UNIT 7- CORPORATE FINANCE – (EQUITY)

Raising of capital/issue of shares

 By Private Placement of shares

 Offer for Sale-By allotting entire shares to an ‘issue house’ which in turn offers the
shares for sale to the public

 Public issue of shares-By inviting the public to subscribe for shares in the company
through a prospectus.

 Right’s issue-Issue of shares to existing shareholders.

 A public Co can also raise its capital by placing the shares privately & without inviting
the public for subscription of shares or debentures.

 In this an underwriter or a broker finds persons, normally his clients who wish to buy
the shares. He acts as an agent & his function is to procure buyer for shares.

 Since no public offer is made for shares there is no need to issue any prospectus.

 Rose Valley Real Estates & Construction Ltd v. SEBI.

 Sahara India Real Estate Corp. Ltd v. SEBI

Private Placement of Shares-
S 42 read with Companies (Prospectus & Allotment of Securities) Rules,2014 as
amended vide Second Amendment Rules,2018.

 S 42(3)-Any offer or invitation to subscribe or issue of shares to a select group of

persons by a company (other than by way of public offer) can be done by private
placement offer cum application.

 A private placement can be done only subject to the following Conditions

(1) A Co may subject to provisions in S 42, make a private placement of securities
(1A) A Co shall not make an offer or invitation to subscribe to securities through private
placement unless the proposal has been previously approved by the shareholders of the
company, by a special resolution for each of the offers or invitations-Companies (Prospectus
& Allotment of Securities) Second Amendment Rules,2018.

 Sahara India Real Estate Corp. Ltd v. SEBI

 (2) Placement can be made only to a select group of people identified by the board
(referred as identified persons) whose number shall not exceed 50 or 200 in a
financial year (excluding the qualified institutional buyers & employees of the co
being offered securities under ESOP).
  (3)A Co making private placement shall issue private placement offer & application in
such form & manner as prescribed to identified persons, whose names & addresses
are recorded by the company in such manner as prescribed.

 Private placement offer & application shall not carry any right of renunciation.

 (4) Every identified person wiling to subscribe to the private placement issue shall
apply in the private placement & application issued to such person along with
subscription money paid either by cheque or DD or other banking channel & not by
cash.

 (5) No fresh offer or invitation shall be made unless the allotments with respect to
any offer or invitation made earlier have been completed or that offer or invitation
has been withdrawn or abandoned by the Co.

 (6) A Co making an offer or invitation under this section shall allot its securities
within 60 days from the date of receipt of application money for such securities & if
the company is not able to allot the securities within that period, it shall repay the
application money to the subscribers within 15 days from the expiry of 60 days & if
the Co fails to repay the application money within the said period it shall be liable to
repay that money with interest at 12% per annum from the expiry of the 60th day.

 (7) No Co issuing securities under his section shall release any public advertisements
or utilize any media, marketing or distribution channels or agents to inform the
public at large about such an issue.

 (8) A Co making any allotment of securities u/s shall file with the Registrar a return of
allotment within 15 days from the date of allotment in such manner as prescribed,
including a complete list of all allottees, with their full names, number of securities
allotted & such other relevant information as may be prescribed.

 (9) If a Co defaults in filing the return of allotment within the period prescribed
u/ss8, its promoters & directors shall be liable to a penalty for each default of 1000
for each day during which such default continues but not exceeding 25 lakhs.

 (10) Subject to ss11if a Co makes an offer or accepts monies in contravention of this

section, the Co , its promoters & directors shall be liable for a penalty which may
extend to the amount raised throughout the private placement or 2 crore, whichever
is lower, & the Co shall also refund all monies with interest as specified in SS(6) to
subscribers within a period of 30 days of the order of imposing penalty.

 (11) Notwithstanding anything contained in SS9 & SS10any private placement issue
not made in compliance of the provisions of SS2 shall be deemed to be a public offer
& all the provisions of this Act & the securities Contract Act 1956 & the SEBI Act 1992
shall be applicable.
Allotment
 Offer for shares are made on application forms supplied by the Co and when an
application is accepted, it amounts to an allotment.

 Sri Gopalan Jalan & Co v. Calcutta Stock Exchange Association Ltd- allotment was
defined as ‘the appropriation out of the previously unappropriated capital of the
company of a certain number of shares to a person.’
Principles regarding allotment

 Proper authority-should be made by proper authority i.e., the BOD, or a committee

authorized to allot shares on behalf of the board. Allotment made without proper
authority will not be valid.

 P.V Damodara Reddy v. Indian National Agencies Ltd.

 ChangaMal v. Provincial Bank.

