BATCH – 2017-2020

FACULTY OF MANAGEMENT AND BUSINESS STUDIES

SHRI GURU RAM RAI UNIVERSITY

DEHRADUN

SUBMITTED TO:- SUBMITTED BY:-

Ms. DIVYA MAM SARTHAK BATRA

 ISSUES OF SHARES

Issue of Shares is the process in which companies allot new shares to shareholders.
Shareholders can be either individuals or corporates. The company follows the rules prescribed
by Companies Act 2013 while issuing the shares. Issue of Prospectus, Receiving Applications,
Allotment of Shares are three basic steps of the procedure of issuing the shares. The process of
creating new shares is known as Allocation or allotment. Let us see the two types of shares of a
company and the procedure for issue of shares that a company must follow.

Nature and Classes of Shares

A share of a company is one of the units into which the capital of a company is
divided. So if the total capital of a company is 5 lakhs, and such capital is divided into
5000 units of Rs 100/- each, then this one unit of amount 100 is a share of the
company.

Thus a share is the basis of ownership of the company. And the person who holds such
shares and is thus a member of the company is known as a shareholder.

Now the Articles of Association will contain some essential information about shares
and share capital, like the classes of shares to be prescribed. In all, there are two types
of shares a company can allot according to the Companies Act 2013. They have
different natures, rights, and obligations.

Types of Share a company can have –

Most companies only ever have one type of share (or class of share). The shares are
commonly called ordinary shares and will be the ones the company was incorporated with.
The typical rights that go with ordinary shares (and the rights conferred by the
Model Articles for private limited companies) Each share is entitled to one vote in any
are:
circumstances. Each share has equal rights to dividends. Each share is entitled to participate in
a distribution arising from a winding up of the company.

However, some companies choose to have two or more different types of share, sometimes referred
to as ‘alphabet shares’. It’s relatively straightforward to create a new share class. Indeed, if the
shareholders consent then a company can have as many different share classes as it likes, each
representing a different type of share. The rights that go with different classes of shares, which are
at least in part described in the prescribed particulars for the class, can be whatever the
shareholders are willing to accept.

Equally, the shareholders’ rights for different classes of shares do not have to be different. In fact,
different share classes can have identical rights to other classes. In some companies, ‘alphabet
shares’ (“Ordinary A Shares”, “Ordinary B Shares” etc) with identical rights are issued to different
shareholders.
Creating different share classes in this way might allow dividends to be paid to some shareholders
but not to others, but the company should be careful to ensure that any such strategy does not
constitute a breach of HMRC rules and guidelines.
However, in general, if a company has more than one type of share the main differences between them
will be found in one or more of the following areas:

Entitlement to dividends Shares may have the right to normal dividends, preferential
dividends
(that is, the right to be paid a dividend before other share classes or at a certain fixed level), a dividend
only in certain circumstances or no dividends at all.

Entitlement to capital on winding up If the company is dissolved, any assets left

after the company’s debts are paid can be distributed to shareholders. However, different share classes
may have different rights to capital distribution – with some shares ranking first and others only paid if
sufficient assets remain after others have received their full distribution of capital.
Voting rights Usually, this is as simple as shares either carrying voting rights or not. However,
weighted or tiered voting rights are also possible – so, for example, shares may carry extra voting rights in
certain circumstances or on certain important matters affecting the company.

While
there are a few conventions which are best followed to avoid any misunderstandings a company can call
shares by whatever name it likes. That said, you cannot simply assume that shares called ordinary in one
company will have exactly the same rights as the ordinary shares in another company. Indeed the only way to
ascertain what rights go with a particular share class is to read the articles of association of that company. The
reasons why a company would want to have different share classes will generally fall into one of the below
categories:

• To attract investment
• To push dividend income in a certain direction
• To remove (or enhance) voting powers of certain individuals
• To motivate staff (to remain as employees)
Provided it follows due process, and subject to any restrictions in its articles of association, a company
can create a new share class at any time. When it needs a new share class a company can choose to
either create a new share class in addition to an existing class or convert an existing share class into one
or more new share classes.
It is the articles of association which set out the division of shares into their different classes. The articles
will also detail the precise rights attaching to each class. Most classes of share will fall into one of the
below categories of types of share:

1.Ordinary shares
These carry no special rights or restrictions. They rank after preference shares as regards dividends and
return of capital but carry voting rights (usually one vote per share) not normally given to holders of
preference shares (unless their preferential dividend is in arrears).
Some companies create more than one class of ordinary shares – e.g. “A Ordinary Shares”, “B Ordinary
shares” etc. This gives flexibility for different dividends to be paid to different shareholders or, for example,
for pre-emption rights to apply to some shares but not others.
In some cases, different classes of ordinary share may be of different nominal values – for example, there
may be £1 Ordinary shares and £0.01 Ordinary shares. If each share had the right to one vote (and
assuming the shares were issued at their nominal value), then the £0.01 Ordinary shareholders would
get 100 votes per £1 paid while the £1 Ordinary shareholders would get 1 vote for paying the same
amount.

2.Deferred ordinary shares

A company can issue shares which will not pay a dividend until all other classes of shares have received a
minimum dividend. Thereafter they will usually be fully participating. On a winding up they will only
receive something once every other entitlement has been met.

3.Non-voting ordinary shares

Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting rights if
certain conditions are met. Alternatively, they may carry no voting rights at all. They may also preclude
the shareholder even attending a General Meeting. In all other respects they will have the same rights as
ordinary shares.
 4.Redeemable shares
The terms of redeemable shares give the company the option to buy them back in the future;
occasionally, the shareholder may (also) have the option to sell them back to the company, although
that’s much less common.
The option may arise at or after a specific date, between two dates or be effective at any time the shares
are in issue. The redemption price is usually the same as the issue price, but can be set differently. A
company can only redeem shares out of profits or the proceeds of a new share issue, which may restrict
its ability to redeem shares even if the directors would like to exercise the option.
If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At
no point can all of its share capital be made up of redeemable shares.
We’ve written a dedicated article covering the features and processes related to redeemable shares.

5.Preference shares
These shares are called preference or preferred since they have a right to receive a fixed amount of
dividend every year. This is received ahead of ordinary shareholders. The amount of the dividend is
usually expressed as a percentage of the nominal value. So, a £1, 5% preference share will pay an
annual dividend of 5p. The full entitlement will be paid every year unless the distributable reserves are
insufficient to pay all or even some of it. On a winding up, the holders of preference shares are usually
entitled to any arrears of dividends and their capital ahead of ordinary shareholders. Preference shares
are usually non-voting (or only have a vote only when their dividend is in arrears).
In another article, you can read in more detail about preference shares.

6.Cumulative preference shares

If the dividend is missed or not paid in full then the shortfall will be made good when the company next
has sufficient distributable reserves. It follows that ordinary shareholders will not receive any dividends
until all the arrears on cumulative preference shares have been paid.
By default, preference shares are cumulative but many companies also issue non-cumulative preference
shares.

7.Redeemable preference shares

Redeemable preference shares combine the features of preference shares and redeemable shares. The
shareholder therefore benefits from the preferential right to dividends (which may be cumulative or
non-cumulative) while the company retains the ability to redeem the shares on pre-agreed terms in the
future.

Most companies start by just having one type of shares in the form of an ordinary share class. These will
typically carry equal rights to voting, capital and dividends. The issue of new shares after company
 incorporation will generally be allotments of these ordinary shares, unless circumstances suggest a need
for flexibility or varied rights.
Just as a company may issue shares in multiple share classes, there’s also nothing to stop a shareholder
holding more than one class of share in the same company and thereby benefiting from the differing rights
(e.g. voting or dividend entitlement) that each class offers.

Difference between Equity Shares and Preference Shares

Preference Shares
A preference share is one which carries two exclusive preferential rights over the other type of
shares, i.e. equity shares. These two special conditions of preference shares are

• A preferential right with respect to the dividends declared by a company. Such dividends
can be at a fixed rate on the nominal value of the shares held by them. So the dividend is
first paid to preference shareholders before equity shareholders.

