418ffdbe-6c2a-4eaf-a5f2-d5caa9b186c7

Module-3
SHARES & SHARE CAPITAL
Assistant Professor: Savio Fernandez

What is a share?
A share is a unit of ownership in a company representing a proportional
claim to the company’s assets and profits. Shares provide shareholders
with voting rights and the potential for dividend income.

Difference between Stocks and Shares
SL NO POINT OF STOCKS SHARES
COMPARISON
1 Stocks represent part ownership of a

A share is a single unit of stock. It’s a
company A stock is a financial instrument
Definition financial instrument representing the
representing part ownership in single or
part ownership of a company.
multiple organizations.
2 The value of two different stocks can be The value of each share of a company
Denomination
different will be the same
3
Paid-up Value Stocks are always fully paid-up Shares may or may not be fully paid-up
4
Stocks are not a part of the original issue;
Original Issue Shares are a part of the original issue
shares are later converted to stocks
5
Stocks are usually divided into two major
types- common and preferred stocks. These Shares are categorized into common
Types
categories can be further divided into growth, shares and preference shares.
value, income, blue-chip etc.,Savio Fernandez
Assistant Professor:
What are the different types of shares?
1. Ordinary equity shares: Ordinary equity shares, also known as common
shares, are the most prevalent type of shares. Holders of these shares have
voting rights in the company's decision-making processes, allowing them to
participate in the election of the board of directors and other significant
matters.
2. Preference shares: Preference shares, as the name suggests, come with
certain preferential rights over ordinary shares. These rights often include a
fixed dividend payment before any distribution to ordinary shareholders and
priority in case of liquidation.

Difference between Equity share and Preference share
SL NO BASIS OF EQUITY SHARE PREFERENCE SHARE

COMPARISION
1 Dividend pay- Receive dividends after other Receive dividends before equity
out financial liabilities are paid shareholders
2 Rate of Dividends determined by Fixed dividend rate

dividends company's board of directors
3 Bonus shares Eligible for bonus shares No provision for bonus shares
4 Capital Repaid last during liquidation Repaid before equity shares

repayment
5 Voting rights Enjoy voting rights Do not have voting rights
Difference between Equity share and Preference share
SL NO BASIS OF COMPARISION EQUITY SHARE PREFERENCE SHARE
6 Redemption Cannot be redeemed Can be redeemed
7 Arrears of No benefit from arrears of Receive arrears of dividends in

dividend dividends addition to current dividends
8 Investment Suitable for long-term investors Ideal for medium to long-term
period investment
9 Investment Typically offer lower Often of higher denominations
denomination denominations
10 Type of investors Attracts investors with higher Attracts investors with lower risk
risk tolerance
Assistant Professor: Savio Fernandez tolerance
Types of ordinary equity shares
1. Authorised share capital: The authorised share capital is the
maximum value of shares that a company is allowed to issue, as
specified in its memorandum of association. This ceiling can be
increased through a formal process if the need arises.
2. Issued share capital: Issued share capital is the portion of
authorised capital that the company has actually issued and sold to
investors. It represents the total value of shares held by
shareholders.
3. Subscribed capital and paid-up capital: Subscribed capital refers to
the portion of issued shares that investors commit to purchasing.
Paid-up capital, on the other hand, is the portion of subscribed
capital that shareholders have paid for. Not all subscribed shares
may be paid for immediately, allowing flexibility in financing.
4. Voting shares and non-voting shares: Voting shares grant
shareholders the right to participate in the company's decision-
making processes. Non-voting shares, while still providing
ownership, do not grant such rights. This distinction is crucial for
investors seeking an active role in corporate governance.
5. Sweat equity shares: Sweat equity shares are issued to employees or

directors as part of their compensation package. These shares
are not purchased but are instead granted as a reward for the
individual's contribution to the company's growth.

6. Right shares: Right shares are offered to existing shareholders first,
giving them the opportunity to purchase additional shares before
they are made available to the public. This ensures that existing
shareholders maintain their proportional ownership in the
company.
7. Bonus shares: Bonus shares are additional shares distributed to
existing shareholders without any cost. These shares are issued
from the company's retained earnings or other reserves, and
they increase the total number of outstanding shares without
affecting the overall value of the company.

