Financial Management

Group Assignment 2

Long Term Financing: Equity Shares- Types and Provisions

Under Company Act 2013

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 TABLE OF CONTENTS

Sr.n Particulars Page

o no.
1. Acknowledgement 3
2. Long Term Finance 4
3. Equity Shares 5
4. Types of Equity Shares 6
5. Prices of Equity Shares 8
6. Advantages Disadvantages 9
7. Provisions Under Company Act 2013 10
8. Investor Point Of View 13
9. References 16

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What is Long Term Finance?

The funds which are not paid back within a period of less than a year are referred to as long term
finance. Certain long term finance options directly form a part of the permanent capital of the firm. In
such cases, the repayment obligation does not even arise. A 20 year mortgage or 10 year treasury bills
are examples of long term finance. The primary purpose of obtaining long-term funds is to finance
capital projects and carrying out operations on an expansionary scale. Such funds are normally
invested into avenues from which greater economic benefits are expected to arise in future. The nature
of such finance can be ownership as well as borrowing or a hybrid of the two. Some of the main
sources of long term finance are listed below

 Equity
 Bonds
 Term Loans
 Internal Accruals
 Venture Capital

In this report, under long term financing we are elaborating on Equity Shares as a source of
finance.

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What Are Equity Shares?
Equity shares are the shares that the organizations issue to people in general for long term
financing. Legally, the equity shares are not redeemable in nature and that is the reason they
are termed as long term finance for an organization. The shareholders reserve the right to
vote, share the benefits and guarantee the advantages of the organization.

The estimation of equity shares is communicated in the different term like par value or face
value, book value, issue price, market price, intrinsic value and so on. For an investor, these
shares are a certificate of ownership in the company by virtue of which investors are entitled
to share the net profits and have a residual claim over the assets of the company in the event
of liquidation.

Why Company Issues Equity Shares?

A company tends to invite the general public to acquire its shares as a means to earn
fractional ownership of the same. Through such ownership, shareholders are entitled to earn
returns in the form of dividends. Usually, a large privately-owned company issues shares to
trade publicly in a stock exchange. However, capital generation is the primary reason why
both small and large companies issue shares to the general public in the first place. The
equity share capital thus raised through equity shares issued is used for developing the
business venture of the company. Additionally, a large capital base helps them to enhance
their creditworthiness in the market. When a company issues share for investors to acquire,
they also extend an opportunity to earn a share of its profits and also to stake in its equity.

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Types of Equity Shares

 Authorised share capital:

The maximum amount of capital that can be issued by a particular company is known as
authorised share capital. Companies can increase their permissible limit to authorise shares
after they have availed permission from respective authority and have paid the required fees.

 Issued share capital:

Shares which a company offers to its investors are known as issued share capital.

 Subscribed share capital:

It comprises of the part of issued share capital, which the investors agree upon and accept.

 Right shares: 

The shares that are issued to individuals after they have invested in equity shares are known
as right shares. They are issued to safeguard existing investor’s ownership.

 Paid-up capital:

It forms the part of subscribed capital which the company invests in their business.

 Sweat equity shares: 

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As an appreciation for a job well-done, companies reward their employees or directors with
shares. Such shares are known as sweat equity shares.

 Bonus shares:

When the company issues shares to its shareholders in the form of a dividend, we shall call
them bonus shares. There are various advantages and disadvantages of bonus shares like
dividend, capital gain, limited liability, high risk, fluctuation in the market, etc.

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VARIOUS PRICES OF EQUITY SHARES

 PAR OR FACE VALUE:

Par or face value is the value of shares which we record in the books of accounts.

 ISSUE PRICE

The price which a company actually offers to the investors. Normally, the issue price and
face value of a share are the same in the case of new companies.

 SHARE/SECURITY PREMIUM AND SHARE AT DISCOUNT

When insurance of shares is at a price higher than face value, we shall call this excess amount
to be premium. Contrary to it, when the insurance of shares is at a price lower than face
value, we shall call this deficit amount to be discount.

 MARKET VALUE

In the case of companies listed on stock exchanges, the market value of the share is the price
at which they are currently sold in the market. It is also called stock market value. It may
happen that stock market value and value as per fundamental principles differ. Because there
are a number of sentiments that affect the stock market value.

 INTRINSIC VALUE 

The intrinsic value of a stock is a price for the stock based solely on factors inside the
company. It eliminates the external noise involved in market prices. It is calculated as per
Dividend Discount Model, Price Earning Ratio Method, Earning Capitalization Method and
Chop Shop method.