• Preferential right when it comes to repayment of capital in case of liquidation of the

company. This means that the preference shareholders get paid out earlier than the
equity shareholders.
Other than these two rights, preference shares are similar to equity shares. The holders of
preference shares can vote in any matters directly affecting their rights or obligations.

Preference shares can actually be of various types as well. They can be redeemable or
irredeemable. They can be participating (participate in further profits after a dividend is paid
out) or non-participating. And they may be cumulative (arrears in demand will cumulate) or
noncumulative.

Equity Shares
Equity share is a share that is simply not a preference share. So shares that do not enjoy any
preferential rights are thus equity shares. They only enjoy equity, i.e. ownership in the
company.

The dividend given to equity shareholders is not fixed. It is decided by the Board of Directors
according to the financial performance of the company. And if in a given year no dividend can
be declared, the shareholders lose the dividend for that year, it does not cumulate.
Equity shareholders also have proportional voting rights according to the paid-up capital of the
company. Essentially it is one share one vote system. A company cannot issue non-voting
equity shares, they are illegal. All equity shares must come with full voting rights

Issue of Shares
When a company wishes to issue shares to the public, there is a procedure and rules that it
must follow as prescribed by the Companies Act 2013. The money to be paid by subscribers can
even be collected by the company in installments if it wishes. Let us take a look at the steps and
the procedure of issue of new shares.

Procedure of Issue of New Shares

1] Issue of Prospectus
Before the issue of shares, comes the issue of the prospectus. The prospectus is like an
invitation to the public to subscribe to shares of the company. A prospectus contains all the
information of the company, its financial structure, previous year balance sheets and profit and
Loss statements etc.

It also states the manner in which the capital collected will be spent. When inviting deposits
from the public at large it is compulsory for a company to issue a prospectus or a document in
lieu of a prospectus.

2] Receiving Applications
When the prospectus is issued, prospective investors can now apply for shares. They must fill
out an application and deposit the requisite application money in the schedule bank mentioned
in the prospectus. The application process can stay open a maximum of 120 days. If in these
120 days minimum subscription has not been reached, then this issue of shares will be
cancelled. The application money must be refunded to the investors within 130 days since
issuing of the prospectus.

3] Allotment of Shares
Once the minimum subscription has been reached, the shares can be allotted. Generally, there
is always oversubscription of shares, so the allotment is done on pro-rata bases. Letters of
Allotment are sent to those who have been allotted their shares. This results in a valid contract
between the company and the applicant, who will now be a part owner of the company.
If any applications were rejected, letters of regret are sent to the applicants. After the
allotment, the company can collect the share capital as it wishes, in one go or in instalments

Share Qualification
A share of common stock that a candidate for a company's Board of Directions (BOD) is required to
own is known as qualification shares. The term does not reflect a difference in the properties of a
qualifying share compared to common shares held by other shareholders. Instead, it refers to the
requirement that a member of the board must hold a vested interest in the operation of the enterprise
in the form of company stock.

Or

The number of shares that a member of the board needs to own to qualify to be on the board of
directors of a company. If not enough shares are owned the person does not qualify to be on the
board. OR A share of common stock that a candidate for a company's Board of Directions (BOD)
is required to own. Instead, it refers to the requirement that a member of the board must hold a
vested interest in the operation of the enterprise in the form of company stock

Bonus Shares

Bonus shares are additional shares given to the current shareholders without any additional cost,
based upon the number of shares that a shareholder owns. These are company's accumulated
earnings which are not given out in the form of dividends, but are converted into free shares.
The basic principle behind bonus shares is that the total number of shares increases with a
constant ratio of number of shares held to the number of shares outstanding. For instance, if
Investor A holds 200 shares of a company and a company declares 4:1 bonus, that is for every
one share, he gets 4 shares for free. That is total 800 shares for free and his total holding will
increase to 1000 shares.