 Allotment against application only-cannot be made unless there is a written

application for allotment-H.H Manabendra Shah v. Official Liquidator.

 Rahul Subodh Windoors Ltd v. A.K Menon.

 Allotment cannot be in contravention of any other law-Re Trans Atlantic Life

Assurance Co.Ltd –violation of foreign exchange regulations.

 Unit Trust of India v. Om Prakash Berlia-allotment made for any improper motive is
bad & can be struck down.

 If shares are allotted on the application of a minor, allotment will be void.

 Reasonable time-allotment must be made within a reasonable period of time,

otherwise the application lapses.

 What is a reasonable time is a question of fact.

 Interval of 6 months between application & allotment was held to be not

reasonable-Ramsgate vitorial Hotel Company v. Montefiore.

 If there is an unreasonable delay in allotment of shares, but its accepted by the

applicant & not revoked he cannot plead delay later- Murugappa Chettiyar v.
Pudukottai Ceramics Ltd.

 Communication-allotment must be communicated to the applicant.

 Universal Banking Corporation, In re

 Changa Mal v. Provincial Bank-a person cannot be treated as a shareholder unless a

notice of allotment has been sent to him.

 Karachi Oils Products Ltd v. Kumar Shree Narendra Singh-once allotment is made &
communicated, directors cannot cancel the allotment.
 Household Fire & Carriage accident Insurance Co v.Grant-posting of a properly
addressed & stamped letter of allotment is sufficient communication even if letter is
delayed or lost in post.

 Absolute and unconditional- allotment must be made on the same terms as stated in
the application.

 No condition should be attached to the acceptance of an offer to purchase shares.

Statutory provisions

 Registration of prospectus

 Application money

 Minimum subscription

 Closing of the subscription list

 Permission to deal on stock exchange-the whole allotment can be void if permission

from any one S.E is denied.

 Rishyashringa Jewellery Ltd v. Stock Exchange, Urmila Bharuka v. Coventry Spring &
Engineering Co Ltd & Ors -if an appeal is preferred against the decision of the stock
exchange allotment shall not be void till the appeal has been disposed off.
Call on shares

 When shares are issued ,the terms of the issue may specify the instalments by which
the issue price shall be payable. Instalments other than those payable by way of
application & allotment are generally referred to as calls.

 A call is a demand by the company for payment of part of the issue price of shares
which has not been paid.

 The amount payable on the application on each share must not be less than 5% of
the nominal amount of the share. Balance payable can be called upon by the BOD in
one or more instalments or by the liquidator during winding up.
Requisites of a valid call

 Resolution at a meeting of the board.

 Call on shares of same class must be made on uniform basis.

 Call to be made bona fide in the interests of the company.

 Time within which shares are to be made fully paid up must be mentioned.

 Notice of call must be given.

 Forfeiture of shares
 Co’s article usually contains power to forfeit shares of a member who fails to pay
calls within a certain time after they fall due.

 Forfeiture involves depriving a person of his property as a penalty or some act or

omission.

 Conditions-

 Shares cannot be forfeited unless the articles confer such power on directors.

 Proper notice must have been served.(not less than 14 days)

 A resolution must be passed by the directors

 Power must be exercised in good faith.

 Hopkinson v. Mortimer Harley & Co-It cannot be for the non payment of any other
debt as that would amount to unauthorized reduction of share capital.

 Hope v. International Finance Society- where the articles authorize the directors to
forfeit the shares of a shareholder, who commences an action against the directors
or the company, it was held that such a clause was invalid as it was against the rights
of a shareholder.

 Kotah Transport Ltd v. State of Rajasthan-where the shares are once registered in
the name of a person, Company has no power to forfeit the shares on the ground of
failure of consideration. Its remedy is only to obtain appropriate relief by suit.
Effect of forfeiture

 Cessation of membership

 No cessation of liability

 No cessation of Liability as past member

 Shares become the property of the Co, so the shares can be re issued or disposed of
on such terms & in such manner as the board thinks fit.

 After forfeiture & discharge of liability if there is any balance, it belongs to the
defaulter & cannot be appropriated by the Co-Naresh Chandra Sanyal v. Calcutta
stock Exchange Assn. Ltd.
Surrender of shares

 Voluntary return of shares by the shareholder to the Co for cancellation. There is no

provision for surrender either in CA or in AOA.

 Bellerby v. Rowland &Marwood Steamship Co. Ltd -it was held that a Co cannot
accept a surrender of its shares as it involves reduction of share capital, forfeiture is
a statutory exception & is the only exception.
 Surrender of shares cannot be accepted without sanction of court as this amount to
reduction of capital-Mangal Sain v. Indian Merchants Bank Authority.