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ADVANTAGES

 Less risk: Equity financing are less risky as there are no fixed monthly loan payments
to be made. These can be beneficial for the start-up businesses which may not
generate profit or may not have positive cash flows during the early months. This
gives freedom to channel more money into the growing business.
 Credit problems: Equity financing may be the only choice for funds to finance
growth, if there are credit problems. Debt financing is less acceptable because of
higher interest rates and steep payments.
 Long-term planning: Equity investors have a long-term view. Immediate returns are
not expected by them on their investments. They might lose their money if the
business fails.
 Learn and gain from partners: Equity financing gives you the benefit to form
informal partnerships with more knowledgeable or experienced individuals who
potentially benefits your business with their great network.

DISADVANTAGES

 Share profit: Equity investors who have invested their money expect to receive
return on the same. Some of the company’s profit must be shared by the owner with
his equity partners.
 Loss of control: Introduction of additional investors in the company make the owner
loses some of the control of his company. This gives equity partners to have their
opinions on the decision making of the important aspects of the business.
 Potential for conflict: Every individual differs from the other and so their thinking
and perspective. Sharing ownership and working together may lead to emergence of
tension and conflicts between the owner and equity partners because of differences in
their vision for the company, management style, and ways of running the business.

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Provisions Under Company Act 2013

Statutory Restrictions on Allotment

1. Minimum subscription and application money

According to Section 49 of Companies Act, 2013 the first requisite of a valid allotment is that of
minimum subscription. In the given prospectus of the company the amount of minimum
subscription shall be stated when shares are offered to the public. No shares shall be allotted
unless a specified amount has been subscribed and the application money, which shall not be less
than the appeal that was held to be successful, the decision of stock exchange was set aside and
the listing would be granted. The allotment would be saved.

2. Over-subscribed Prospectus

An allotment is valid when the permission of a stock exchange has been granted and the
prospectus being considered as over-subscribed portion of the money received shall be sent back
to the applicants within the given time frame.

Global Depository Receipt

 As given under  Section 41 of the Companies Act 2013, a company may pass a resolution
in its general meeting authorising it to issue depository receipts in any foreign country in
such manner and subject to such conditions as prescribed by the company.

Private Placement

 According to Section 42 of Companies Act 2013, a company may make a private

placement through issue of offer letters for private placement. Provisions of Section 42
become applicable to such placement. Provisions of Section 42 become applicable to such
placement. The offer of securities or invitation to subscribe for securities can be made to a
number of persons but not exceeding 50 or such higher number as may be prescribed.
This number is not to include qualified institutional buyers and employees of the

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 company being offered securities under a scheme of employees stock option as per the
provisions of Section 62(1)(b). This can be done in one financial year and on such
conditions as may be prescribed which is to include the form and manner of private
placement.
 According to [Section 42(3)] no fresh offer or invitation is to be made by the company
unless allotments under any earlier offer have been completed or that offer has been
withdrawn or abandoned.
 As per Section 42(5) Securities have to be allotted within 60 days of receipt of application
money failing which the application money would have to be refunded within 15 days or
else 12 per cent interest would become chargeable. The money received on application is
to be kept in a separate bank account in a scheduled bank and is to be utilized only for
adjustment against allotment of securities or refund as given under Section 42(6).
 As given under Section 42(7) a company offering securities under this section is not to
release any public advertisements or utilize any media, marketing distributing channels or
agents to inform the public about the offer.
 Section 42(8) explains that after making allotments, the company shall file with the
Registrar a return of allotment in the prescribed by the company which consist of  the
complete list of all the security holders along  with their full names, addresses, number of
securities allotted and also any other information.

Consequences for the default

 Section 42(10) provides an explanation stating that any contravention of the section
would make the company, its promoters and directors liable to a penalty which may
extend to the amount involved in the offer, or two crore rupees whichever is higher. The
company shall then be in a position to refund the money to subscribers within a specified
time frame of 30 days of the order imposing the penalty.

Numbering of shares

 Every share in a company has to be distinguished by its distinctive number. The proviso
to this declaration says that this section is not to apply to a share held by a person whose
name is entered as a holder of beneficial interest in a share in the records of a depository.

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Certification for shares

 An allottee is generally permitted to have from the company a document, that is the share
certificate. And this certificate certifies the allottee is the holder of the specified number
of shares in the company. Shares in a depository record are not required be given their
distinctive numbers. The right of an allottee to get his certificate cannot be defeated by
putting up the right of lien for any dues owed by the allottee to the company. A complaint
was allowed to be filed at a place other than the company’s registered office.

Duplicate Certificate

 A shareholder shall carefully preserve and store his certificate as he shall not be issued a
duplicate unless and until it he shows that the original certificate is lost, damaged or
destroyed by any means and is surrendered to the company. 

