C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (75)

In this Chapter

Sr. # Topic Reference

1. Share CORR*

CORR*
2. Kinds of Shares

CORR*
3. Classes and Kinds of Share Capital

CORR*
4. Types of Shares & Share Capital

CORR*
5. Fully Paid Shares Only

6. Types of Preference Shares. Guidelines/

CORR*

7. Redemption of Preference Shares CORR*

8. Issuance of Shares at a Discount. Guidelines/

CORR*

9. Issue of Shares at Premium CORR*/OLRGEP*1

10. Further Issue of Capital. CORR*/ OLRGEP*1

11. Issue of Shares for a Consideration Otherwise than in Cash CORR*/ OLRGEP*1

12. Issue of Bonus Shares OLRGEP*1

* Companies Ordinance, 1984 and relevant Rules (Syllabus Grid A)

*1 Other laws and regulations, governance, ethics and professionalism (Syllabus Grid C)
i. Companies (Issue of Capital) Rules, 1996
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (76)

CHAPTER-4

SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES

1. SHARE
A share is a right to receive a certain proportion of the profits made by a company while it is a going
concern and of the capital when it is wound up. In the Companies Ordinance, 1984 a share is defined
as, “a share in the share capital of the company”. It includes stocks, except when the distinction
between stocks and shares is expressed or implied. It is a movable property, transferable in the
manner provided by the articles of the company. [Section 89]

1.2 Share Capital

Share capital means a particular amount of money with which a business is started. It may be:
a) Nominal or authorized capital
The maximum amount of capital which a company can issue according to its memorandum.
b) Issued capital
That part of amount of authorized capital which is offered by directors or promoters for
subscription.
c) Subscribed capital
That part of amount of issued capital for which people have deposited money.
d) Paid up capital
That part of subscribed capital against which money has been received.

2. KINDS OF SHARES
a) Ordinary Shares:
These carry the right to share in profits, if available, the right to share in surplus assets on
winding up, and the voting rights.
b) Preference Shares:
These carry the right to a fixed dividend which is payable before payment of any dividend on
the ordinary shares, but these shares have no voting right except when the rights of the
holders are affected. The right to receive dividend may either be cumulative or non-
cumulative. Company may issue preference shares convertible to ordinary shares or
redeemable preference shares.
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3. CLASSES AND KINDS OF SHARE CAPITAL [SECTION 90]

A company limited by shares can have different kinds of share capital with different classes in
accordance with its Memorandum and Articles of Association. The different rights and privileges of
the different classes may only be conferred in the manner prescribed in the Rules.
It should be remembered that previously the Companies Ordinance, 1984 allowed companies limited
by shares to issue only ordinary shares.

4. TYPES OF SHARES & SHARE CAPITAL

Scrip less shares

It is option of the shareholders of the listed companies to keep the shares in physical form with them
or to deposit those shares with Central Depository Company (CDC) and enjoy the ownership of the
shares without having scrip of those shares with them. The shares are kept deposited in an account
opened with CDC. CDC acts just like a bank for securities. It does not own the shares although the
securities are registered in the name of CDC.

CDC is named as a member in the members’ register but it does not beneficially own the securities, it
is just a trustee, holding the shares in trust on behalf of owners of shares.
We shall study it in detail.

5. FULLY PAID SHARES ONLY [SECTION 91]

No company is allowed to issue partly paid shares i.e. full nominal value of shares should be received
by every company with the application for shares.
Companies Ordinance 1984 does not explicitly provide for the issuance of any preference shares
however from various provisions of the Ordinance it can be construed that the companies are
allowed to issue preference shares and there may be different classes of the preference shares as per
the articles of association of the company.

6. TYPES OF PREFERENCE SHARES (DERIVED FROM THE SECP GUIDELINE FOR

ISSUANCE OF PREFERENCE SHARES)
Securities & Exchange Commission of Pakistan has provided guidelines on the issue of preference
shares and it also contains various types of preference shares which are summarized hereunder.

a. Cumulative preference shares:

If the Company is not able to pay preference dividend in one year, the arrears of dividend
are to be carried forward and paid out of the profits of the subsequent years, such preference
shares are known as cumulative Preference shares.
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (78)

b. Non-cumulative preference shares:

If unpaid dividend is not carried forward but lapses then such shares are known as
noncumulative preference shares.

c. Participatory preference shares:

Preference shares which are entitled to participate in surplus profits, i.e. profit proposed to
be distributed among the shareholders after dividend to preference and ordinary
shareholders, are termed as participatory preference shares. Similarly in the winding up of a
company, if, after paying back both the preference and ordinary shareholders, there is
surplus, and the preference shareholders are entitled to share in the distribution of available
surplus, then such preference shares are also known as participatory preference shares.

