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CHAPTER 06 SHARES

CHAPTER 6 SHARES
MEANING AND NATURE
The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as `shares. A share is not a negotiable instrument. A share is an expression of proprietary relationship between a shareholder and the company. A share is share in the share capital of a company and includes stock except where a distinction between stock and share is expressed of implied. [Section 2 (46)] By share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holders by the Articles of the Company, which constitute a contract between him and the company. [CIT v. Standard Vacuum Oil Co. [1966] Comp LJ 187 (SC)] A right to participate in the profits made by a company, while it is a going concern and declares a dividend and in the assets of the company when it is wound up [Bucha F Guzdar v. CIT, Bombay LR 617 (SC)] Stock the aggregate of fully paid up share of a member merged into one fund of equal value. It is a set of shares put together in a bundle.

KINDS OF SHARES [SECTION 86]

The shares of company shall be of two kinds namely: with voting rights with differential rights - issued in accordance with the Companies (Issue of share capital with differential voting rights) Rules 2001. Preference Shares that part of the share capital which fulfils both the following conditions (a) preferential dividend; and (b) preferential right at the time of winding up. The Preference Shares may be of two types: (i) Cumulative Preference Shares It confers a right to claim a fixed dividend of the past and the current years out of future profits. The fixed dividend keeps on accumulating till is fully paid up. Where the dividend is due for more than two years from the date of shareholders meeting, the member shall have a right to vote. (ii) Non-cumulative Preference Shares in these shares the unpaid dividend for the past years do not accumulate. The voting rights on such shares accrue if the dividend is in arrear for 2 financial years immediately preceding the meeting or any 3 years during a period of 6 financial years preceding the meeting. The companies are now prohibited from issuing any preference share, which is irredeemable or is redeemable after the expiry of a period of 20 years. (i)

1. Equity Share capital Shares which are not preference shares

(ii)

2.

CLASSES OF CAPITAL

Usually the following classification of capital is made. Nominal or Authorised Capital - This is the sum mentioned in the Memorandum of Association as the capital of the company. It is known as the nominal or authorised capital, since this is the maximum amount of capital, which the company is authorised to, raised by the issue of shares. The company usually fixes this amount keeping in view the estimated capital which it may require for its present as well as its future needs. This is divided into shares of fixed denomination. Issued Capital - It is that part of the authorised capital which is issued for the time being for public subscription. Subscribed Capital - That part of the issued capital, which is actually subscribed or taken up by the public, is known as the subscribed capital. Called-up Capital - It is that portion of the capital that is called-up or demanded by the company. Usually the total amount due on the subscribed shares is not demanded by the company at a time, but is called up in three four installments payable on application, allotment, first call, final call etc. Reserve Capital - It is that part of the uncalled capital which the company has decided not to call up except at the time of the winding up of the company.

ISSUE OF SHARES [SECTION 81]

(i)

A company limited by shares may issues share in the following three ways: To the existing members (Rights Issue/Pre-emptive right)
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(ii)

(iii) (iv)

The existing members of the company shall have the first right to further issue of shares (Preemptive right) - Where at any time after the expiry of 2 years from the formation of a company or at any time after the expiry of one year from the first allotment of shares, whichever is earlier. Such members shall have a right to renounce in favour any other person. In case, the existing members/renouncee do not subscribe, the Board of Directors may dispose of them in such manner as they think most beneficial to the company. SEBI has issued guidelines for listed/to be listed companies. The offer letter is called `Letter of Offer`. To the Public not wholly to the existing members (Section 81(1A) (Public Issue) When the company issues to Public (persons other than existing members). The offer letter is called `Prospectus`. The existing shareholders shall pass a Special Resolution for making public issue of the company. Every company has to comply with SEBI (DIP Guidelines, 2000. Issue of further shares by conversion of loans of or debentures issued to financial institutions/banks, as per Loan Agreement approved by the Central Government. Issue of further shares by conversion of Convertible debentures in to Equity shares, as per the terms of issue.

