Companies Act Section 62

Companies Act Section 62: Process for Further Issue of Share Capital

1. Overview of Additional Share Capital Issuance

Section 62 of the Companies Act provides a comprehensive framework for companies with share capital seeking to increase their subscribed capital by issuing additional shares. 

This section ensures that the issuance process maintains shareholder interests and transparency, while also offering options for issuing shares to existing shareholders, employees, or external persons. 

2. Rights Issue to Existing Equity Shareholders

When a company decides to issue additional shares, the first priority is to offer these shares to existing equity shareholders. 

This offer is made in proportion to their current shareholding, as closely as possible, based on the paid-up share capital they already hold. 

Conditions of the Offer to Existing Shareholders

The offer to existing shareholders is governed by specific terms to ensure fairness and clarity. These terms include:

Notice Requirements: 

The company must send a notice of the offer to each eligible shareholder. This notice should specify the number of shares offered and the timeframe within which the offer must be accepted or will otherwise be deemed declined. 

This timeframe cannot be less than fifteen days (or shorter if prescribed by specific regulations) and not exceed thirty days from the date of the offer.   

Right of Renunciation:

If the company's articles of association permit, each shareholder has the right to renounce their shares, either fully or partially, in favor of another person. The notice must clearly communicate this right of renunciation to the shareholders.

Handling Declined Shares: 

If shareholders do not accept the shares within the specified period or decline the offer early, the Board of Directors may allocate these shares in a way that is not disadvantageous to existing shareholders or the company.

3. Offering Shares to Employees via Stock Option Scheme

In addition to the rights issue for existing shareholders, the company may issue shares to its employees under an Employee Stock Option Scheme (ESOP). 

This issue requires a special resolution passed by the company’s general meeting and must adhere to conditions that may be specified under relevant regulations. 

The ESOP offers a way for companies to incentivize and retain employees by giving them a stake in the company’s growth.

4. Issuance of Shares to Specific Persons by Special Resolution

The company may also offer shares to any other persons, whether they include existing shareholders, employees, or external entities. Such an offer must meet these conditions:

Authorization by Special Resolution: 

A special resolution passed in a general meeting must authorize the issuance to the specified persons.   

Valuation Report Requirement: 

When shares are issued to external persons, the valuation of the shares must be determined by a registered valuer. This report must comply with Chapter III requirements and any other relevant conditions.

5. Mode of Dispatch for Notices

The Act mandates that the notice for a rights issue under subsection 1(a)(i) should be sent to existing shareholders using secure, traceable delivery methods, which include registered post, speed post, courier services, or electronic modes that offer proof of delivery. The notice must reach shareholders at least three days before the rights issue opens.

6. Exemptions in the Case of Convertible Debentures or Loans

The requirements under Section 62 are not applicable when a company’s subscribed capital increases due to the exercise of options on convertible debentures or loans that allow for conversion into shares. 

This exemption applies if the terms of such debentures or loans were pre-approved by a special resolution in a general meeting before the issuance of the debentures or the raising of the loan.

7. Conversion of Government-Issued Debentures or Loans

In certain cases, the Government may intervene to convert debentures or loans issued by a company into equity shares. This can happen when:

The Government deems it necessary in the public interest.

An order is issued by the Government to convert all or part of these debentures or loans into shares, even if the original terms did not specify such a conversion option.

Company's Right to Appeal Against Government’s Conversion Terms

If the conversion terms set by the Government are not acceptable to the company, the company has the right to appeal to the Tribunal within sixty days of receiving the conversion order. The Tribunal will hear both the company and the Government before deciding on the appeal.

8. Factors Considered by the Government in Setting Conversion Terms

In determining reasonable conversion terms, the Government must take into account several factors, such as:

The financial position of the company.

Interest rates on the debentures or loans being converted.

The original terms of the issuance of the debentures or loans.

Any other aspects the Government deems relevant.

9. Effect of Government-Mandated Conversion on Company’s Authorized Share Capital

If the Government’s order for conversion increases the company’s authorized share capital, the company’s memorandum is automatically altered to reflect this increase. 

Consequently, the authorized share capital of the company will rise by an amount equal to the value of shares resulting from the conversion of the debentures or loans.