d. Convertible preference shares:

Preference shares which are convertible into any other shares of the Company after a
specified period of time or on occurrence of a defined event are termed as convertible
preference shares.

e. Redeemable preference shares:

Preference shares which are issued for a definite time period after the expiry of which the
preference shares will be redeemed in cash are termed as redeemable preference shares.

f. Irredeemable preference shares:

If preference shares are not redeemable / convertible after a specific period of time are
called irredeemable preference shares.

g. Stepped preference shares:

Preference shares with dividend which increases annually by a specified amount and with a
pre-determined capital return.

h. Zero dividend preference shares:

Preference shares which receive no dividend throughout their lives and instead a fixed
known amount is paid at maturity.
Companies Ordinance however provides for the redemption of redeemable preference shares,
relevant provisions are summarized as follows.
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (79)

7. REDEMPTION OF PREFERENCE SHARES: (SECTION 85)

1) Company limited by shares may redeem the preference shares provided that
a) Shares are fully paid.
b) It is redeemed out of
c) I. Profits of the company available for distribution as dividend
II. Sinking fund created for this purpose.
III. Proceeds of fresh issue of shares made for the purpose of redemption or.
IV. Sales proceeds of any property of the company.
2) If preference shares are not redeemed out of fresh issue, a sum equal to the amount
redeemed shall be transferred, out of the profits which would otherwise have been available
for dividend, to Capital Redemption Reserve Account.
3) In case the shares are redeemed out of proceeds of fresh issue, the premium on redemption
must have been provided for out of profits of the company before the shares are redeemed
or out of share premium account.
4) The redemption of preference shares by a company shall not be taken as reducing the
amount of its authorized share capital.
5) Capital redemption reserve fund shall be treated as fully paid share capital of the company at
the time of reduction of capital.

8. ISSUANCE OF SHARES AT A DISCOUNT [SECTION 84]

Issuance of shares at a discount means that company shall not receive the full face value of the shares
and the shareholder will get the benefit of acquiring the share at lower than the face value of the
share. The companies usually issue shares at a discount whenever the company is in financial
difficulties and the issue of shares at discount is one of the last options available with the company.
The relevant provisions of the Companies Ordinance regarding the issue of shares at a discount are
as follows.
Issue of shares at a discount must be authorized by members through a resolution passed in the
general meeting and it must be sanctioned by the Commission.
a) The resolution must specify the maximum rate of discount at which the shares are to be
issued.
b) At least one year should have been elapsed from the date of commencement of the business
by the company.
c) Shares must be issued within sixty days from the date of sanction of the Commission.
d) Every prospectus and balance sheet issued after issue of shares at a discount must contain
the particulars of discount allowed on issue of shares.
e) Issue of shares at discount shall not be deemed to be the reduction of capital by the
company.
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8.1 Guidelines for issuance of shares at a discount

Securities and Exchange Commission of Pakistan has given the following guidelines for the sake of
issuance of shares at a discount

The following policy would be followed by the Commission while considering the
applications for issue of shares at a discount:
a. Discount shall be allowed if the financial projections establish that injection of fresh capital
will result in enough profits enabling the Company to amortize the discount within a period
of not more than 5 year.
b. A banking company proposing to issue shares at a discount shall be required to obtain prior
approval of the State Bank of Pakistan and a copy of the consent letter shall be provided to
the Commission while seeking approval.
c. Commission may impose such conditions as it may deem fit while granting sanction under
section 84 of the Companies Ordinance. Such conditions may include the following:-
i. That shares allotted to sponsors and directors at a discount shall not be disposed of
by allottees for a period of three years.
ii. That the percentage of shares held by the directors shall not increase as a
consequence of allotment made otherwise than by way of right offer.
The issuers desirous of issuing shares at a discount shall accordingly submit adequate
information/documents requisite, as below, for an early decision by the Commission whether to
grant or not to grant the sanction applied for under sub-section (2) of section 84 of the Companies
Ordinance 1984: -

