Chapter 4: Share Capital and Debentures - Test 3: answer key

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

Scenario. Anekta Engineering Limited is an unlisted public company engaged in manufacturing industrial machinery. During its Board meeting held on 10 October 2026, the directors considered issuing fully paid-up bonus shares to existing equity shareholders in the ratio of 1:2. The Articles of Association expressly authorise the company to issue bonus shares, and the Board has recommended the proposal for approval at the forthcoming general meeting. The company's financial statements disclose the following reserve balances: Particulars | Amount Free reserves (excluding revaluation reserve) | ₹6 crore Securities Premium Account | ₹3 crore Capital Redemption Reserve | ₹1.50 crore Revaluation Reserve | ₹5 crore The company proposes to capitalise ₹9 crore for the bonus issue. The CFO suggests using the revaluation reserve because it represents an increase in the value of the company's factory and machinery. The statutory auditor objects to this proposal. Further, the company's capital structure includes 2,00,000 partly paid-up equity shares of ₹10 each, on which ₹6 per share has been paid. The Board proposes to allot bonus shares in November 2026 without first collecting the outstanding ₹4 per share. The company has also defaulted in payment of certain statutory provident fund contributions relating to its employees, although all interest and principal obligations on fixed deposits and debt securities have been discharged. The Board intends to place the bonus proposal before the shareholders and asks whether the proposed sources, partly paid-up shares and outstanding employee statutory dues affect the validity of the proposed issue.

Anekta Engineering Limited requires ₹9 crore for its proposed bonus issue. Considering the reserve balances provided and the restrictions under Section 63(1), which combination of reserves may lawfully be capitalised to meet the requirement?

1. ₹6 crore from free reserves and ₹3 crore from securities premium. (correct answer)
2. ₹6 crore from free reserves and ₹3 crore from revaluation reserve.
3. ₹5 crore from revaluation reserve and ₹4 crore from Capital Redemption Reserve.
4. ₹3 crore from securities premium and ₹6 crore from revaluation reserve.

Answer: A — ₹6 crore from free reserves and ₹3 crore from securities premium.

Explanation. Section 63(1) permits bonus shares to be issued from free reserves, the securities premium account or the Capital Redemption Reserve Account. However, free reserves exclude reserves created by revaluation of assets. Therefore, ₹6 crore from free reserves and ₹3 crore from securities premium constitute a permissible combination of ₹9 crore. The primary distractor incorrectly treats the revaluation reserve as an eligible source merely because it represents an increase in asset values.

Where it goes wrong. Including revaluation reserves among the permissible sources of bonus capitalisation.

Authority. Section 63(1) of the Companies Act, 2013; Section 52(2) of the Companies Act, 2013

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

The CFO proposes capitalising the ₹5 crore revaluation reserve because the factory and machinery have appreciated in value and the revaluation has been properly recorded in the financial statements. Which conclusion is legally correct?

1. The revaluation reserve may be used if the statutory auditor certifies the asset valuation.
2. The revaluation reserve may be used after obtaining approval through a special resolution.
3. The revaluation reserve cannot be capitalised for issuing bonus shares, irrespective of shareholder approval. (correct answer)
4. The revaluation reserve may be used only when the bonus issue is made to existing shareholders.

Answer: C — The revaluation reserve cannot be capitalised for issuing bonus shares, irrespective of shareholder approval.

Explanation. The proviso to Section 63(1) expressly prohibits issuing bonus shares by capitalising reserves created by the revaluation of assets. The prohibition is substantive and cannot be overcome by obtaining an ordinary or special resolution, or by obtaining a valuation certificate from the auditor. Revaluation reserves are excluded because they represent accounting appreciation rather than an eligible source for bonus capitalisation. The other statutory sources remain available subject to applicable conditions.

Where it goes wrong. Assuming that shareholder approval or auditor certification can override the absolute prohibition on using revaluation reserves.

Authority. Section 63(1), proviso, of the Companies Act, 2013

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

The company proposes allotting bonus shares while 2,00,000 existing equity shares remain partly paid-up, with only ₹6 paid on each ₹10 share. What must the company ensure before the proposed bonus allotment?

1. Bonus shares may be allotted proportionately according to the amount already paid on existing shares.
2. The outstanding ₹4 per share must be collected so that the partly paid-up shares become fully paid-up on the date of bonus allotment. (correct answer)
3. The company must cancel all partly paid-up shares before undertaking the bonus issue.
4. Bonus shares may be allotted if the shareholders waive their liability to pay the outstanding amount.

Answer: B — The outstanding ₹4 per share must be collected so that the partly paid-up shares become fully paid-up on the date of bonus allotment.

Explanation. Section 63(2)(e) requires that partly paid-up shares outstanding on the date of allotment must be made fully paid-up. Therefore, Anekta Engineering Limited must collect the remaining ₹4 per share before or by the date of allotment so that the condition is satisfied. The company cannot issue bonus shares proportionately against partly paid-up shares or simply waive the outstanding liability. The statutory requirement concerns the status of the existing shares on the allotment date.