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Investor Point of view

Standalone Dec-19 Sep-19 Jun-19 Mar-19

Promoters 50.03 50.05 47.29 47.27

Pledged 0 0 0 0
FII/FPI 24.51 23.7 24.33 24.32
Total DII 16.72 17.37 19.41 19.43
Fin.Insts 0.03 0.05 0.05 0.04
Insurance Co 6.51 6.8 7.1 7.34
MF 5.25 5.36 4.56 4.48
Others DIIs 4.93 5.16 7.7 7.57
Others 8.73 8.9 8.97 8.99
Total 99.99 100.02 100 100.01

Announcement Effective Dividend Dividend

Remarks
Date Date Type (%)
Rs.6.5000 per share(65%)Final
18-04-2019 43679 Final 65
Dividend
Rs.6.0000 per
27-04-2018 43278 Final 60
share(60%)Dividend
Rs.11.0000 per
25-04-2017 42929 Final 110
share(110%)Dividend
Rs.10.5000 per
08-03-2016 42446 Interim 105
share(105%)Interim Dividend
Rs.10.0000 per
17-04-2015 42132 Final 100
share(100%)Dividend
Rs.9.5000 per
21-04-2014 41775 Final 95
share(95%)Dividend
Rs.9.0000 per
16-04-2013 41404 Final 90
share(90%)Dividend
20-04-2012 41060 Final 85 -
21-04-2011 40668 Final 80 -
26-04-2010 40308 Final 70 -
07-10-2009 40102 Final 130 -
21-04-2008 39576 Final 130 -
02-03-2007 39162 Interim 110 -
27-04-2006 38869 Final 100 -
27-04-2005 38484 Final 75 AGM
29-04-2004 38127 Final 52.5 AGM
23-04-2003 37764 Final 50 -
30-09-2002 37552 Final 47.5 -
12-04-2001 37007 Final 42.5 -

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Announcement Date Bonus Ratio Record Date Ex-Bonus Date

21-07-2017 01:01 42987 42985

07-10-2009 01:01 40144 40143

13-09-1997 01:01 35763 35730

28-10-1983 03:05 30-11--0001 -

Announcement Date Rights Ratio Face Value Premium Record Date Ex-Rights Date

30-09-1991 01:20 0 0 33523 33487

Share Holding Pattern in

Mar-19 Dec-18 Sep-18 Mar-18
(%)

Standalone 43525 43435 43344 43160

Promoters 56.21 56.21 56.21 56.21

Pledged 0 0 0 0

FII/FPI 22.3 22.67 22.78 25.19

Total DII 17.09 16.9 17.14 15.14

Fin.Insts 7.44 7.34 7.16 5.72

Insurance Co 0 0 0 0
MF 5.77 5.91 6.05 5.66
Others DIIs 3.88 3.65 3.93 3.76
Others 4.4 4.21 3.87 3.47
Total 100 99.99 100 100.01

Announcement Date Effective Date Dividend Type Dividend (%) Remarks

Rs.80.0000 per
25-04-2019 14-08-2019 Final 1600 share(1600%)Final
Dividend

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 Rs.80.0000 per
27-04-2018 14-08-2018 Final 1600 share(1600%)Final
Dividend
Rs.75.0000 per
27-04-2017 24-08-2017 Final 1500 share(1500%)
Dividend.
Rs.35.0000 per
26-04-2016 31-08-2016 Final 700 share(700%)Final
Dividend
Rs.25.0000 per
27-04-2015 26-08-2015 Final 500 share(500%)Final
Dividend
Rs.12.0000 per
25-04-2014 27-08-2014 Final 240
share(240%)Dividend
Rs.8.0000 per
26-04-2013 13-08-2013 Final 160
share(160%)Dividend
Rs.7.50 per
28-04-2012 14-08-2012 Final 150 share(150%)Final
Dividend
Rs.7.50 per
25-04-2011 24-08-2011 Final 150 share(150%)Final
Dividend
26-04-2010 24-08-2010 Final 120 -
24-04-2009 18-08-2009 Final 70 -
24-04-2008 14-08-2008 Final 100 -
24-04-2007 22-08-2007 Final 90 AGM
31-07-2006 23-08-2006 Final 70 -
i.e. Rs.2.00 per share
06-05-2005 25-08-2005 Final 40 (Nominal Value Rs.5
per share)
i.e. Rs.1.50 (Nominal
17-05-2004 08-07-2004 Final 30 Value Rs. 5 per
share) & AGM

Announcement
Rights Ratio Face Value Premium Record Date Ex-Rights Date
Date

30-09-1993 02:01 0 0 34122 -

References:
 https://groww.in/p/equity-share-capital/

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 https://blog.ipleaders.in/what-is-share/
 Section 44 of Companies Act,2013,
 Section 45 of Companies Act,2013,
 http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
 https://www.indianivesh.in/kb-blog/what-is-equity-shares
 https://efinancemanagement.com/sources-of-finance/long-term-finance
 https://efinancemanagement.com/sources-of-finance/benefits-and-disadvantages-of-
equity-finance

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