SEBI (DIP) GUIDELINES 2000

Every listed/to be listed company for making further issue shall have to comply with SEBI (Disclosure and Investors Protection) Guidelines 2000 besides the provisions of the Companies Act 1956. it must be noted that SEBI has issued separate specific Rules and Regulations for each of the market intermediary. Some of the salient features of the DIP Guidelines are given below :RIGHTS ISSUE Existing listed or to be listed post issue Compulsory where the issue size is more than Rs. 50 lakhs All intermediaries- Registrar (Cat. I), Brokers, sub-brokers, Bankers, Underwrites should be SEBI Registered and give consent therefor The Letter of Offer document shall be prepared as per SEBI Guidelines. At 75% should be thru verifiable means Ordinary resolution Draft Letter of Offer duly signed by Directors with price band, Due Diligence Certificate to be filed at least 21 Days` before issue opening. Not before 22 days from the date of filing of draft offer letter and maximum of 365 days` from the date of SEBI Observation Letter. To be obtained before the issue opening

PARTICULARS APPLICABILITY APPOINTMENT OF SEBI REGD. CAT. I MERCHANT BANKER APPOINTMENT OF INTERMEDIARIES SEBI REGISTERED NATURE OF OFFER DOCUMENT FIRM ARRANGEMENT OF FINANCE NATURE OF SHAREHOLDERS RESOLUTION. FILING OF DRAFT OFFER LETTER BY MERCHANT BANKER AT 21 DAYS ALONG WITH THEIR DUE DILIGENCE CERTIFICATE EARLIEST ISSUE OPENING

PUBLIC ISSUE Existing listed or to be listed post issue Appointment of Merchant banker is mandatory. All intermediaries- Registrar (Cat. I), Brokers, Brokers, Bankers, Underwrites should be SEBI Registered and give consent therefor The Prospectus shall be prepared as per SEBI Guidelines. At 75% should be thru verifiable means Special resolution Draft Prospectus duly signed by Directors with price band, Due Diligence Certificate to be filed at least 21 Days` before issue opening. Not before 22 days from the date of filing of draft offer letter and maximum of 365 days` from the date of SEBI Observation Letter. To be obtained before the issue opening

TO OBTAIN`LETTER PRECEDENT TO LISTING` FROM THE CENTRAL LISTING AUTHORITY AND IN PRINCIPAL APPROVAL FROM CONCERNED STOCK EXCHANGE PROMOTERS` CONTRIBUTION LOCK IN PERIOD ELIGIBILITY

Not applicable No applicable Not applicable for an existing listed company

Mandatory before listing Free pricing Re. 1/- where the issue price is more than Rs. 500/No applicable 1% of the issue size Discretionary Discretionary To be open for Min 30 days Specified in SEBI Guidelines

AGREEMENT WITH DEPOSITORY PRICING OF SHARES FACE VALUE OF SHARES

20% post issue 3 years from the date of allotment in public issue. Lock in of 1 year for shares in exceeding promoters contribution. Net Tangible Assets Rs. 3 Cr.; Track of distributable profits 3 out of preceding 5 years; Issue Size upto 5 time pre issue net worth; post issue capital Rs. 10 Cr. [Separate guidelines for Infra structure, software companies] Mandatory before listing Free pricing Re. 1/- where the issue price is more than Rs. 500/IPO to be made through Book Building route with Green Shoe Option (Stabilising Agent) Not applicable Compulsory Compulsory To be open for min 3 days and more than 10 days Specified in SEBI Guidelines, Lead Merchant Banker accountable. LECTURES BY PROF. S N GHOSH

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CHAPTER 06 SHARES

ALLOTMENT

When an application offering to subscribe to shares of the company is accepted by the issuer company, is called allotment.
money Moneys to be kept in a separate bank account Statutory provisions Registration of prospectus with ROC 25% of nominal amount of share as minimum application

General principles Proper authority of the Board of Directors/Committee of Directors Allotment against application only Allotment not be in contravention of any other law e.g. SEBI Act 1992, FEMA 2000 Allotment to be made with in reasonable time Communication of allotment to the applicant must be complete Allotment must be absolute and unconditional

Minimum subscription Allotment to be made atleast 5 days of issue opening Prior in principal approval of Central Listing Authority and Stock Exchanges where shares proposed to be listed. Basis of allotment as per SEBI Guidelines accountability of Merchant Banker, Registrar to the Issue in consultation with Executive Director of SE and Public Representative

IRREGULAR ALLOTMENT
If allotment of share is made in contravention f the provisions of the Act, then the allotment is termed as irregular.