Companies issue bonus shares to encourage retail participation and increase their equity base.
When price per share of a company is high, it becomes difficult for new investors to buy shares of
that particular company. Increase in the number of shares reduces the price per share. But the
overall capital remains the same even if bonus shares are declared.

Bonus Shares are shares distributed by a company to its current shareholders as fully paid

shares free of charge.

 to capitalize a part of the company's retained earnings

 for conversion of its share premium account, or

 distribution of treasury shares.

An issue of bonus shares is referred to as a bonus share issue.

A bonus issue is usually based upon the number of shares that shareholders already own. (For
example, the bonus issue may be "n shares for each x shares held"; but with fractions of a share
not permitted.) While the issue of bonus shares increases the total number of shares issued and
owned, it does not change the value of the company. Although the total number of issued
shares increases, the ratio of number of shares held by each shareholder remains constant. In
this sense, a bonus issue is similar to a sto duckt.

Process

Whenever a company announces a bonus issue, it also announces a book closure date which is a
date on which the company will ideally temporarily close it fresh transfers of stock.
Depending upon the constitutional documents of the company, only certain classes of shares may
be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes.
Bonus shares are distributed in a fixed ratio to the shareholders.
Sometimes a company will change the number of shares in issue by capitalizing its reserve. In
other words, it can convert the right of the shareholders because each individual will hold the
same proportion of the outstanding shares as before.
Because a bonus issue does not represent an economic event – no wealth changes hands. The
current shareholders simply receive new shares, for free, and in proportion to their previous share
in the company. Therefore, a bonus share issue is very similar to a stock split. The only practical
difference is that a bonus issue creates a change in the structure of the company's shareholders'
equity (in accounting). Another difference between a bonus issue and a stock split is that while a
stock split usually also splits the company's authorized share capital, the distribution of bonus
shares only changes its issued share capital (or even only its outstanding shares).

Right Issue

A rights issue or rights offer is a dividend of subscription rights to buy additional securities in

a company made to the company's existing security holders. When the rights are
for equity securities, such as shares, in a public company, it is a non-dilutive(can be dilutive) pro
rata way to raise capital. Rights issues are typically sold via a prospectus or prospectus
supplement. With the issued rights, existing security-holders have the privilege to buy a specified
number of new securities from the issuer at a specified price within a subscription period. In a
public company, a rights issue is a form of public offering (different from most other types of public
offering, where shares are issued to the general public). Sometimes Right issue can give
privileges to people like director, employees those are having some ownership in company to buy
the issues.
Rights issues may be particularly useful for all publicly traded companies as opposed to other
more dilutive financing options. As equity issues are generally preferable to debt issues from the
company's viewpoint, companies usually opt for a rights issue in order to minimize dilution and
maximize the useful life of tax loss carryforwards. Since in a rights offering there is no change of
control and a "no-sale theory" applies, companies are able to preserve tax loss carry-forwards
better than via either follow-on offerings or other more dilutive financings. It's one of the types in
modes of issue of securities both in public and private companies.

A rights issue is directly distributed as a tax free dividend to all shareholders of record or through
broker dealers of record and may be exercised in full or partially. Subscription rights may be
transferable, allowing the subscription-rightsholder to sell them on the open market. A rights issue
to shareholders is generally made as a tax-free dividend on a ratio basis (e.g. a dividend of three
subscription rights for two shares of common stock issued and outstanding). Because the
company receives shareholders' money in exchange for shares, a rights issue is a source
of capital.
 Advantages of the Rights Issue of Shares
• The shares are offered to the shareholders at the discounted price to encourage them to
purchase the rights issue.

• The company saves a significant amount of money, such as underwriting fees, advertisement
cost and so on.

• The control of the company remains in the hands of the existing shareholders. This is because
the shares are only issued to those shareholders who on the date of rights issue are the holders
of the shares.

• There is an equitable distribution of the shares and the same proportion of the voting rights.