Types of Preference Shares
1. Redeemable and irredeemable preference shares.
2. Convertible and non-convertible preference shares.
3. Participating and non-participating preference shares.
4. Cumulative and non-cumulative preference shares

1. Redeemable and irredeemable preference shares: Redeemable preference
shares come with a predetermined maturity date, allowing the company to buy
back the shares from shareholders. Irredeemable preference shares, on the
other hand, have no fixed maturity date and are a permanent part of the
company's capital structure.
2. Convertible and non-convertible preference shares: Convertible preference

shares give shareholders the option to convert their preference shares into
ordinary equity shares after a specified period. Non-convertible preference
shares do not have this conversion option, offering a fixed return without the
possibility of equity conversion.

3. Participating and non-participating preference shares: Participating preference
shares give shareholders the right to participate in the company's profits beyond
the fixed dividend. Non-participating preference shares only entitle shareholders to
the fixed dividend and nothing more.
4. Cumulative and non-cumulative preference shares: Cumulative preference

shares ensure that if the company cannot pay the fixed dividend in a particular year
due to financial difficulties, the unpaid dividends accumulate and must be paid in
the future. Non-cumulative preference shares do not accumulate unpaid dividends.

DEBENTURE
A debenture is a type of loan, or a long-term debt instrument issued by
a company or organisation to raise funds from the public or
institutional investors. It is essentially a form of loan that investors
provide to the issuer.

Features
1. Debentures are instruments of debt, which means that debenture
holders become creditors of the company
2. They are a certificate of debt, with the date of redemption and

amount of repayment mentioned on it. This certificate is issued
under the company seal and is known as a Debenture Deed
3. Debentures have a fixed rate of interest, and such interest amount

is payable yearly or half-yearly

Features
4. Debenture holders do not get any voting rights. This is because they
are not instruments of equity, so debenture holders are not owners of
the company, only creditors
5. The interest payable to these debenture holders is a charge against

the profits of the company. So these payments have to be made even
in case of a loss.

Different types of debentures
1. Convertible debenture:
A convertible debenture is a type of debt instrument that provides the holder with
the option to convert the debenture into equity shares of the issuing company after
a specified period.
This conversion feature allows investors to benefit from potential capital
appreciation if the company's stock price rises, thereby transitioning from being
creditors (debt holders) to shareholders.
2. Non-convertible debenture (NCD):
Non-convertible debentures are debt instruments that cannot be converted into
equity shares. They remain as fixed-income securities throughout their tenure.
NCDs offer investors regular interest payments at a predetermined interest rate
until the maturity date, providing a predictable income stream.

3. Registered debenture:
A registered debenture is a debenture for which the issuer maintains a register of
debenture holders. These debentures are linked to specific investors, and the issuer
has a record of the holders' names and contact information.
Registered debentures provide a level of security for investors, as they can be easily
traced in case of loss or theft.
4. Unregistered debenture:
Unregistered debentures, in contrast to registered debentures, do not have a
specific record of individual debenture holders. They are considered bearer
debentures.
Unregistered debentures can be transferred more easily, as they do not require a
formal transfer of ownership, making them more convenient for trading in the
secondary market.

5. Redeemable debenture:
Redeemable debentures are debentures that come with a specific maturity date.
The issuer is obligated to repurchase them from debenture holders at face value
upon maturity.
Investors receive both periodic interest payments and the return of the principal
amount upon maturity, which provides clarity on when the investment will be
repaid.
6. Irredeemable debenture (perpetual debenture):
Irredeemable debentures, also known as perpetual debentures, do not have a fixed
maturity date. They continue indefinitely, and the issuer has no obligation to
repurchase them.
Investors receive periodic interest payments, and the principal amount remains
invested, with no specified date for redemption. These debentures offer a
perpetual income stream.

Difference between shareholder and Debenture holder
SL NO SHARE HOLDER DEBENTURE HOLDER
1 Represent ownership in a company Represent creditorship or debt.
2 Shareholders have ownership stake Debenture holders are lenders
3 Participate in company's success Expect regular interest payments
4 Considered riskier investments Lower risk profile
5 Subject to market volatility Receive fixed interest payments
6 Lower claim on company's assets Higher claim on company's assets
7 Considered unsecured investments Considered secured loans

RAISING OF CAPITAL
Methods
1. Retained earnings.
2. Debt capital.
3. Equity capital.