Irregular Allotment - Its Effects

Sl. No. 1 Nature of irregularity Copy of a prospectus not delivered to the Registrar Application money being less than 5% if the nominal value of share Legal effect allotment Allotment is void on Liability of Company/ Director etc. Company and every person knowingly a party to the issue of such prospectus, punishable with fine may extend to Rs. 50,000 Director, willfully authorising contravention liable for damages to the company as well as to the allottee Company and every officer of the company punishable with fine which may extend to Rs. 5,000 On closure of the issue(60 days from the closure if the issue is underwritten), all moneys to be refunded to the applicants without interest and if not refunded within next 8 days directors shall be liable to pay money with 15% pa interest Director willfully esponsible for contravention liable for damages to the company as well as to the allottee Director willfully authorising the contravention liable for damages to the company as well as to the allottee Company and every officer of the company punishable with fine which may extend to Rs.10,000 Director willfully authorising the contravention liable for damages to the company as well as to the allottee Company and its every officer, who is in default, punishable with fine which may extend to Rs.50,000 LECTURES BY PROF. S N GHOSH

Allotment is voidable

Minimum subscription not subscribed for

Allotment is voidable

4 5 Application money not kept deposited with a scheduled bank A statement in lieu of prospectus not delivered to the Registrar Allotment is voidable Allotment is voidable 6 Time limit as to opening of the subscription list not observed Allotment is valid

WLC 7 Condition as to listing of shares on a recognised stock exchange not observed

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Allotment is void

CHAPTER 06 SHARES If permission is not granted with 10 weeks of closing of the subscription list, application money to be refunded. if not refunded within 8 days, directors to repay with interest @ 15% pa Company and every officer of the company, who is in default, liable to pay fine upto Rs.50,000. In case refund is delayed beyond 6 months director also liable to imprisonment upto 1 year.

RETURN AS TO ALLOTMENT [SECTION 75]

It has been provided under the Act within 30 days of the allotment a return of allotment on Form No. 2 detailing the aggregate number of shares allotment, face value, amount paid up on each share, authority for allotment, name, address and occupation of each allottee should be filed with ROC.

UNDERWRITING AND BROKERAGE

Underwriting is in the nature of an insurance against the possibility of inadequate subscription. A public company cannot proceed to allot shares offered to the public unless the issue of raises the amount specified in the prospectus as the minimum subscription, is raised by the issue of shares.An underwriter is entitled to enter into subsidiary agreement with which the company is not concerned. They are not required to be disclosed in the prospectus. The underwriting agreement being a contract that the underwriter will either himself purchase of procure purchasers for the shares underwritten by him, it is no concern of the company as to how the underwriter procures the purchasers. (Re: Nani Gopal Lahiri) Brokerage is the reward paid to an intermediary (called broker) who brings about a bargain between the seller and a proposed investor (purchaser) of shares or debentures. Brokerage is different from underwriting commission because the underwriter undertakes to subscribe for shares in case of public default it is insurance on the happening of an agreed event; but the brokerage is only a commission for procuring the securities for the company. SEBI has issued separate guidelines for underwriters as well as the brokers. SEBI GUIDELINES COMPANIES ACT
UNDERWRITERS SEBI Registered Lead manager to satisfy ability of underwriter to meet financial obligation Written consent before inclusion of name in prospectus Lead merchant banker to underwrite 5% or Rs. 25 lacs whichever is less. Outstanding commitment not to exceed 20 times its net worth In case of devolvement, lead merchant banker to ensure payment within 60 days. To comply with Code of Conduct To appoint Compliance Officer BROKERAGE SEBI Registered UNDERWRITERS Authority under Articles Commission 5% for shares 2.5% for Debentures Disclosure in prospectus. BROKERAGE Authority under Articles Reasonable brokerage, usually 1% of the securities procured. Disclosure in prospectus Name and address of the brokers to be mentioned in prospectus

Written consent before inclusion of name in prospectus

Name and address of the brokers to be mentioned in prospectus Number and value of securities underwritten to be disclosed in prospectus A copy of underwriting agreement to be filed with ROC.