 The only exception where fully paid up shares may be accepted is when shares are
surrendered in exchange for new shares of the same nominal value.(as there is no
reduction of share capital)
Lien on shares

 Lien is a security, it’s a charge on shares to secure any debt which may be due from
the member of the company.

 The AOA of a Co normally give the power to Co to exercise a lien-Canara Bank v.

Thribhuvandas

 Where shares are held in joint names, the Co will have a lien on such shares in
respect of a debt due by any one of the joint holders-Narandar v. Indian
Manufacturing Co. Ltd.

 Co can enforce its lien on shares by the sale of the shares if a member defaults
payment.
Transfer of Shares

 S 44 every share holder can transfer his shares in the manner laid down in Articles &
in accordance with various provisions of law.

 In the case of a private Co the ‘pre-emption clause’ restricts transfer & transferor
must offer his shares to the existing members of the Co.

 Regulation 20 provides certain restrictions regarding transfer of shares in public Co

also.

 BOD may refuse to register the transfer of partly paid up shares to a person whom
they do not approve; BOD may refuse to transfer shares on which the Co has a lien.
Procedure

 Regulation 21 stipulates that certain conditions can be introduced by the Co in its

Articles to restrict transfer.

 S 56, a Co is required within 1 month after application of transfer to deliver share

certificates that are duly transferred.

 Mathrubhumi Printing & Publishing Co. Ltd v. Vardhaman Publishers Ltd,

Padmanabha Rao v. Union Theaters(P)Ltd, In re, Reliance Industries Ltd, Jay
Investments P. Ltd v. Deccan Leafine Services Ltd.
Procedure

 S 56-A Co shall not register a transfer of securities unless a proper instrument of

transfer duly stamped, date & executed by or on behalf of the transferor &
 transferee specifying the name, address & occupation of the transferee has been
delivered to the Co by the transferor or transferee.

 The instrument of transfer must have been delivered to the Co within a period of 60
days from the date of execution.

 The instrument of transfer must be accompanied by the certificate or a letter of

allotment, relating to securities.

 Co shall unless prohibited by any provision of law or any order of court, tribunal or
other authority deliver the certificate within a period of 1 month.
Case Laws

 Sanjay Mukim v. Thermax Ltd.

 Nuddea Tea Co Ltd v. Ashok kumar Saha

 Kothari Industrial Corp. Ltd v. Lazor Detergent P Ltd.

 Arvind Parasramka v. Minwool Rock Fibres Ltd.

 Subhash Chander v. Vardhaman Spg & Gen Mills Ltd.

Blank Transfer

 In blank transfer the share holder signs a share transfer form without filling the
name of the transferee & hands it over along with share certificate thereby allowing
him to deal with shares.

 It facilitates purchase & sale of shares by mere delivery of share certificates along
with the transfer form.

 It ensures easy transferability & saves stamp duty.

Transmission

 Transmission takes place when the registered share holder dies or when he is
adjudicated insolvent or where the shareholder is a Co, when it goes into liquidation.

 Succession certificate is to be insisted upon by public Co for registering transmission

of shares-Ms. Vidya Primlani v. ITC Ltd.

 S 56(2) provides that the Co will have the power to register on intimation of such
transmission.

 S56(4) Co shall deliver the certificates duly transmitted within a period of 1 month
from the date of receipt of intimation of transmission.
Difference between a Transfer & Transmission
Transfer

 Voluntary & deliberate

 Transferor & transferee have to execute an instrument of transfer.

 Normal method of transferring property in shares.

Transmission

 Operation of law

 Instrument of transfer not required only proof of title to share is required.

 Takes place only on death or insolvency.

Variation of Share Holder Right’s.

 S 48- If share capital of the Co is divided into different classes of shares the rights
attached to the shares of any class may be varied with consent in writing of the
holders of not less than ¾ of the issued shares of that class or with the sanction of
special resolution passed at the meeting.

 However, this is possible only if such a provision is provided in the MOA or AOA of
the Co.

 If variation of one class of shareholders affects the rights of any other class of
shareholders the consent of ¾ of such other class of shareholders shall be obtained.
Employee stock option scheme

 A scheme under which a Co grants employee stock option directly or through a trust.

 If Co is planning to implement the scheme through a trust the same shall have to be
decided upfront & approval of shareholders should be taken through a special
resolution.

 There shall be a minimum vesting period of 1 year.

 Co can specify a lock in period.

 The employee shall not have the right to receive any dividend or to vote or enjoy the
benefits of a S.H in respect of the option granted to him.
Rights shares (S 62)

 Co limited by shares can increase its share capital by issuing new shares, if it is
authorized by the AOA by passing a special resolution.