MODES OF ISSUE OF SHARES
1. Private Placement
2. Allotting shares to issue-house
3. Public issue of shares

1. Private Placement
Private placement of shares refers to the sale of securities (shares,
bonds, etc.) directly to a select group of investors, rather than offering
them to the general public. This method is often used by companies to
raise capital without having to go through the rigorous and expensive
process of a public offering.
2. Allotting shares to Issue house

The organisation that is issuing shares allocates or consents to
distribute the shares to an issue house at a concurred cost. The issuing
house or monetary organisation distributes an archive called an ‘offer
for sale’. It issues to people in the form of debentures or shares
available for purchase at more exorbitant costs.
3. Public Issue of Shares
When an issue / offer of shares or convertible securities is made to new
investors for becoming part of shareholders’ family of the issuer.
Steps
a) Filling of Prospectus
b) Issue of Prospectus
c) Receive application
d) Scrutiny of application
e) Allotment of shares

SEBI Guidelines for issue of shares
1. No Association with Similar Role: Directors, promoters, or other Key

Management Personnel of the company must not hold similar positions in any
other company.
2. No Debarment from Primary Market: Those with control over the company,
such as directors, promoters, or key management personnel, must not be debarred
from accessing the primary market.
3. Listing Application: The company must submit an application to list its shares
with a recognised stock exchange in India.
4. Depository Arrangement: The company must enter into legal contracts with a
depository to dematerialise its specific securities.

5. Fully Paid-up Equity Shares: Partly paid-up equity shares must be fully paid-up
before the IPO.
6. Minimum Public Shareholding: A listed company must maintain a minimum
public shareholding of 25%. If not met, the company has one year to comply with
this requirement.
7. Source of Funds: The company must arrange its financial resources from
trustworthy and verifiable sources, excluding the amount allocated to issue new
company shares.
8. Draft Offer and Red Herring Prospectus: For IPOs exceeding INR 50 lakhs, the
process begins with the company filing a draft offer in the form of a Draft Red
Herring Prospectus (DRHP) with SEBI.
9. Final Offer Document: After the review and receipt of the final observation
letter from SEBI, the company must file the final offer document or Red Herring
Prospectus with the Registrar of Companies

EMPLOYEE STOCK OPTION PLAN (ESOP)
Employee Stock option plan or Employee Stock Ownership Plan (ESOP)
is an employee benefit scheme that enables employees to own shares
in the company. These shares are purchased by employees at price
below market price, or in other words, a discounted price.
In order to claim the benefits of the ESOP, the employees have to wait
for a certain time period which is known as the vesting period. After
the completion of the vesting period the employees can purchase or
sell the specified amount of shares.

Types of ESOP
1. Employee Stock Option Scheme (ESOS)
The ESOS is a type of stock option scheme that grants an employee the
right (they are in no way obligated, though) to buy shares of the
business directly from the company at a predetermined value. This
option is subject to specific performance goals over a certain vesting
period.
2. Employee Stock Purchase Plan (ESPP):

It is an ESOP that gives employees the ability to purchase shares of the
company stock at a discounted or lower than the fair market price.

3. Restricted Stock Units (RSU)
Under Restricted Stock Units Plan, an Employee is awarded with the
right to receive shares on a pre-determined date subject to occurrence
of a specified event or fulfillment of specified conditions.
4. Stock Appreciation Rights (SARs)

SARs provide employees with cash payments equal to the appreciation
of the company’s stock over a specified duration.

Types of IPO:
1. Fixed Price Issue
2. Book Building Issue
BOOK BUILDING
Book building is a price discovery mechanism used by companies
issuing securities, particularly IPOs, to determine the price at which the
securities will be offered to the public.
In the book building issue, the price is discovered during the process of
IPO. There is no fixed price, but there is a price band. The lowest price
in the band is referred to as the ‘floor price’ and the highest price is
referred to as the ‘cap price’.

Advantages of book building IPO
Book building offers several advantages over traditional fixed-price offerings:
1. Price discovery: Book building facilitates the discovery of the optimal

price for securities by assessing investor demand. This ensures that the
securities are priced competitively, maximising the issuer's proceeds.
2. Efficient capital allocation: By allowing investors to indicate their

willingness to pay for the securities, book building ensures efficient
capital allocation, as the securities are allocated to those investors who
value them the most.

3. Flexibility: Book building provides flexibility to adjust the offering price
within a predetermined range based on investor demand, thereby
accommodating market conditions and maximising investor participation.
4. Reduced price fluctuations: Since the offering price is determined through

a consensus of investor bids, book building can help mitigate price volatility
in the secondary market post-listing.
5. Enhanced transparency: The book building process enhances transparency

by providing investors with insights into demand dynamics and pricing
considerations, enabling informed investment decisions.

