Chapter 4: Share Capital and Debentures - Test 5: answer key

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

Scenario. Anekta Garments Ltd. is a public company whose Articles expressly authorise buy-back. At its latest Board meeting, the finance team reports paid-up equity share capital of ₹40 crore and free reserves of ₹24 crore. The stated free-reserve figure already includes a securities premium balance of ₹4 crore; the company has no preference share capital outstanding, although an earlier issue of redeemable preference shares has since been fully redeemed. The Board initially proposes to buy back its equity shares for ₹6.8 crore under a Board resolution alone. The CFO argues that the proposal is permissible because it is below one-fourth of the combined capital and reserves. The Board is also considering increasing the proposed amount to ₹12 crore if the required shareholder approval is obtained. For financing the expanded proposal, the treasury plan earmarks ₹5 crore from proceeds of an earlier issue of equity shares, ₹4 crore from accumulated free reserves and ₹3 crore from proceeds of the earlier issue of redeemable preference shares. All shares proposed to be bought back are fully paid-up. The company has not made any other buy-back during the current financial year, and no offer has yet been opened. The CFO's post-transaction statement for the proposed ₹12 crore buy-back estimates secured and unsecured debt together at ₹110 crore and the relevant paid-up capital plus free reserves after the proposed buy-back at ₹52 crore. He treats this leverage calculation as a separate condition from the amount limits and approval route. The Board asks the company secretary to verify the available funding sources, the Board-resolution threshold, the separate overall and equity-specific ceilings, and the post-buy-back debt ratio before any offer is launched.

Anekta initially proposes a buy-back of ₹6.8 crore under a Board resolution alone. Based on its paid-up equity capital of ₹40 crore and free reserves of ₹24 crore, which conclusion is correct regarding the Board-only approval route under Section 68(2)(b)?

1. No. ₹6.8 crore exceeds the Board-only ceiling of ₹6.4 crore; a special resolution is required. (correct answer)
2. Yes. Any buy-back below ₹16 crore may be approved only by the Board.
3. Yes. The Board may authorise up to 25% of the paid-up equity capital.
4. No. A special resolution is required only when post-buy-back debt exceeds equity.

Answer: A — No. ₹6.8 crore exceeds the Board-only ceiling of ₹6.4 crore; a special resolution is required.

Explanation. The Board-only exception applies only where the buy-back is 10% or less of the total paid-up equity capital and free reserves and is authorised by a Board resolution. Here, the relevant base is ₹64 crore, so the ceiling is ₹6.4 crore. The proposed ₹6.8 crore exceeds it and therefore requires a special resolution. The ₹16 crore figure relates to the separate general 25% ceiling, not the Board-only threshold.

Where it goes wrong. Confusing the 10% Board-only threshold with the general 25% buy-back ceiling.

Authority. Section 68(2)(b), Companies Act, 2013

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

The treasury team has identified proceeds from an earlier equity share issue, free reserves and proceeds from an earlier issue of redeemable preference shares as possible sources for the proposed equity buy-back. Which identified source is expressly prohibited for financing the buy-back of equity shares?

1. The company's accumulated free reserves.
2. The proceeds of the earlier preference share issue.
3. The proceeds of the earlier equity share issue. (correct answer)
4. The company's securities premium account.

Answer: C — The proceeds of the earlier equity share issue.

Explanation. Section 68(1) permits buy-back out of free reserves, the securities premium account or proceeds of an issue of shares or other specified securities. However, the proviso prohibits a buy-back of any kind of shares or specified securities out of proceeds of an earlier issue of the same kind. Since the proposed buy-back is of equity shares, earlier equity issue proceeds are barred. Earlier preference share proceeds are not proceeds of the same kind.

Where it goes wrong. Applying the same-kind restriction to every earlier securities issue rather than only to an earlier issue of the same kind.

Authority. Section 68(1), Companies Act, 2013; Explanation II to Section 68, Companies Act, 2013

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

Assume Anekta obtains a special resolution for the proposed buy-back of equity shares worth ₹12 crore. Its paid-up equity capital is ₹40 crore and free reserves are ₹24 crore. What is the maximum amount of equity shares that may be bought back in the financial year, considering both statutory percentage ceilings?

1. ₹16 crore, being 25% of paid-up capital and free reserves.
2. ₹10 crore, being 25% of total paid-up equity capital. (correct answer)
3. ₹12 crore, being the amount proposed by the Board.
4. ₹6.4 crore, being 10% of paid-up equity capital and free reserves.

Answer: B — ₹10 crore, being 25% of total paid-up equity capital.

Explanation. The general limit is 25% of the aggregate of paid-up capital and free reserves, which is ₹16 crore here. However, for buy-back of equity shares in any financial year, the 25% reference is construed with respect to total paid-up equity capital. That separate ceiling is ₹10 crore. The lower applicable ceiling controls, so a ₹12 crore equity buy-back is not permitted merely because it falls below ₹16 crore.