Where it goes wrong. Assuming bonus shares can be issued against partly paid-up shares in proportion to their paid-up value.

Authority. Section 63(2)(e) of the Companies Act, 2013

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

Anekta Engineering Limited has defaulted in payment of provident fund contributions relating to its employees. Its obligations relating to interest and principal on fixed deposits and debt securities have been discharged. Which statement correctly describes the effect of the unpaid provident fund contributions on the proposed bonus issue?

1. The company can proceed because employee statutory dues are not relevant to bonus issues.
2. The company can proceed because only defaults relating to bank borrowings are covered by Section 63.
3. The company can proceed if the employees provide written consent to the proposed bonus issue.
4. The company cannot satisfy the statutory eligibility condition while the specified employee statutory dues remain unpaid. (correct answer)

Answer: D — The company cannot satisfy the statutory eligibility condition while the specified employee statutory dues remain unpaid.

Explanation. Section 63(2) requires the company not to have defaulted in payment of interest or principal in respect of fixed deposits or debt securities and not to have defaulted in payment of specified employee statutory dues, including provident fund contributions, gratuity and bonus. The company has satisfied the first condition but has failed the employee-dues condition. Therefore, it cannot proceed with the proposed bonus issue while that statutory eligibility requirement remains unsatisfied.

Where it goes wrong. Checking only financial defaults and overlooking statutory dues payable to employees.

Authority. Section 63(2)(c) and Section 63(2)(d) of the Companies Act, 2013

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

Scenario. Zenith Agro Tech Limited is a listed agricultural technology company having sufficient accumulated profits and reserves. Its Board of Directors, after examining the company's financial position, recommended a bonus issue of one fully paid-up equity share for every three equity shares held. The Articles of Association expressly authorise the issue, and the shareholders subsequently approved the proposal at the general meeting. The company had separately declared a cash dividend of ₹4 per equity share for FY 2025-26. Due to temporary liquidity constraints, certain directors suggested cancelling the dividend payment and instead issuing additional bonus shares to compensate shareholders. The Board also considered withdrawing the bonus proposal because a major agricultural equipment acquisition would require substantial funds. On 20 September 2026, the Board formally announced its decision recommending the bonus issue. The company subsequently communicated the proposal to shareholders through its investor-relations portal. On 15 October 2026, the Board reconsidered its position and proposed withdrawing the bonus issue before allotment, arguing that no shareholder had yet received any additional shares. The finance department also informed the Board that the company maintains a Capital Redemption Reserve of ₹8 crore arising from earlier redemption transactions and a Securities Premium Account of ₹12 crore. The CFO believes these balances cannot be used for bonus shares because they are not ordinary distributable profits. The Board seeks advice regarding the permitted sources of bonus capitalisation, the status of the already declared dividend and whether the announced bonus proposal can subsequently be withdrawn.

Zenith Agro Tech Limited has already declared a cash dividend of ₹4 per equity share. Certain directors now propose issuing additional bonus shares instead of paying the declared dividend, arguing that the bonus shares provide shareholders with an equivalent economic benefit. Which statement correctly applies Section 63?

1. The proposal is valid if the bonus shares are issued in the same proportion as the dividend entitlement.
2. The proposal is invalid because bonus shares cannot be issued in lieu of dividend. (correct answer)
3. The proposal is valid if the company obtains approval from shareholders through an ordinary resolution.
4. The proposal is valid if the company has sufficient free reserves to capitalise the declared dividend.

Answer: B — The proposal is invalid because bonus shares cannot be issued in lieu of dividend.

Explanation. Section 63(3) expressly provides that bonus shares shall not be issued in lieu of dividend. Therefore, Zenith Agro Tech Limited cannot cancel its declared cash dividend and substitute bonus shares, even if the economic value appears equivalent and sufficient reserves are available. The statutory prohibition is independent of the proportion in which bonus shares are proposed or the level of shareholder approval obtained.

Where it goes wrong. Treating bonus shares as an alternative method of discharging a declared cash dividend.

Authority. Section 63(3) of the Companies Act, 2013

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

The Board of Zenith Agro Tech Limited has recommended a bonus issue, and its Articles expressly authorise such an issue. Which additional corporate approval is required before the company can capitalise its profits or reserves for issuing fully paid-up bonus shares?

1. Approval through an ordinary resolution passed exclusively at a Board meeting.
2. Approval through a special resolution passed only by the directors of the company.
3. Prior confirmation from the Registrar of Companies before placing the matter before members.
4. Authorisation in the general meeting of the company on the recommendation of the Board. (correct answer)

Answer: D — Authorisation in the general meeting of the company on the recommendation of the Board.

Explanation. Section 63(2) requires the issue to be authorised by the Articles and, on the recommendation of the Board, authorised in the general meeting of the company. Board recommendation alone is not sufficient. The proposed bonus issue therefore requires general-meeting authorisation after the Board's recommendation. The primary distractor confuses the Board's power to recommend the issue with the separate statutory requirement of shareholder authorisation in the general meeting.

Where it goes wrong. Treating Board recommendation as equivalent to shareholder authorisation.

