Section 44 of Companies Act – Nature of shares or debentures. “The shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company”.

An Examination of Section 44 of Companies Act 2013.

The Section 44 of Companies Act 2013 emphasises on three things namely: –

Shares
Debenture, and
Other Interest

Shares

These stand for a portion of the company’s ownership. Different kinds of shares, such as equity and preference, have different rights and benefits.

Debenture

In essence, these are investor-provided loans to the business; holders of debentures are creditors, not owners, with particular rights to repayment and interest.

Other Interest:

This could include products that give investors various possibilities to get ownership or a semblance of ownership in the business, such as convertible notes or stock options.

The shares, debenture or other interest of any member in a company shall be treated as movable property and its transfer should be in accordance with the manner provided under articles of the company under section 5 of this Act.

Evaluative Analysis of Section 44 of Companies Act

The section mentions two keywords for the transfer as a movable property. Both the keywords are discussed in depth for the understanding of the concept.

Share:

The Section 2(84) of The Companies Act 2013 defines shares. “Share” means a share in the share capital of a company and includes stock. It can also be said that ‘share is just part of securities’. Shares are issued by the companies to raise money from investors who tend to invest their money.

Debenture:

The section 2(30) of The Companies Act 2013 defines “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;

[Provided that-

the instruments referred to in Chapter III-D of the Reserve Bank of India Act,1934 (2 of 1934); and

such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company,

shall not be treated as debenture;]

Debenture is an instrument of debt that companies issue under their common seal. In short, the Debenture are issued to the public as a contract of repayment of money borrowed from them. The debenture is a specified sum of money for a fixed period of time and fixed interest rate.

There are various kinds of Debentures issued by a company namely:

2.1) Secured Debentures:

Secured against an asset of company. Debenture holders can recover money from the mortgaged property.

2.2) Unsecured Debentures:

Debentures that are unsecured and do not carry charge on fixed assets of company. Debenture holders cannot recover money by selling assets of the company.

2.3) Convertible Debentures:

Debentures which get converted into equity shares on expiry of fixed period of time. The ratio of conversion and the period of conversion is specified at the time of issue of debentures.

2.4) Non-Convertible Debentures:

These types of debentures do not get converted into equity shares. They always remain with creditors of the company.

2.5) Registered Debentures:

Debentures which are recorded in the register of debenture holders of the company. These can be transferred only through a regular instrument of transfer.

2.6) Bearer Debenture:

Those type of debenture which are transferable by mere delivery are regarded as bearer debenture.

2.7) First Debenture:

These are those debentures which are repaid before any other debenture has been paid.

2.8) Second Debenture:

These are the debentures that are paid only when the first debenture has been paid back.

The Section 2(30) of the Act explicitly provides for the instruments that should not be treated as debenture under this Act. They are expressly:

the instruments referred to in Chapter III-D of the Reserve Bank of India Act,1934 (2 of 1934).
such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company.

Transferability: The Nuts and Bolts:

The transfer of shares means voluntary transfer of shares by a member of a company in favor of another person. Section 44 empowers companies to set their own rules in their articles. Common methods of transfer include:

Direct transfer:

You may follow the guidelines in the articles to sell your shares or debentures to another individual directly.

Transfer through the stock exchange:

For listed companies, shares can be bought and sold on stock exchanges like the NSE or BSE.

Transmission:

According to the articles of incorporation and succession rules, shares or debentures of a deceased shareholder may be distributed to their legal heirs.

In the case of Life Insurance corporation of India V. Escorts Ltd. & Ors on 19 December, 1985, the Supreme Court ruled that the transfer of a company’s shares to a nominee of a shareholder is lawful & acquires all of the rights & advantage associated with those shares.

The Supreme Court also provided a few rights to the investors;

To benefit from the company’s profit in forms of individuals.
To seek remedy from the court in case of abuse & mismanagement.

Ingredients required for Transfer of shares [under Section 44 of Companies Act]

Share Certificate:

The Section 46(1) of the Companies Act,2013 provides for the definition of share certificate. “A certificate, ¹[issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary], specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares.”