To comply with Code of Conduct To appoint Compliance Officer

ISSUE OF SECURITIES AT PREMIUM [SECTION 78]

A company may issue securities at a premium when it is able to sell them at a price above face value for example Rs. 10/- per share at a price of Rs.47/- per share. Rs. 10/- is the face value (nominal value) and Rs. 37/- is the premium. Premium may be utilized only for: 1. Issuing fully paid Bonus shares. 2. Writing off the balance of preliminary expenses.
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3. Writing off the commission paid of discount or expenses incurred in the connection with the issue of securities. 4. Providing premium payable on redemption of redeemable preference shares or debentures.

ISSUE OF SHARES AT DISCOUNT [SECTION 79]

If the buyer of the shares is required to pay less than the face value of shares for example Rs. 9/- per share against the face value of Rs. 10/-, then the share is said to be issued or sold at a discount (in this case 10% discount). Shares can be issued at a discount on fulfillment of the following conditions: The shares to be issued should be o a class that has previously been issued by the company. The issue should be authorised by a resolution of the member in general meeting, and sanctioned by the Central Government. The resolution authorising the issue should state the maximum rate of discount. The discount should not exceed 10% unless the Tribunal sanctions a higher rate. A period of one year should have elapsed from the date the company was entitled to commence business. The shares should be issued within two months from the date of the sanction by the Central Government or permitted extended period. This section and restrictions do not extend to issue of debentures at a discount

1. 2. 3. 4. 5.

BUYBACK OF SHARES [SECTION 77A AND 77B]

This section enables a company to purchase its own shares, whether equity or preference shares or other specified securities including employees stock option or other securities as may be notified by the Central Government from time to time. This section applies both to public and private companies, whether listed or unlisted. The buy back by a listed company is to be made in accordance with SEBI (Buy back of Securities) Regulations, 1998, and by an unlisted company in accordance with Private Limited Company and Unlisted Public Limited Company (Buy back of Securities) Rules, 1999. Pre-conditions Permitted only if the articles of the company so authrorised. Buy back of shares/securities is restricted to 25% of the total paid up capital and free reserves of the company, in any financial year. The debt equity ration should not be more than 2:1 after buy back. All the shares or other specified securities for buy back are fully paid up. The shares are not subject to any lock in period. . Restrictions imposed A Company shall not buy back its shares or other specified securities Through any subsidiary company, including its own subsidiary company. Through any investments company or group of investment companies. If default subsists in repayment of deposit or interest payable thereon, redemption of debentures or preference shares, or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or bank. If the company has (I) failed to file the annual return with the ROC, (II) failed to pay dividend with 30 days from the date of declaration (III) failed to prepare the Balance Sheet and profit and loss account as per the requirements of Schedule VI.
ADVANTAGES On buy back of shares the promoters holding increases automatically without buying any extra shares. This can also be used as defensive mechanism against hostile takeovers; DISADVANTAGE This militates against the interests of the creditors, particularly unsecured creditors who have advanced funds either as deposit or otherwise based on the paid up capital structure; Can tantamount to negation formation, in fact this will shun capital growth. of capital

The EPS increases. This leads to increase in the share price of the company over a period of time. Enhancement of shareholders` value as a result of buy back of shares Save stamp duty on shares so bought back by the company Considered as an addition for rewarding the shareholder in the years of mega profits or landslide earnings as opposed to minuscule dividend It reflects positive thinking by the management and instills more confidence amongst the investors; With lesser number of shares in circulation in the market an illiquid situation will be created. With lesser number of shares in circulation and lesser number of shareholders the quality of service can be improved.