Authority. Section 63(2)(a) and Section 63(2)(b) of the Companies Act, 2013

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

On 20 September 2026, Zenith Agro Tech Limited announced the Board's decision recommending a bonus issue. On 15 October 2026, the Board proposes withdrawing the issue before allotment because of a proposed acquisition. Which statement correctly reflects the applicable Rule?

1. The company cannot subsequently withdraw the bonus issue once the decision of the Board recommending it has been announced. (correct answer)
2. The company can withdraw the bonus issue at any time before the actual allotment of shares.
3. The company can withdraw the issue if the Board passes a fresh ordinary resolution explaining the reasons.
4. The company can withdraw the issue if more than half of the shareholders provide written consent.

Answer: A — The company cannot subsequently withdraw the bonus issue once the decision of the Board recommending it has been announced.

Explanation. Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014 provides that a company which has once announced the decision of its Board recommending a bonus issue shall not subsequently withdraw the same. Therefore, Zenith Agro Tech Limited cannot withdraw the announced proposal merely because the allotment has not yet taken place or the company has identified another investment opportunity. The prohibition attaches to withdrawal after the Board's recommendation has been announced.

Where it goes wrong. Assuming the Board retains unrestricted withdrawal powers until the actual allotment of bonus shares.

Authority. Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014; Section 63(2)(f) of the Companies Act, 2013

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

The CFO argues that the company's Capital Redemption Reserve of ₹8 crore and Securities Premium Account of ₹12 crore cannot be used for bonus shares because neither represents ordinary distributable profits. Which statement is correct under Section 63?

1. Only free reserves representing distributable profits can be used for bonus shares.
2. Capital Redemption Reserve can be used, but the Securities Premium Account is always prohibited as a source.
3. Both the Capital Redemption Reserve and Securities Premium Account are permissible sources, subject to applicable statutory conditions. (correct answer)
4. Neither reserve can be used unless the company first converts it into general reserve.

Answer: C — Both the Capital Redemption Reserve and Securities Premium Account are permissible sources, subject to applicable statutory conditions.

Explanation. Section 63(1) expressly recognises the securities premium account and the Capital Redemption Reserve Account as permissible sources for issuing fully paid-up bonus shares. These sources are not restricted merely because they are not ordinary distributable profits. Their use must nevertheless satisfy the other applicable statutory requirements, including restrictions governing the securities premium account. The CFO's assertion that only general or free reserves can be used is therefore incorrect.

Where it goes wrong. Assuming bonus shares can be issued only by capitalising free reserves.

Authority. Section 63(1)(b) and Section 63(1)(c) of the Companies Act, 2013; Section 52(2) of the Companies Act, 2013

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

Scenario. Vayu Infrastructure Limited is a public company having a share capital of ₹100 crore divided into equity shares of ₹10 each. Its Articles of Association authorise alteration of its share capital. The company is considering restructuring its capital to improve liquidity in the secondary market and simplify its shareholder records. The proposed transactions include: 1. Consolidating ten equity shares of ₹10 each into one equity share of ₹100 each. 2. Sub-dividing existing equity shares of ₹100 each into five equity shares of ₹20 each. 3. Converting fully paid-up equity shares into stock for certain institutional shareholders. 4. Cancelling 5,00,000 authorised shares of ₹10 each that have neither been taken up nor agreed to be taken up by any person. During the restructuring review, the company discovered that consolidation of certain classes of shares would change the voting percentage of some shareholders. The Board proposes to complete the consolidation through an ordinary resolution without approaching the National Company Law Tribunal, contending that the total nominal share capital will remain unchanged. Additionally, some equity shares of ₹100 each are partly paid-up, with ₹60 paid and ₹40 unpaid. The CFO proposes dividing them into five shares of ₹20 each but wishes to allocate ₹15 as paid-up and ₹5 as unpaid on each resulting share. The Company Secretary objects that the paid-up and unpaid proportions must be preserved. The Board seeks clarification regarding the powers available under Section 61, the requirement of Tribunal approval and the legal treatment of cancellation of unissued shares.

Vayu Infrastructure Limited proposes consolidating ten equity shares of ₹10 each into one equity share of ₹100 each. However, the restructuring will alter the voting percentage of certain shareholders because different classes are affected differently. Which approval is additionally required for the consolidation and division to take effect?

1. A separate ordinary resolution from every affected shareholder is sufficient without Tribunal involvement.
2. Approval of the Registrar of Companies is sufficient because total nominal capital remains unchanged.
3. Approval of the National Company Law Tribunal in the prescribed manner is required. (correct answer)
4. Approval of the Central Government is mandatory for every consolidation involving shares of larger denomination.

Answer: C — Approval of the National Company Law Tribunal in the prescribed manner is required.

Explanation. Section 61(1)(b) permits a limited company having share capital to consolidate and divide its share capital into shares of a larger amount, provided the Articles authorise the alteration. However, where such consolidation and division results in a change in the voting percentage of shareholders, it shall not take effect unless approved by the Tribunal on an application made in the prescribed manner. Unchanged nominal capital does not remove this requirement.

