Rule 1Short title and commencement
- The Rules are the Companies (Share Capital and Debentures) Rules, 2014.
- They came into force on 1 April 2014.
Finin2minCompanies Act Rules Master Series 03
Share Capital, Preference Shares,
Buy-back and Debentures
A professional rulebook covering differential rights, physical certificates, sweat equity, ESOPs, rights and preferential issues, preference redemption, transfers, buy-back, secured debentures, DRR, maturity funds and nominations.
20 Rule Entries
Rules 1-19 including Rule 12A
Rules 1-19 including Rule 12A
74% DVR Cap
Total voting-power test
Total voting-power test
10% DRR
Other unlisted companies
Other unlisted companies
15% Maturity Fund
Applicable debenture classes by 30 April
Applicable debenture classes by 30 April
Executive architecture
Six transaction systems in one rulebook
Equity rights
Ordinary and differential equity, capital alterations, class rights and voting design.
Employee capital
Sweat equity, ESOP and employee-benefit trust routes with different eligibility and timing.
Capital raising
Rights, preferential, bonus and preference issues, with valuation and allotment controls.
Ownership records
Certificates, transfer, duplicate issue, custody, registers and nomination.
Capital return
Preference redemption, reduction and buy-back with solvency and creditor safeguards.
Corporate debt
Secured/convertible debentures, trustee, charge, trust deed, DRR and maturity funding.
Decision map
Choose the capital transaction first
Route discipline: one approval cannot be reused to bypass another route. Sweat equity, ESOP, preferential allotment, bonus, buy-back and reduction have different legal effects.
Act gateway
Sections 43-72 - working map
| Section cluster | Subject | Control focus |
|---|---|---|
| 43-48 | Kinds of capital, voting, calls, alteration of rights | Rights attached to each class, voting-power design and class-consent route. |
| 49-59 | Uniform calls, dividend proportion, premium/discount, sweat, preference, transfer and rectification | Capital maintenance, certificates/demat, transfer evidence and Tribunal remedies. |
| 60-65 | Publication, alteration, notice, bonus and reserve capital | Authorised capital, rights offer and SH-7/MCA master-data controls. |
| 66 | Reduction of share capital | Special resolution, Tribunal confirmation, creditor protection and accounting treatment. |
| 67-70 | Financial assistance and buy-back | Permitted employee scheme, size, solvency, funding, CRR, prohibitions and post-buy-back gap. |
| 71 | Debentures | Conversion approval, no voting rights, trustee, charge, DRR/maturity funds and remedies. |
| 72 | Nomination | Nomination, variation, minor and transmission interface. |
Current operative register
Companies (Share Capital and Debentures) Rules
Rule 2Definitions
- Defines Act, Annexure, fees, form/e-form, Regional Director and section.
- Undefined expressions follow the Act and the Companies (Specification of Definitions Details) Rules.
Rule 3Application
- Applies to unlisted public companies and private companies.
- Applies to listed companies only so far as it does not contradict or conflict with SEBI regulations.
Rule 4Equity shares with differential rights
- Articles authorisation and member approval are required; listed issuers apply the applicable postal-ballot and SEBI framework.
- Voting power attached to differential-right shares cannot exceed 74% of total voting power.
- The former three-year distributable-profit condition was removed in 2019.
- Filing/default, regulatory-history, explanatory-statement, Board-report and register controls remain.
- Existing ordinary equity cannot be converted into differential-right equity or vice versa.
Rule 5Physical share certificates
- Board resolution, controlled execution and SH-1 form requirements apply where securities are not held in demat.
- Signing/common-seal rules differ for ordinary companies and OPCs.
- Certificate particulars must be entered in the register of members.
Rule 6Renewed and duplicate share certificates
- Damaged/consolidated certificates require surrender and replacement markings.
- Lost/destroyed certificates require Board consent, evidence, indemnity and permitted fee.
- Issue timelines: three months for unlisted companies and 45 days for listed companies after complete documents.
- Maintain permanent SH-2 register.
Rule 7Custody of certificate forms and records
- Blank forms are Board-authorised, consecutively numbered and securely controlled.
- Certificate books and supporting records are preserved for the prescribed period.
- Surrendered certificates are cancelled and destroyed only through the authorised process.
Rule 8Sweat equity shares
- Unlisted-company issue requires special resolution and detailed explanatory statement.