This will lead to manipulation of shares in the market due to price rigging which may work to the prejudice of the shareholders; This will shun competitive and healthy takeover, which may be beneficial particularly to hose companies, which are facing financial crunch LECTURES BY PROF. S N GHOSH

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CHAPTER 06 SHARES

REDUCTION OF CAPITAL [SECTIONS 100 105]

A company limited by shares or a company limited by guarantee and having a share capital may reduce its capital: If so authorised by its articles. Confirmation by the Tribunal. Passing of a special resolution. Circumstances of reduction of capital (i) Extinguishing or reducing liability on shares not paid (ii) Cancellation of paid up share capital (iii) Return of excess capital The general rule is that the prescribed majority of the shareholders are entitle to decide whether there should be a reduction of capital, and, if so, in what manner and to what extent it should be carried into effect.

TRANSFER AND TRANSMISSION OF SECURITIES [SECTION 108 TO 111A]

(i) (ii) (iii) (iv) (v) (vi)

TRANSFER Transferability of shares is one of the most vital features of company limited by shares. It is this attribute of a share that endows company with perpetual and interrupted existence. Upon incorporation, a company acquires its own independent legal personality and distinct entity, and its shareholders acquire the right to hold and transfer their shares in the company. A Private Limited company by virtue of Section 3(1)(iii) may impose restrictions on the transfer of shares, however, a public limited company, whether listed or closely held the shares shall be freely transferable. It must be noted that the provisions of this section are applicable only in the case of physical shares. Section 108 requires for effecting a valid transfer the following requirements are to be satisfied: The instrument of transfer shall be in the prescribed form (Form 7B). The form has been duly stamped (25 Paise for every Rs. 100/- of the consideration value or market price which ever is higher, in the case of gift the stamp duty should be paid on the market price) The transfer deed should be duly filled up executed by or on behalf of the transferor; name, address, occupation of the transferee and duly signed by the transferee or his duly appointed representative The related share certificate in original shall accompany the transfer deed. The duly executed and completed transfer deed along with related share certificate should be deposited at the registered office or any other notified office (may be share transfer agent) of the company. The transfer deed should be valid. Validity period of transfer deed In the case of listed shares - 12 months from the date of presentation or date of first book closure after the date of execution, whichever is later. In the case of private or closely held public limited company 2 months from the date of presentation. Where the pledged shares are released by lending bank/financial institution 2 months from the date of such release. Blank transfer - where a transferor signs a share transfer form without filing in the name of the transferee and hand it over along with the share certificate to the transferee thereby enabling him to deal with the shares. This procedure facilitates sale and purchase of shares by delivery. At the time when the validity of the transfer deed is about to expiry, the last purchaser may complete the deed and lodge for registration in his name. Shares of Public limited company freely transferable after the enactment of Depositories Act 1996, the Companies Act has accordingly been amended. Section 111A(2) read with Section 111(14) inter alia, provide the shares of a public limited company shall be freely transferable. In other words, only a private limited company may refuse transfer of shares. However, an application may be made to the National Company Law Tribunal if such transfer is in contravention of any of the provisions of the SEBI Act, 1992 or any other law for the time. Such an application shall be made by NSDL/CDSL (Depository), SEBI, Depository Participant or company within 2 months of the transfer. TRANSMISSION Transmission of securities takes place by operation of law (i) when the member dies or; (ii) when he is adjudicated an insolvent; or (iii) where the member is a company and it goes into liquidation.

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CHAPTER 06 SHARES

The person entitled to the securities by operation of law shall send the legal document evidencing his title to the property (securities) together with the original certificates of the related securities. The company on being satisfied registers the name of that person in the place of the previous member.

NOMINATION OF SECURITIES
Every holder of shares or debentures may at any time nominate a person to whom his shares/debentures shall vest in the event of his death. The intimation regarding nomination shall be in prescribed form in duplication and filed with the Company/Share Transfer Agents who will return one copy thereof to the shareholder/debenture holder. A minor can be nominated, however the name and address of the guardian shall also be filed up. Such nomination will hold good against any legal successor.

