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Shares

Shares Meaning

Sec. 2 (46) defines a share as A share is a share in the share capital of a Company. A share represents the interest of a share holder in the capital of the Company & this interest is measured by the number of shares he is holding & the amount paid by him to the company on shares.

Shares Meaning

A share does not merely represent an interest of a shareholder in a company, it carries certain rights and liabilities while the company is going concern or while the company is being wound up.

A share represents a bundle of rights and obligations.

Kinds of Shares

Section 86, as amended by Companies (Amendment) Act, 2000 provides that the share capital of a company limited by shares shall be of two kinds only, namely:-

(a) Equity share capital(i) with voting rights; or (ii) with differential rights as to dividend, voting or otherwise (b) Preference share capital

Preference Shares

Preference share is the one which satisfies the following criteria: With respect to dividend it carries a preferential right to be paid which may be a fixed amount or a fixed rate On winding up or on repayment of capital a preferential right to be repaid the amount .

Kinds of Preference Shares

On the basis of participation :

Participating Preference shares:

This type of shares are allowed to participate in surplus profits during the lifetime of the company & surplus assets during winding up. For e.g. after 20% dividend has been paid to equity shareholders, the preference shareholders may share surplus profits equally with equity shareholders.

Non Participating Shares:


These shares are not entitled to participate in surplus profit. Dividend at fixed rate is given.

Kinds of Preference Shares

On the basis of participation

Participating Preference shares:

This type of shares are allowed to participate in surplus profits during the lifetime of the company & surplus assets during winding up. For e.g. after 20% dividend has been paid to equity shareholders, the preference shareholders may share surplus profits equally with equity shareholders.

Non Participating Shares:


These shares are not entitled to participate in surplus profit. Dividend at fixed rate is given.

Kinds of Preference Shares

On the basis of cumulation of dividend

Cumulative Preference Shares


They are those shares on which carries the right for payment of arrears of dividend from future profits. The fixed dividend keeps on accumulating until it is fully paid.

Non Cumulative Preference Shares


These are those shares on which does not carry the right to dividend in arrears.

Example: Cumulative preference shares Year 1 Net Profit / (Loss) for the year before appropriations 5,000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 1,500 Year 2 Year 3

(1,000)

(2,000) 50,000

Example: Non-cumulative preference shares Year 1 $ Net Profit / (Loss) for the year before appropriations Year 2 $ Year 3 $

(1,000)

(2,000) 50,000

5,000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 500

10

Kinds of Shares

On the basis of conversion

Convertible preference shares:


The owners of these shares have the option to convert their preference shares into equity shares as per the terms of issue.

Non-convertible preference shares:


The owners of these shares do not have any right of converting their shares into equity shares.

Kinds of Shares

On the basis of redemption

Redeemable preference shares These are to be purchased back by the company after a certain period as per the terms of issue. Irredeemable preference shares These are not to be purchased back by the company during its lifetime.

Redeemable Preference Shares

Requirements for issue of Redeemable Preference Shares


The articles must provide for the issue of such shares. Such shares are to be issued as redeemable preference shares; shares issued earlier cannot be converted into redeemable preference shares. The shares to be redeemed must be fully paid-up. The shares shall be redeemed out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption.

Redeemable Preference Shares

Requirements for issue of Redeemable Preference Shares


The premium, if any, payable on redemption shall have been provided for out of the profits of the company or out of the company's security premium account, before the shares are redeemed . Where the shares are redeemed out of profits, a sum equal to the nominal amount of the shares redeemed, be transferred to a reserve fund, to be called the capital redemption reserve account.

Redeemable Preference Shares

Requirements for issue of Redeemable Preference Shares


The provisions of this Act relating to the reduction of the share capital of a company shall, except as provided in this section, apply as if the capital redemption reserve account were paidup share capital of the company.
The redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorized share capital.

Status of Preference Shares, if Articles of Association are silent


Preference shares will be presumed to be: Cumulative Non-Participating Irredeemable and

Non-Convertible.

Equity Shares

The equity shares or ordinary shares are those shares on which the dividend is paid after the dividend on fixed rate has been paid on preference shares. Characteristics: No fixed rate of dividend. Dividend is paid after dividend at a fixed rate is paid on preference shares. At the time of liquidation, capital on equity is paid after preference shares have been paid back in full.. Equity shareholders have voting rights & thus, control the working of the Company. Equity shareholders are the virtual owners of the Company.

Issue of Shares/ Raising of Capital


1. 2.

3.

By private placement of shares By allotting entire shares to an issue-house, which in turn, offers the shares for sale to the public By inviting the public to subscribe for shares in the company through a prospectus.

Private Placement of Shares

A private company limited by shares is prohibited by the Act and the articles from inviting the public to subscribe in shares or debentures. It also need not file statement in lieu of prospectus. Its shares are issued privately, to a small number of persons known to the promoters or related to them by family connections.

Private Placement of Shares

A public company can also raise its capital by placing shares privately and, without inviting the public to subscribe to its shares or debentures. In this kind of arrangement, an underwriter or broker finds persons, normally his clients who wish to buy the shares. A company is required to file with Registrar a statement in lieu of prospectus, at lest 3 days before making allotment of any shares or debentures.