Where it goes wrong. Assuming Tribunal approval is unnecessary merely because the total nominal share capital remains unchanged.

Authority. Section 61(1)(b) of the Companies Act, 2013

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

Certain partly paid-up shares of Vayu Infrastructure Limited have a nominal value of ₹100 each, with ₹60 paid and ₹40 unpaid. The company proposes sub-dividing each share into five shares of ₹20 each. Which paid-up and unpaid composition must be maintained for every resulting share under Section 61(1)(d)?

1. ₹12 paid-up and ₹8 unpaid on each resulting share. (correct answer)
2. ₹15 paid-up and ₹5 unpaid on each resulting share.
3. ₹10 paid-up and ₹10 unpaid on each resulting share.
4. ₹20 paid-up and nil unpaid on each resulting share.

Answer: A — ₹12 paid-up and ₹8 unpaid on each resulting share.

Explanation. Section 61(1)(d) permits sub-division into shares of smaller amounts but requires the proportion between the amount paid and unpaid on each reduced share to remain the same as on the original share. The original share has 60% paid-up value and 40% unpaid value. Each ₹20 share must therefore have ₹12 paid and ₹8 unpaid. The proposed ₹15 paid and ₹5 unpaid arrangement changes the original proportion and is not permissible.

Where it goes wrong. Preserving the total paid-up amount while incorrectly changing the proportion of paid and unpaid capital.

Authority. Section 61(1)(d) of the Companies Act, 2013

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

Vayu Infrastructure Limited proposes converting fully paid-up equity shares held by institutional shareholders into stock. The company also has certain partly paid-up equity shares and wishes to include them in the same conversion. Which statement correctly applies Section 61(1)(c)?

1. Both fully paid and partly paid shares may be converted into stock if the Articles authorise the transaction.
2. Partly paid shares may be converted into stock after approval of the Tribunal.
3. All issued shares must be converted into stock together, and selective conversion is prohibited.
4. Only fully paid-up shares may be converted into stock, and such stock may be reconverted into fully paid-up shares of any denomination. (correct answer)

Answer: D — Only fully paid-up shares may be converted into stock, and such stock may be reconverted into fully paid-up shares of any denomination.

Explanation. Section 61(1)(c) permits a limited company having share capital to convert all or any of its fully paid-up shares into stock and reconvert that stock into fully paid-up shares of any denomination. The provision specifically requires the shares being converted into stock to be fully paid-up. Therefore, Vayu Infrastructure Limited may convert the fully paid-up shares but cannot include its partly paid-up shares in the same conversion merely because the Articles authorise capital alteration.

Where it goes wrong. Overlooking the requirement that shares converted into stock must be fully paid-up.

Authority. Section 61(1)(c) of the Companies Act, 2013

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

Vayu Infrastructure Limited proposes cancelling 5,00,000 authorised shares of ₹10 each that have not been taken up or agreed to be taken up by any person. Which statement correctly describes the treatment of this cancellation under Section 61?

1. The cancellation automatically constitutes a reduction of share capital requiring confirmation under Section 66.
2. The company may cancel such shares under Section 61(1)(e), and the cancellation is not deemed to be a reduction of share capital. (correct answer)
3. The company must obtain unanimous shareholder consent because authorised shares cannot otherwise be cancelled.
4. The company may cancel the shares only after obtaining approval from every creditor of the company.

Answer: B — The company may cancel such shares under Section 61(1)(e), and the cancellation is not deemed to be a reduction of share capital.

Explanation. Section 61(1)(e) permits cancellation of shares which, on the date of the relevant resolution, have not been taken up or agreed to be taken up by any person. Section 61(2) expressly provides that such cancellation shall not be deemed to be a reduction of share capital. Therefore, the cancellation is not treated as a reduction under Section 66 merely because the authorised capital is diminished by the cancelled amount. Statutory filing requirements under Section 64 nevertheless remain applicable.

Where it goes wrong. Confusing cancellation of unissued shares with reduction of subscribed or paid-up share capital.

Authority. Section 61(1)(e) and Section 61(2) of the Companies Act, 2013

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

Scenario. Prism Healthcare Limited is a public company whose Articles of Association expressly authorise alteration of its share capital. On 5 September 2026, the Board proposed increasing its authorised share capital from ₹50 crore to ₹80 crore to finance a proposed expansion of its hospital network. The proposal was subsequently approved by the members through an ordinary resolution at a general meeting held on 20 September 2026. Separately, the company decided to subdivide certain shares of ₹100 each into shares of ₹10 each and cancel 2,00,000 authorised shares that had never been taken up or agreed to be taken up by any person. The company also completed redemption of a series of redeemable preference shares on 25 September 2026. The Company Secretary advised the Board that the company must file the prescribed notice of alteration with the Registrar of Companies. However, the CFO believes that filing is necessary only when the company increases its authorised capital and is unnecessary for subdivision, cancellation of unissued shares or redemption of preference shares. The company eventually filed Form SH-7 on 5 November 2026 without attaching the altered memorandum. The Board argues that the filing delay should not attract a penalty because the alteration was duly approved by shareholders. The auditors have asked the company to examine Section 64, the applicable Rules and the prescribed consequences of delayed or incomplete filing. The Board seeks clarification on the applicable filing deadline, accompanying documents and monetary penalty for non-compliance.