DEPOSITORY SYSTEM
A depository is a facility for holding securities, which enables securities transactions to be processed by book entry. To achieve this purpose, the depository may immobilize the securities or dematerialise them (so that they exist only as electronic records).' India has chosen the dematerialisation route. In India, a depository is an organisation, which holds the beneficial owner's securities in electronic form, through a registered Depository Participant (DP). A depository functions somewhat similar to a commercial bank. To avail of the services offered by a depository, the investor has to open an account with it through a registered DP. A depository interfaces with the investors through its agents called Depository Participants (DPs). If an investor wants to avail the services offered by the depository, the investor has to open an account with a DP. This is similar to opening an account with any branch of a bank in order to utilise the bank's services. SEBI has issued separate regulations for Depositories and Depository Participant. Beneficial Owner is a person in whose name a demat account is opened with Depository (NSDL/ CDSL) for the purpose of holding securities in the electronic form and whose name is recorded as such with the Depository. A Depository Participant (DP) is an agent of the depository who is authorised to offer depository services to investors. Financial institutions, banks, custodians and stockbrokers complying with the requirements prescribed by SEBI/Depositories can be registered as DP. Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited in the investor's account with its DP. In order to dematerialise certificates; an investor will have to first open an account with a DP and then request for the dematerialisation of certificates by filling up a dematerialisation request form [DRF], which is available with the DP and submitting the same along with the physical certificates. The investor has to ensure that before the certificates are handed over to the DP for demat, they are defaced by marking "Surrendered for Dematerialisation" on the face of the certificates. 'Rematerialisation' is the term used for converting electronic holdings back into certificates. In this case, the beneficial owner has to make a specific request to his DP. The DP will forward the same to NSDL, after verifying that the beneficial owner has the necessary balance. NSDL in turn will intimate the registrar who will print the certificates and dispatch the same to beneficial owner. Thereafter, the company/Share Transfer Agent will remove the name of that person from the register of beneficial owner and enter the same in the Register of Members of the company. The benefits of participation in a depository are: 1. Immediate transfer of securities; 2. no stamp duty on transfer of securities; 3. elimination of risks associated with physical certificates such as bad delivery , fake securities , etc.; 4. reduction in paperwork involved in transfer of securities; 5. reduction in transaction cost; 6. nomination facility; 7. change in address recorded with DP gets registered electronically with all companies in which investor holds securities eliminating the need to correspond with each of them separately; 8. transmission of securities is done by DP eliminating correspondence with companies; 9. convenient method of consolidation of folios/accounts ; 10. holding investments in equity, debt instruments and Government securities in a single account; 11. automatic credit into demat account, of shares, arising out of split/consolidation/merger etc.

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CHAPTER 06 SHARES

EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK PURCHASE SCHEME

SEBI has issued ESOS and ESOP Guidelines listed companies. The Department of Company Affairs has on the same line issued Rules for unlisted companies. Employee stock option means the option given to the whole-time Directors, Officers or employees of a company which gives them the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a predetermined price. Employee stock option scheme (ESOS) means a scheme under which a company grants employee stock option. Employee stock purchase scheme (ESPS)" means a scheme under which the company offers shares to employees as part of a public issue or otherwise. Eligibility to participate: - An employee including overseas employee and employee of a subsidiary company. Not Eligibility to participate Promoter or belongs to the promoter group. A director who either by himself or through his relative or through any body corporate, directly or indirectly holds more than 10% of the outstanding equity shares of the company. The company shall for the purpose constitute a Compensation Committee which will consist of majority of independent directors. The committee shall formulate the terms and conditions of the ESOS. The scheme shall be approval by the shareholders by way of a Special Resolution. The explanatory statement shall contain prescribed details regarding the scheme including the particulars of the concerned employees. Option granted to an employee shall not be transferable to any person. In the event of the death of employee while in employment, all the option granted to him till such date shall vest in the legal heirs or nominees of the deceased employee. Until all the options are exercised/lapsed, prescribed particular of the scheme shall be disclosed in the Directors Report of the company. The company has to place before the shareholders at every meeting a certificate from the Statutory Auditors certifying that all the related provisions with regard to ESOS have been duly complied with by the company. The company has to follow prescribed accounting policy.

LECTURES BY PROF. S N GHOSH