8.2 Issue at discount to existing shareholders as a right issue.

(i) A statement signed by all the directors of the company (except the nominee directors), who
were present at the board meeting in which the issue of shares at a discount was decided
upon stating that the funds in question are essentially required and they have explored all
other avenues of funding available and shares at a discount are being issued as a last resort.
(ii) The details of issue of shares at par or at a discount in the last five years stating purpose,
utilization of funds and benefit arisen to the company and its shareholders. The amount of
capital injected thereby and the increase in profit before tax in consequence thereof shall be
stated.
(iii) A certified copy of the notice of general meeting published and circulated among the
shareholders.
(iv) A copy of the statement annexed to the said notice in pursuance of section 160 (1)(b) ibid;
setting out information required under that section and containing all the material facts
concerning the issue of shares at discount, including the matters listed in these guidelines.
(v) A certified copy of Resolution passed in the general meeting authorizing issue of shares at
discount.
(vi) A certified copy of minutes of the respective general meeting indicating the number of
shareholders present in person or through proxies.
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(vii) A certified copy of the underwriting agreement which shall interalia contain a clause that the
underwriter shall subscribe or arrange to subscribe any unsubscribed portion of the offer
within fifteen days of being called upon to do so by the company along with a copy of due
diligence report by underwriters. It should be mandatory on the issuer to make available at
it’s registered office for inspection, the due diligence report of the underwriters.
(viii) A copy of financial plan, projections and other information assisted in rule 5(ii) of the
Companies (Issue of Capital) Rules, 1996 along with the schedule of discount amortization.
(ix) In case of discount more than 10 percent, a copy of the project appraisal report by a
Development Financial Institution, commercial bank or an investment bank.
(x) Break-up value of the Company’s share at the end of last financial year as determined by the
auditor. In case of discount exceeding 10 percent, breakup value of shares based on
valuation of assets by a consulting engineer registered with Pakistan Engineering Council
may also be provided.
(xi) Audited annual accounts for the last three years along with latest half yearly and quarterly
accounts.
(xii) Turnover details and market share price of Company’s share during preceding 6 months.
(xiii) Details of advances/loans to the associated companies and directors during preceding three
years and justification thereof.
(xiv) Latest pattern of shareholding and variation in shareholding of the shareholders, having 10%
or more shares in the company in the last six months and after the proposed issue.

8.3 Issue of shares at discount by way of other than right offer.

In addition to requirements laid in foregoing paragraph “8.2” above, companies will be required to
submit: -

(i) Significance of the project and its national importance, if that forms the basis for the
application.
(ii) If an arrangement has been made with a person to whom shares are proposed to be allotted,
a copy of the agreement/consent of that person.

9. ISSUE OF SHARES AT PREMIUM

Companies Ordinance does not provide clear guidance as to the procedure for issue of shares at
premium, however through various provisions of the Ordinance it can be construed that the
companies are allowed to issue shares at a premium, however relevant legislative is contained in Rule
4 of the Issue of Capital Rules 1996 which is summarized as under

9.1 (Rule 4 of the Companies (Issue of Capital) Rules 1996- Applicable only if shares are offered
to General Public)
1. A company may issue shares to the general public at premium subject to the following
conditions, namely;
i. the company has commenced commercial operations and based on its latest audited
accounts for not less than 12 months, it has-
a. Earned profits from its principal operarions; and
b. Positive earnings per share;
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(However this provision shall not be applicable where the issue is made through the
book building.)
ii. The premium on public offerings shall not exceed the amount of premium charged on
placements with foreign or local investors, if such placement has been made within a
period of 6 months preceding the opening of the public subscription and the names
and addresses of such investors shall be disclosed in the prospectus.
(However this provision shall not be applicable where the issue is made through the
book building.)
iii. The issue shall be fully underwritten in the manner prescribed under these rules.
iv. The company shall justify the amount of premium per share which shall be disclosed
in the prospectus
v. The employees of the company getting preferential allocation, if any, shall be charged
premium at the same rate as the public
vi. The shares allotted or allocated to any person including employees on account of
preferential allocation within a period of six months preceding the opening of the
public subscription, at a price lesser than than the price at which shares are to be
offered to the general public shall not be saleable or transferable for a period of six
months from the date of close of the public subscription; and
vii. The issuing company shall ensure that the shares allotted on account of preferential
allocation are deposited in an account with a depository company in frozen form:
Provided that charges of opening and maintaining of such account shall be borne by
the holder of such shares.

9.2 Permissible usages of Share Premium Account [Section- 83]

1. If a company issues shares at a premium, whether on cash or otherwise than on cash, an

amount equal to the premium shall be transferred to an account called “Share Premium
Account”.