Prism Healthcare Limited proposes increasing its authorised share capital from ₹50 crore to ₹80 crore. Its Articles expressly authorise alteration of the capital clause. Which combination of corporate action and resolution is appropriate under Section 61?

1. The Board may directly increase authorised capital through a Board resolution without involving shareholders.
2. The company must obtain a special resolution followed by compulsory Tribunal confirmation in every case.
3. An ordinary resolution is sufficient even where the Articles contain no authority to alter share capital.
4. The company may alter its share capital at a general meeting through an ordinary resolution, exercising authority contained in its Articles. (correct answer)

Answer: D — The company may alter its share capital at a general meeting through an ordinary resolution, exercising authority contained in its Articles.

Explanation. Section 61 permits a limited company having share capital to alter its share capital if authorised by its Articles of Association. Such alteration is carried out by passing a resolution in a general meeting. The study material specifies that an ordinary resolution is sufficient for the alterations covered by Section 61(1). Since Prism Healthcare Limited's Articles expressly authorise the alteration, it may proceed through the required general-meeting resolution rather than relying on a Board resolution alone.

Where it goes wrong. Confusing the Board's power to propose capital alteration with the general-meeting resolution required to implement it.

Authority. Section 61(1) of the Companies Act, 2013

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

Prism Healthcare Limited passed the relevant capital alteration resolution on 20 September 2026. Which filing requirement must the company comply with under Section 64 read with Rule 15?

1. File Form SH-7 within sixty days, without attaching the altered memorandum.
2. File Form SH-7 with the Registrar along with the altered memorandum within thirty days of alteration. (correct answer)
3. File Form MGT-14 within thirty days and submit Form SH-7 only at the next annual general meeting.
4. File Form SH-7 only after receiving prior written approval from the Registrar.

Answer: B — File Form SH-7 with the Registrar along with the altered memorandum within thirty days of alteration.

Explanation. Section 64(1), read with Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014, requires the company to file notice in Form SH-7 with the Registrar within thirty days of alteration of share capital. The altered memorandum must accompany the prescribed notice. Therefore, filing Form SH-7 alone without the altered memorandum is incomplete. The primary trap is confusing the filing of a resolution with compliance with the specific capital-alteration filing requirement.

Where it goes wrong. Remembering the SH-7 form but overlooking the requirement to attach the altered memorandum and comply with the thirty-day deadline.

Authority. Section 64(1) of the Companies Act, 2013; Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014

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

Prism Healthcare Limited filed Form SH-7 after the prescribed thirty-day period and failed to attach the altered memorandum. Assuming the default continues for 200 days and no different penalty provision applies, what is the statutory penalty exposure under Section 64(2)?

1. ₹1,00,000 for the company and ₹50,000 for the officer in default.
2. ₹200 for the company and ₹200 for the officer in default.
3. ₹2,00,000 for the company and ₹2,00,000 for the officer in default. (correct answer)
4. ₹1,00,000 for the company and ₹1,00,000 for the officer in default.

Answer: C — ₹2,00,000 for the company and ₹2,00,000 for the officer in default.

Explanation. Section 64(2) prescribes a penalty of ₹500 for each day during which the default continues, subject to a maximum of ₹5 lakh for the company and ₹1 lakh for every officer in default. For 200 days, the calculation is ₹500 × 200 = ₹1,00,000 for each liable party. Therefore, both the company and the officer in default face a penalty of ₹1,00,000. The applicable maximum limits do not affect this calculation because neither cap is reached.

Where it goes wrong. Confusing the daily penalty rate or applying the maximum penalty even when the calculated amount is below the statutory ceiling.

Authority. Section 64(2) of the Companies Act, 2013

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

Prism Healthcare Limited has also completed redemption of its redeemable preference shares on 25 September 2026. Its CFO argues that Form SH-7 is unnecessary for this transaction because there has been no fresh issue of equity shares or alteration through consolidation. Which statement correctly applies Section 64?

1. No filing is required because redemption of preference shares is governed exclusively by Section 55.
2. Form SH-7 is required only when the company increases its authorised capital under Section 61.
3. Redemption of redeemable preference shares is also covered by Section 64, requiring notice in Form SH-7 within thirty days. (correct answer)
4. Form SH-7 is required only where preference shares are redeemed through a fresh issue of equity shares.

Answer: C — Redemption of redeemable preference shares is also covered by Section 64, requiring notice in Form SH-7 within thirty days.

Explanation. Section 64(1)(c) specifically includes redemption of redeemable preference shares among the events requiring notice to the Registrar in Form SH-7. The obligation is not restricted to capital alterations under Section 61 or increases in authorised share capital. Therefore, Prism Healthcare Limited must comply with the prescribed filing requirement following redemption, even though the transaction is governed substantively by Section 55.

Where it goes wrong. Assuming that Form SH-7 applies exclusively to alterations made under Section 61.