- Eligible directors/employees receive shares for know-how, intellectual-property rights or value addition.
- Special resolution remains valid for allotment for 12 months.
- Annual limit: 15% of existing paid-up equity capital or issue value of Rs. 5 crore, whichever is higher.
- Overall limit: 25%; eligible startup companies may reach 50% during the first 10 years.
- Three-year lock-in, registered-valuer reports, accounting treatment, Board-report disclosure and SH-3 register apply.
Rule 9Issue and redemption of preference shares
- Articles and special resolution are required and no subsisting preference-redemption/dividend default may exist.
- Priority, participation, cumulative status, conversion, voting, redemption, premium and dilution terms are disclosed.
- Redemption follows section 55 funding, full-payment and Capital Redemption Reserve controls.
Rule 10Infrastructure preference shares
- Qualifying infrastructure-project companies may issue preference shares for more than 20 years but not more than 30 years.
- At least 10% is redeemed annually from year 21 or earlier at the holder's option, proportionately.
Rule 11Instrument of transfer
- Physical transfer uses SH-4 and is delivered within 60 days of execution.
- Partly paid securities require SH-5 notice and a two-week no-objection period.
- Current SH-4 includes the FEMA government-approval declaration introduced in 2022.
Rule 12Employee stock options
- Unlisted-company ESOP requires special resolution and detailed scheme disclosures.
- Independent directors are excluded; promoter/promoter-group and over-10% director restrictions apply subject to startup relief.
- Separate approval applies to specified group-company employees and grants at or above 1% of issued capital in a year.
- Minimum vesting is one year, subject to specified merger/substitution relief.
- Options are non-transferable and non-pledgeable; maintain SH-6 and Board-report disclosures.
Rule 12ARights-offer acceptance period
- Offer acceptance period under section 62(1)(a) must be at least seven days.
- The statutory outer period remains 30 days and dispatch must precede opening.
Rule 13Preferential issue
- Articles, special resolution and section 42 compliance apply where relevant.
- Explanatory statement covers objects, number, price, valuation, relevant date, proposed allottees, control change and shareholding.
- Complete allotment within 12 months or obtain fresh approval.
- Unlisted price cannot be below registered-valuer value; non-cash consideration is separately valued and accounted.
Rule 14Bonus shares
- Once the Board announces its recommendation for a bonus issue, the company cannot subsequently withdraw it.
Rule 15Notice of capital alteration
- File SH-7 for relevant section 61 capital alterations, specified government-conversion increases and preference redemption matters.
- Use the current substituted SH-7 webform and instructions.
Rule 16Company money for employee share purchase
- Employee-benefit financing through trustees requires special resolution and prescribed disclosures.
- Listed shares are bought through a recognised stock exchange; unlisted shares require registered-valuer pricing.
- Aggregate company money and shares purchased cannot exceed 5% of paid-up capital and free reserves.
- Trustee eligibility, voting and Board-report controls apply.
Rule 17Buy-back by private and unlisted public companies
- Explanatory statement, SH-8 letter of offer and SH-9 solvency declaration precede dispatch.
- Offer period, proportionate acceptance, verification, separate bank account, payment and extinguishment follow strict timelines.
- Maintain SH-10 and file current SH-11 return with the embedded compliance declaration signed by two directors including MD, if any.
- Borrowed bank/financial-institution funds and proceeds of an earlier issue of the same kind cannot fund the buy-back.
Rule 18Debentures
- Secured tenure, charge coverage, eligible security, trustee and trust-deed controls apply.
- Ordinary secured tenure is up to 10 years; specified infrastructure/finance issuers may use up to 30 years.
- Trust deed is executed in SH-12 within 60 days after allotment for covered issues.
- Current DRR and 15% investment/deposit requirements depend on issuer category and public/private issue status.
- Rupee-denominated bonds issued exclusively to overseas investors receive the specified exception.
Rule 19Nomination
- Use SH-13 for nomination and SH-14 for cancellation/variation.
- Joint holders nominate jointly; the company records the request within two months.
- The nominee may elect registration or transfer on death, subject to the Rule and succession-law interface.
