A special resolution authorising sweat equity issue, specifying the number of shares, current market price, consideration and recipient classes, was passed on 15 February 2026. The allotment is proposed for 5 February 2027. A registered valuer has furnished a report valuing the shares and the intellectual property and has addressed the report to the Board with reasons for the valuation. The company had issued sweat equity shares having an aggregate issue value of ₹3.80 crore in earlier years. No sweat equity shares have been issued during the current financial year. The Board now proposes to issue further sweat equity shares having an aggregate issue value of ₹2 crore. The company is not a startup and has not been registered as such. The CFO believes the annual limit is 15% of paid-up equity capital, while the Company Secretary points out the separate ₹5 crore benchmark and the cumulative ceiling. The recipients also want to transfer the shares immediately after allotment, arguing that they are already employees and directors. The Board seeks advice on eligibility, the validity of its approval, the maximum permissible issue and the transfer restriction.

Pragati Robotics Limited proposes to issue sweat equity shares partly in its existing equity class and partly in a newly created Class B series. No shares of Class B have previously been issued. Which statement correctly applies Section 54(1)?

1. Both classes are eligible because a special resolution can create a new class simultaneously with sweat equity.
2. Sweat equity can be issued only in a class of shares that has already been issued by the company. (correct answer)
3. Class B is eligible if the registered valuer determines its fair price before the allotment.
4. The company can issue Class B sweat equity if the recipients unanimously approve the proposed rights.

Answer: B — Sweat equity can be issued only in a class of shares that has already been issued by the company.

Explanation. Section 54(1)(a) permits a company to issue sweat equity shares of a class of shares already issued. Consequently, Pragati Robotics Limited can issue sweat equity in its existing ordinary equity class but cannot issue sweat equity in the proposed Class B series because no shares of that class have previously been issued. A special resolution or valuation report cannot remove this statutory requirement. The principal trap is confusing authority to create a new class with eligibility to issue sweat equity in that class.

Where it goes wrong. Assuming that a special resolution can overcome the requirement that the relevant class must already have been issued.

Authority. Section 54(1)(a) of the Companies Act, 2013; Section 2(88) of the Companies Act, 2013

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

The special resolution authorising the sweat equity issue was passed on 15 February 2026, and allotment is proposed on 5 February 2027. Assuming the existing equity class is used, which statement correctly describes the validity of the resolution and the subsequent transfer restriction?

1. The resolution has expired after six months, and the shares become transferable immediately after allotment.
2. The resolution remains valid indefinitely, but the shares are locked in for two years from approval.
3. The resolution remains valid for eighteen months, and the shares are locked in for three years from approval.
4. The resolution is within its twelve-month validity, and the shares remain locked in for three years from allotment. (correct answer)

Answer: D — The resolution is within its twelve-month validity, and the shares remain locked in for three years from allotment.

Explanation. Rule 8(3) provides that the special resolution authorising sweat equity shares remains valid for allotment within a period not exceeding twelve months from its passing. The proposed allotment on 5 February 2027 falls within twelve months of 15 February 2026. Separately, Rule 8(5) requires sweat equity shares issued to directors or employees to remain locked in and non-transferable for three years from the date of allotment. The lock-in therefore does not begin from the date of shareholder approval.

Where it goes wrong. Calculating the three-year lock-in from the special resolution date rather than from the actual allotment date.

Authority. Rule 8(3) of the Companies (Share Capital and Debentures) Rules, 2014; Rule 8(5) of the Companies (Share Capital and Debentures) Rules, 2014

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

The existing paid-up equity capital is ₹20 crore. Earlier sweat equity issues have an aggregate issue value of ₹3.80 crore. The company proposes a further issue of ₹2 crore. What is the maximum additional sweat equity issue permissible under Rule 8, assuming all other conditions are satisfied?

1. ₹3 crore, because the annual limit is 15% of existing paid-up equity capital.
2. ₹5 crore, because the cumulative limit is 25% of paid-up equity capital.
3. ₹1.20 crore, because the cumulative ceiling leaves only this much available capacity. (correct answer)
4. ₹2 crore, because the proposed issue is lower than the prescribed annual benchmark.

Answer: C — ₹1.20 crore, because the cumulative ceiling leaves only this much available capacity.

Explanation. The annual issue benchmark is the higher of 15% of existing paid-up equity capital and shares having an issue value of ₹5 crore. Here, 15% of ₹20 crore is ₹3 crore, so the annual benchmark is ₹5 crore. However, the cumulative ceiling for a non-startup company is 25% of paid-up equity capital, i.e. ₹5 crore. Previous issues of ₹3.80 crore leave only ₹1.20 crore available. The proposed ₹2 crore issue must therefore be restricted to ₹1.20 crore.

Where it goes wrong. Applying the annual issue benchmark without checking the separate cumulative ceiling on sweat equity.

Authority. Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014

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

The company has obtained a report from a registered valuer covering both the fair price of the sweat equity shares and the intellectual property and know-how being contributed. The report is addressed to the Board and contains valuation justifications. Which statement correctly describes this requirement?

