Companies Act Section 238

Companies Act, Section 238: Registration of Offer of Schemes Involving Transfer of Shares

Section 238 of the Companies Act, 2013 lays down the procedural and regulatory requirements for the registration of offers involving the transfer of shares from a transferor company to a transferee company under the scheme or contract contemplated in Section 235. This provision aims to ensure that such offers are made in a transparent, well-informed, and fair manner, protecting the interests of shareholders and ensuring compliance with the law.

This section primarily governs the disclosure and registration process for circulars and communications relating to such offers and imposes penalties for non-compliance.

1. Requirements for Offer Circulars in Share Transfer Schemes

Where a scheme or contract for the acquisition or transfer of shares under Section 235 is proposed particularly where one company (transferee) seeks to acquire shares of another company (transferor) certain documentation and formalities must be followed.

These include the following key requirements:

(a) Information Disclosure in the Offer Circular

Every circular that contains the offer and includes a recommendation by the directors of the transferor company to its members (i.e., shareholders) to accept the offer must be:

Accompanied by prescribed information,
Prepared in a format and manner prescribed by the relevant rules, and
Designed to provide the shareholders with sufficient and accurate information to make an informed decision about the offer.
This clause mandates transparency and clarity so that shareholders are not misled or influenced without access to relevant facts.

(b) Statement Regarding Cash Availability

Every such offer circular must also include a statement made by or on behalf of the transferee company declaring the steps it has taken to ensure that the necessary cash resources will be available for making payments to shareholders if the offer is accepted.

This requirement is designed to:

Assure shareholders that the offer is financially backed,
Prevent default in payments once the transfer is executed, and
Demonstrate the financial credibility and preparedness of the transferee company.
(c) Mandatory Registration of Circular with the Registrar

Every circular referred to in clauses (a) and (b) must be presented to the Registrar of Companies (RoC) for registration.

Key condition:

No such circular can be issued to the shareholders until it is formally registered with the RoC.
This mechanism serves as a regulatory checkpoint to prevent the dissemination of misleading, incomplete, or deceptive circulars that could negatively impact shareholders’ decisions.

Proviso- Power of Registrar to Refuse Registration

The Registrar has the power to refuse registration of any such circular if:

It fails to contain the information required under clause (a), or
The information is presented in a way that is likely to give a false impression or mislead shareholders.
In such cases:

The Registrar must record the reasons for refusal in writing, and Communicate the refusal to the concerned parties within thirty days from the date of the application.
This adds a level of oversight and prevents the misuse of corporate communication tools.

2. Appeal Against Registrar's Refusal

If the Registrar refuses to register a circular, the aggrieved party (e.g., the company or its directors) has the right to appeal to the National Company Law Tribunal (NCLT).

Key point:

The appeal must challenge the Registrar’s refusal under Subsection (1), and the NCLT will decide whether the circular should be registered or not.
This appellate remedy ensures that there is judicial oversight over administrative decisions and provides a channel for redressal if the Registrar’s decision is considered arbitrary or incorrect.

3. Penalty for Non-Registration of Circular

Any director who issues a circular regarding the offer of share transfer without first ensuring it has been registered with the Registrar, as required under clause (c) of Subsection (1), will be subject to a financial penalty.

As per the provision:

Such a director shall be liable to a penalty of ?1,00,000 (one lakh rupees).
This provision enforces individual accountability on directors and deters non-compliance by making it a punishable lapse.