2. The “Share Premium Account” may be utilized by the company in:-

a) Writing off the preliminary expenses;
b) Writing off the expenses of, or the commission paid or discount allowed on the
issue of shares or debentures;
c) Providing for the premium on redemption of preference shares or debentures ; or
d) Issue of bonus shares to its members
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10. FURTHER ISSUE OF CAPITAL [SECTION-86]

In case of a public company, first issue of shares is made by a company before obtaining certificate
of commencement of business by issuing a prospectus or filing a statement in lieu of prospectus.
Private companies are not required to obtain a certificate of commencement of business and nor
required to file a statement in lieu of prospectus so they may start business only by paying up the
shares agreed to be taken up by the subscribers to the memorandum however the provisions of law
are similar when it comes to further issue of shares and they are summarized as under.
Where the directors decide to increase the capital of the company by the issue of further shares,
1. such shares shall be offered to the members in proportion to the existing shares held by each
member, irrespective of the class of shareholders ,and
2. such offer shall be made by notice (commonly known as right letter) specifying the number
of shares to which the member is entitled and limiting a time, within which the offer, if not
accepted, will be deemed to have been declined.
3. The offer of new shares shall be strictly in proportion to the number of existing shares held.
4. The offer of new shares shall be accompanied by a circular containing
a. material information about the affairs of the company,
b. latest statement of the accounts, and
c. the necessity for issue of further capital.
5. Such circular shall be duly signed by,
a. the directors or
b. an officer of the company authorized by them in this behalf (Chief Executive or
Secretary).
6. A copy of the circular shall be filed with the Registrar before the circular is sent to the
shareholders.
7. The circular shall specify a date by which the offer, if not accepted, will be deemed to have
been declined.
8. If the whole or any part of the shares offered is declined or is not subscribed, the directors
may allot and issue such shares in such manner as they may deem fit
9. In following cases a public company may issue further capital without offering the shares to
the existing members.
a. if the company passes a special resolution for the purpose and gets the approval of
Federal Government
b. In case the company reserves certain percentage of the further issue of shares for its
employees under an Employee Share Option Scheme duly approved by
Commission.
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (84)

10.1 Companies Issue of Capital Rules 1996 also dictate certain matters when it comes to the issue of
right shares by a listed company summery of which is as follows
According to Rule 5 of the Companies (Issue of Capital) Rules 1996. A listed company may issue
right shares subject to following conditions namely;
i. The company shall not make a right issue within one year of an issue of capital to the public
or further issue of capital through right issue:
Provided that this clause shall not be applicable to a right issue made for meeting the
minimum equity or paid up capital requirements under the law.
Explanation: For the purpose of this clause, the time period of one year, in case of
issue of capital to the public shall be reckoned from the last date for public
subscription of such issue and the time period for one year, in case of previous right
issue, shall be reckoned from the last date for payment for such previous right issue;
ii. The board of directors of the company while deciding the right issue shall in its resolution
clearly record the quantum of the issue, issue price per share, purpose of right issue, use of
the proceeds of the issue, its benefits to the company and the risk factors associated with the
right issue, if any;
iii. The resolution of the board of directors to issue right shares alongwith copy of the financial
plan and three years financial projections duly approved by the board shall be sent to the
Commission for information and the respective stock exchanges for public dissemination on
the day of the resolution;
iv. The company may charge premium on right shares, if-
a. sponsors of the company undertake to subscribe at least forty percent of the right
issue and in case sponsors shareholding entitle them to less than forty percent of the
right issue then sponsors shall arrange subscription for the balance which together
with the shareholding held by sponsors will constitute forty percent, from other
shareholders;
b. the balance right issue is fully underwritten by atleast two underwriters:
i. the underwriters shall not be associated companies or associated
undertakings of the issuing company; and the
ii. the sponsors shall not enter into any agreement or arrangements directly or
indirectly with the underwriters with respect to the purchase of shares taken
up by the underwriters to the issue.
c. the justification for the amount of premium per share is disclosed in the right
allotment letter.
v. In case of a right issue, at par value, of a loss making company or a company whose market
price of share during the preceding six months has remained below par value, sixty percent
of the right issue shall be underwritten in the manner described in “b” above and for the
forty percent the Sponsors of the company shall provide an undertaking that they will
subscribe right shares to be offered to them and in case sponsors shareholding entitle them
to less than forty percent of the right issue then sponsors shall arrange subscription for the
balance which together with the shareholding held by sponsors will constitute forty percent,
from other shareholders;
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Explanation: For the purpose of this clause “a loss making company” means;

a. A company which has incurred losses as per its latest audited accounts
despite accumulated profits; and

b. A company having accumulated losses as per its latest audited accounts

despite having profitable operations for the current year;
vi. The book closure shall be made within thirty days from the date of the resolution by the
board of directors or approval of the Commission, where required, and letter or offer of
right shall be dispatched or credited within the time period as specified in the listing
regulations of the exchange concerned and the payment and renunciation date once
announced for the letter or offer of right shall not be extended;
vii. If an announcement of the issue of bonus and right share is made simultaneously, the
resolution of the board of directors shall specify whether the bonus shares covered by the
announcement qualify for right entitlement;
viii. The sponsors shall not enter into any agreement or arrangement directly or indirectly with
the underwriters for the purchase of shares taken up by the underwriters to the issue;
ix. In case, purpose of the right issue is to finance a project like expansion, balancing,
modernization and replacement etc. the company shall submit a quarterly progress report on
implementation of such project till its completion to the Commission for information and
the stock exchange concerned for public dissemination; and
x. A right issue once announced shall not be varied, postponed, withdrawn or cancelled.