1. The registered valuer must determine the fair price of the shares and value the intellectual property, know-how or value additions through a properly justified report to the Board. (correct answer)
2. Only the intellectual property needs valuation, while the Board can independently determine the fair price of sweat equity shares.
3. The valuer may determine the share price, but the intellectual property must be valued exclusively by the statutory auditor.
4. The valuation report is optional when the sweat equity consideration consists entirely of non-cash assets.

Answer: A — The registered valuer must determine the fair price of the shares and value the intellectual property, know-how or value additions through a properly justified report to the Board.

Explanation. Rule 8(6) requires sweat equity shares to be valued at a fair price determined by a registered valuer, supported by justification. Rule 8(7) separately requires valuation of intellectual property rights, know-how or value additions by a registered valuer, who must provide a proper report addressed to the Board with justification. Therefore, the company has obtained the required categories of valuation. The main trap is assuming that valuation of the shares automatically replaces valuation of the underlying contribution.

Where it goes wrong. Confusing valuation of the sweat equity shares with the separate valuation of the intellectual property or value addition.

Authority. Rule 8(6) of the Companies (Share Capital and Debentures) Rules, 2014; Rule 8(7) of the Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Suryodaya Components Limited, an unlisted public company, proposes to increase its subscribed equity share capital through a rights issue to persons who are equity shareholders on the date of the offer. The paid-up capital is ₹40 crore, and the Board has approved a proportionate offer based on the paid-up capital held by each shareholder. The offer letter dated 10 November 2026 specifies the number of shares offered to each member and allows acceptance until 30 November 2026. The issue is scheduled to open on 15 November 2026 and close on 30 November 2026. The Articles of Association expressly permit renunciation of all or any part of the entitlement in favour of another person. Ms. Kavita, who is entitled to 2,000 shares, intends to renounce 800 shares in favour of her business associate, who is not presently a member. Another member, Mr. Dinesh, neither accepts nor rejects his entitlement by the closing date. The Board proposes to treat his silence as a rejection and allot the declined shares to a strategic investor. A few directors argue that the company must keep the offer open for another month because the shareholder has not expressly declined it. The Company Secretary also reminds the Board that any disposal of declined shares must not be made in a manner disadvantageous to the company or its shareholders. The Board asks whether the notice period, renunciation, deemed rejection and proposed subsequent disposal comply with Section 62 and the relevant Rules.

Suryodaya Components Limited intends to make a rights issue to existing equity shareholders. Which principle must the company follow while determining each shareholder's entitlement to the further shares?

1. The shares must be offered equally to all members irrespective of their existing paid-up shareholding.
2. The entitlement must be determined by the number of members in each shareholder's family.
3. The shares must be offered proportionately according to the paid-up capital on the equity shares held by each person. (correct answer)
4. The entitlement must be calculated exclusively using the nominal value of authorised share capital.

Answer: C — The shares must be offered proportionately according to the paid-up capital on the equity shares held by each person.

Explanation. Section 62(1)(a)(i) requires further shares to be offered to persons who are holders of equity shares on the date of the offer, in proportion to the paid-up capital on those shares held by them. The statutory test therefore concerns paid-up share capital, not merely the number of members or the authorised capital. The primary distractor confuses equal treatment of shareholders with proportionate entitlement based on existing paid-up holdings.

Where it goes wrong. Calculating rights entitlement by counting shareholders or issued shares without considering the paid-up capital held.

Authority. Section 62(1)(a)(i) of the Companies Act, 2013

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

The offer letter is dated 10 November 2026 and allows existing shareholders to accept until 30 November 2026. The company proposes to open its issue on 15 November 2026. Which statement correctly evaluates the acceptance period?

1. The twenty-day acceptance period satisfies the ordinary statutory range of fifteen to thirty days. (correct answer)
2. The acceptance period is invalid because every rights offer must remain open for exactly thirty days.
3. The acceptance period is invalid because a rights offer cannot remain open for more than fifteen days.
4. The acceptance period is valid only if every existing shareholder expressly consents to twenty days.

Answer: A — The twenty-day acceptance period satisfies the ordinary statutory range of fifteen to thirty days.

Explanation. Section 62(1)(a)(ii) requires the offer notice to specify an acceptance period of not less than fifteen days, or such lesser number of days as prescribed, but not exceeding thirty days from the date of the offer. The prescribed Rule 12A permits a lesser period, subject to a minimum of seven days. The stipulated twenty-day period falls comfortably within the ordinary statutory range. The trap is treating the maximum or minimum as the only permissible duration.

Where it goes wrong. Confusing the minimum and maximum limits with a requirement that every rights issue must have a fixed acceptance period.

Authority. Section 62(1)(a)(ii)(2) of the Companies Act, 2013; Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014

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

Ms. Kavita wishes to renounce 800 out of her 2,000 rights entitlements in favour of a business associate who is not a shareholder. The Articles of Association expressly permit renunciation. Which conclusion is correct?

1. Renunciation is prohibited because a rights entitlement can only be transferred to an existing member.
2. Renunciation is valid only if the proposed transferee is a director or employee of the company.
3. Renunciation requires a separate special resolution even when the Articles expressly permit it.
4. Kavita may renounce all or any part of her entitlement in favour of another person because the Articles do not prohibit renunciation. (correct answer)

Answer: D — Kavita may renounce all or any part of her entitlement in favour of another person because the Articles do not prohibit renunciation.