Where it goes wrong. Applying the 25% aggregate capital-and-reserves ceiling without applying the separate equity-share ceiling.

Authority. Section 68(2)(c), Companies Act, 2013

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

For the proposed ₹12 crore buy-back, the CFO's post-transaction figures show secured and unsecured debt of ₹110 crore and paid-up capital plus free reserves of ₹52 crore. Which conclusion follows from the post-buy-back debt-equity ratio condition?

1. The ratio is 1.90:1 and the statutory condition is satisfied.
2. The ratio is exactly 2:1 and the statutory condition is satisfied.
3. The ratio is 2.10:1 but remains permissible with a special resolution.
4. The ratio is approximately 2.12:1 and exceeds the statutory maximum. (correct answer)

Answer: D — The ratio is approximately 2.12:1 and exceeds the statutory maximum.

Explanation. The ratio is calculated by dividing aggregate secured and unsecured debt after buy-back by paid-up capital and free reserves after buy-back. ₹110 crore divided by ₹52 crore is approximately 2.12:1. Section 68(2)(d) ordinarily requires the post-buy-back ratio not to exceed 2:1. Passing a special resolution does not waive this independent financial condition.

Where it goes wrong. Assuming shareholder approval can cure a post-buy-back debt-equity ratio above the statutory limit.

Authority. Section 68(2)(d), Companies Act, 2013

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

Scenario. Trident Auto Components Ltd. is considering a buy-back to return surplus cash to its shareholders. The company had defaulted on an instalment of a term loan from a banking company, originally due on 10 April 2022. The loan arrears were eventually paid, and the lender confirmed that the default ceased to subsist on 30 September 2023. The Board now proposes to commence a buy-back on 15 September 2026. Some directors count three years from the original missed instalment date and believe the old default can no longer affect the proposal. The treasury team has suggested two alternative routes for acquiring the company's shares: asking a wholly-owned subsidiary to purchase them on the company's behalf, or arranging the purchase through an investment company in the group. The company secretary points out that the proposed route must be examined independently of the company's financial position and the passage of time since the loan default. A separate review reveals that the company accepted deposits from members and failed to repay one matured deposit together with interest. That default remains outstanding on the proposed buy-back date. In addition, the company has not filed its annual return under section 92 and its financial statements under section 129 for the latest financial year. The Board believes that if it settles the old loan default and has sufficient free reserves, the buy-back can proceed. It seeks advice on the three-year period after a default is remedied, prohibited acquisition routes, filing-related disqualifications and the effect of the unpaid deposit.

Trident's term-loan default ceased to subsist on 30 September 2023, when the arrears were fully paid. The company proposes to commence a buy-back on 15 September 2026. Which conclusion correctly applies the proviso to Section 70(1)(c)?

1. The buy-back is permanently prohibited because a term-loan default once occurred.
2. The buy-back is permitted because three years are counted from the original due date.
3. The buy-back remains prohibited because three years have not elapsed from 30 September 2023. (correct answer)
4. The buy-back is permitted if the Board passes a special resolution.

Answer: C — The buy-back remains prohibited because three years have not elapsed from 30 September 2023.

Explanation. The proviso to Section 70(1)(c) removes the prohibition only where the default has been remedied and three years have lapsed after the default ceased to subsist. The relevant date is therefore 30 September 2023, not the original loan instalment due date. On 15 September 2026, three full years have not yet elapsed. A special resolution cannot override this prohibition.

Where it goes wrong. Starting the three-year period from the original missed payment date instead of the date on which the default ceased.

Authority. Section 70(1)(c), Companies Act, 2013

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

The treasury team considers acquiring Trident's shares through either its wholly-owned subsidiary or an investment company in the group. Which statement correctly describes the prohibition under Section 70(1)?

1. Both routes are prohibited, whether the acquisition is made directly or indirectly. (correct answer)
2. Only the subsidiary route is prohibited if the subsidiary is wholly-owned.
3. Only the investment-company route is prohibited when the investment company is controlled.
4. Neither route is prohibited where the parent company has sufficient free reserves.

Answer: A — Both routes are prohibited, whether the acquisition is made directly or indirectly.

Explanation. Section 70(1) prohibits a company from directly or indirectly purchasing its own shares or other specified securities through any subsidiary company, including its own subsidiaries, or through any investment company or group of investment companies. The prohibition is not limited to wholly-owned subsidiaries and is not removed merely because the parent has sufficient reserves or meets the other buy-back limits.

Where it goes wrong. Assuming an indirect acquisition becomes permissible because a separate group entity executes the purchase.