Rule 5A: RIGHT TO RENOUNCE A RIGHT OFFER:

1. Where the members of a company are offered right shares, the directors may, unless the
articles of the company provide otherwise, allow the members to renounce their right to
subscribe such shares in favour of any other person and the letters of right issued to the
members shall contain a statement of such right.

2. The directors’ decision to allow another person to subscribe to shares in place of the
member shall be deemed to be a decision in accordance with the provisions of Further Issue
of Capital (Sec 86), if the said person decides to subscribe to such shares.

3. The time announced by the company, within which the letters or offer of right shall be
subscribed, shall not be more than ninety days from the date of resolution by the board of
directors regarding approval of the right issue or approval of the Commission where
required and the shares against the paid letters or offer of right shall be credited and/or
dispatched within the time period as specified in the listing regulations of the exchange
concerned:

Provided that the Commission may, upon a reasoned request of the company, extend the
above time period of ninety days for a period of not more than thirty day.
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Provided further that in case of issue of right shares at a discount, the time period shall be sixty days.

4. The right issue shall be made according to the schedule approved by the stock exchange
concerned.
5. If the time period announced by the company for payment of letters or offer of right and
credit and/or dispatch of shares against paid letters of right is less than ninety days, it may be
extended by the company in consultation with the stock exchanges on which such shares are
listed, subject to maximum period of ninety days.

10 A Public Companies (Employees Stock Option Scheme) Rules

1. Definitions

“Compensation Committee
” means a Compensation Committee constituted under rule 4;
. "Employee"
Means
i. a regular employee of a company working in Pakistan or out of Pakistan;
ii. ii. an executive director who is on pay roll of a company; or iii. a chief executive who
is on pay roll of a company;

"Employees’ Compensation"
means the total cost incurred by a company towards gross salary of its employees; e. "exercise"
means making of an application by an employee to a company for issue of shares against option
vested in him in pursuance of a Scheme;
"Exercise Period"
means the time period after vesting within which an employee should exercise his right to apply
for shares against an option vested in him in pursuance of the Scheme;
"Exercise Price"
means the price payable by an employee for exercising an option granted to him in pursuance of
a Scheme;
"Independent Director"
means a director of a company, not being a whole time director and who is neither a promoter
nor belongs to a promoter group;
"Market Price"
in relation to shares on a given date, means the closing price of the shares on that date on the
stock exchange on which the shares of a company are listed;
Explanation.- If the shares are listed on more than one stock exchange, but quoted only on one
stock exchange on a given date, then the price on that stock exchange shall be considered. If the
share price is quoted on more than one stock exchanges, then the stock exchange where there is
highest trading volume on that date shall be considered. If share price is not quoted on a given
date, then the share price on the last trading day shall be considered.
"option"
means a right but not an obligation granted to an employee in pursuance of a Scheme to apply for
shares of a company at a pre- determined price;
"Promoter"
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Means
i. the person or persons who are in over-all control of a company;
ii. the person or persons who are instrumental in the formation of a company or the
shares offering to public; or
iii. the person or persons named in the offer document as directors: Provided that a
director or an officer of a company, if he is acting as such only in his professional
capacity, shall not be deemed to be a promoter;

Explanation.- Where a promoter of a company is a body corporate, the promoters of that

body corporate shall also be deemed to be promoters of the company.
“Scheme”
means the Employees Stock Option Scheme approved by the Commission and introduced under
these rules;
Share
eans equity shares and securities convertible into equity shares and shall include American
Depository Receipts (ADRs), Global Depository Receipts (GDRs) or other depository receipts
representing underlying equity shares or securities convertible into equity shares;
vesting
means exercise of right to apply for shares of a company; and
Vesting Period
means the period during which the vesting of an option granted to an employee in pursuance of a
Scheme takes place.
2. Ineligibility to participate in a Scheme