Explanation. Section 62(1)(a) recognises the right of an existing equity shareholder to renounce all or any part of the shares offered in favour of another person, unless the Articles of Association otherwise provide. Here, the Articles expressly permit renunciation. The proposed transferee need not already be a member merely because the entitlement originated through a rights offer. The main trap is confusing the initial rights offer, which goes to existing equity shareholders, with the subsequent permitted renunciation.

Where it goes wrong. Assuming that a rights entitlement can only be renounced in favour of an existing shareholder.

Authority. Section 62(1)(a)(ii)(iv) of the Companies Act, 2013

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

Mr. Dinesh does not accept or reject his rights entitlement by 30 November 2026. The Board wants to treat the shares as declined and dispose of them. Which statement correctly describes the company's legal position?

1. The shares must remain reserved indefinitely because silence cannot constitute rejection of a rights offer.
2. The offer is deemed declined after expiry of the specified acceptance period, and the Board may dispose of the declined shares without disadvantaging the company or its shareholders. (correct answer)
3. The Board can dispose of the shares only after obtaining individual written rejection from the shareholder.
4. The shares automatically stand cancelled and cannot subsequently be allotted to any other person.

Answer: B — The offer is deemed declined after expiry of the specified acceptance period, and the Board may dispose of the declined shares without disadvantaging the company or its shareholders.

Explanation. The notice of a rights issue must specify that failure to accept within the stated period will be deemed to constitute rejection of the offer. Consequently, Mr. Dinesh's failure to respond by the specified closing date results in deemed rejection. Once the offer is declined expressly or by expiry of the acceptance period, the Board may dispose of the shares in a manner that is not disadvantageous to the shareholders and the company. No separate written rejection is required.

Where it goes wrong. Assuming that the company needs an affirmative written rejection before treating an unaccepted rights offer as declined.

Authority. Section 62(1)(a)(ii)(iii) of the Companies Act, 2013

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

Scenario. Aster Digital Systems Private Limited has been developing enterprise software products and has a wholly owned subsidiary, Aster Cloud Services Private Limited. The holding company intends to introduce an employee stock option scheme to retain key personnel and align their interests with long-term growth. Under the proposal, eligible employees will receive an option to subscribe to equity shares of Aster Digital Systems at a predetermined exercise price at a future date, subject to the scheme's terms. The proposed beneficiaries include permanent employees of the issuing company working in India, a director who is not a whole-time director, and a permanent employee of its wholly owned subsidiary working outside India. The Board also proposes granting options to an independent software consultant who is neither an employee nor a director of the company or its group entities, on the ground that his services have been valuable. The company is a private company and has duly filed its financial statements under Section 137 and annual returns under Section 92 for all relevant years. The Board proposes to seek approval through an ordinary resolution, relying on the special exemption available to qualifying private companies. One director objects that Section 62(1)(b) invariably requires a special resolution and that options can be granted only to employees on the issuer's own payroll. The company has not listed its securities on a recognised stock exchange. The Board seeks advice on the character of an employee stock option, eligible recipients, the resolution required and whether the proposed consultant may participate under this route.

Aster Digital Systems proposes to grant options to employees at a predetermined exercise price, exercisable for subscription to its shares at a future date. Which description most accurately represents the employee stock option under Section 2(37)?

1. A right given to directors, officers or employees of the company or its holding or subsidiary company to purchase or subscribe for shares at a future date at a predetermined price. (correct answer)
2. An immediate allotment of fully paid shares to any consultant who contributes intellectual property to the company.
3. A compulsory right given to every shareholder to purchase additional shares in proportion to existing holdings.
4. A right to receive a fixed dividend from the company without acquiring any right to subscribe for its shares.

Answer: A — A right given to directors, officers or employees of the company or its holding or subsidiary company to purchase or subscribe for shares at a future date at a predetermined price.

Explanation. Section 2(37) defines an employee stock option as an option given to directors, officers or employees of a company or its holding or subsidiary company, if any, that provides a benefit or right to purchase or subscribe for shares of the company at a future date at a predetermined price. It is therefore a future contractual option rather than an immediate allotment of shares. The primary distractor confuses ESOPs with sweat equity issued against contributions such as intellectual property or know-how.

Where it goes wrong. Confusing the grant of an option to acquire shares in the future with an immediate issue of sweat equity shares.

Authority. Section 2(37) of the Companies Act, 2013; Section 62(1)(b) of the Companies Act, 2013

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

Which of the following persons can be included in Aster Digital Systems Private Limited's proposed employee stock option scheme under the described facts?

1. Only employees working on the issuing company's payroll in India, excluding all directors and subsidiary employees.
2. Any independent consultant who provides valuable services, irrespective of employment or directorship status.
3. Permanent employees of the issuing company, its directors whether whole-time or not, and employees or directors of its holding or subsidiary company in India or abroad. (correct answer)
4. Only whole-time directors and permanent employees of the issuing company, excluding subsidiary company personnel.