Authority. Section 64(1)(c) of the Companies Act, 2013; Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. A limited company proposes issuing fully paid-up bonus shares by capitalising its free reserves. Its Articles authorise bonus issues, the Board has recommended the proposal, and the members have approved it in a general meeting. However, the company has outstanding interest payable on fixed deposits accepted from investors. Its directors argue that bonus shares can still be issued because the issue does not involve any fresh cash outflow. Which conclusion is correct?

A limited company proposes issuing fully paid-up bonus shares by capitalising its free reserves. Its Articles authorise bonus issues, the Board has recommended the proposal, and the members have approved it in a general meeting. However, the company has outstanding interest payable on fixed deposits accepted from investors. Its directors argue that bonus shares can still be issued because the issue does not involve any fresh cash outflow. Which conclusion is correct?

1. The issue is valid because bonus shares do not involve fresh cash payment by the company.
2. The company cannot satisfy the prescribed bonus-issue condition because it has defaulted in payment of interest on fixed deposits. (correct answer)
3. The issue is valid if the company capitalises its Securities Premium Account instead of free reserves.
4. The issue is valid if the company obtains unanimous consent from the deposit holders.

Answer: B — The company cannot satisfy the prescribed bonus-issue condition because it has defaulted in payment of interest on fixed deposits.

Explanation. Section 63(2)(c) requires that the company must not have defaulted in payment of interest or principal in respect of fixed deposits or debt securities issued by it. The requirement is a statutory condition for capitalising profits or reserves for bonus shares. The fact that bonus shares do not involve a cash payment to shareholders does not remove this requirement. Changing the source of capitalisation or obtaining deposit-holder consent cannot substitute for compliance.

Where it goes wrong. Assuming that the absence of a cash outflow makes financial-default conditions irrelevant to bonus issues.

Authority. Section 63(2)(c) of the Companies Act, 2013

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

Scenario. A company has announced a bonus issue following a Board recommendation. Two weeks later, its Board identifies an attractive acquisition opportunity and proposes withdrawing the bonus issue to preserve its reserves. The shares have not yet been allotted, and shareholder approval is still being processed. Can the company withdraw its previously announced decision?

A company has announced a bonus issue following a Board recommendation. Two weeks later, its Board identifies an attractive acquisition opportunity and proposes withdrawing the bonus issue to preserve its reserves. The shares have not yet been allotted, and shareholder approval is still being processed. Can the company withdraw its previously announced decision?

1. No, because Rule 14 prohibits subsequent withdrawal once the Board's decision recommending the bonus issue has been announced. (correct answer)
2. Yes, because the company retains an unrestricted withdrawal right until the actual allotment.
3. Yes, provided the Board passes another resolution with reasons for withdrawing the bonus issue.
4. Yes, provided at least three-fourths of the shareholders approve the withdrawal.

Answer: A — No, because Rule 14 prohibits subsequent withdrawal once the Board's decision recommending the bonus issue has been announced.

Explanation. Rule 14 provides that a company which has once announced the decision of its Board recommending a bonus issue shall not subsequently withdraw the same. The restriction is not postponed until the actual allotment of shares. Consequently, the Board cannot withdraw the announced proposal merely because another commercial opportunity has arisen. The principal distractor incorrectly assumes that the Board retains an unrestricted right to reverse the decision until allotment.

Where it goes wrong. Assuming that an announced bonus issue can be withdrawn at any time before allotment.

Authority. Rule 14 of the Companies (Share Capital and Debentures) Rules, 2014; Section 63(2)(f) of the Companies Act, 2013

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

Scenario. A manufacturing company has the following reserves: free reserves ₹10 crore, Securities Premium Account ₹4 crore, Capital Redemption Reserve ₹3 crore and Revaluation Reserve ₹6 crore. The Board proposes capitalising ₹12 crore for a bonus issue. Which combination would satisfy Section 63(1) without using any prohibited reserve?

A manufacturing company has the following reserves: free reserves ₹10 crore, Securities Premium Account ₹4 crore, Capital Redemption Reserve ₹3 crore and Revaluation Reserve ₹6 crore. The Board proposes capitalising ₹12 crore for a bonus issue. Which combination would satisfy Section 63(1) without using any prohibited reserve?

1. ₹10 crore from free reserves and ₹2 crore from revaluation reserve.
2. ₹6 crore from revaluation reserve and ₹6 crore from securities premium.
3. ₹9 crore from revaluation reserve and ₹3 crore from Capital Redemption Reserve.
4. ₹8 crore from free reserves, ₹2 crore from securities premium and ₹2 crore from Capital Redemption Reserve. (correct answer)

Answer: D — ₹8 crore from free reserves, ₹2 crore from securities premium and ₹2 crore from Capital Redemption Reserve.

Explanation. Section 63(1) permits capitalisation of free reserves other than revaluation reserves, the securities premium account and the Capital Redemption Reserve Account. The proposed combination uses ₹8 crore from free reserves, ₹2 crore from securities premium and ₹2 crore from CRR, totalling ₹12 crore. None of these sources is prohibited by the revaluation-reserve restriction. The other combinations improperly include some portion of the revaluation reserve.