Only regular employees who are on the pay roll of a company shall be eligible to participate in a
Scheme.
3. Compensation Committee.- .
No Scheme shall be offered unless the company constitutes a Compensation Committee
for administration and superintendence of the Scheme.
The Compensation Committee shall be a Committee appointed by the Board of Directors
but shall not include the directors who can be classified as employees of a company or
are on its pay roll.
3.1 Powers and functioning of Compensation Committee.- .
The Compensation Committee shall, inter alia, formulate the detailed terms and
conditions of a Scheme including the following, namely:-
i. quantum of option to be granted under a Scheme to each employee and in
aggregate;
ii. conditions under which option vested in an employee may lapse in case of
termination of employment for misconduct;
iii. exercise period within which an employee should exercise option and that
option shall lapse on failure to exercise the same within the exercise
period;
iv. specified time period within which an employee shall exercise vested
options in the event of termination from service or resignation;
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v. right of an employee to exercise all options vested in him at one time or at

various points of time within an exercise period;
vi. procedure for making a fair and reasonable adjustment to the number of
options and to an exercise price in case of rights issues, bonus issues and
other corporate actions;
vii. grant, vesting and exercise of option in case of an employee who is on
long leave; and
viii. procedure for cashless exercise of options.
ix. The Compensation Committee shall make suitable policies and systems to
ensure that there is no violation of insider trading provisions of the
Securities and Exchange Ordinance, 1969 (XVII of 1969), and the
Securities and Exchange Commission of Pakistan Act, 1997 (XLII of
1997), or the rules made under those laws.

4 Shareholders' approval.-
No Scheme shall be offered to employees of a company unless shareholders of the company
approve the Scheme by passing a special resolution in the general meeting
The statement of facts annexed to a notice and resolution proposed to be passed in a general
meeting for a Scheme shall, inter alia, contain the following information, namely:-
i. total number of options to be granted;
ii. identification of classes of employees entitled to participate in the Scheme;
iii. requirements of vesting and period of vesting;
iv. maximum period within which any option shall be vested;
v. exercise price or pricing formula;
vi. appraisal process for determining eligibility of an employee to the Scheme;
vii. maximum number of options to be issued per employee and in aggregate; and
viii. a statement to the effect that the company shall conform to the accounting policies
specified in these rules

Approval of shareholders by way of separate resolution in a general meeting shall be obtained by

a company in case of
i. grant of option to employees of a subsidiary or holding company; and
ii. grant of option to identified employees, during any one year, equal to or exceeding
one per cent of the issued capital (excluding outstanding conversions) of the company
at the time of grant of option.

5. Variation of terms of a Scheme.

A company shall not vary the terms of a Scheme in any manner which may be detrimental to the
interests of its employees.
A company may by special resolution in a general meeting vary the terms of a Scheme offered
pursuant to an earlier resolution of a general body but not yet exercised by its employees
provided such variation is not prejudicial to the interests of the option holders.
6. Pricing.-
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A company granting option to its employees pursuant to a Scheme shall have the freedom to
determine the exercise price subject to conforming to the accounting policies specified in these
rules
7. Lock-in period and rights of an option-holder.-
There shall be a minimum period of one year between the grant of option and vesting of option.
A company shall have the freedom to specify the lock-in period for the shares issued pursuant to
an exercise of option.
An employee shall not have right to receive any dividend or to vote or in any manner enjoy the
benefits of a shareholder in respect of option granted to him, till shares are issued to him on
exercise of option.
8. Consequence of failure to exercise option
In case of failure to exercise the option, the right granted shall lapse.
9. Option not transferable.
1. n option granted to an employee shall not be transferable to any other person except to an
entitled employee of a company
2. Under the cashless system of exercise, a company may itself fund the payment of
exercise price which shall be adjusted against the sale proceeds of some or all the shares.
3. An option granted to an employee shall not be pledged, hypothecated, mortgaged or
otherwise alienated in any other manner.
4. In the event of death of an employee while in employment of a company, all options
granted to him till the date of his death shall vest in his legal heirs or nominees.
5. In case an employee suffers a permanent incapacity while in employment of a company,
all options granted to him, as on the date of permanent incapacitation, shall vest in him on that
day.
6. In the event of resignation or termination of service of an employee, all options not
vested as on that day shall expire:
7. Provided, the employee shall, subject to the terms and conditions of a Scheme
formulated in terms of these rule be entitled to retain all the vested options.
10. Disclosure in the Board of Directors’ Report.-
The Board of Directors, shall, inter alia, disclose in the annexure to the Annual Report, the
following details of a Scheme, namely:- .
i. options granted;
ii. pricing formula
iii. options vested;
iv. options exercised;
v. total number of shares arising as a result of exercise of option;
vi. options lapsed;
vii. variation of terms of options;
viii. money received against exercise of options;
ix. employee-wise details of options granted to
a. senior managerial personnel;
b. any other employee who receives a grant in any one year of option amounting to
five per cent or more of option granted during that year; and
c. identified employees who were granted option, during any one year, equal to or
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (90)

exceeding one per cent of the issued capital (excluding outstanding conversions)
of a company at the time of grant; and
x. diluted earnings per share pursuant to issue of shares on exercise of option calculated
in accordance with International Accounting Standard No. 33

11. Accounting policies.-

Every company that has passed a special resolution for a Scheme under these rules, shall comply
with the accounting policies specified in the Schedule to these rules.