Answer: C — Permanent employees of the issuing company, its directors whether whole-time or not, and employees or directors of its holding or subsidiary company in India or abroad.

Explanation. The statutory definition of employee stock option covers directors, officers and employees of the issuing company and its holding or subsidiary company. The study material also recognises permanent employees working in India or outside India and directors whether whole-time or otherwise in the relevant employee framework. Therefore, the subsidiary employee working abroad and the non-whole-time director can be covered. An independent consultant who is neither an employee nor a director of the relevant entities does not qualify merely because his services are valuable.

Where it goes wrong. Restricting ESOP eligibility to employees on the issuing company's own payroll or treating every service provider as an eligible employee.

Authority. Section 2(37) of the Companies Act, 2013; Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014

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

Aster Digital Systems Private Limited has not defaulted in filing its financial statements under Section 137 or annual returns under Section 92. What is the minimum shareholder resolution required for its employee stock option scheme under the applicable exception?

1. No shareholder resolution is necessary because the company is a private company.
2. An ordinary resolution is sufficient instead of the generally prescribed special resolution. (correct answer)
3. A special resolution is compulsory because Section 62(1)(b) does not recognise exemptions for private companies.
4. A unanimous written consent of every employee and director is sufficient instead of a shareholder resolution.

Answer: B — An ordinary resolution is sufficient instead of the generally prescribed special resolution.

Explanation. Section 62(1)(b) generally requires a special resolution for issuing further shares to employees under an employee stock option scheme. However, the study material recognises an exemption permitting an ordinary resolution for a private company that has not defaulted in filing its financial statements under Section 137 or annual return under Section 92. Aster Digital Systems has satisfied both filing conditions. Therefore, an ordinary resolution is sufficient. The primary trap is applying the general special-resolution requirement without checking the prescribed private-company exception.

Where it goes wrong. Ignoring the special ordinary-resolution exemption available to qualifying private companies.

Authority. Section 62(1)(b) of the Companies Act, 2013; Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014

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

The Board argues that the proposed consultant's contribution of software know-how makes his immediate allotment of shares equivalent to granting him an employee stock option. Which statement correctly distinguishes these arrangements?

1. Both arrangements are identical because every option granted against know-how automatically becomes sweat equity.
2. An ESOP always represents immediate allotment, whereas sweat equity represents only a future subscription right.
3. Both arrangements may be granted to any consultant without requiring the person to be an employee or director.
4. An ESOP creates a future right to subscribe or purchase shares at a predetermined price, whereas sweat equity involves issuing shares to directors or employees at a discount or for non-cash consideration involving know-how, intellectual property or value additions. (correct answer)

Answer: D — An ESOP creates a future right to subscribe or purchase shares at a predetermined price, whereas sweat equity involves issuing shares to directors or employees at a discount or for non-cash consideration involving know-how, intellectual property or value additions.

Explanation. An employee stock option under Section 2(37) provides a future right to purchase or subscribe for shares at a predetermined price. Sweat equity under Section 2(88) involves issuing equity shares to directors or employees at a discount or for consideration other than cash for providing know-how, intellectual property rights or value additions. The consultant's valuable contribution does not automatically make him eligible for an ESOP or sweat equity. The primary trap is treating the two arrangements as interchangeable merely because both involve employee incentives.

Where it goes wrong. Confusing the immediate issue of sweat equity with the grant of a future employee stock option.

Authority. Section 2(37) of the Companies Act, 2013; Section 2(88) of the Companies Act, 2013; Section 54 of the Companies Act, 2013; Section 62(1)(b) of the Companies Act, 2013

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

Scenario. Narmada Appliances Limited, an unlisted public company, proposes to raise ₹60 crore for a new manufacturing facility. The Board has identified three strategic investors, none of whom currently holds shares in the company. It proposes to issue them equity shares under a preferential allotment, rather than make a proportionate rights offer to existing equity shareholders. The draft proposal provides for part of the consideration to be paid in cash and part through transfer of specialised machinery to the company. The Board proposes to pass a special resolution at a general meeting authorising the issue to the identified investors. For the machinery portion, the finance team has obtained a report from a registered valuer determining the value of the machinery and the corresponding price of the shares. However, the finance director argues that the same valuation report is unnecessary because the company and the investors have negotiated a commercial price. Some existing shareholders contend that Section 62(1)(a) gives them an exclusive right to subscribe to every further issue and that a non-member cannot receive shares unless all existing shareholders first reject their entitlement. The Board also wants to know whether the company can issue shares for a consideration other than cash through the preferential route and whether the special resolution must specifically authorise the proposed issue. The Company Secretary has been asked to explain the distinction between a rights issue and a preferential offer and to identify the statutory safeguards applicable to the proposed non-cash allotment.

The three strategic investors identified by Narmada Appliances Limited are not existing members. Which provision provides the appropriate statutory route for issuing further equity shares to these investors?

1. Section 62(1)(a), because every further issue must first be offered exclusively to existing shareholders.
2. Section 62(1)(b), because every strategic investor is treated as an employee for further share issues.
3. Section 62(1)(c), which permits an issue to any persons when authorised by a special resolution. (correct answer)
4. Section 54, because any issue to non-members is automatically treated as sweat equity.