Authority. Section 70(1)(a) and Section 70(1)(b), Companies Act, 2013

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

Trident has not filed its annual return under Section 92 and its financial statements under Section 129. Assume that the old loan default has otherwise passed the three-year period and that the company has sufficient reserves. What is the effect of these filing defaults on the proposed buy-back?

1. The buy-back is allowed because the three-year period has passed.
2. The buy-back is allowed if the Board obtains a solvency report.
3. The buy-back is prohibited only where the company is listed.
4. The buy-back is prohibited until the specified statutory non-compliances are addressed. (correct answer)

Answer: D — The buy-back is prohibited until the specified statutory non-compliances are addressed.

Explanation. Section 70(2) independently prohibits a company from directly or indirectly purchasing its own shares or specified securities where it has not complied with Sections 92, 123, 127 or 129. This restriction is separate from the three-year proviso relating to specified payment defaults under Section 70(1)(c). Passing the three-year period for an old loan default does not cure non-compliance with the filing and other provisions listed in Section 70(2).

Where it goes wrong. Treating the three-year cure period for payment defaults as a general cure period for every Section 70 prohibition.

Authority. Section 70(2), Companies Act, 2013; Sections 92, 123, 127 and 129, Companies Act, 2013

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

Apart from the cured term-loan default, Trident still has an unpaid matured deposit and interest due on that deposit. Assume the company has otherwise complied with Sections 92, 123, 127 and 129 and will make a direct buy-back. What is the effect of the continuing deposit default?

1. The deposit default is irrelevant if the buy-back is funded from free reserves.
2. The buy-back is prohibited while the deposit default subsists; the three-year period applies only after it is remedied. (correct answer)
3. The company may proceed after repaying the principal, even if the interest remains unpaid.
4. The prohibition applies only to defaults involving debentures and term loans.

Answer: B — The buy-back is prohibited while the deposit default subsists; the three-year period applies only after it is remedied.

Explanation. Section 70(1)(c) covers defaults in repayment of deposits accepted before or after commencement of the Act and defaults in payment of interest on those deposits. The prohibition continues while the default subsists. If the default is remedied, the buy-back is not prohibited under this clause only after three years have lapsed from the date the default ceased to subsist. The source of buy-back funds does not remove this restriction.

Where it goes wrong. Overlooking deposit interest defaults or assuming that funding a buy-back from reserves bypasses Section 70.

Authority. Section 70(1)(c), Companies Act, 2013

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

Scenario. Meridian Components Ltd., whose equity shares are listed on a recognised stock exchange, has obtained approval for a buy-back by special resolution passed at its general meeting on 1 March 2026. The resolution states that the buy-back is to be completed by 15 March 2027. The directors believe that the one-year period for completing a buy-back should be counted from the date on which the offer closes, rather than from the date of the resolution. Before commencing the purchase, the company prepares a declaration of solvency in Form SH-9. It files the form with the Registrar of Companies but not with SEBI. The declaration is signed by the chairperson and another director. The company has an appointed managing director, who has not signed the declaration. The Board proposes to begin the buy-back immediately after these filings. For planning purposes, the finance team also considers an alternative in which the buy-back is completed within the statutory one-year period, on 15 February 2027. In that event, the company proposes to issue further equity shares of the same kind five months after completion. It also has a previously approved bonus issue and outstanding convertible debentures that are due for conversion into equity under their terms. The company secretary is asked whether these proposed issuances are all subject to the same restriction. Finally, the company plans to file its return of buy-back in Form SH-11 thirty-five days after completion, and proposes to send it only to the Registrar. The audit committee asks for a consolidated view of the completion deadline, the declaration of solvency, the six-month restriction on further issue and the post-completion return requirements.

Meridian passed the special resolution authorising the buy-back on 1 March 2026 but proposes to complete it on 15 March 2027. Which statement correctly identifies the statutory completion deadline?

1. The buy-back must be completed within one year from the date the offer closes.
2. The buy-back must be completed within one year from 1 March 2026, so the proposed date is beyond the limit. (correct answer)
3. The buy-back must be completed within one year from the date of the first purchase.
4. The Board may extend the completion period by six months through a resolution.

Answer: B — The buy-back must be completed within one year from 1 March 2026, so the proposed date is beyond the limit.

Explanation. Section 68(4) requires every buy-back to be completed within one year from the date of passing the special resolution or, where the Board-only exception applies, the relevant Board resolution. The period is not calculated from the offer's closing date or the first purchase. A completion date of 15 March 2027 falls after the one-year period beginning on 1 March 2026.

Where it goes wrong. Calculating the one-year completion period from the offer timetable rather than the authorising resolution.

Authority. Section 68(4), Companies Act, 2013

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

Meridian is listed and has filed Form SH-9 only with the Registrar. The declaration is signed by two directors, but neither is the managing director, although the company has an appointed managing director. Which statement correctly identifies the compliance position before the buy-back?