12. Certificate from auditors.-

In the case of every company that has passed a special resolution for a Scheme, the Board of
Directors shall at each annual general meeting place before the shareholders, a certificate from
the auditors of the company that the Scheme has been implemented in accordance with these
rules and in accordance with the resolution of the company passed in a general meeting.
13 Options outstanding at public issue.-
If any option is outstanding at the time of an initial public offering by a company, the promoters'
contribution shall be calculated with reference to the enlarged capital which would arise on
exercise of all vested options.
i. If any options granted to employees in pursuance of a Scheme are outstanding at the time
of initial public offering, the offering document of a company shall disclose all the information
specified in above rules.
14. Preferential allotment.-
Nothing in these rules shall apply to shares issued to employees at the time of public offering
through the prospectus of a company.
15. Relaxation of rules:-
Where the Commission is satisfied that it is not practicable to comply with any requirement of
these rules in a particular case or class of cases, the Commission may, for reasons to be recorded
in writing, relax such requirement subject to such conditions as it may deem fit.
18. Penalty:
Whoever fails or refuses to comply with, or contravenes any provision of these rules , or
knowingly and willfully authorizes or permits such failure, refusal or contravention, shall, in
addition to any other liability under the Companies Ordinance , 1984 (XLVII of 1984), be also
punishable with a fine not exceeding two thousand rupees, and in case of continuing failure,
refusal or contravention, to a further fine not exceeding one hundred rupees for every day after
the first during which such failure, refusal or contravention continues.
THE SCHEDULE
ACCOUNTING POLICIES FOR A SCHEME
In respect of options granted during any accounting period, the accounting value of the options
shall be treated as another form of employee compensation in the financial statements of a
company.
1. The accounting value of options shall be equal to the aggregate, over all employee stock
options granted during the accounting period, of the fair value of the options. Explanation.- For
the purposes of paragraph
a. fair value means an option discount, or, if a company so chooses, the value of an option using
the Black Scholes formula or other similar valuation method; and
b. option discount means the excess of market price of the share at the date of grant of an option
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (91)

under a Scheme over exercise price of the option (including up-front payment, if any).
2. Where an accounting value is accounted for as employee compensation in accordance
with above paragraph the amount shall be amortised on a straight-line basis over the vesting
period.
3. When an unvested option lapses by virtue of an employee not conforming to the vesting
conditions after the accounting value of an option has already been accounted for as employee
compensation, this accounting treatment shall be reversed by a credit to employee compensation
expense equal to the amortized portion of the accounting value of the lapsed options and a credit
to deferred employee compensation expense equal to the unamortized portion
4. When a vested option lapses on expiry of an exercise period, after the fair value of an option
has already been accounted for as employee compensation, this accounting treatment shall be
reversed by a credit to employee compensation expense.

11. ISSUE OF SHARES FOR A CONSIDERATION OTHERWISE THAN IN CASH

Companies Ordinance empowers companies to issue shares for a consideration otherwise than in
cash as well. Company is required to file a return of allotment whenever it allots shares to any person,
however when the shares are allotted for a consideration otherwise than in cash following additional
documents/information shall be provided (Section-73)
1) The company shall produce for the inspection of the Registrar
a) a duly stamped contract constituting the title of the allottee to the allotment and
b) contract of sale, or
c) contract for services or
d) contract for other consideration in respect of which that allotment was made.
2) Further, company shall file
a) verified copies of all such contracts and
b) a return stating the number and nominal amount of shares so allotted,
c) the amount to be treated as paid-up, and the consideration for which they have been
allotted
3) If the contract as aforesaid is not reduced to writing, the company shall produce and file a
memorandum of the terms of the contract stamped with the same stamp duty which would
have been payable had the contract been in writing.
From the above requirements we can clearly identify that the Ordinance does not specify the pre-
requisites for the issuance of shares for a consideration otherwise than in cash, such pre-requisites are
contained in the Companies (Issue of Capital) Rules 1996 Issue
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (92)
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (93)