Answer: C — Section 62(1)(c), which permits an issue to any persons when authorised by a special resolution.

Explanation. Section 62(1)(c) permits a company to issue further shares to any persons if the issue is authorised by a special resolution. This provides a statutory route for preferential allotment to persons who are not existing members. The company is therefore not absolutely restricted to making further issues only through a proportionate rights offer under Section 62(1)(a). The principal distractor confuses the normal pre-emptive rights mechanism with the separate preferential allotment route under Section 62(1)(c).

Where it goes wrong. Assuming that existing shareholders have an absolute right to subscribe before every preferential allotment to non-members.

Authority. Section 62(1)(c) of the Companies Act, 2013

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

Part of the proposed preferential allotment consideration consists of specialised machinery transferred to the company. The finance director argues that a negotiated commercial price is sufficient and that valuation is unnecessary. Which statement correctly applies the prescribed requirement?

1. The company may accept the negotiated price because valuation is necessary only for issues made entirely for cash.
2. Where the consideration is non-cash, the price must be determined by a valuation report of a registered valuer, subject to Rule 13. (correct answer)
3. The machinery must be valued exclusively by the statutory auditor, and the registered valuer has no role.
4. Non-cash consideration is prohibited under Section 62(1)(c), irrespective of shareholder approval.

Answer: B — Where the consideration is non-cash, the price must be determined by a valuation report of a registered valuer, subject to Rule 13.

Explanation. Section 62(1)(c) permits further shares to be issued for cash or for consideration other than cash. Where non-cash consideration is involved, the study material requires the price to be determined through a valuation report of a registered valuer, subject to Rule 13. A negotiated commercial price cannot replace the prescribed valuation requirement. The primary distractor incorrectly assumes that non-cash consideration is prohibited, whereas the provision expressly permits it subject to the prescribed safeguards.

Where it goes wrong. Assuming that commercial negotiation alone replaces the registered valuer's prescribed valuation for non-cash consideration.

Authority. Section 62(1)(c) of the Companies Act, 2013; Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014

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

The Board of Narmada Appliances Limited proposes to issue shares to three identified non-members. It has approved the proposal at a Board meeting and obtained written acceptance from all three investors. Which additional approval is required under Section 62(1)(c)?

1. A special resolution of the company authorising the proposed preferential issue. (correct answer)
2. An ordinary resolution of the company followed by unanimous approval of all directors.
3. Only a resolution of the Board because the proposed investors have accepted the commercial terms.
4. A separate written consent from at least 90% of the existing shareholders by number.

Answer: A — A special resolution of the company authorising the proposed preferential issue.

Explanation. Section 62(1)(c) requires that an issue of further shares to any persons be authorised by a special resolution. The Board's commercial approval and the investors' acceptance do not substitute for the required shareholder approval. Consequently, Narmada Appliances Limited must obtain a special resolution authorising the preferential allotment before proceeding under this route. The principal trap is treating Board approval as sufficient merely because the proposed allottees are identified and willing to subscribe.

Where it goes wrong. Confusing Board approval and investor acceptance with the mandatory shareholder special resolution.

Authority. Section 62(1)(c) of the Companies Act, 2013

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

The proposed preferential issue includes both cash and specialised machinery as consideration. Which statement correctly identifies the permissible consideration structure under Section 62(1)(c)?

1. Only cash consideration is permitted, because shares cannot be issued against transfer of machinery.
2. Only non-cash consideration is permitted when the allotment is made to persons who are not members.
3. The company must first complete a rights issue and may accept machinery only if every existing shareholder rejects the offer.
4. The preferential issue may be for cash or non-cash consideration, subject to the applicable approval and valuation requirements for the non-cash portion. (correct answer)

Answer: D — The preferential issue may be for cash or non-cash consideration, subject to the applicable approval and valuation requirements for the non-cash portion.

Explanation. Section 62(1)(c) expressly recognises further issues to any persons for cash or consideration other than cash, provided the issue is authorised by a special resolution. Where non-cash consideration is involved, valuation requirements prescribed under Rule 13 must also be followed. Therefore, Narmada Appliances Limited can structure the preferential issue using both cash and machinery, subject to the applicable statutory requirements. The main trap is incorrectly restricting preferential allotment to cash alone.

Where it goes wrong. Assuming that preferential allotment to non-members must necessarily be made exclusively for cash.

Authority. Section 62(1)(c) of the Companies Act, 2013; Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Zenith Agro Tech Limited is a non-startup company with existing paid-up equity share capital of ₹40 crore. Its previous sweat equity issues have an aggregate issue value of ₹8 crore. It has not issued any sweat equity shares during the current financial year. The Board now proposes another sweat equity issue having an aggregate issue value of ₹5 crore. Assuming all required approvals and valuation reports are available, what is the maximum additional issue value permissible under Rule 8?

Zenith Agro Tech Limited is a non-startup company with existing paid-up equity share capital of ₹40 crore. Its previous sweat equity issues have an aggregate issue value of ₹8 crore. It has not issued any sweat equity shares during the current financial year. The Board now proposes another sweat equity issue having an aggregate issue value of ₹5 crore. Assuming all required approvals and valuation reports are available, what is the maximum additional issue value permissible under Rule 8?

