Chapter 5

Companies raise capital in various ways. They can use the founder's savings, obtain loans from
banks or institutions, or collect capital from the general public.

In this context, "equity" simply means money that a company raises by selling ownership shares
or stocks to investors, including the general public. It's like when people buy a piece of the
company in exchange for their investment. So, raising equity means getting money by selling
these ownership shares, which is different from borrowing money through loans.
s2(1) 38,52,54,62

s2(1) 38 defines listed company

security means shares
(38) ―listed company means a public company, body corporate or any other entity whose
securities are listed on securities exchange;

public company definition

s 2 (1)(52)
(52) ―public company means a company which is not a private company

s2(1)54
A "public sector company" is a company, whether it's public or private, where the government or
government-related entities hold at least 51% of the voting power or voting securities. This
means the government has significant control over the company. It also includes not-for-profit
associations in the public sector licensed under section 42. However, if directors are nominated
by a securities exchange commission or another law, it doesn't automatically make the company
a public sector company.
securities" typically refer to shares, stocks, or other financial instruments that represent
ownership or investment in a company

s2(1)62
(62) ―securities exchange means a public company licenced by the Commission as a
securities exchange under the Securities Act, 2015 (III of 2015)

Directors
Single pvt co mei 1
Directors in pvt company min 2
Public mei min 3,7 if listed

Minimum share paid-up capital subscription

Pvt co 1 million thousand
Main Board:Minimum post issuance paid-up capital of PKR 200 million
(FOR SMEs) GEM Board:Minimum post issuance paid-up capital of PKR 25 million
5.2
private and public. The main difference in terms of capital raising lies in where the investment
comes from. Private companies typically receive their initial investment from their founders, who
use their personal savings or obtain bank loans. These companies can take various forms,
including limited or unlimited. If they choose to be limited, they can be limited by shares or by
guarantee. Private companies are not allowed to raise capital from the general public. The law
prohibits them from doing so

The London Stock Exchange (LSE) has its own set of rules known as the Listing Rules. These
rules apply to companies that want to be publicly listed on the LSE.

Public companies, in contrast, can freely raise capital from the general public. They are not
restricted from doing so. They have the option to issue shares to the public.
In cases where a significant amount of capital is required, a public company might choose to
raise funds by listing on a stock exchange like the LSE. This means their shares can be traded
by the public on the stock exchange.

Listing on a stock exchange involves adhering to additional regulations and requirements

specific to the exchange, which adds another layer of oversight and compliance.

Public companies face stricter regulations compared to private companies due to their dealings
with the general public.
- Public companies can only be formed as "limited by shares"
- When applying for registration, a public company must explicitly state that it is public.
- Like private companies, the liability of members in a public company is limited, and the
company's name must include "public limited company" (PLC or plc) at the end, as per CA
2006,
- Public companies have more stringent requirements regarding their share capital. The CA
2006, Section 763, mandates an authorized minimum share capital of £50,000 for public
companies.

- Public companies are meant to attract investments from the general public and can openly
advertise the sale of their shares.
- They are required to issue a prospectus that provides a detailed and accurate description of
the company's plans.

5.6
- The state is more involved in protecting investors when it comes to public companies because
the general public is affected by their capital-raising activities.
- The Companies Act subjects public companies to enhanced regulation in three key areas:

1. Accounting: Public companies face stricter deadlines for preparing and filing their
accounts. They do not have economic size exemptions similar to those available to small private
companies.

2. Capital: Public companies have to meet a minimum capital requirement. They also face
strict rules regarding the subscription for shares and tighter rules regarding financial assistance
and the purchase of their own shares.

