India: Amendment To The Share Capital And Debenture Rules: New Regime And Relaxations


On August 16, 2019 the Ministry of Corporate Affairs introduced the Companies (Share Capital and Debentures) Amendment Rules, 2019[1] (the "Amendment") to further amend the Companies (Share Capital and Debentures) Rules, 2014 (the "Rules") to be read harmoniously with applicable provisions of the Companies Act, 2013 ("Act").

The amendments have been made effective immediately and are introduced with an aim to boost the economy. Salient aspects of the Amendment are discussed below.


2.1. Equity Shares with Differential Rights

Prior to the Amendment, the aggregate voting power in respect of equity shares of a company with differential rights as to dividend, voting or otherwise ("DVRs") was capped at 26% of the post-issue paid up equity share capital issued at any point of time (including DVRs). The said cap has now been increased from 26% to 74%.

Further, the requirement of companies having a consistent track record of having distributable profits for the last 3 years to be able to issue DVRs, has also been done away with.

2.2. Issue of Employee Stock Options

Rule 12 of the Rules prohibits issue of ESOPs to an employee who is a promoter or a director(s) who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of outstanding equity in the company ("Excluded Persons"). An exemption from such prohibition was first introduced vide the circular dated July 19, 2016 issued by the Ministry of Corporate Affairs, allowing 'start-ups' as defined in notification S.R. 180(E), dated February 17, 2016 issued by the Department of Industrial Policy and Promotion ("Start-up notification 1") to issue ESOPs to Excluded Persons.

Thereafter, the Start-up notification 1 was replaced with G.S.R. 501(E), dated May 23, 2017 ("Start-up notification 2"), which was then replaced with G.S.R. 364(E), dated April 11, 2018 ("Start-up notification 3") and altered with G.S.R. 127(E), dated 19th February, 2019 ("Start-up notification 4"). The eligibility criteria for being a start-up was revised and relaxed with each subsequent notification, as described below:

Eligibility criteria for being a start-up


Notification 1


Notification 2


Notification 3


Notification 4

Number of years from incorporation should not exceed





Turnover of the company should not exceed (in INR)

25 crores

25 crores

50 crores

100 crores

Irrespective of the changes in the start-up notifications, Rule 12 was not amended till this Amendment and hence, there was confusion as to whether definitions of a 'start-up' under the aforementioned notifications could be relied upon for claiming exemption under Rule 12. However, the Amendment has clarified this aspect.

Further, the option to grant ESOPs to an Excluded Person was allowed only till 5 years from the date of the incorporation (in case of a company) or registration (in case of partnerships) of the start-up (as was contemplated in Start-up notification 1), which period, with this Amendment been extended to 10 years from the date of the incorporation or registration.

2.3. Debenture Redemption Reserve

The requirements with respect to Debenture Redemption Reserve ("DRR") under Rule 18 of the Rules has been completely revamped. The position remains unchanged for All Indian Financial Institutions ("AIFI") and banking companies, which continue to be exempted from the requirement of maintaining any DRR.

However, changes have been brought in for NBFCs, Housing Finance Companies ("HFCs"), financial institutions as defined under section 2 (72) of the Act ("FIs"), listed companies and unlisted companies. A comparative analysis is provided below:



Requirement to maintain DRR before the Amendment in case of

Requirement to maintain DRR after the Amendment in case of

Public Issue

Private Placement

Public Issue

Private Placement
















Listed Companies





Unlisted Companies





* of the value of outstanding debentures

Prior to the Amendment, every company required to create DRR, was also required to, on or before the 30th day of April each year, invest or deposit a sum of not less than 15% of the amount of its debentures maturing during the next financial year in one of the secured methods provided under the Rules ("Investment or Deposit Requirement"). The Investment or Deposit Requirement has now been mandated for every type of company (except AIFIs, banking companies, unlisted NBFCs and unlisted HFCs) issuing debentures irrespective of the requirement to create DRR.


The liberalization of the rules for issue of equity shares with differential rights will enable companies to reduce their costs where more capital can be raised without dilution of voting rights of shareholders including foreign investors.

Relief has been granted to start-ups who were struggling to incentivize their promoters by giving them ESOPs, given the confusion regarding eligible start-ups who were exempted from prohibition on granting ESOPs to Excluded Persons. The Amendment spells out the correct position and maps the law to the current policy re entities that qualify as a start-up ensuring that the exemption is available to all start-ups in line with the original intent.

The changes brought in with respect to DRR provide level playing field to banking companies, financial institutions, NBFCs, HFCs and listed companies. These changes are slated to reduce the cost of raising monies through issuance of debentures and expand the market. Further, the mandatory Investment or Deposit Requirement will help secure the debenture market towards its effective functioning.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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