1. The filing is valid because two directors have signed the declaration.
2. Only filing with SEBI is required because the company's shares are listed.
3. The declaration may be filed after the first purchase if the Board confirms solvency.
4. The declaration must be filed with the Registrar and SEBI before the buy-back and signed by at least two directors, including the managing director. (correct answer)

Answer: D — The declaration must be filed with the Registrar and SEBI before the buy-back and signed by at least two directors, including the managing director.

Explanation. For a buy-back authorised by a special resolution or the relevant Board resolution, the company must file a declaration of solvency before making the buy-back. It is filed with the Registrar and, for a listed company, also with SEBI. It must be signed by at least two directors, one of whom must be the managing director, if any. Meridian has omitted SEBI filing and the required managing director's signature.

Where it goes wrong. Assuming that two director signatures are sufficient even where the company has an appointed managing director.

Authority. Section 68(6), Companies Act, 2013; Rule 17, Companies (Share Capital and Debentures) Rules, 2014

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

Assume Meridian completes the buy-back on 15 February 2027 within the one-year period. Five months later, it proposes a fresh issue of equity shares of the same kind. It also proposes a bonus issue and conversion of outstanding convertible debentures into equity under their existing terms. Which course is permitted under Section 68(8)?

1. The fresh issue of the same kind is barred, but the bonus issue and conversion of subsisting obligations are exceptions. (correct answer)
2. All three issuances are barred for six months after completion of the buy-back.
3. All three issuances are permitted if the Board approves them before the six-month period ends.
4. The six-month restriction applies only to specified securities and not to equity shares.

Answer: A — The fresh issue of the same kind is barred, but the bonus issue and conversion of subsisting obligations are exceptions.

Explanation. After completing a buy-back, the company cannot make a further issue of the same kind of shares or other specified securities within six months. Section 68(8), however, expressly permits a bonus issue and issues made in discharge of subsisting obligations, including conversion of debentures into equity shares. A fresh issue of the same kind is therefore restricted, while the stated bonus issue and conversion fall within the exceptions.

Where it goes wrong. Treating the six-month restriction as absolute and overlooking the statutory exceptions.

Authority. Section 68(8), Companies Act, 2013

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

Meridian plans to file Form SH-11 thirty-five days after completing the buy-back. It proposes to file only with the Registrar and does not plan to attach the prescribed compliance certificate. Which statement correctly describes the post-completion requirement for this listed company?

1. Form SH-11 must be filed within sixty days and only with the Registrar.
2. Form SH-11 must be filed within thirty days from the date of the authorising resolution.
3. Form SH-11 must be filed within thirty days of completion with the Registrar and SEBI, with the prescribed SH-15 certificate. (correct answer)
4. Form SH-11 must be filed within fifteen days of completion without any directors' certificate.

Answer: C — Form SH-11 must be filed within thirty days of completion with the Registrar and SEBI, with the prescribed SH-15 certificate.

Explanation. Under Section 68(10), the return of buy-back is to be filed within thirty days of completion. A listed company files the return with both the Registrar and SEBI. The prescribed compliance certificate in Form SH-15, signed by two directors including the managing director, if any, is also required. Filing after thirty-five days is late, and filing only with the Registrar is incomplete for a listed company.

Where it goes wrong. Counting the thirty-day period from the resolution date or treating the Registrar as the only filing authority for a listed company.

Authority. Section 68(10), Companies Act, 2013; Rule 17, Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Vistaar Infrastructure Ltd. is an unlisted public company engaged in setting up infrastructure projects. It is not an All India Financial Institution, banking company, registered NBFC or registered Housing Finance Company. The company proposes a public issue of secured, non-convertible debentures. The prospectus is being finalised, but the Board's draft timetable places appointment of the debenture trustee after the prospectus is issued. The company intends to create a charge in favour of the trustee over specified plant and immovable property. The initial valuation indicates that the secured assets are sufficient to cover the principal amount and interest due on the debentures. The issue will leave ₹80 crore of debentures outstanding. As an unlisted company outside the exempt categories, Vistaar proposes to create a Debenture Redemption Reserve of ₹8 crore out of profits available for payment of dividend. The finance director also records that the amount credited to the DRR is not available for general working-capital expenditure. Of the outstanding debentures, ₹20 crore will mature during the financial year ending 31 March 2028. The issue closes on 31 March 2027. The company is considering investing or depositing the required amount for debentures maturing in that financial year on 30 April 2027. In May 2027, however, the trustee receives a revised valuation indicating that the charged assets may become insufficient to discharge the principal amount when it falls due. The Board asks whether the trustee can approach the Tribunal before an actual repayment default, and what restrictions the Tribunal may impose after hearing the company and interested persons.