1. ₹6 crore, because the annual ceiling is 15% of the existing paid-up equity capital.
2. ₹5 crore, because the annual ceiling is the higher of the prescribed alternative limits.
3. ₹2 crore, because only the unused portion of the cumulative ceiling is available. (correct answer)
4. ₹10 crore, because the cumulative ceiling is 25% of existing paid-up equity capital.

Answer: C — ₹2 crore, because only the unused portion of the cumulative ceiling is available.

Explanation. The annual issue benchmark is the higher of 15% of existing paid-up equity capital and shares having an issue value of ₹5 crore. Fifteen per cent of ₹40 crore is ₹6 crore, so the annual limit is ₹6 crore. The cumulative ceiling for a non-startup is 25% of ₹40 crore, i.e. ₹10 crore. Previous issues total ₹8 crore, leaving only ₹2 crore available. Hence, despite the higher annual capacity, the maximum additional issue is ₹2 crore.

Where it goes wrong. Using the annual ceiling without applying the separate cumulative limit after considering earlier sweat equity issues.

Authority. Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Aster Packaging Limited passed a special resolution authorising sweat equity shares on 10 December 2025. The company did not complete allotment within the following twelve months. It proposes to allot the shares on 15 December 2026, relying on the earlier resolution and arguing that no fresh member approval is necessary because the valuation report remains valid. What is the correct legal position?

Aster Packaging Limited passed a special resolution authorising sweat equity shares on 10 December 2025. The company did not complete allotment within the following twelve months. It proposes to allot the shares on 15 December 2026, relying on the earlier resolution and arguing that no fresh member approval is necessary because the valuation report remains valid. What is the correct legal position?

1. The earlier special resolution has ceased to be valid for allotment, and a fresh special resolution is required. (correct answer)
2. The resolution remains valid for two years because the underlying valuation report has not expired.
3. The resolution remains valid indefinitely if the shares are issued to existing employees.
4. The allotment is valid because the twelve-month requirement applies only to listed companies.

Answer: A — The earlier special resolution has ceased to be valid for allotment, and a fresh special resolution is required.

Explanation. Rule 8(3) specifies that a special resolution authorising sweat equity shares remains valid for making allotment within a period of not more than twelve months from its passing. The proposed allotment on 15 December 2026 falls after the expiry of twelve months from 10 December 2025. Therefore, the company cannot rely on the old special resolution merely because its valuation report remains available. A fresh special resolution is necessary before proceeding with the proposed issue.

Where it goes wrong. Assuming that validity of the valuation report automatically extends the validity of the special resolution.

Authority. Rule 8(3) of the Companies (Share Capital and Debentures) Rules, 2014; Section 54 of the Companies Act, 2013

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

Scenario. A newly incorporated company, Aruna Medical Devices Private Limited, was incorporated on 1 January 2026 and commenced commercial operations on 1 February 2026. In October 2026, it proposes to issue sweat equity shares to its eligible technical director for providing valuable know-how. The Articles authorise the issue, a valid special resolution has been passed, and the company has obtained the required registered valuer reports. Some directors object that a company must complete one full year of business operations before issuing sweat equity. Which statement is correct?

A newly incorporated company, Aruna Medical Devices Private Limited, was incorporated on 1 January 2026 and commenced commercial operations on 1 February 2026. In October 2026, it proposes to issue sweat equity shares to its eligible technical director for providing valuable know-how. The Articles authorise the issue, a valid special resolution has been passed, and the company has obtained the required registered valuer reports. Some directors object that a company must complete one full year of business operations before issuing sweat equity. Which statement is correct?

1. The company must wait until one complete year has elapsed from its incorporation date.
2. There is no present one-year business commencement condition under Section 54, subject to compliance with the other requirements. (correct answer)
3. The company must complete two years of business operations before issuing sweat equity shares.
4. Only startup companies may issue sweat equity shares during their first year of incorporation.

Answer: B — There is no present one-year business commencement condition under Section 54, subject to compliance with the other requirements.

Explanation. The Companies (Amendment) Act, 2017 omitted the earlier requirement under Section 54(1) that at least one year must have elapsed since the date on which the company commenced business. The omission became effective from 7 May 2018. Therefore, Aruna Medical Devices Private Limited is not disqualified merely because it has operated for less than one year. It must nevertheless comply with the remaining statutory conditions, including the requirement concerning the class of shares, special resolution and applicable rules.

Where it goes wrong. Applying the pre-amendment one-year commencement condition despite its statutory omission.

Authority. Section 54(1) of the Companies Act, 2013; Companies (Amendment) Act, 2017

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

Scenario. A manufacturing company proposes to issue sweat equity shares for providing specialised technical know-how. The proposed recipients include a permanent employee of its holding company working in Singapore, an independent consultant who has no employment or directorship relationship with the company or its group entities, and a non-whole-time director of the company. Which statement correctly identifies the eligible recipients under the relevant provisions?

A manufacturing company proposes to issue sweat equity shares for providing specialised technical know-how. The proposed recipients include a permanent employee of its holding company working in Singapore, an independent consultant who has no employment or directorship relationship with the company or its group entities, and a non-whole-time director of the company. Which statement correctly identifies the eligible recipients under the relevant provisions?