11.1 Rule 8 of the Companies (Issue of Capital) Rules 1996 states as follows
Following conditions should be met for issue of shares for a consideration otherwise than in cash
i. The value of assets, services and resources shall be determined as follows;
a. The value of plant and machinery shall be determined by atleast two independent
companies registered with Pakistan Engineering Council as consultant and whose
names appear, as a valuer, on the panel of Pakistan Banks Association;
b. The value of immovable property i-e land, building etc. shall be determined by
atleast two independent companies, whose names appear, as a valuer, on the panel
of Pakistan Banks Association;
c. The valuation of services shall be determined by at least two independent firms of
practicing chartered accountants having satisfactory Quality Control Review
awarded by Institute of Chartered Accountants of Pakistan;
d. The value of securities, shall be determined by at least two independent firms of
practicing chartered accountants having satisfactory Quality Control Review
awarded by Institute of Chartered Accountants of Pakistan;
e. The value of natural resources and exploration thereof shall be determined by atleast
two independent companies having an experience of atleast five years in the relevant
fields whose names appear, as a valuer, on the panel of Pakistan Banks Association;
f. The value of all other assets not covered above shall be determined by at least two
independent companies or firms having experience as a valuer of at least five years
in the relevant field and whose name appear, as a valuer, on the panel of Pakistan
Banks Association:
Provided that the valuation shall not be older than six months from the date of
submission to the registrar and that the Commission may require the issuing
company to undertake valuation of the consideration from any third valuer:
Provided further that in case of difference in valuation carried out by two different
valuers, the valuation whichever is lower shall be taken into consideration.

Explanation: For the purpose of this clause the words, “independent

companies or firms” shall mean the companies that are neither associated
companies nor associated undertakings of the issuing company.”
ii. The value of assets taken over shall be reduced by depreciation charged on consistent basis;

iii. For issue of shares against goodwill and other intangible assets, the issuing company shall
comply with the requirements of applicable International Accounting Standards:
Provided that in case of business combination under common control, companies shall
adopt method similar to pooling of interest method that will not create any good will; and
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (94)

iv. The company, before the allotment of shares, shall file with the registrar copies of the
following documents, namely;

a. Documents relating to title of the seller of the property;

b. Due diligence certificate from an independent legal counsel or advocate that the title
of the property or consideration is free from all types of encumbrances;

c. The valuation report as required under this section duly certified by the company
secretary and chief financial officer of the issuing company.

d. The executed sale deed;

e. Any authentic document evidencing transfer of ownership of the consideration in

the name of the issuing company; and

f. Auditors’ certificate confirming receipt of full consideration by the issuing company

against the proposed allotment of shares.

12. ISSUE OF BONUS SHARES

Companies Ordinance 1984 does not contain any specific provisions for the issue of bonus shares.
As per relevant provisions, company may issue its unissued shares as fully paid bonus shares from
any of the following sources namely:

1. Accumulated profits/Free Reserves,

2. Share premium account,

3. Capital re-purchase reserve account and Capital redemption reserve fund, or

4. Surplus on revaluation of assets, when actually realized at the time of sale of the asset.

However Companies (Issue of Capital) rules 1996, do provide certain conditions for listed companies
only which are provided hereunder,

12.1 Rule 6 of the Companies (Issue of Capital) Rules 1996 (Applicable to listed companies only)

A listed company may issue bonus shares subject to the following conditions, namely;
a. The resolution of board of directors to issue bonus shares shall be communicated to the
Commission and the respective stock exchange on the day of the decision for public
dissemination;
b. The company shall retain at least fifteen percent of the enhanced paid up capital as free
reserves; and
c. A certificate shall be obtained by the company from the auditor certifying that-
C-Law (Chapter-4) SHARE CAPITAL - ISSUE AND FURTHER ISSUE OF SHARES (95)

i. The free reserves retained after the issue of bonus shares are not less than fifteen
percent of the increased paid up capital of the company; and

ii. All contingent liabilities have been deducted while calculating the minimum residual
reserve of fifteen percent and such certificate shall be sent to the Commission for
information and the respective stock exchange on the day of the decision for the
public dissemination.

Explanation: For the purpose of this rule the term “free Reserves” includes
any amount which, having been set aside out of revenue or other surpluses
after adjustment of all intangible or fictitious assets, is free and that it is not
retained to meet any diminution in value of assets, specific liability,
contingency or commitment known to exist at the date of balance sheet, but
does not include:
1. Reserve created as a result of revaluation of fixed assets;

2. Good will reserve;

3. Depreciation reserve to the extent of ordinary depreciation or

otherwise as admissible under the Income Tax Ordinance, 2001.

4. Development allowance reserve created under the provisions of

Income Tax Ordinance, 2001;

5. Provisions for taxation to the extent of the deferred or current liability

of the company;

6. Capital redemption reserve; and

7. Unrealized capital gain.