ALLOTMENT OF SHARES
1) General Principles
2) Statutory restrictions
1. General Principles
a) Allotted by proper authority
b) Allotment against application only
c) Reasonable time
d) Communication
e) Absolute and Unconditional

2) Statutory Restrictions
a) A prospectus must be issued and a copy of the same should be filed
with the registrar.
b) Minimum subscription
c) Statement in lieu of prospectus

UNDERWRITING
Underwriting is an agreement, with or without conditions, to subscribe
to the securities of a body corporate when existing shareholders of the
body corporate or the public do not subscribe to the securities offered
to them.
As per SEBI Guidelines, it is required that if the body corporate is not

able to collect 90% of the offer amount, then it needs to compulsorily
return the money to those who have subscribed to the shares.

ISSUE PRICE OF SHARES
1. Shares issued at Par

2. Shares issued at Premium
3. Shares issued at Discount
1. Shares issued at par value when subscribers are only needed to pay
the nominal or face value of the shares issued.
2. If the sum received for issued shares is greater than the face value
of the shares, they are considered to be issued at a premium.
3. The issue of shares at a discount occurs when a company issues its
shares at a lower cost than the nominal value of the share.
Sweat equity:
Sweat equity shares’ to mean equity shares issued by the company to
employees or directors at a discount or for consideration other than
cash for providing the knowhow or making available rights in the
nature of intellectual property rights.
Right Shares
If a public company issues additional or further shares after the first
allotment of shares, it must be offered to the existing equity
shareholders of the company in proportion to the capital paid up on
their shares, such shares are called rights shares.

Bonus shares
Bonus shares are shares issued by a company out of its accumulated
reserves or profits to the existing equity share holders either as fully
paid shares or partly paid shares free of cost.
Call on shares
When shares are issued, the terms of issue may specify the installment
by which the issue price shall be payable. A member of a company is
bound to pay the nominal amount of share which he has purchased.
The balance may be payable as and when called for. The power to make
call is exercised by the board in the meeting by means of a resolution.

Calls in advance
According to sec.92 of the companies act, a company may if so
authorized by its articles, accept from a shareholder either the whole
or part of the amount remaining unpaid on any shares held by them, as
calls in advance.
Surrender of shares:
a shareholder who is not able to pay the call money may surrender its
shares to the company. The company cancels such surrender shares.
Surrender is a voluntary act on the part of the shareholder, whereas
forfeiture is a compulsory act on part of the company

Forfeiture of shares:-
When shares are allotted to an applicant, it becomes a contract
between the shareholder & the company. As & when the directors
make the calls, If he fails to pay the calls then his shares may be
forfeiture by the directors if authorized by the articles of association of
the company. The forfeiture can be only for non-payment of calls on
shares and not for any other reasons.
Re-issue of forfeited shares:-
Shares are forfeited because only a part of the due amount of such
shares is received and the balance remains unpaid. On forfeiture the
membership of the original allottee is cancelled. Such shares become
the property of the company. Therefore company may sell these
shares.

Differences between a share certificate and share warrant:
1. Share certificates can be issued by public companies as well as
private companies. But share warrants can be issued only by public
companies limited by shares.
2. Share certificates can be issued for fully paid as well as partly paid
shares, whereas share warrants can be issued only for fully paid
shares.
3. No authorization by the articles of association is necessary for the
issue of shares certificates. But share warrants cannot be issued by
a company unless their issue is authorized by the articles of
association.
4. No sanction or approval of the central government is necessary for
the issue of shares certificates, whereas the approval of the central
government is necessary for the issue of share warrants

4. The name of the holder of a share certificate appears in the register
of members. But the name of the holder of a share warrant does not
appear in the register of members.
5. A share certificate is not a negotiable instrument, whereas a share

warrant is considered as a negotiable instrument under mercantile
usage and custom.
6. A share certificate can be issued originally. But a share warrant

cannot be issued originally. Only share certificates can be converted
into share warrants later on.

SHARE TRANSFER
Transfer of shares means the voluntary handing over of the rights and
possibly, the duties of a company member (as represented in a share of
the company). The rights and duties of the share transfer happen from
a shareholder who wishes to not be a member of the company any
more to a person who wishes of becoming a member.