1. Only the permanent employee of the issuing company working in India is eligible.
2. Only whole-time directors and employees of the issuing company are eligible.
3. The independent consultant is eligible because contributing valuable know-how is sufficient by itself.
4. The holding company's permanent employee working abroad and the company's non-whole-time director can qualify, but the independent consultant does not qualify merely as a consultant. (correct answer)

Answer: D — The holding company's permanent employee working abroad and the company's non-whole-time director can qualify, but the independent consultant does not qualify merely as a consultant.

Explanation. Sweat equity shares under Section 2(88) are issued to directors or employees for providing know-how, intellectual property rights or value additions. Rule 8 recognises permanent employees working in India or abroad, directors whether whole-time or not, and employees or directors of holding or subsidiary companies. Consequently, the holding company's permanent employee working in Singapore and the non-whole-time director can qualify. An independent consultant who is neither an employee nor a director does not automatically become eligible by contributing know-how.

Where it goes wrong. Confusing a person's contribution of valuable know-how with the statutory eligibility requirement that the recipient be a director or employee.

Authority. Section 2(88) of the Companies Act, 2013; Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Madhav Industries Limited, an unlisted public company, makes a rights offer to its existing equity shareholders. The offer notice dated 1 December 2026 specifies that the offer will remain open for acceptance for ten days. The Articles do not contain any provision allowing a shorter acceptance period, and the company has not obtained any special consent from its members. The Board argues that the offer is invalid because Section 62 ordinarily specifies fifteen days as the minimum period. Which statement correctly applies Section 62 read with Rule 12A?

Madhav Industries Limited, an unlisted public company, makes a rights offer to its existing equity shareholders. The offer notice dated 1 December 2026 specifies that the offer will remain open for acceptance for ten days. The Articles do not contain any provision allowing a shorter acceptance period, and the company has not obtained any special consent from its members. The Board argues that the offer is invalid because Section 62 ordinarily specifies fifteen days as the minimum period. Which statement correctly applies Section 62 read with Rule 12A?

1. The ten-day period is permissible because Rule 12A prescribes a minimum acceptance period of seven days. (correct answer)
2. The offer is invalid because every rights issue must remain open for at least fifteen days without exception.
3. The ten-day period is permissible only if every shareholder individually accepts the offer in writing.
4. The offer is invalid because Rule 12A prescribes a maximum acceptance period of seven days.

Answer: A — The ten-day period is permissible because Rule 12A prescribes a minimum acceptance period of seven days.

Explanation. Section 62(1)(a)(ii) prescribes an acceptance period of not less than fifteen days or such lesser period as may be prescribed, but not exceeding thirty days. Rule 12A provides that the acceptance period shall not be less than seven days from the date of the offer. Therefore, a ten-day period is permissible, even though it is shorter than the ordinary fifteen-day period. The primary trap is overlooking the express statutory provision permitting a shorter period prescribed by the Rules.

Where it goes wrong. Treating fifteen days as an absolute minimum while ignoring the lesser period expressly prescribed under Rule 12A.

Authority. Section 62(1)(a)(ii) of the Companies Act, 2013; Rule 12A of the Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. A private company makes a rights offer to its existing equity shareholders. Its Articles expressly provide that shareholders cannot renounce rights entitlements in favour of any other person. One shareholder nevertheless attempts to transfer the entire entitlement to an outside investor, arguing that Section 62(1)(a) creates an unconditional statutory right of renunciation. Which statement correctly describes the legal position?

A private company makes a rights offer to its existing equity shareholders. Its Articles expressly provide that shareholders cannot renounce rights entitlements in favour of any other person. One shareholder nevertheless attempts to transfer the entire entitlement to an outside investor, arguing that Section 62(1)(a) creates an unconditional statutory right of renunciation. Which statement correctly describes the legal position?

1. Renunciation is compulsory in every rights issue and cannot be restricted through the Articles.
2. Renunciation is always permissible if the proposed recipient agrees to subscribe to the shares.
3. The statutory right of renunciation is subject to the Articles, which may provide otherwise. (correct answer)
4. The company must permit renunciation if the original shareholder owns more than 10% of the paid-up capital.

Answer: C — The statutory right of renunciation is subject to the Articles, which may provide otherwise.

Explanation. Section 62(1)(a) recognises the right of an existing shareholder to renounce all or any part of the rights offer in favour of another person, unless the Articles of Association otherwise provide. The provision therefore does not establish an unconditional right of renunciation. Since the company's Articles expressly prohibit renunciation, the shareholder cannot insist on transferring the entitlement to the outside investor under this statutory provision.

Where it goes wrong. Ignoring the express qualification that the statutory renunciation right operates unless the Articles provide otherwise.

Authority. Section 62(1)(a)(ii)(iv) of the Companies Act, 2013

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

Scenario. A private company having 500 members proposes to dispatch rights issue notices only two days before opening the issue. Of its 500 members, 451 have provided written consent to the shorter dispatch period. These 451 members collectively hold only 65% of the company's equity capital. The Board argues that the shorter dispatch period is invalid because consenting shareholders do not represent 90% of the shareholding. Which statement correctly applies Section 62(2)?