Vistaar proposes a public issue of secured debentures but plans to appoint the debenture trustee only after issuing the prospectus. Which statement correctly applies the appointment requirement?

1. A trustee may be appointed after the prospectus if the security is already created.
2. A trustee is mandatory only when an offer is made to more than 500 members.
3. A trustee may be appointed after allotment if the trust deed is executed on time.
4. One or more debenture trustees must be appointed before the issue of the prospectus or offer. (correct answer)

Answer: D — One or more debenture trustees must be appointed before the issue of the prospectus or offer.

Explanation. Section 71(5) requires appointment of one or more debenture trustees before a company issues a prospectus or makes an offer or invitation to the public or to its members exceeding five hundred for subscription of debentures. Rule 18(1)(b) also requires appointment before the prospectus or letter of offer for secured debentures. Appointment after issue of the prospectus is too late.

Where it goes wrong. Confusing the timing of trustee appointment with the later execution of the debenture trust deed.

Authority. Section 71(5), Companies Act, 2013; Rule 18(1)(b), Companies (Share Capital and Debentures) Rules, 2014

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

Vistaar is an unlisted company outside the exempt financial-institution, banking, NBFC and Housing Finance Company categories. Its outstanding debentures are ₹80 crore. What is the required adequacy of its Debenture Redemption Reserve under the applicable Rule 18(7) category?

1. No DRR is required because the debentures are issued through a public issue.
2. The DRR is 10% of outstanding debentures, amounting to ₹8 crore, from profits available for payment of dividend. (correct answer)
3. The DRR is 15% of outstanding debentures, amounting to ₹12 crore.
4. The DRR is 25% of outstanding debentures, amounting to ₹20 crore.

Answer: B — The DRR is 10% of outstanding debentures, amounting to ₹8 crore, from profits available for payment of dividend.

Explanation. For an unlisted company other than the specified exempt categories, Rule 18(7) prescribes DRR adequacy of 10% of the value of outstanding debentures. Ten per cent of ₹80 crore is ₹8 crore. The reserve is created out of profits available for payment of dividend, and Section 71(4) restricts its use to redemption of debentures. The 15% figure relates to a separate investment or deposit requirement for debentures maturing during the relevant year.

Where it goes wrong. Confusing the 10% DRR requirement with the separate 15% investment or deposit requirement.

Authority. Section 71(4), Companies Act, 2013; Rule 18(7)(a) and Rule 18(7)(b)(iv)(B), Companies (Share Capital and Debentures) Rules, 2014

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

Vistaar has ₹20 crore of debentures maturing during the financial year ending 31 March 2028. It proposes to make the prescribed investment or deposit on 30 April 2027. What minimum amount must it invest or deposit, assuming it falls within the applicable Rule 18(7) category?

1. ₹20 crore, being the entire amount of debentures maturing in that year.
2. ₹8 crore, being the amount of its Debenture Redemption Reserve.
3. ₹3 crore, being 15% of the debentures maturing during the relevant year. (correct answer)
4. ₹1.5 crore, being 7.5% of the debentures maturing during the relevant year.

Answer: C — ₹3 crore, being 15% of the debentures maturing during the relevant year.

Explanation. Rule 18(7)(v) requires a company within the specified categories to invest or deposit, on or before 30 April, a sum not less than 15% of the amount of debentures maturing during the financial year ending on 31 March of the next year. Fifteen per cent of ₹20 crore is ₹3 crore. The amount must remain invested or deposited at not less than the prescribed level and may be used only for redemption of the relevant debentures.

Where it goes wrong. Using the DRR balance or the total outstanding debenture amount as the base instead of the amount maturing in the relevant financial year.

Authority. Rule 18(7)(v) and Rule 18(7)(vi), Companies (Share Capital and Debentures) Rules, 2014

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

Vistaar's debenture trustee receives a valuation report indicating that the charged assets are likely to become insufficient to discharge the principal amount when due, although the maturity date has not yet arrived. What statutory course is available to the trustee?

1. The trustee may petition the Tribunal, which may after hearing the company and interested persons restrict further liabilities. (correct answer)
2. The trustee must wait until maturity and may then directly sell the company's assets without Tribunal involvement.
3. Only individual debenture-holders may petition the Tribunal before a payment default occurs.
4. The Tribunal must automatically order liquidation as soon as the security value declines.

Answer: A — The trustee may petition the Tribunal, which may after hearing the company and interested persons restrict further liabilities.

Explanation. Section 71(9) permits a debenture trustee to petition the Tribunal where it concludes that the company's assets are insufficient or are likely to become insufficient to discharge the principal amount when due. After hearing the company and any other interested person, the Tribunal may impose restrictions on the company incurring further liabilities where considered necessary to protect debenture-holders. An actual maturity default is not a prerequisite for this remedy.