In simple words, a share certificate is a written document that serves as legal proof of the ownership of the number of shares a person carry on behalf of the company signed by either:

Common seal of the company
Two directors
One director and one Company secretary

The company can issue a share certificate in either physical or, electronic form. The effect of share certificates can be described as:

Establishes legal ownership
Transfer of ownership
Shareholder participation
Shareholder identity
Legitimacy in trading

Form SH4:

The Ministry of Corporate Affairs (MCA), Government of India, has introduced new share transfer Form SH4 and has also prescribed the format of the same.

According to Section 56 of the Companies Act of 2013, a transfer cannot be registered by the company unless the appropriate instrument of transfer, a SH4 duly stamped, dated, and executed by the transferor or the transferee, and giving details of the transferee’s name, address, and occupation (if any), is delivered to the company by the transferor or the transferee within sixty days of the date of execution, together with the certificate relating to the securities, or in the absence of such a certificate, along with the letter of allotment of securities.

Transferor of Share:

A person who possesses a share certificate issued by the corporation and is willing to transfer ownership to another individual is referred to as a transferor of shares.

Transferee of Share:

A person willing to purchase the number of shares from the transferor is referred to as transferee of the share. After successful transfer of shares he will be the owner of those number of shares and his name will be mentioned in the register of the company.

The transfer of shares is governed under the Act through various steps. Some of which are as discussed:

Stamp duty on transfer deed:

The transfer deed should require stamps in accordance with the Indian Stamp Act and the stamp duty notification in effect in the state in question. Stamp duty on transfer of deed is 25 paise for every Rs. 100 of the value of the share or art thereof.

Time for issuance of certificate:

The company shall provide a certificate for transfer of shares within one month application for registration of transfer of shares.

Period for depositing transfer deed:

The transfer deed ‘FORM SH4’ shall be submitted to the company within 60 days of its execution by transferor or transferee.

Important Caveats:

Companies can be flexible when establishing transfer policies, however they cannot go against these guidelines:

Fairness:

All shareholders and holders of debentures must be treated fairly and equally under the rules.

Transparency:

The transfer process needs to be readily available and properly explained.

Compliance with other laws:

The transfer procedure cannot be in violation of any other relevant laws or rules.

Conclusion: Beyond the Basics

The section 44 of Companies Act 2013 collectively describes the shares and its types along with debenture with various kinds of debenture that a company possess. These all has far-reaching implications for different stakeholders:

Companies: This enables them to customize their ownership structure and draw in various kinds of investors.
Investors: It facilitates their comprehension of the conditions surrounding their investment and the simplicity of transferring their ownership.
Regulators: In addition to safeguarding investor interests and fostering a thriving market, they make sure that fair and transparent procedures are followed.

FAQs

Q1) What are the natures of shares?

These stand for a portion of the company’s ownership. Different kinds of shares, such as equity and preference, have different rights and benefits.

Q2) What is the nature of shares or debentures in Section 44 of Companies Act?

The nature of shares or debentures in section 44 of the Act is movable and transferable in accordance with the article of association.

Q3) What are the 2 types of shares?

The two types of shares are:

Equity shares
Preference

Q4) What is the nature of issue of shares?

The public buys the shares from the company and in return gets the number of shares issued against his name. The company also raises funds by the way of issue of shares.

Q5) What is the issue of debentures?

When the company gets loan from the investors, the company in return provides a certificate under the seal of the company to acknowledge the debt. This is known as issue of debenture. It is similar to the process of issue of share.

Q6) What is the nature of share certificate?

A share certificate is a written document that serves as legal proof of the ownership of the number of shares a person carry on behalf of the company signed by either:

Common seal of the company
Two directors
One director and one Company secretary

Q7) What is the nature of debentures in company law?

The debenture given by the company to the debenture holder is of the nature of debt.

Q8) What is difference between stock and share?

The stock is the partial ownership of the stock holder in multiple companies however the share is the single unit of ownership in a company.

Aayush Aman

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