Where it goes wrong. Treating revaluation reserve as an eligible source when combining multiple reserves for a bonus issue.

Authority. Section 63(1) of the Companies Act, 2013; Section 52(2) of the Companies Act, 2013

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

Scenario. A company proposes a bonus issue on 31 December 2026. Its employee statutory contributions are overdue, including provident fund and gratuity payments. The company has sufficient free reserves, and its Articles permit bonus shares. The directors suggest that obtaining an ordinary resolution from shareholders should cure the payment default. Which conclusion is correct under Section 63?

A company proposes a bonus issue on 31 December 2026. Its employee statutory contributions are overdue, including provident fund and gratuity payments. The company has sufficient free reserves, and its Articles permit bonus shares. The directors suggest that obtaining an ordinary resolution from shareholders should cure the payment default. Which conclusion is correct under Section 63?

1. Shareholder approval automatically overrides defaults in employee statutory dues.
2. Only a default in payment of declared dividend can prevent a bonus issue.
3. The company cannot satisfy Section 63(2) while the specified employee statutory dues remain unpaid. (correct answer)
4. The company may proceed if the unpaid employee contributions are disclosed in its Board's Report.

Answer: C — The company cannot satisfy Section 63(2) while the specified employee statutory dues remain unpaid.

Explanation. Section 63(2)(d) requires that the company must not have defaulted in respect of payment of statutory dues of employees, such as provident fund contributions, gratuity and bonus. This is an independent statutory condition and cannot be overridden by an ordinary shareholder resolution or disclosure in the Board's Report. Therefore, the company cannot proceed with the proposed bonus issue while the specified employee statutory dues remain in default.

Where it goes wrong. Assuming that shareholder approval can cure non-compliance with the employee statutory-dues condition.

Authority. Section 63(2)(d) of the Companies Act, 2013

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

Scenario. A limited company proposes consolidating two classes of equity shares into shares having a larger nominal value. The total number of shares will reduce, but the consolidation will not alter the voting percentage of any shareholder. The Articles authorise consolidation, and the members have approved the proposal in the general meeting. Is prior Tribunal approval necessary merely because consolidation and division are being undertaken?

A limited company proposes consolidating two classes of equity shares into shares having a larger nominal value. The total number of shares will reduce, but the consolidation will not alter the voting percentage of any shareholder. The Articles authorise consolidation, and the members have approved the proposal in the general meeting. Is prior Tribunal approval necessary merely because consolidation and division are being undertaken?

1. Yes, every consolidation and division requires prior Tribunal confirmation regardless of its effect.
2. No, Tribunal approval is required under this provision where consolidation and division results in a change in shareholders' voting percentages. (correct answer)
3. Yes, because consolidation involving two classes automatically constitutes a reduction of capital.
4. No, because a company is never required to obtain Tribunal approval for alteration of share capital.

Answer: B — No, Tribunal approval is required under this provision where consolidation and division results in a change in shareholders' voting percentages.

Explanation. Section 61(1)(b) permits consolidation and division of share capital into shares of larger amounts. The proviso specifically requires Tribunal approval where the consolidation and division results in changes in the voting percentage of shareholders. In the given case, the voting percentages remain unchanged. Therefore, the specific Tribunal-approval requirement attached to that proviso is not attracted, assuming the other requirements, including Articles authority and general-meeting approval, are satisfied.

Where it goes wrong. Treating Tribunal approval as compulsory for every consolidation instead of examining whether voting percentages change.

Authority. Section 61(1)(b) of the Companies Act, 2013

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

Scenario. An unlisted public company has 10,000 fully paid-up equity shares of ₹100 each. The Board proposes converting 4,000 of those shares into stock for certain institutional shareholders and retaining the remaining shares in their existing form. Some directors argue that all shares must be converted together and that selective conversion is not permitted. Which statement correctly applies Section 61(1)(c)?

An unlisted public company has 10,000 fully paid-up equity shares of ₹100 each. The Board proposes converting 4,000 of those shares into stock for certain institutional shareholders and retaining the remaining shares in their existing form. Some directors argue that all shares must be converted together and that selective conversion is not permitted. Which statement correctly applies Section 61(1)(c)?

1. The company must convert all 10,000 shares into stock because partial conversion is prohibited.
2. The company may convert only 4,000 shares if every institutional shareholder agrees unanimously.
3. The company may convert shares into stock only if the Tribunal first approves the transaction.
4. The company may convert all or any of its fully paid-up shares into stock, subject to the Articles and applicable corporate approval. (correct answer)

Answer: D — The company may convert all or any of its fully paid-up shares into stock, subject to the Articles and applicable corporate approval.

Explanation. Section 61(1)(c) expressly permits a limited company having share capital to convert all or any of its fully paid-up shares into stock. Therefore, the company is not required to convert every issued share. The proposed conversion of 4,000 fully paid-up shares is permissible in principle, provided the Articles authorise the alteration and the company follows the applicable general-meeting procedure. The principal trap is interpreting 'all or any' as requiring complete conversion.