Where it goes wrong. Assuming that the trustee can act only after the debentures mature or that a decline in security value automatically results in liquidation.

Authority. Section 71(9), Companies Act, 2013; Rule 18(1)(c), Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Alto Ceramics Ltd. closed an offer to buy back its equity shares on 18 November 2025. The Board now proposes another offer to buy back the same kind of shares on 17 November 2026. The company has ample free reserves, its Articles authorise buy-back and no payment default exists. The secretary argues that the one-year period for completing a buy-back is the only relevant timing rule. Which statement correctly applies the separate restriction on successive buy-back offers?

Alto Ceramics Ltd. closed an offer to buy back its equity shares on 18 November 2025. The Board now proposes another offer to buy back the same kind of shares on 17 November 2026. The company has ample free reserves, its Articles authorise buy-back and no payment default exists. The secretary argues that the one-year period for completing a buy-back is the only relevant timing rule. Which statement correctly applies the separate restriction on successive buy-back offers?

1. The new offer is permissible because the Board has passed a fresh special resolution.
2. The one-year interval is measured from the date of the preceding authorising resolution.
3. The new offer cannot be made because one year has not elapsed from closure of the preceding offer. (correct answer)
4. The restriction applies only to equity shares and not to other specified securities.

Answer: C — The new offer cannot be made because one year has not elapsed from closure of the preceding offer.

Explanation. The proviso to Section 68(2) prohibits making an offer of buy-back within one year reckoned from the date of closure of the preceding offer of buy-back. The relevant date is therefore 18 November 2025, not the date of the earlier resolution. An offer on 17 November 2026 is within the one-year period and is prohibited, even where the Articles authorise buy-back and the company has sufficient reserves.

Where it goes wrong. Confusing the one-year interval between successive offers with the separate one-year period for completing an authorised buy-back.

Authority. Proviso to Section 68(2), Companies Act, 2013

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

Scenario. Ritu Appliances Ltd. proposes to buy back 10,000 of its equity shares. Of these, 8,000 are fully paid-up and 2,000 are partly paid-up. The Articles authorise buy-back, the Board has secured the necessary approvals and the company has sufficient permitted sources. The CFO proposes buying all 10,000 shares, reasoning that partly paid shares are still issued shares and that the unpaid call amount can be adjusted against the consideration. Which statutory condition most directly defeats this proposal?

Ritu Appliances Ltd. proposes to buy back 10,000 of its equity shares. Of these, 8,000 are fully paid-up and 2,000 are partly paid-up. The Articles authorise buy-back, the Board has secured the necessary approvals and the company has sufficient permitted sources. The CFO proposes buying all 10,000 shares, reasoning that partly paid shares are still issued shares and that the unpaid call amount can be adjusted against the consideration. Which statutory condition most directly defeats this proposal?

1. Every share or other specified security proposed to be bought back must be fully paid-up. (correct answer)
2. Partly paid shares may be bought back if the unpaid call amount is adjusted.
3. Only a majority of the shares proposed to be bought back must be fully paid-up.
4. The Board may waive the fully paid-up condition by passing a special resolution.

Answer: A — Every share or other specified security proposed to be bought back must be fully paid-up.

Explanation. Section 68(2)(e) requires all shares or other specified securities proposed to be bought back to be fully paid-up. The requirement applies to each security included in the buy-back, not merely to a majority of them. Consequently, Ritu Appliances cannot include the 2,000 partly paid-up shares in the proposed buy-back. A special resolution or adjustment of unpaid calls does not create an exception to this condition.

Where it goes wrong. Assuming that partly paid-up shares can be included if the unpaid call amount is adjusted against the buy-back consideration.

Authority. Section 68(2)(e), Companies Act, 2013

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

Scenario. Following a buy-back, a company is found to have contravened a requirement of Section 68. The authority considers the penalty under Section 68(11). The company contends that only the company is liable and that the responsible director cannot be fined, while the director argues that the earlier imprisonment provision continues to apply. Assuming the contravention is established and the director is an officer in default, what penalty is prescribed under the applicable provision?

Following a buy-back, a company is found to have contravened a requirement of Section 68. The authority considers the penalty under Section 68(11). The company contends that only the company is liable and that the responsible director cannot be fined, while the director argues that the earlier imprisonment provision continues to apply. Assuming the contravention is established and the director is an officer in default, what penalty is prescribed under the applicable provision?

1. Only the company is liable to a fine of ₹1 lakh to ₹3 lakh.
2. The company is liable to imprisonment and the officer is liable only to a warning.
3. The company and officer are liable to imprisonment for up to three years and a fine.
4. The company and every officer in default are each liable to a fine of ₹1 lakh to ₹3 lakh. (correct answer)

Answer: D — The company and every officer in default are each liable to a fine of ₹1 lakh to ₹3 lakh.