 Generally they do not issue the whole of its authorized capital at once. When the
BOD feel the need for additional expansion of funds they may issue further shares.
 To be first offered to the existing members of the company. Such shares are known
as ‘rights shares & the right of members to be so offered is called the ‘right of pre-
emption’.
Bonus shares (S 63)

 S 63 contains the provisions.

 A Co may issue fully paid up bonus shares to its members out of its free reserves, the
securities premium account or the capital redemption reserve account.

 It should be authorized by the AOA, has been authorized in the general meeting of
the Co, has not defaulted in payment of interest or principal in respect to fixed
deposits or debt securities, statutory dues of employees like PF, gratuity or bonus.
Cannot be issued in lieu of dividend.
Underwriting & Brokerage

 Underwriting is an expression used in company matters signifying a contract by

which a person(underwriter) agrees (for a commission) that if shares, debentures or
debenture stock to be offered for subscription or some specified portions thereof
are not taken up by the public, he will take them up & pay for what the public did
not take up.

 Nani Gopal Lahiri v. State of U.P-underwriting is like an insurance against the

possibility of an inadequate subscription.

 Prospectus must state the details about underwriting of the issue including the
names, addresses of the underwriters & the amount underwritten by them.

 Rule 13 of Co (Prospectus & Allotment of Securities Rules,2014)- Co may pay

commission to any person in connection with the subscription whether absolute or
conditional subject to following conditions-

 The payment of such commission shall be authorized in the Co AOA

 Commission may be paid out of proceeds of the issue or the profits of the Co, both

 Rate of commission shall not exceed 5 % of the price at which the shares are issued
or a rate authorized by the articles which ever is less or 2 & half % if its debentures.

 No commission can be paid to the underwriters on securities which are not offered
to the public for subscription

 A copy of the payment of commission should be delivered to the Registrar at the

time of delivery of the prospectus for registration.
Brokerage

 Brokerage-Reward paid to middle man(broker)who brings about a bargain between

the seller & a purchaser of shares or debentures.
 Different from underwriting as the underwriter undertakes to subscribe for shares in
case public defaults, but a broker does not incur any such liability.

 If he brings a bargain between the company & the allottee, he gets the brokerage
otherwise not.

 The amount of brokerage payable must be disclosed in the prospectus. Brokerage

can be paid only to a professional broker & not to a person who has casually induced
others to subscribe.
S 66-Reduction of share capital
Subject to confirmation by Tribunal on an application by the Co, a Co ltd by shares or
limited by guarantee & having a share capital may by special resolution reduce the
share capital in any manner & may-

 reduce the liability of any shares in respect of share capital not paid up.
 Either with or without reducing liability on any shares –cancel any paid up share
capital which is lost or is unrepresented by available assets, pay off any paid up share
capital which is in excess of the wants of the Co.

 A Co affecting reduction of capital may alter its MOA by reducing the amount of its
share capital & its shares accordingly.

 No reduction of capital shall be allowed if the Co is in arrears in repayment of any

deposits accepted by it either before or after the commencement of this Act or
interests payable thereon.
Procedure u/s 66

 A special resolution must be passed

 Application to the tribunal to confirm the resolution

 Tribunal shall give notice of application to the Central govt, ROC,SEBI & in case of
listed Co & to the creditors of the Co.

 All the above will have to make their representations(objections) within 3 months
from the date of receipt of notice failing which it will be presumed that they have no
objection.

 No application shall be sanctioned by the tribunal unless the accounting treatment

proposed by the Co is in conformity with the accounting standards u/s 133.

 The order of confirmation by the tribunal shall be published by the Co.

 The Co shall deliver to the Registrar a Copy of the order of the Tribunal within 30
days.
 A member of the Co past or present shall not be liable to any call or contribution
exceeding the amount of difference if any between the amount paid on share or
reduced amount if any.

 Liability in case of omission- to creditors.

 Liability of officers of the Co.in case of concealment, misrepresentation-punishable

with fine of not less than 5 lakhs but which could extend up to 25 lakhs.
Reduction-Without sanction of Tribunal

 Forfeiture of shares

 Surrender of Shares

 Redemption of redeemable preference shares

 Purchase of shares of a member by the company u/s 242.

 Buy-back of its shares by a company u/s 68.

Buy-back of shares-Conditions-S 68

 S 67(1) of the CA 2013, a Co limited by shares or a Co limited by guarantee having a

share capital cannot buy its own shares.

 This restriction is applicable to all Co having share capital whether public or private.