By an Offer for Sale

Under this arrangement, the company allots or agrees to allot shares or debentures at a price to a financial institution or an issue-house for sale to public. The issue-house publishes a document called an offer for sale, with an application form attached, offering to the public shares or debentures for sale at a price higher than what is paid it or at par. On receipt of applications from the public, the issue house renounces the allotment of number of shares mentioned in the application in favor of applicant purchaser who becomes direct allottee of the shares.

By inviting the public through prospectus

The company invites offers from members of the public to subscribe for shares or debentures through prospectus.

Issue of Shares at Par

Shares are deemed to have been issued at par when subscribers are required to pay only the amount equivalent to the nominal or face value of the shares issued. E.g. if the face value of a share is Rs. 10 and the buyer is required to pay thereon Rs. 10 only.

Issue of Shares at Premium

The shares are deemed to have been issued at premium when subscribers are required to pay a price higher than the par value of the shares. The difference between the issue price and the par value of the shares is share premium.
The premium cannot be treated as profit and therefore cannot be distributed as dividend. The amount of premium received in cash and an equivalent of it received in kind, must be kept in separate in bank account known as the Share Premium Account. The amount of share premium is to be maintained with same sanctity as the share capital.

Issue of Shares at Premium

The share premium account be treated as free reserves, it is in nature of capital reserves. According to sec. 78(2), share premium can be utilised only for the following purposes:

To issue bonus shares

To write off preliminary expenses of the company To write off the expenses or commission paid or discount allowed on, any issue of shares or debentures To provide for the payment of premium payable on the redemption of redeemable preference shares or dentures

Issue of Shares at Discount

The shares are deemed to have been issued at discount when subscribers are required to pay a price lower than the par value of the shares. The difference between the issue price and the par value of the shares is share discount

Requirements for Issue of Shares at Discount ( sec. 79):

Issue of shares at discount is authorised by a resolution passed in

general meeting and sanctioned by NCLT. The issue must be of a class of shares already issued. The maximum rate of discount must not exceed 10 % or such higher amount as NCLT may permit any special case.

Issue of Shares at Discount

The shares are deemed to have been issued at discount when subscribers are required to pay a price lower than the par value of the shares. The difference between the issue price and the par value of the shares is share discount

Requirements for Issue of Shares at Discount ( sec. 79):

Issue of shares at discount is authorised by a resolution passed in

general meeting and sanctioned by Central Govt. The issue must be of a class of shares already issued. The maximum rate of discount must not exceed 10 % or such higher amount as Central Govt. may permit any special case.

Issue of Shares at Discount


Requirements for Issue of Shares at Discount ( sec. 79): Not less than 1 year has, at the date of issue, elapsed since the

date on which the company was entitled to commence business. The shares to be issued at a discount must be issued within 2 months of the sanction by Central Govt. or within such extended time as it may allow. Every prospectus at the date of its issue must mention particulars of the discount allowed on the issue of shares, or the exact amount of the discount as has not been written off.
In case of default, the company and every officer of the company who is in

default, shall be punishable with fine which may extend to Rs. 500.

Allotment of Shares

Offer for shares are made on application forms supplied by the company. When an application is accepted, it amounts to an allotment. Allotment is defined as the appropriation out of the previously unappropriated capital of the company of certain number of shares to a person.

General Principles Regarding Allotment


Allotment by Proper Authority The allotment should be made by a proper authority i.e. the BOD or a committee authorized to allot shares on behalf of the Board.

Allotment against Application Only No valid allotment can be made on an oral request. Sec.41 provides that for becoming a member, a person should agree in writing.

General Principles Regarding Allotment


Allotment not to be in Contravention of any other Law If shares are allotted on an application of a minor, the allotment will be void. Reasonable Time Allotment of shares must be made within a reasonable time. What is reasonable time is a question of fact in each case. The interval of about 6 months between application and allotment was held unreasonable. An applicant may refuse to take shares if the allotment is made after a long time.

General Principles Regarding Allotment


Communication The allotment must be communicated. Posting of letter of allotment or allotment advice will be taken as a valid communication even if the letter is lost in transit. Absolute and Unconditional The allotment should be absolute and unconditional. Shares must be allotted on same terms on which they were applied for and as they are stated in the application for shares. Allotment of shares subject to certain conditions is also not be valid one.

General Principles Regarding Allotment


Revocation An application for shares or debentures may be revoked only after the expiry of 5th day after the opening of subscription list or after the public notice, but before the allotment of shares is made.

Statutory Provisions Regarding Allotment


Registration of Prospectus A copy of prospectus signed by every person, who is named therein as a director or proposed director or by his agent authorized in writing shall be duly filed with the Registrar on or before the date of its publication.

Application Money An amount payable on the applications which must not be less than 5% of the nominal value of the share.