Explanation. Section 68(11) prescribes a fine of not less than ₹1 lakh and up to ₹3 lakh for the company and the same range for every officer of the company who is in default. The earlier imprisonment language in this sub-section was omitted by the Companies (Amendment) Act, 2020. Therefore, the company cannot argue that only it is liable, and the director cannot rely on the omitted imprisonment provision.

Where it goes wrong. Using the pre-amendment penalty wording or assuming that the officer in default escapes liability.

Authority. Section 68(11), Companies Act, 2013; Section 14, Companies (Amendment) Act, 2020

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

Scenario. Amber Industrial Ltd. issued secured debentures and the offer closed on 31 May 2026. The company appointed the debenture trustee before issuing the offer letter and created the required security. However, it executed the debenture trust deed on 5 September 2026. Which statement correctly applies the prescribed form and time limit for execution of the trust deed?

Amber Industrial Ltd. issued secured debentures and the offer closed on 31 May 2026. The company appointed the debenture trustee before issuing the offer letter and created the required security. However, it executed the debenture trust deed on 5 September 2026. Which statement correctly applies the prescribed form and time limit for execution of the trust deed?

1. The deed must be executed in Form SH-10 within thirty days of allotment.
2. The deed must be executed in Form SH-12 within three months of closure of the issue or offer. (correct answer)
3. The deed must be executed in Form SH-11 within six months of the prospectus.
4. The deed may be executed at any time before the first redemption date.

Answer: B — The deed must be executed in Form SH-12 within three months of closure of the issue or offer.

Explanation. Rule 18(5) requires the company issuing debentures to execute a debenture trust deed in Form SH-12, or as near thereto as possible, in favour of the debenture trustees within three months of closure of the issue or offer. The relevant event is closure of the issue or offer, not allotment or the first redemption date. Execution on 5 September 2026 is beyond three months from 31 May 2026.

Where it goes wrong. Confusing the SH-12 trust deed with buy-back forms or calculating the three-month period from allotment.

Authority. Rule 18(5), Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Shakti Steel Ltd. proposes to issue debentures carrying an option to convert them partly into equity shares at the time of redemption. The Articles authorise the issue, and the Board has approved the proposal at its meeting. No resolution has been passed by the shareholders. Which further approval is required for the proposed conversion option?

Shakti Steel Ltd. proposes to issue debentures carrying an option to convert them partly into equity shares at the time of redemption. The Articles authorise the issue, and the Board has approved the proposal at its meeting. No resolution has been passed by the shareholders. Which further approval is required for the proposed conversion option?

1. No further approval is needed because the conversion will occur only at redemption.
2. An ordinary resolution passed at a Board meeting is sufficient.
3. A special resolution must be passed at a general meeting approving the conversion option. (correct answer)
4. A special resolution is required only where the debentures are fully convertible.

Answer: C — A special resolution must be passed at a general meeting approving the conversion option.

Explanation. Section 71(1) permits a company to issue debentures with an option to convert them into shares, either wholly or partly at the time of redemption, provided the issue is approved by a special resolution passed at a general meeting. The requirement is not avoided because conversion is only partial or takes place at redemption. Board approval and authority in the Articles do not replace the prescribed shareholder special resolution.

Where it goes wrong. Assuming that an optional or partial conversion feature does not require a special resolution.

Authority. Section 71(1), Companies Act, 2013

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

Scenario. A company proposes to issue secured non-convertible debentures. The CFO suggests that the debenture terms should grant voting rights to holders whenever interest remains unpaid for two years, relying on the voting rights available to certain preference shareholders. Is this proposal valid under the Companies Act, 2013?

A company proposes to issue secured non-convertible debentures. The CFO suggests that the debenture terms should grant voting rights to holders whenever interest remains unpaid for two years, relying on the voting rights available to certain preference shareholders. Is this proposal valid under the Companies Act, 2013?

1. No. A company cannot issue debentures carrying voting rights, and unpaid interest does not create such a right. (correct answer)
2. Yes. Debenture-holders acquire voting rights whenever interest remains unpaid for two years.
3. Yes. Secured debentures may carry voting rights if the trust deed permits them.
4. No. Voting rights are prohibited only for convertible debentures.

Answer: A — No. A company cannot issue debentures carrying voting rights, and unpaid interest does not create such a right.

Explanation. Section 71(2) expressly prohibits a company from issuing any debentures carrying voting rights. The prohibition is not restricted to unsecured or convertible debentures and does not contain an exception for interest remaining unpaid for two years. The CFO is confusing the treatment of certain preference shares with the statutory position of debenture-holders.

Where it goes wrong. Transferring the two-year unpaid-dividend voting rule for preference shareholders to debenture-holders.