Share Transfer Process/Provision
1. Instrument of transfer: Transfer deed

2. Transfer by legal representative.
3. Application for transfer
4. Transfer of partly paid shares.

Share Transmission
Transmission of shares takes place due to the operation of law that is when
the holder is deceased or has become lunatic or insolvent. In case of the
death of the holder the shares, it will be transferred to the legal
representative and in case of insolvency to the official assignee.
Transfer Of Shares Under Depository System:

Section 56(4) of the Companies Act, 2013 provides for the transfer of share
under the depository system. Under this section when a company is doing a
transfer of shares or other securities through a depository, then one should
inform the details of allotment of shares or securities immediately to the
depository.
NSDL, CDSL

Difference between Transfer and Transmission of shares
Particulars Transfer of Securities Transmission of Securities
Voluntarily and intentional transfer Ownership is transferred either to the
Ownership
of ownership legal representative or legal assignees
Reason of Transfer Sale, gift, pledge, etc Death, insolvency, and unsoundness
Death certificate, succession

Legal Agreement between parties, transfer
certificate, or probate of a will be
Requirements deed, and verification of documents
required
Time Frame of There is no such time limit it can be It is possible only after the death of
Transfer done at any time as per the law the security owner
Consent of both the parties that Consent of the transferee is needed
Consent are transferor and transferee is as the other party is not able to give
required Assistant Professor: Savio Fernandez
consent
Dematerialisation and Rematerialisation of Shares
What is Dematerialisation ?
• Dematerialisation is the process of converting physical share certificates
and debentures into electronic format. The term ‘demat’ in Demat
accounts stands for dematerialisation as investors essentially use the
account to hold dematerialised shares and securities virtually.
• To dematerialise your securities, you must approach a Depository
Participant (DP) to open a demat account in India. The DPs utilise two
depositories: the National Securities Depository Limited (NSDL) and Central
Depository Services Limited (CDSL) to open Demat accounts in India.

What is Rematerialisation ?
• Rematerialisation is the process of converting securities that are in
digital format into physical certificates. Investors who have converted
or have their securities in electronic format stored in Demat accounts
can opt for the rematerialisation process. However, while securities
are undergoing the rematerialisation process, investors cannot trade
them on the relevant exchange.

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Module-3

SHARES & SHARE CAPITAL

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

1 Stocks represent part ownership of a

Assistant Professor: Savio Fernandez

SL NO BASIS OF EQUITY SHARE PREFERENCE SHARE

2 Rate of Dividends determined by Fixed dividend rate

4 Capital Repaid last during liquidation Repaid before equity shares

SL NO BASIS OF COMPARISION EQUITY SHARE PREFERENCE SHARE

6 Redemption Cannot be redeemed Can be redeemed

7 Arrears of No benefit from arrears of Receive arrears of dividends in

5. Sweat equity shares: Sweat equity shares are issued to employees or

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

2. Convertible and non-convertible preference shares: Convertible preference

Assistant Professor: Savio Fernandez

4. Cumulative and non-cumulative preference shares: Cumulative preference

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

2. They are a certificate of debt, with the date of redemption and

3. Debentures have a fixed rate of interest, and such interest amount

Assistant Professor: Savio Fernandez

5. The interest payable to these debenture holders is a charge against

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

SL NO SHARE HOLDER DEBENTURE HOLDER

1 Represent ownership in a company Represent creditorship or debt.

2 Shareholders have ownership stake Debenture holders are lenders

3 Participate in company's success Expect regular interest payments

4 Considered riskier investments Lower risk profile

5 Subject to market volatility Receive fixed interest payments

6 Lower claim on company's assets Higher claim on company's assets

7 Considered unsecured investments Considered secured loans

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

2. Allotting shares to Issue house

Assistant Professor: Savio Fernandez

1. No Association with Similar Role: Directors, promoters, or other Key

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

2. Employee Stock Purchase Plan (ESPP):

Assistant Professor: Savio Fernandez

4. Stock Appreciation Rights (SARs)

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

1. Price discovery: Book building facilitates the discovery of the optimal

2. Efficient capital allocation: By allowing investors to indicate their

Assistant Professor: Savio Fernandez

4. Reduced price fluctuations: Since the offering price is determined through

5. Enhanced transparency: The book building process enhances transparency

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

As per SEBI Guidelines, it is required that if the body corporate is not

Assistant Professor: Savio Fernandez

1. Shares issued at Par

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez

Assistant Professor: Savio Fernandez