Disadvantages of the Rights Issue of Shares

• The company may not be able to raise more funds and fail to achieve their target. This may
happen if the existing shareholders of the company are not too keen to invest more.

• The value of each share may get diluted if there are an increased number of shares issued.

• If a well-established company is going for the rights issue of the shares, then it goes on to
create a negative market sentiment. It is assumed that the company is struggling to run its
business operations smoothly.

Conclusion
In summation, rights issues are a way by which companies can raise equity capital by giving the
existing shareholders the privilege to buy a specified number of new securities at a specified
price within a specified time frame. The rights issue is different from bonus shares. While both
of them are issued to existing shareholders, bonus shares are for free, whereas rights shares are
usually at a discount. Rights issue also differs from the initial public offer or follow-on public
offer as rights are issued to existing shareholders at a discounted price compared to market
value while ordinary shares may be issued at face value or at a premium to the general public at
large

Sweat Equity Shares

 According to Sweat Equity Shares under Companies Act, 2013 it means that such equity shares
as are issued by a company to its directors or employees at a discount or for consideration, other
than cash for providing them know how or making available rights in the nature of intellectual
property rights or values addition, by whatever name called.

Sweat Equity Shares are issued only when the following conditions are fulfilled namely:

1. A special resolution has to be passed by the company to issue sweat equity

shares
2. The resolution has to specify the number of shares, the current market price and
the class or classes of directors or employees to whom these equity shares are issued.
3. The sweat equity shares that are authorised by the special resolution shall be
valid for making the allotment within a period which is not more than 12 months from the
date of passing of the special resolution.
4. The company should at least be incorporated for one year.
5. In the case where the equity share of the company is listed in a stock exchange,
the sweat equity shares are issued as per the Securities and Exchange Board and if it is
not listed then the sweat equity shares are issued in as per the rules prescribed.
6. The sweat equity that is issued to directors or employees shall be locked in for a
period of three years from the date of allotment of the shares and the share certificate is
under lock-in and the period of expiry of lock-in shall be stamped in bold or mentioned
prominently on the share certificate.

Procedure to issue Sweat Equity Shares

Firstly, summon and hold a board meeting in order to consider the proposal of issue of sweat equity
shares and to fix up the date, time, place as well as the agenda for a general meeting and to pass a
special resolution for the same.

Secondly, issue notices in writing to Shareholders for a general meeting along with explanatory
statements. It should contain the following:

1. Date of the Board meeting at which the proposal for issue of sweat equity shares was
approved;
2. The reason for the issue of shares
3. The class under which the shares are intended to be issued
4. The total number of shares that is to be issued as sweat equity
5. The class or classes of directors or employees to whom the shares are to be issues
6. The terms and condition on which the sweat equity shares are to be issued which also
includes the basis of valuation.
7. The time period of association of such person with the company.
 8. The name of the director or the employee to whom the sweat equity shares will be issued
and their relationship with the promotor or/and Key Managerial Personnel.
9. The sweat equity share rate.
10. The consideration including consideration other than cash, if any.,
11. The ceiling on managerial remuneration, if any, be breached by the issuance of sweat
equity and how it is proposed to be dealt with;
12. A statement to the effect that the company shall comply with the applicable accounting
standards,
13. Diluted earnings per share pursuant to the issue of sweat equity shares which is calculated as
per the applicable accounting standards,

Thirdly, Convene the general Meeting and Pass a special resolution.

Fourthly, file a resolution with MCA in Form No. MGT-14 within 30 days of passing the same.

Fifthly, call for the board meeting and allot sweat equity shares in the meeting.

Sixthly, Form No. PAS-3 had to be filed within 30 days of the passing of the Board resolution for
allotting sweat equity.

Seventhly, Form No. SH-3 for the Register of Sweat Equity Shares shall be maintained and enter
the particulates of Sweat Equity Shares.

Seventhly, a Sweat Equity Shares shall be maintained at the registered office of the company or
any other registered office as the board decides.

Finally, the entries in the registrar shall be authenticated by the Company Secretary of the
company or any other authorized person by the Board for the purpose .