Issue-route comparison
DVR, sweat equity, ESOP, rights, preferential and bonus
| Route | Approval | Valuation/timing | Core restriction |
|---|---|---|---|
| Differential-right equity | Articles + member approval; listed overlay | Model total voting power before issue | DVR voting power cannot exceed 74% of total voting power. |
| Sweat equity | Special resolution | Allot within 12 months; registered valuer; three-year lock-in | 15% or Rs. 5 crore annual limit, overall 25%; qualifying startup 50% for 10 years. |
| ESOP | Special resolution; separate approvals for specified grants | Minimum one-year vesting; exercise after vesting | No independent director; promoter/over-10% director restrictions subject to startup relief. |
| Rights issue | Board issue under section 62(1)(a) | Acceptance open at least 7 and not more than 30 days | Existing-holder entitlement and renunciation rules. |
| Preferential issue | Articles + special resolution + section 42 where applicable | Registered-valuer pricing for unlisted; allot within 12 months | Cannot be used to avoid public, rights, ESOP, sweat or bonus rules. |
| Bonus issue | Articles/member approval where required and Board recommendation | Capitalisation of permitted reserves | Board cannot withdraw after announcing its recommendation. |
Professional method: document eligibility, approval, price, dilution, accounting, tax, FEMA, PAS-3 and register entries for each route separately.
Differential rights
Rule 4 - voting-power design and continuing controls
- Calculate the cap using voting power, not only number of shares.
- Keep the articles, ordinary resolution/postal-ballot route and statutory default/penalty history on file.
- Disclose total shares, rights, price, issue basis, proposed allottees, control effect, diluted EPS and pre/post shareholding.
- Do not convert existing ordinary shares into DVR shares or vice versa.
- Record the differential rights in the register of members and Board report.
Example: Existing ordinary equity carries 26 lakh votes. Proposed founder DVR shares carry 74 lakh votes. DVR voting power is exactly 74% of the 100 lakh total and reaches the statutory ceiling.
Sweat equity versus ESOP
Do not confuse immediate allotment with an option
| Point | Sweat equity | ESOP |
|---|---|---|
| Economic purpose | Know-how, IP rights or value addition. | Future employee participation and retention. |
| Instrument timing | Shares are allotted after approval and valuation. | Option is granted, then vests, then may be exercised into shares. |
| Consideration | Discount or non-cash contribution permitted within law. | Exercise price paid under scheme terms. |
| Lock/vesting | Three-year lock-in. | Minimum one-year vesting, subject to specified relief. |
| Registers | SH-3. | SH-6. |
| Limits | Annual/overall/startup percentage limits. | Scheme disclosures and separate approval for specified grants. |
Certificates and transfer
Physical-security control chain
Board authority->SH-1->Controlled signatures->Register entry->Custody/destruction log
| Event | Form/record | Key deadline or control |
|---|---|---|
| Original certificate | SH-1 / register of members | Board resolution and proper execution. |
| Renewed/duplicate | SH-2 | Three months unlisted; 45 days listed after complete documents. |
| Physical transfer | SH-4 | Deliver within 60 days of execution; stamp, title and FEMA checks. |
| Partly paid transfer | SH-5 | Two-week transferee objection window. |
| Nomination | SH-13 / SH-14 | Record within two months; joint holders nominate jointly. |
Demat interface: Rules 9A and 9B under the Prospectus Rules can block a physical issue or transfer for covered unlisted public and private companies.
Preference shares
Issue terms, redemption and infrastructure exception
- Articles and special resolution are required; no subsisting redemption or dividend default may exist.
- Draft cumulative/non-cumulative, participating/non-participating, convertible/non-convertible, voting, premium and option terms explicitly.
- Ordinary maximum redemption period is 20 years.
- Qualifying infrastructure projects may use more than 20 and up to 30 years, with at least 10% annual redemption from year 21.
- Redemption requires fully paid shares, eligible profits or fresh issue and Capital Redemption Reserve where profits are used.
Example: A 30-year infrastructure preference issue of Rs. 100 crore should provide a minimum Rs. 10 crore redemption each year from year 21 through year 30 unless the holder-option mechanism starts earlier.