Where it goes wrong. Ignoring the statutory words 'all or any' and assuming that selective conversion into stock is prohibited.

Authority. Section 61(1)(c) of the Companies Act, 2013

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

Scenario. A company has equity shares of ₹200 each on which ₹150 has been paid and ₹50 remains unpaid. It proposes subdividing each share into ten shares of ₹20 each under Section 61(1)(d). The Board suggests making each new share fully paid-up by treating the unpaid amount as waived. Which arrangement correctly preserves the statutory proportion?

A company has equity shares of ₹200 each on which ₹150 has been paid and ₹50 remains unpaid. It proposes subdividing each share into ten shares of ₹20 each under Section 61(1)(d). The Board suggests making each new share fully paid-up by treating the unpaid amount as waived. Which arrangement correctly preserves the statutory proportion?

1. Each new share must carry ₹15 paid-up value and ₹5 unpaid value. (correct answer)
2. Each new share must carry ₹10 paid-up value and ₹10 unpaid value.
3. Each new share must carry ₹20 paid-up value and no unpaid amount.
4. Each new share must carry ₹12 paid-up value and ₹8 unpaid value.

Answer: A — Each new share must carry ₹15 paid-up value and ₹5 unpaid value.

Explanation. The original share has ₹150 paid and ₹50 unpaid, representing a 75:25 ratio. Section 61(1)(d) requires the proportion between paid and unpaid amounts on each subdivided share to remain the same as that of the original share. Accordingly, each new ₹20 share must carry ₹15 paid-up and ₹5 unpaid. Waiving the unpaid amount or changing the proportion would not satisfy the statutory condition.

Where it goes wrong. Calculating subdivision only by face value without preserving the original paid-up and unpaid ratio.

Authority. Section 61(1)(d) of the Companies Act, 2013

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

Scenario. A company has defaulted in filing Form SH-7 for alteration of its share capital. The default has continued for 1,200 days. Under Section 64(2), the prescribed penalty is ₹500 per day, subject to maximum limits of ₹5 lakh for the company and ₹1 lakh for every officer in default. What is the maximum aggregate penalty exposure of the company and one officer in default?

A company has defaulted in filing Form SH-7 for alteration of its share capital. The default has continued for 1,200 days. Under Section 64(2), the prescribed penalty is ₹500 per day, subject to maximum limits of ₹5 lakh for the company and ₹1 lakh for every officer in default. What is the maximum aggregate penalty exposure of the company and one officer in default?

1. ₹6,00,000 for the company and ₹6,00,000 for the officer.
2. ₹5,00,000 for the company and ₹5,00,000 for the officer.
3. ₹5,00,000 for the company and ₹1,00,000 for the officer. (correct answer)
4. ₹1,00,000 for the company and ₹1,00,000 for the officer.

Answer: C — ₹5,00,000 for the company and ₹1,00,000 for the officer.

Explanation. The daily calculation is ₹500 × 1,200 days = ₹6,00,000. However, Section 64(2) caps the company's penalty at ₹5 lakh and the penalty for every officer in default at ₹1 lakh. Therefore, the company is liable up to ₹5,00,000 and one officer in default up to ₹1,00,000, making the aggregate maximum exposure ₹6,00,000. The principal trap is applying the same maximum cap to both the company and its officer.

Where it goes wrong. Ignoring the separate statutory maximum penalty limits applicable to the company and the officer.

Authority. Section 64(2) of the Companies Act, 2013

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

Scenario. A limited company cancels 3,00,000 authorised equity shares of ₹10 each. These shares have not been taken up or agreed to be taken up by any person. The CFO contends that, because Section 61(2) says such cancellation is not a reduction of share capital, no further statutory action is required. Which statement is correct?

A limited company cancels 3,00,000 authorised equity shares of ₹10 each. These shares have not been taken up or agreed to be taken up by any person. The CFO contends that, because Section 61(2) says such cancellation is not a reduction of share capital, no further statutory action is required. Which statement is correct?

1. The cancellation is treated as a reduction under Section 66 and requires Tribunal confirmation.
2. The cancellation is not deemed to be a reduction of share capital, but the company must still give the prescribed notice under Section 64. (correct answer)
3. The cancellation is valid only if the company first obtains consent from every existing shareholder.
4. No cancellation is permitted unless the company has fully redeemed all its preference shares.

Answer: B — The cancellation is not deemed to be a reduction of share capital, but the company must still give the prescribed notice under Section 64.

Explanation. Section 61(1)(e) permits cancellation of shares which have not been taken up or agreed to be taken up by any person. Section 61(2) provides that such cancellation shall not be deemed to be a reduction of share capital. However, the transaction remains an alteration of share capital under Section 61. Consequently, Section 64 still requires the company to file Form SH-7 with the Registrar along with the altered memorandum within thirty days of the alteration.

Where it goes wrong. Mistaking the exemption from classification as reduction of capital for an exemption from the separate ROC filing requirement.

Authority. Section 61(1)(e) and Section 61(2) of the Companies Act, 2013; Section 64(1) of the Companies Act, 2013; Rule 15 of the Companies (Share Capital and Debentures) Rules, 2014