Companies Act Section 62 — Further issue of share capital

CHAPTER IV SHARE CAPITAL AND DEBENTURES

Commercial / Corporate

Summary

Sub-section (1) sets out the main rule: if a company that already has share capital wants to increase its subscribed capital by issuing more shares, those new shares must first be offered in one of three ways.

Under clause (a) of sub-section (1), the shares must be offered to existing equity shareholders in proportion to their paid-up share capital, by sending them a letter of offer. This offer is subject to three conditions. First, under sub-clause (i), the offer must be made by a notice that states the number of shares offered and gives a time limit of not less than fifteen days (or such lesser number of days as may be prescribed) and not more than thirty days from the date of the offer, within which the offer, if not accepted, is treated as declined. Second, under sub-clause (ii), unless the company's articles say otherwise, the offer is deemed to include a right for the shareholder to renounce the shares offered to him, or any of them, in favour of any other person, and the notice must state this right. Third, under sub-clause (iii), after the time limit in the notice expires, or if the person gives earlier intimation that he declines the offer, the Board of Directors may dispose of the shares in a manner that is not disadvantageous to the shareholders and the company.

Under clause (b) of sub-section (1), the shares may be offered to employees under an employees' stock option scheme, but this requires a special resolution passed by the company and is subject to such conditions as may be prescribed.

Under clause (c) of sub-section (1), the shares may be offered to any persons, if authorised by a special resolution, whether or not those persons include the ones referred to in clause (a) or clause (b). This can be for cash or for a consideration other than cash, but the price of such shares must be determined by the valuation report of a registered valuer, subject to compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed.

Sub-section (2) requires that the notice referred to in sub-clause (i) of clause (a) of sub-section (1) must be dispatched through registered post, speed post, electronic mode, courier, or any other mode that provides proof of delivery, to all existing shareholders at least three days before the opening of the issue.

Sub-section (3) states that this section does not apply to an increase in subscribed capital caused by the exercise of an option attached to debentures issued or loans raised by the company, where that option allows conversion of those debentures or loans into shares. However, this exemption only applies if the terms of issue of such debentures or loans containing the option were approved by a special resolution passed by the company in general meeting before the issue of the debentures or the raising of the loan.

Sub-section (4) provides an exception to sub-section (3). Where debentures have been issued or a loan has been obtained from any Government, and that Government considers it necessary in the public interest, it may by order direct that such debentures or loans, or any part of them, be converted into shares on terms and conditions that appear reasonable to the Government, even if the original terms of issue did not include an option for conversion. However, if the company does not accept the terms and conditions of such conversion, it may, within sixty days from the date of communication of the order, appeal to the Tribunal, which shall hear the company and the Government and pass such order as it deems fit.

Sub-section (5) requires that, when determining the terms and conditions of conversion under sub-section (4), the Government must have due regard to the financial position of the company, the terms of issue of the debentures or loans, the rate of interest payable on them, and such other matters as it may consider necessary.

Sub-section (6) deals with the effect of a Government order made under sub-section (4) directing conversion of debentures or loans into shares. Where no appeal has been preferred to the Tribunal under sub-section (4), or where such appeal has been dismissed, the memorandum of the company shall stand altered if the order has the effect of increasing the authorised share capital. The authorised share capital shall then stand increased by an amount equal to the value of the shares into which such debentures or loans, or part thereof, have been converted.

Official Text

(1) Where at any time, a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered—

(a) to persons who, at the date of the offer, are holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by sending a letter of offer subject to the following conditions, namely:—

(i) the offer shall be made by notice specifying the number of shares offered and limiting a time not being less than fifteen days 1[or such lesser number of days as may be prescribed] and not exceeding thirty days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined;

(ii) unless the articles of the company otherwise provide, the offer aforesaid shall be deemed to include a right exercisable by the person concerned to renounce the shares offered to him or any of them in favour of any other person; and the notice referred to in clause (i) shall contain a statement of this right;

(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier intimation from the person to whom such notice is given that he declines to accept the shares offered, the Board of Directors may dispose of them in such manner which is not dis-advantageous to the share holders and the company;

(b) to employees under a scheme of employees’ stock option, subject to special resolution passed by company and subject to such conditions as may be prescribed; or

(c) to any persons, if it is authorised by a special resolution, whether or not those persons include the persons referred to in clause (a) or clause (b), either for cash or for a consideration other than cash, if the price of such shares is determined by the valuation report 2[of a registered valuer, subject to the compliance with the applicable provisions of Chapter III and any other conditions as may be prescribed]. 3[

(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be dispatched through registered post or speed post or through electronic mode or courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue.]

(3) Nothing in this section shall apply to the increase of the subscribed capital of a company caused by the exercise of an option as a term attached to the debentures issued or loan raised by the company to convert such debentures or loans into shares in the company:

Provided that the terms of issue of such debentures or loan containing such an option have been approved before the issue of such debentures or the raising of loan by a special resolution passed by the company in general meeting.

(4) Notwithstanding anything contained in sub-section (3), where any debentures have been issued, or loan has been obtained from any Government by a company, and if that Government considers it necessary in the public interest so to do, it may, by order, direct that such debentures or loans or any part thereof shall be converted into shares in the company on such terms and conditions as appear to the Government to be reasonable in the circumstances of the case even if terms of the issue of such debentures or the raising of such loans do not include a term for providing for an option for such conversion:

Provided that where the terms and conditions of such conversion are not acceptable to the company, it may, within sixty days from the date of communication of such order, appeal to the Tribunal which shall after hearing the company and the Government pass such order as it deems fit.

(5) In determining the terms and conditions of conversion under sub-section (4), the Government shall have due regard to the financial position of the company, the terms of issue of debentures or loans, as the case may be, the rate of interest payable on such debentures or loans and such other matters as it may consider necessary.

(6) Where the Government has, by an order made under sub-section (4), directed that any debenture or loan or any part thereof shall be converted into shares in a company and where no appeal has been preferred to the Tribunal under sub-section (4) or where such appeal has been dismissed, the memorandum of such company shall, where such order has the effect of increasing the authorised share capital of the company, stand altered and the authorised share capital of such company shall stand increased by an amount equal to the amount of the value of shares which such debentures or loans or part thereof has been converted into.