Buy-back framework
Section 68 and Rule 17 control matrix
| Control | Requirement |
|---|---|
| Board route | Up to 10% of total paid-up equity capital and free reserves. |
| Member route | Special resolution for the larger route; overall buy-back up to 25% of aggregate paid-up capital and free reserves. |
| Equity annual cap | Equity shares bought back in a financial year cannot exceed 25% of total paid-up equity capital. |
| Leverage | Post-buy-back secured and unsecured debt ordinarily not more than twice paid-up capital and free reserves. |
| Funding | Permitted free reserves, securities premium or proceeds of another kind; not borrowed bank/FI money or proceeds of an earlier issue of the same kind. |
| Documents | SH-8, SH-9, offer process, SH-10 and current SH-11 declaration. |
| Completion | Complete within one year of Board/special resolution; extinguish and destroy securities under the statutory timeline. |
| Fresh issue gap | No fresh issue of same kind for six months after completion, except statutory exceptions. |
Example: Paid-up equity Rs. 100 crore and free reserves Rs. 60 crore. Board-route ceiling is Rs. 16 crore. The 25% equity annual cap is Rs. 25 crore; a larger amount also must remain within the aggregate member-route and debt-ratio limits.
Debenture map
Security, trustee, DRR and maturity funding
Debenture controls
Rule 18 decision matrix
| Area | Working rule | Evidence |
|---|---|---|
| Conversion | Convertible debenture issue requires special resolution under section 71. | Terms, conversion price/method, valuation and member approval. |
| Secured tenure | Ordinarily up to 10 years; specified infrastructure/finance classes up to 30 years. | Issuer-category memo and maturity schedule. |
| Charge | Security sufficient for principal and interest on eligible company/group assets. | Valuation, charge instrument and CHG filings. |
| Trustee | Appoint before covered prospectus/offer; trustee must be independent and consent in writing. | Consent, eligibility declaration and appointment letter. |
| Trust deed | Execute SH-12 within 60 days after allotment for covered issue. | Stamped deed, charge and inspection/copy process. |
| DRR | Other unlisted companies: 10% of outstanding debentures; exemptions depend on issuer/route. | Issuer classification and reserve ledger. |
| 15% fund | Applicable classes invest/deposit by 30 April at least 15% of debentures maturing through next 31 March. | Unencumbered bank/government/trust investments and monthly monitoring. |
Current DRR and investment matrix
2019 and 2020 amendment effect
| Issuer / issue | DRR | 15% investment/deposit |
|---|---|---|
| Banking company or RBI-regulated AIFI | Not required | Not under this matrix |
| Listed company - public issue | Not required | Required by 30 April |
| Listed company - private placement | Not required | Not required under current sub-clause (v) |
| Unlisted NBFC/HFC - private placement | Not required | Not required under current sub-clause (v) |
| Other unlisted company | 10% of outstanding debentures | 15% of next financial-year maturities |
Common error: applying the old 25% DRR rule or applying the 15% maturity fund to every private placement without reading the 2020 narrowing amendment.
Listed-company boundary
Current SEBI overlay
- Listed ESOP and sweat-equity transactions apply the SEBI Share Based Employee Benefits and Sweat Equity Regulations.
- Listed buy-backs apply the SEBI Buy-Back Regulations and exchange/depository process.
- Listed non-convertible securities apply the SEBI NCS Regulations, current master circulars, LODR and stock-exchange requirements.
- Rule 3 applies the MCA Rules only so far as they do not conflict with SEBI.
Decision-date verification: Use the current consolidated SEBI regulation and exchange circulars; listed-company rules can change without an MCA amendment.
Forms and registers
Primary document map
| Form / record | Purpose | Control |
|---|---|---|
| SH-1 | Share certificate | Physical securities only; controlled execution. |
| SH-2 | Renewed and duplicate certificate register | Permanent preservation. |
| SH-3 | Sweat-equity register | Immediate allotment particulars. |
| SH-4 | Transfer instrument | 60-day delivery plus stamp/FEMA checks. |
| SH-5 | Notice for partly paid transfer | Two-week objection period. |
| SH-6 | Employee-stock-option register | Grant, vesting and exercise trail. |
| SH-7 | Notice of capital alteration | Use current webform and attachments. |
| SH-8 | Buy-back letter of offer | File before dispatch. |
| SH-9 | Declaration of solvency | Board/director certification and filing. |
| SH-10 | Buy-back register | Securities accepted, paid and extinguished. |
| SH-11 | Buy-back return and current director declaration | Post-completion filing. |
| SH-12 | Debenture trust deed | Covered secured issue. |
| SH-13 / SH-14 | Nomination / cancellation-variation | Register and holder confirmation. |
| PAS-3 | Return of allotment | Issue-specific deadline and allottee list. |
| MGT-14 | Resolution filing where applicable | Test company-specific exemptions. |
| CHG forms | Creation/modification/satisfaction of debenture charge | Coordinate with trustee and trust deed. |
Practical cases
Fourteen professional scenarios
1. DVR cap: Proposed voting rights produce 75% DVR voting power. The issue fails even if DVR shares are less than 74% of the share count.
