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The Companies (Share Capital and Debentures) Rules, 2014 have been amended vide the Companies (Share Capital and Debentures) Third Amendment Rules, 2016 dated 19 July 2016, to bring major changes with respect to issuance of equity shares with differential voting rights (DVRs), partly-paid up securities, conversion price for convertible securities, security for secured debentures, debenture redemption reserve, and holidays for Start-ups.

Following are the key changes:

Cure period introduced for issuance of DVRs by defaulter companies

A company which has defaulted in following can issue equity shares with DVRs upon expiry of 5 years from which such default was made good:

  1. Payment of the dividend on preference shares; or
  2. Repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon;
  3. Payment of dues with respect to statutory payments relating to its employees to any authority; or
  4. Crediting the amount in Investor Education and Protection Fund to the Central Government.

ELP Comment

Earlier public companies were prohibited from issuing equity shares with DVRs if they had defaulted in any of the above-mentioned liabilities.

Preferential Issues of Shares

i. Issuance of Partly-paid up Securities allowed

Preferential issues of shares can be made for partly-paid up shares as well. The prohibition of securities to be allotted by way of preferential offer to be made fully paid up at the time of their allotment has been deleted.

ELP Comment

The Companies Act, 1956, did not restrict the issuance of partly-paid up securities. However, prior to this amendment, the Companies Act, 2013 read with the Rules required securities to be allotted by way of preferential offer to be made fully paid up at the time of their allotment. This restricted ability to have partly-paid up shares which continued to remain so post allotment. The aforementioned change will now permit issuance of partly-paid up securities.

ii. Disclosure of upfront conversion price for issuance of Convertible Securities relaxed

In place of the earlier requirement to provide for the conversion price for convertible securities beforehand, now such the conversion price can be determined in following manner, provided the company discloses such manner upfront at the time of offer of such securities:

  1. Upfront at the time when the offer of convertible securities is made, on the basis of valuation report of the registered valuer given at the stage of such offer; or
  2. At the time, which shall not be earlier than 30 days to the date when the holder of convertible security becomes entitled to apply for shares, on the basis of valuation report of the registered valuer given not earlier than 60 days of the date when the holder of convertible security becomes entitled to apply for shares.

ELP Comment

The requirement of an upfront disclosure of conversion price in case of convertible securities had created some problems for investors and companies for preferential allotment of convertible securities. The abovementioned change will relax the requirement of upfront disclosure and will allow breather to companies to raise further capital by way of issuance of convertible instruments.

Disclosure in increase of numbers

A company which does not have share capital is now required to disclose it to ROC in Form No. SH.7 on increase of number of members.

ELP Comment

This move will require the companies which do not have share capital to report increase in number of members to the ROC.

Assets that can be offered as security for secured debentures broadened

Issue of secured debentures can now be secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon. Earlier, the security could have been created only on the properties of assets of the concerned company. In view of this, it is clarified that security can be created on any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise.

ELP Comment

This is a welcome move as companies will now have more options to raise funds by issuance of secured debentures by offering assets or properties of their subsidiaries, holding and associate companies.

Value of Debenture Redemption Reserve (DRR) clarified

The adequacy of DRR has been clarified to mean 25% of the value of the outstanding debentures rather than the value of debentures issued. Further, a company which is planning to redeem debentures before time can transfer any amount in DRR even if such amount exceeds the limit for DRR.

ELP Comment

This change will enable the companies to understand their outstanding liabilities for debentures and the money that is not required for redemption of debentures or for meeting interest payment can now be utilised by the company for other purposes.

Holidays for Start-ups

Start-ups as defined in notification number GSR 180(E) dated 17th February,2016 issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry' Government of India, have been provided with following holidays in case of sweat equity shares and ESOPs:

i. Higher cap for issuance of sweat equity shares for Start-ups for an initial period of 5 years

In order to promote Start-ups, a startup company is allowed to issue sweat equity shares not exceeding 50% of its paid-up share capital upto 5 years from the date of its incorporation or registration as compared to any other company which can issue sweat equity shares not more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of Rs. 5 Crores, whichever is higher, with an overall cap of 25% of the paid up equity capital of the Company at any time.

ii. Broader category of ‘employees’ for ESOPs for Start-ups for an initial period of 5 years

Start-ups can issue ESOPs to following category of persons who are otherwise not eligible for ESOPs in case of any other company:

  1. An employee who is a promoter or a person belonging to the promoter group; or
  2. A director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than ten percent of the outstanding equity shares of the company.

The above holiday is given upto 5 years from the date of its incorporation or registration.

ELP Comment

This move is in furtherance of the Government’s initiative to promote Start-ups, and will help the Start-ups to retain talent/technology to survive the tough completion amongst the Start-ups.

Please find attached the Companies (Share Capital and Debentures) Third Amendment Rules, 2016 dated 19 July 2016.


Disclaimer: The information provided in this update is intended for informational purposes only and does not constitute legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This update is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial/ quasi judicial authorities may not take a position contrary to the views mentioned herein. Should you have any questions, feel free to reach out to us.


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