Surrender of Shares, Right Shares
Surrender of Shares
Surrender of shares means the return of shares by the shareholder to the company for cancellation. Holder in this case voluntarily abandons all his shares in favour of the company. A mere refusal to take up newly issued shares, to which a shareholder is entitled to, is not a surrender of shares. The power to accept surrender of shares cannot be exercised by a company unless expressly given by the Articles of Association.
But no shares can, in any case, be surrendered to the company in consideration of the payment of money or money’s worth by the company. Such a surrender shall be ultra-vires the company since it would amount to purchase by the company of its own shares. There are only two cases where surrender of shares will be valid provided its acceptance by the company is authorised by the Articles of Association—
(i) When shares are surrendered in exchange of the new shares of the same nominal value. There would be no reduction of share capital in such a case; and
(ii) When shares are surrendered as a short cut to forfeiture of shares when all the circumstances for forfeiture have arisen. Reduction of capital in such a case shall be valid.
Provisions in the articles, for the acceptance of surrender of shares in all other cases except the above two, will be void.
A member validly surrendering his shares to the company can nevertheless be held liable as a list B contributory in the event of winding up of the company within twelve months of his surrender of shares. Court may order for the restoration of the plaintiff’s name in the Register of Members after lapse of any number of years if the surrender of shares is proved to be illegal and provided that the shares have not been reissued in the meantime or otherwise dealt with by the company.
The companies act does not provide for surrender of shares. Shares are said to be surrendered when they are voluntarily given up. The articles of a company may authorize the directors to accept surrender of shares. Surrender of shares is valid where it is done to relive the company from going through the formality of forfeiture of shares and the shareholder is willing to surrender the shares. A surrender and a forfeiture have practically the same effect, the only difference being that the former is done with the assent of the shareholder while the latter is done at the instance of the company.
A surrender of shares will be void if it amounts to a purchase of shares by the company or if it is accepted for the purpose of relieving a member of his liabilities. Every surrender of shares whether fully paid-up or not, involves a reduction of capital which is unlawful except when sanctioned by the court. But, fully paid shares can be surrendered without leave of the court provided the surrender does be surrendered without leave of the court provided the surrender does not involve the reduction of capital i.e., in exchange for other shares of the same nominal value.
A person ceases to be a member of the company on a valid surrender of shares. But he shall be liable as a contributory as a past member of the company if it is wound up within twelve months of his surrendering his shares. Shares which have been validly surrendered can be reissued in the same way as forfeited shares.
Right shares are the shares that are issued by a company for its existing shareholders. The existing shareholders have their right to subscribe to these shares unless some special rights reserve them for some other persons.
Right shares can only be issued after two years of the formation of the country or after one year of the first issue of the shares whichever is earlier, as per the Section 81 of Indian Companies Act. The right shares are usually issued in the ratio of the equity shares held by the existing shareholders. The Right shares are normally issued with 15 days’ notice and cannot be opened more than 60 days as per the SEBI guidelines.
The Benefits of Right Shares are listed below
- Greater control on the existing shareholders.
- Increase in the value of shares and hence no loss of existing shareholders.
- Increases company goodwill and brand perception.
- There is no cost involved with the issuance of the shares.
- Company has easy access to any capital required at any point of time.
- The distribution technique involved with right shares is more scientific.
The Disadvantages of the Right Shares include
- The dilution of the value of the shares due to increased number of shares.
- It offers only a temporary solution to any management problem but not a permanent solution to it.
Sometimes in the issuance of right shares, companies work with underwriters (financial institutions, major shareholders etc.) who promise that if the existing shareholders do not buy the share offered to them, they will buy them.