3. Governance: Public companies have more rules about how they are run. For example, they
must have at least two directors, and they have to follow stricter rules about conflicts of interest.
These rules are in place to protect investors and make sure that public companies are

in the late 1800s and early 1900s, companies started selling shares to the public to raise money.
These companies got so big that the people who owned shares (shareholders) couldn't run
them anymore. So, they hired managers. These managers had a lot of power, even though they
didn't own much of the company. The problem was that there were millions of small
shareholders who didn't care much about watching over the managers because they only
owned a tiny bit of the company.This made it easy for the managers to get away with things that
were not in the best interests of the company or the shareholders.

This big group of shareholders also caused issues for regulators. Most of these small
shareholders didn't know much about the companies they were investing in, making them easy
targets for fraud. In response, the London Stock Exchange (LSE) stepped in to regulate the
market. They encouraged companies to share more information with investors to help them
make better decisions.

Over time, the government got involved too, protecting shareholders and punishing any abuse.
It's worth noting that not all public companies are listed on the stock exchange. Listing on the
exchange helps companies raise more money, and the LSE plays a crucial role in regulating it.
There are two markets on the LSE: the main market for big, established companies, and the
Alternative Investment Market (AIM) for smaller companies. In total, the LSE lists over 2,400
companies, with a combined value exceeding £4 trillion.
5.9-5.10
4 ways money can be raised by the public

- Companies have different methods to raise capital by offering shares:

1. Prospectus and Advertising: The company can directly offer its shares for subscription by
issuing a prospectus and advertising in trade or general press.
2. Offer for Sale: The more common method involves the company making an agreement with
an issuing house to allot its entire share issue. The issuing house then attempts to sell these
shares to its clients and the general public. This method transfers the risk of unsold shares to
the issuing house in exchange for a fee.
3. Placement with Merchant Banks: Shares may be placed with the clients of a merchant
bank or a group of merchant banks without being offered to the general public.
4. Rights Issue: the company could raise money through a rights issue. This is where new
shares are offered to the existing shareholders in proportion to their existing shareholding
usually because of shareholders’ pre-emption rights.

5.11 financial conduct authority and London Stock exchange

- Before May 2000, the London Stock Exchange (LSE) handled listing responsibilities in the UK.

- The Financial Services and Markets Act 2000 (FSMA) shifted these responsibilities to the
Financial Services Authority (FSA) until 2013.

- Post the 2007 financial crisis, the Financial Services Act 2012 split the FSA into the Prudential
Regulatory Authority (PRA) and the Financial Conduct Authority (FCA).

- The FCA now serves as the UK Listing Authority and collaborates with the LSE for effective
market functioning, including monitoring disclosures, reviewing prospectuses, and enforcing
listing rules for governance and investor protection.

5.15
Obligation at the time of listing
- The FCA and the LSE work together to ensure companies comply with listing requirements
and ongoing obligations for listed firms.

- Key rules for listing include providing past financial accounts, meeting a minimum market
capitalization, and having a minimum proportion of shares available to the public (25% for
Premium main market listing).

- The FSMA, Section 80, specifies detailed information that a company must share with the
public when listing its shares. This information must be comprehensive and cover what investors
and their advisors would reasonably need to assess:
a) The company's assets, liabilities, financial position, profits, losses, and prospects.
b) The rights associated with the securities being offered.
- Section 80(1) obligates the disclosure of information within the knowledge of those responsible
for listing particulars or information they could reasonably obtain through inquiries (Section
80(3)).

- Section 80(4) requires considering the nature of the securities, the company, potential
investors, matters known to professional advisors, and any information available due to
regulatory requirements, Listing Rules, or other laws.

5.17
Continuing obligation
Continuing obligations for listed companies in the UK are a set of requirements that
companies must adhere to after they have been listed on a stock exchange. These
obligations are designed to protect investors and to maintain an orderly market.

The main continuing obligations are set out in the FCA Listing Rules. They include the fol

A director of a public company knows that the company is about to sign a major contract.
This information is not yet public, but the director knows that it will have a significant impact
on the price of the company's shares. Under the model code, the director is not allowed to
buy or sell shares in the company until the information has been made public. If the director
did buy or sell shares, they would be breaking the code and could face serious
consequences.