 S 68 however, allows a Co to purchase its own shares or other securities subject to

certain conditions.
A Co can buy its shares & other securities out of -

 its free reserves

 securities premium account or the proceeds of any shares or other specified
securities.

 S 69 if shares are bought back out of free reserves then a sum equal to the nominal
value of shares bought back shall be transferred to a reserve account called the
‘Capital Redemption Reserve Account’ & details of such transfer to be disclosed in
the balance-sheet.
Benefits of Buy-back

 Return of surplus cash to share holders

 Maintain a revised capital structure

 Discourage unwelcome takeover bids

 Increase in dividend rate

 Increase in earning per share

 More efficient use of corporate resources

 Increase in promoter’s stake in the Co by resorting to open market purchase

Penalty-fine not less than 1 lakh that can extend to 3 lakh & every officer in default
will be punishable with imprisonment that can extend to 3 years or fine not less than
1 lakh-3 lakh or both.
S 68(2)
No Co shall purchase its own shares or other securities unless:

 I) The buy back is authorized by its articles

 A special resolution has been passed at a general meeting of the Co authorizing the
buy-back. However up to 10% can be affected by passing a resolution at the meeting
of BOD.

 Buy back cannot exceed 25% of the total paid up equity capital in that financial year.
 There cannot be more than one buy back within a period of 1 year
 All shares for buy back are fully paid up.
 Buy back of shares listed on stock exchange is in accordance with the provisions
made by SEBI

 II) the notice of meeting at which special resolution is proposed to be passed shall be
accompanied by an explanatory statement.

 III) every buy back shall be completed within a period of 1 year from the date of
passing the special resolution.

 IV) Buy-back shall be permissible-from the existing share holders on a proportionate

basis, from the open market, from employees under sweat equity scheme or stock
option plans.

 V) must file with the ROC & SEBI, a declaration of solvency signed by at least 2
directors of the Co & verified by an affidavit to the effect that the BOD of the Co has
made full enquiries into the affairs of the Co & as a result of it they have formed an
opinion that the Co is capable of meeting its liabilities & will not be rendered
insolvent within a period of 1 year from the date of this declaration.

 VI) Co buys back its own securities, it shall extinguish & physically destroy the
securities so bought back within 7 days of the last date of completion of buy-back.

 VII) after completion of buy back it will not make further issue of the same kind of
shares within a period of 6 months except by way of bonus shares, conversion of
warrants, stock option scheme, sweat equity or conversion of preference shares or
debentures into equity shares.
 VIII)It shall maintain a register for this & shall file a return with the ROC & SEBI within
30 days.

 The order of confirmation by the tribunal shall be published by the Co.

 The Co shall deliver to the Registrar a Copy of the order of the Tribunal within 30
days.

 A member of the Co past or present shall not be liable to any call or contribution
exceeding the amount of difference if any between the amount paid on share or
reduced amount if any.

 Liability in case of omission- to creditors.

 Liability of officers of the Co.in case of concealment, misrepresentation

Issue of shares at a Premium

 A Co may issue securities at a premium when it is able to sell them at a price above
face value.

 CA 2013 does not restrict the issue of securities at a premium, but some conditions
have to be fulfilled.

 Premium cannot be treated as profit & cannot be distributed as dividend but can be
given as bonus shares, the amount of premium must be recorded in a separate
account, known as the ‘securities premium account’ this account cannot be treated
as free reserves & has to be maintained with the same sanctity as share capital.

 S 52(2) it can be utilized for-issuing bonus shares, writing off balance of the
preliminary expenses of the Co, writing off commission paid, discount allowed or
expenses incurred on issue of shares or debentures of the Co, for purchase of its
own shares or securities u/s 68.

 Hyderabad Industries Ltd, In re [2004]-Unless AOA permit utilization of share

premium account for purposes other than mentioned in S 52(2) company court
cannot approve resolution to that effect.

 Mangalam Cements Ltd, In re [2008] -Company can utilize credit balance in securities
premium account for the purpose of meeting deferred tax liabilities.

 Hyderabad Industries Ltd, In re [2004]-for utilization of share premium account for

purposes mentioned in S 52(2) no approval or sanction from court is required.
Issue of shares at a Discount (53)

 If the buyer of shares is required to pay less than face value of shares then the share
is issued or sold at a discount.
 S 54 provides that a company shall not issue shares at a discount and only sweat
equity shares can be issued at a discount after complying with specific conditions
provided.

 Any share issued by a Co at a discount shall be void & punishable with fine & officers
in default with imprisonment.

 However, under CA 2017, a Co may make such an issue in pursuance of any statutory
restructuring plan or debt restructuring scheme.