A private company having 500 members proposes to dispatch rights issue notices only two days before opening the issue. Of its 500 members, 451 have provided written consent to the shorter dispatch period. These 451 members collectively hold only 65% of the company's equity capital. The Board argues that the shorter dispatch period is invalid because consenting shareholders do not represent 90% of the shareholding. Which statement correctly applies Section 62(2)?

1. The shorter dispatch period is invalid because 90% of paid-up equity capital must consent.
2. The shorter dispatch period is valid because more than 90% of the members by number have consented. (correct answer)
3. The shorter dispatch period is invalid because all 500 members must consent regardless of the mode of dispatch.
4. The shorter dispatch period is valid only if the consenting members hold at least 75% of equity capital.

Answer: B — The shorter dispatch period is valid because more than 90% of the members by number have consented.

Explanation. Section 62(2) ordinarily requires dispatch of the rights issue notice at least three days before opening the issue. The study material recognises the private-company exception permitting a shorter dispatch period when 90% of the members consent in writing or electronically. The prescribed test is based on the number of members, not their aggregate shareholding. Here, 451 out of 500 members equals 90.2%, satisfying the threshold despite their holding only 65% of equity capital.

Where it goes wrong. Applying the 90% consent threshold to the percentage of share capital rather than the number of members.

Authority. Section 62(2) of the Companies Act, 2013; Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. A private company proposes to introduce an employee stock option scheme. It has duly filed its financial statements under Section 137 but has defaulted in filing its annual return under Section 92 for the immediately preceding financial year. The Board proposes to pass an ordinary resolution, claiming that every private company is entitled to the exemption from the special-resolution requirement under Section 62(1)(b). Which statement is correct?

A private company proposes to introduce an employee stock option scheme. It has duly filed its financial statements under Section 137 but has defaulted in filing its annual return under Section 92 for the immediately preceding financial year. The Board proposes to pass an ordinary resolution, claiming that every private company is entitled to the exemption from the special-resolution requirement under Section 62(1)(b). Which statement is correct?

1. An ordinary resolution is sufficient because compliance with Section 137 alone satisfies the private-company exception.
2. No shareholder resolution is necessary because ESOP schemes are exclusively within Board powers.
3. An ordinary resolution is sufficient because filing defaults under Section 92 do not affect ESOP approvals.
4. The ordinary-resolution exception is unavailable because the company has defaulted in filing its annual return, and the general special-resolution requirement applies. (correct answer)

Answer: D — The ordinary-resolution exception is unavailable because the company has defaulted in filing its annual return, and the general special-resolution requirement applies.

Explanation. The ordinary-resolution exception recognised for private companies requires that the company must not have defaulted in filing financial statements under Section 137 or annual returns under Section 92. These are separate filing requirements. Although the company has complied with Section 137, its annual-return default prevents it from relying on the exception. Consequently, the general requirement of a special resolution under Section 62(1)(b) continues to apply. The primary trap is treating compliance with either one of the two filing requirements as sufficient.

Where it goes wrong. Reading the private-company exemption as requiring compliance with only one of the two statutory filing obligations.

Authority. Section 62(1)(b) of the Companies Act, 2013; Section 92 of the Companies Act, 2013; Section 137 of the Companies Act, 2013

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

Scenario. A public company proposes to issue further equity shares to a group of outside investors in consideration for the transfer of specialised industrial equipment. The existing shareholders argue that such an allotment cannot be made because the investors are not employees and are not existing members. The Board proposes to obtain a special resolution and a registered valuer's report determining the issue price for the non-cash consideration. Which statutory route and conditions are most appropriate?

A public company proposes to issue further equity shares to a group of outside investors in consideration for the transfer of specialised industrial equipment. The existing shareholders argue that such an allotment cannot be made because the investors are not employees and are not existing members. The Board proposes to obtain a special resolution and a registered valuer's report determining the issue price for the non-cash consideration. Which statutory route and conditions are most appropriate?

1. Section 62(1)(a), requiring a proportionate rights offer exclusively to existing equity shareholders.
2. Section 62(1)(b), permitting the issue because every outside investor can be treated as an employee stock option holder.
3. Section 54, permitting an immediate issue because the investors are contributing valuable industrial equipment.
4. Section 62(1)(c), permitting an issue to any persons through a special resolution, with registered valuer determination for the non-cash consideration. (correct answer)

Answer: D — Section 62(1)(c), permitting an issue to any persons through a special resolution, with registered valuer determination for the non-cash consideration.

Explanation. Section 62(1)(c) provides a separate route for issuing further shares to any persons, including persons who are not existing members or employees, provided the issue is authorised by a special resolution. The provision permits consideration in cash or otherwise. Where non-cash consideration is involved, the issue price must be determined through a registered valuer's report, subject to Rule 13. The primary trap is incorrectly assuming that only existing shareholders or employees can receive further shares.

Where it goes wrong. Confusing the rights issue and ESOP routes with the separate preferential allotment mechanism available under Section 62(1)(c).

Authority. Section 62(1)(c) of the Companies Act, 2013; Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014