The specific continuing obligations that a company is subject to will vary depending on the
type of listing that it has. For example, premium listed companies are subject to stricter
requirements than standard listed companies.

Here is a very easy way to understand the main continuing obligations for listed companies
in the UK:

● Tell the market everything they need to know. This includes your financial results,
any changes to your business model, and any insider information.
● Be governed well. Follow the UK Corporate Governance Code to ensure that your
company is well-managed and that your shareholders' interests are protected.
● Play fair. Don't use your insider knowledge to give yourself an unfair advantage when
dealing in the company's shares.
Directors of listed companies must also produce a "business review." This is a document
that describes the company's development and performance over the past year, as well as
the principal risks and uncertainties that the company faces in the future. The business
review must also discuss the effects of the company's operations on its stakeholders
(employees, creditors, the environment, and the local community).

The purpose of the business review is to provide investors with a comprehensive

understanding of the company's business and its performance. It is also important for the
business review to be written in a clear and concise way, so that it is accessible to all
investors.

The main point of this is that premium listed companies on the London Stock Exchange (LSE)
must communicate information to shareholders and potential shareholders in a way that avoids
creating or continuing a false market in their shares. This means that companies must be
transparent and disclose information to the market as quickly as possible, even if it is
price-sensitive.

This is important to ensure that all investors have access to the same information, to prevent
insider trading, and to maintain an orderly market.

Companies can apply to the Financial Conduct Authority (FCA) for an exemption from the
disclosure rules in certain cases, such as when they are planning a takeover.

Insider Dealing

Insider dealing is the buying or selling of a security by someone who has access to material
non-public information (MNPI) about the company. MNPI is information that is not publicly
known but could significantly affect the price of the security if it were to be disclosed.

Insider dealing is illegal because it gives an unfair advantage to the insider. The insider
knows something that the rest of the market does not, and this allows them to make a profit
by trading on that information. Insider dealing can also undermine public confidence in the
stock market.

Examples of insider dealing

 ● An executive of a company learns that the company is about to be acquired by
another company. The executive buys shares of the target company before the
acquisition is announced, and then sells them after the announcement, making a
large profit.
● A trader learns that a company is about to release a bad earnings report. The trader
sells shares of the company before the report is released, and then buys them back
after the report causes the price to drop, making a profit.

What are the penalties for insider dealing?

Insider dealing is a crime in most countries. The penalties for insider dealing can include
fines, imprisonment, or both.The London Stock Exchange (LSE) has a number of rules in
place to prevent insider dealing. These rules include:

● Requiring companies to disclose MNPI as quickly as possible

● Restricting the trading of shares by insiders
● Investigating and punishing insider dealing

However, the view that insider dealing is morally reprehensible prevails, and the law
attempts to deal with this through criminal and civil sanctions. The LSE also tries to ensure
that opportunities for insider dealing are minimized by ensuring that companies disclose any
significant information that might affect share price as quickly as possible.

Under securities act 2015 pakistan

Section 128: Prohibition of Insider Trading

● This section prohibits insider trading and defines what constitutes insider trading.
● Insider trading includes any transaction made using inside information, as well as
passing on inside information to others who then use it to trade.

Section 129: Definition of Inside Information

 ● This section defines inside information as any information that is not yet public, that
could affect the price of a listed security if it were made public, and that the person
trading or passing on the information knows or should know is not public.

Section 130: Definition of Insiders

● This section defines who is considered an insider for the purposes of the rules against
insider trading.
● Insiders include directors, officers, and major shareholders of listed companies, as well
as certain other individuals who have access to inside information.

Section 131: Responsibilities of Listed Companies to Disclose Inside Information

● This section requires listed companies to disclose insider information to the public as
soon as possible, unless there is a duty of confidentiality.
● Listed companies must also maintain a list of individuals who have access to inside
information and regularly update this list.