Statutory Provisions Regarding Allotment


Money to be deposited in a separate bank account All money received from application for shares shall be kept deposited in a scheduled bank account Until the certificate to commence business has been obtained or; Where such certificate has already been received, until the entire amount payable on application for shares in respect of the minimum subscription has been received by the company.

a)

b)

Statutory Provisions Regarding Allotment


a)

b)

Minimum Subscription A public limited company cannot make any allotment of shares unless: The amount stated in the prospectus as the minimum amount has been subscribed The sum payable on application for such an amount has been paid to and received by the company
In case the minimum subscription is not received within 120 days from the first issue of prospectus by the company, the entire application money must be refunded without any interest within the next 10 days. If the company fails to refund application money, then the directors shall be liable to repay the same with interest at 6% p.a.

Statutory Provisions Regarding Allotment


Statement in lieu of Prospectus In case the public company arranges capital privately, it must file a statement in lieu of prospectus with the Registrar at least 3 days before the first allotment is made.

Statutory Provisions Regarding Allotment


Opening of the Subscription List When shares or debentures of a company are offered in pursuance of a prospectus issued generally, no allotment may be made until the beginning of the fifth day from the date of the prospectus or on such later day as may be specified in the prospectus. The object of this provision is to give sufficient time to study the prospectus and to withdraw their application if they are not satisfied with the prospectus.

Statutory Provisions Regarding Allotment


Closing of the Subscription List SEBIs Guidelines, 2000, provide that the subscription list for public issue must be kept open for at least 3 working days and for not more than 10 working days. Public issues of infrastructure companies may be kept open for 21 working days.

Statutory Provisions Regarding Allotment

Listing of Shares

The prospectus may state that an application has been made for permission for the shares to be dealt in on one or more recognized stock exchanges.
Any allotment will be void if permission has not been granted by the stock exchange or each stock exchange, before the expiry of ten weeks from the date of the closing of the subscription list.

Statutory Provisions Regarding Allotment


Listing of Shares Where an appeal against the decision of any recognized stock exchange refusing permission for the shares or debentures to be dealt in on that stock exchange has been preferred, such allotment shall not be void until the dismissal of the appeal. When a stock exchange fails to dispose of the application within 10 weeks, then the same shall be deemed to have been rejected.
The company may appeal to the Central Govt. against the refusal: i. Within 15 days from the date of refusal ii. Within 15 days from the expiry of 10 weeks, whichever is earlier.

Statutory Provisions Regarding Allotment

Listing of Shares

Where the allotment is void under section 73, the company has to repay the entire application money at once to the applicants. If it is not repaid within 8 days after the company becomes liable to repay, the company and every director of the company who is officer in default shall be jointly and severally liable to repay it with interest @ 15% p.a. for the period of delay in making the payment.

Statutory Provisions Regarding Allotment

Refund of Excess Money (Oversubscription)

Irregular Allotment

If company without complying with the provisions of Act in general and of Sec. 69 and 70, in particular, makes an allotment of shares, then it will be considered irregular allotment.

Irregular Allotment Its Effects


Nature of Irregularity 1. Copy of prospectus not delivered to the Registrar Legal Effects on Allotment Allotment is Valid Liability of Company/ Directors etc. Company an every person knowingly a party to the issue of such prospectus , punishable with fine which may extend to Rs. 50, 000. a) Director willfully authorizing contravention, liable for damages to the company as well as allottee b) Company and every officer punishable with fine which may extend to Rs. 5000

2.

Application money being less than 5% of nominal value of share

Allotment is voidable

Irregular Allotment Its Effects


Nature of Irregularity Legal Effects on Allotment Liability of Company/ Directors etc.

3.

Minimum subscription not subscribed for

Allotment is Voidable

a) On closure of the issue, all money to be refunded to applicants without interest, and after 8 days directors liable to pay money with interest @ 15 % p.a. b) Director willfully authorizing contravention, liable for damages to the company as well as allottee

Irregular Allotment Its Effects


Nature of Irregularity 4. Application money not kept deposited with a scheduled bank Legal Effects on Allotment Allotment is Voidable Liability of Company/ Directors etc. a) Every promoter, director or other officer knowingly responsible for such contravention shall be punishable with fine which may extend to Rs. 50, 000. b) Director willfully authorizing contravention, liable for damages to the company as well as allottee

Irregular Allotment Its Effects


Nature of Irregularity 5. A statement in lieu of prospectus not delivered to the Registrar Legal Effects on Allotment Allotment is voidable Liability of Company/ Directors etc. a) Company and every director responsible for contravention punishable with fine upto Rs. 10, 000 b) Director willfully authorizing contravention, liable for damages to the company as well as allottee Company and every officer who is in default liable for fine which may extend to Rs. 50,000

6.

Time limit as to opening of subscription list not observed

Allotment is valid

Irregular Allotment Its Effects


Nature of Irregularity 7. Condition as to listing of shares on a recognized stock exchange not observed Legal Effects on Allotment Allotment is Void Liability of Company/ Directors etc. a) If permission not granted within 10 weeks from the date of closing of the subscription list, application money to be refunded. If not refunded within 8 days directors liable to pay money with interest @ 15 % p.a. b) Company and every officer punishable with fine which may extend to Rs. 5,000. in case refund delayed beyond 6 months, the guilty director shall also be liable to imprisonment upto 1 year.