company law
Surrender of shares refers to the process in which an existing shareholder voluntarily returns shares to the company. This action typically occurs due to the shareholder’s inability to pay the outstanding amounts required upon future calls for those shares. By surrendering shares, the shareholder is relieved of the obligation to pay the remaining amounts associated with holding those shares. The outcome of a share surrender is akin to share forfeiture, with both resulting in the non-allocation of shares. However, it is important to note that share forfeiture is governed by the Companies Act (“Act”), whereas surrender lacks specific statutory regulations. The authority for a company to accept share surrenders originates from its Articles of Association (AOA), which empower company directors to facilitate this process. Since surrendering shares involves no consideration in exchange, it contrasts with typical transactions for shares. Although English jurisprudence provides a basis for understanding share surrender, Indian law currently lacks comprehensive statutory and precedential regulations on this matter.
Several key court rulings provide insight into the legality of share surrender:
Madras Court In Re: Mirza Ahmed Namazi (1924): The court ruled that a company can only accept a share surrender under the same conditions and limitations required for share forfeiture.
Commissioner of Income-Tax v. Jasrup Baijnath and Sons (P.) Ltd. (1969): The ruling clarified that court approval is not necessary for the surrender of shares, which led to a reduction of share capital.
Vasant Investment Corporation Ltd. (1978): This decision recognized the validity of share surrender as a means to avoid the formalities associated with share forfeiture.
Securities Appellate Tribunal in Khoday India Ltd. and Others vs. Sebi (2019): The tribunal distinguished share surrender from a "buy-back," which is prohibited under Section 67 of the Act.
ICAP IL (India) (P) Ltd. (2021): The tribunal ruled that a special resolution from the members is required for reducing capital through share surrender, which must be approved by the NCLT.
Allianz Biosciences Private Limited (2018): The tribunal determined that stamp duty must be paid upon the surrender of shares.
In India, the surrender of shares is a nuanced area of corporate governance primarily governed by the Articles of Association as specified under the Companies Act, 2013. Despite the absence of specific provisions in the Act, surrendering shares is treated similarly to forfeiture when approved by the Board of Directors. This process allows companies to manage their share capital more effectively, particularly when shares have been issued improperly or during restructuring efforts. Legal clarity and compliance with procedural requirements are essential to minimize disputes and ensure that the share surrender process is transparent and compliant with the law. Surrendered shares may be treated as forfeited in situations where no surrender occurs. Additionally, these shares can potentially be reissued to other shareholders, thereby avoiding the complex legal ramifications associated with capital reduction. Importantly, the act of surrendering shares does not equate to either the issuance or redemption of those shares but can influence the overall reduction of share capital.