Official Suggested Answer
Answer: (d)
No, the company is ineligible to issue the new shares as the company needs to wait for five years till March 31, 2024.
Source: ICAI Board of Studies. open source PDF ↗
Worked Solution
✓ VerifiedAnswer: (b)
Under Rule 4(1) of the Companies (Share Capital and Debentures) Rules, 2014 framed under the Companies Act, 2013, a company proposing to issue equity shares with differential rights must satisfy several cumulative eligibility conditions. Two conditions are critical here:
First, the company must have a consistent track record of distributable profits for the last three years preceding the year of issue. Second, the company must have no subsisting default in payment of declared dividends, repayment of matured deposits, or redemption of preference shares/debentures.
In the present case, Kapoor Limited had defaulted on preference share dividends during the period prior to FY 2018–19, and the default was made good only in September 2018 (i.e., during FY 2018–19). For proposing an issue in FY 2019–20, the "last three years" look-back period would cover FY 2016–17, FY 2017–18, and FY 2018–19 — years during which the company was in default on preference dividends. Therefore, the company cannot demonstrate a clean, consistent three-year track record as required by Rule 4.
The company must wait until it completes three consecutive financial years free from any such default — namely FY 2019–20, FY 2020–21, and FY 2021–22 — making it eligible to issue equity shares with differential rights only from FY 2022–23 onwards (i.e., after March 31, 2022).
Accordingly, option (b) is correct: the company is ineligible to issue equity shares with differential rights for FY 2019–20 and must wait three years till March 31, 2022.
Write it like this
1The skeleton
- Lock onto Rule 4(1) of Companies (Share Capital and Debentures) Rules, 2014 in your very first line — writing only 'Companies Act, 2013' without the Rule number drops you a mark instantly because the eligibility conditions live in the Rules, not the Act itself.
- State BOTH cumulative conditions upfront — three-year distributable profit track record AND no subsisting default — because the examiner is checking whether you know it's a conjunctive test, not a pick-one test.
- Do the look-back math explicitly on paper — write out FY 2016-17, FY 2017-18, FY 2018-19 and flag that the default existed in that window; this one-line working shows the examiner you applied the rule, not just memorised it.
- State the 'made good ≠ immediately eligible' principle cleanly — the default being cleared in September 2018 resets the clock but does NOT satisfy the three-year clean track record; the examiner is specifically testing whether you know this distinction.
- End with the earliest eligible year (FY 2022-23) — always close the MCQ reasoning with the concrete conclusion so the examiner can tick your answer without hunting for it.
2Examiner-rewarded phrases
3Common trap
The classic kill shot here is writing 'the default was cleared in 2018-19, so the company is eligible for 2019-20' — most students treat 'made good' as an instant green light. It's not; the three clean years START AFTER the default is cleared, so the earliest eligible year is 2022-23, not 2019-20.