2. Sweat-equity annual limit: Existing equity Rs. 20 crore. Annual limit is the higher of Rs. 3 crore and Rs. 5 crore, therefore Rs. 5 crore.
3. Startup sweat: A nine-year qualifying startup may use the 50% overall ceiling; the status and notification definition must be documented.
4. ESOP grant: A grant is not an allotment. Shares arise only after vesting, exercise and allotment.
5. Six-day rights issue: The acceptance period is below the seven-day minimum and is invalid.
6. Preferential delay: Allotment after 12 months needs fresh member approval.
7. Bonus withdrawal: Board cannot withdraw after announcing its recommendation.
8. Duplicate certificate: Issue without Board consent, indemnity and SH-2 entry is a fraud/control failure.
9. FEMA transfer: SH-4 cannot substitute for required Government approval under foreign-investment rules.
10. Preference default: A company with subsisting redemption default cannot issue a fresh preference series under Rule 9.
11. Board buy-back: Proposed amount above 10% requires the special-resolution route and must still satisfy every 25% and leverage limit.
12. Listed private NCD: No DRR and no Rule 18(7)(b)(v) 15% fund under the current matrix, subject to SEBI and issue terms.
13. Other unlisted company: Outstanding debentures Rs. 100 crore and next-year maturities Rs. 40 crore require Rs. 10 crore DRR and Rs. 6 crore investment/deposit.
14. Trustee delay: Executing SH-12 after 60 days from allotment breaches the trust-deed timeline.
Audit and secretarial checklist
Capital transaction evidence pack
Issue and ownership
- Articles and route-classification memo
- Board/member approvals
- Registered-valuer report
- Offer notice and explanatory statement
- PAS-3 and share/debenture registers
- Demat/ISIN and FEMA/stamp review
Return and debt
- Buy-back limit and leverage calculation
- SH-8/9/10/11 and bank trail
- Charge and trustee eligibility
- SH-12 and debenture-holder communications
- DRR and 30 April investment evidence
- Redemption and interest calendar
Immediate red flags
| Red flag | Why it matters |
|---|---|
| DVR measured by share count | Rule 4 cap is voting power. |
| Sweat equity described as ESOP | Eligibility, valuation, timing and accounting differ. |
| Buy-back funded by same-kind issue proceeds | Expressly prohibited. |
| Old 25% DRR matrix used | 2019 amendment changed the issuer categories and percentage. |
| 15% debenture fund pledged | Amount must be unencumbered and reserved for redemption. |
Finin2min Q&A
Quick answers
Is the DVR ceiling 74% of shares?
No. It is 74% of total voting power.
No. It is 74% of total voting power.
What is the sweat-equity annual ceiling?
15% of existing paid-up equity capital or issue value of Rs. 5 crore, whichever is higher, subject to overall limits.
15% of existing paid-up equity capital or issue value of Rs. 5 crore, whichever is higher, subject to overall limits.
Can a rights offer remain open for six days?
No. Rule 12A requires at least seven days.
No. Rule 12A requires at least seven days.
Can a Board-recommended bonus issue be withdrawn?
No.
No.
Does every company create DRR?
No. The answer depends on issuer category and issue route.
No. The answer depends on issuer category and issue route.
Primary-source and update control
Companies Act, 2013 - sections 43-72, consolidated India Code text.
Companies (Share Capital and Debentures) Rules, 2014 and amendments dated 16 August 2019, 5 June 2020, 11 February 2021 and 4 May 2022.
Current MCA webforms and instruction kits for SH/PAS/CHG filings, including later form substitutions.
Current SEBI Buy-Back, Share Based Employee Benefits and Sweat Equity, and Non-Convertible Securities regulations for listed entities.
Professional-use note: Apply valuation, accounting, tax, stamp duty, FEMA, sector regulation, listing and transaction-specific facts before implementation.