Authority. Section 71(2), Companies Act, 2013

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

Scenario. Pinnacle Manufacturing Ltd. proposes to appoint a professional as its debenture trustee. The proposed trustee is otherwise eligible, but he personally owes ₹499 to the company under an outstanding advance. He argues that the amount is too small to affect his independence and that the disqualification should apply only where the debt exceeds a prescribed minimum. Which statement is correct under Rule 18?

Pinnacle Manufacturing Ltd. proposes to appoint a professional as its debenture trustee. The proposed trustee is otherwise eligible, but he personally owes ₹499 to the company under an outstanding advance. He argues that the amount is too small to affect his independence and that the disqualification should apply only where the debt exceeds a prescribed minimum. Which statement is correct under Rule 18?

1. He may be appointed because the amount owed is below ₹500.
2. He may be appointed if the Board approves the appointment unanimously.
3. He is disqualified only if the amount owed exceeds ₹50 lakh.
4. He cannot be appointed because a person indebted to the company is disqualified, irrespective of the amount. (correct answer)

Answer: D — He cannot be appointed because a person indebted to the company is disqualified, irrespective of the amount.

Explanation. Rule 18(2) disqualifies a person who is indebted to the company or its subsidiary, holding or associate company, or a subsidiary of its holding company. The rule does not prescribe a minimum debt amount for this disqualification. Therefore, the proposed trustee's outstanding debt of ₹499 is sufficient to disqualify him. Board approval cannot override a prescribed eligibility restriction.

Where it goes wrong. Importing the monetary threshold for pecuniary relationships into the separate disqualification for being indebted to the company.

Authority. Rule 18(2), Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Himalayan Infrastructure Ltd. is engaged in setting up an infrastructure project and proposes to issue secured debentures with a tenor of 27 years. The finance team has been advised that secured debentures ordinarily cannot have a tenor exceeding ten years. Which statement correctly applies the exception under the Companies (Share Capital and Debentures) Rules, 2014?

Himalayan Infrastructure Ltd. is engaged in setting up an infrastructure project and proposes to issue secured debentures with a tenor of 27 years. The finance team has been advised that secured debentures ordinarily cannot have a tenor exceeding ten years. Which statement correctly applies the exception under the Companies (Share Capital and Debentures) Rules, 2014?

1. The issue is invalid because every secured debenture must mature within ten years.
2. The issue is valid because every company may issue secured debentures for up to thirty years.
3. The issue is invalid because the infrastructure exception permits a maximum tenor of fifteen years.
4. The issue may qualify because companies engaged in setting up infrastructure projects may issue secured debentures for up to thirty years. (correct answer)

Answer: D — The issue may qualify because companies engaged in setting up infrastructure projects may issue secured debentures for up to thirty years.

Explanation. Rule 18(1)(a) ordinarily limits the tenor of secured debentures to ten years from the date of issue. It provides exceptions for specified categories, including companies engaged in setting up infrastructure projects, for which the tenor may extend up to thirty years. Himalayan Infrastructure may therefore qualify for the exception, subject to satisfying the applicable classification and other conditions. The exception is not available to every company.

Where it goes wrong. Either applying the ten-year general rule without considering the infrastructure exception or extending the exception to all companies.

Authority. Rule 18(1)(a), Companies (Share Capital and Debentures) Rules, 2014

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

Scenario. Rashmi Engineering Ltd. fails to redeem its debentures on the contractual maturity date and also fails to pay interest when due. The debenture trustee proposes to apply to the Tribunal for relief. Which statement correctly describes the Tribunal's power under Section 71(10)?

Rashmi Engineering Ltd. fails to redeem its debentures on the contractual maturity date and also fails to pay interest when due. The debenture trustee proposes to apply to the Tribunal for relief. Which statement correctly describes the Tribunal's power under Section 71(10)?

1. Only the company may apply, and the Tribunal may merely advise it to negotiate with holders.
2. The trustee may apply, but the Tribunal can only restrict the company's future borrowings.
3. Any or all debenture-holders or the trustee may apply, and the Tribunal may after hearing direct forthwith redemption with principal and interest due. (correct answer)
4. Only a majority of debenture-holders may apply, and the Tribunal must order liquidation.

Answer: C — Any or all debenture-holders or the trustee may apply, and the Tribunal may after hearing direct forthwith redemption with principal and interest due.

Explanation. Where a company fails to redeem debentures on maturity or fails to pay interest when due, Section 71(10) permits an application by any or all debenture-holders or by the debenture trustee. After hearing the parties concerned, the Tribunal may direct the company to redeem the debentures forthwith and pay the principal and interest due. The provision does not require a majority application or make liquidation automatic.

Where it goes wrong. Confusing the Tribunal's power to order immediate redemption under Section 71(10) with its power to restrict further liabilities under Section 71(9).

Authority. Section 71(10), Companies Act, 2013