Shares

Shares – Meaning

Sec. 2 (46) defines a share as “A share is a share in the share capital of a Company.” “A share represents the interest of a share holder in the capital of the Company & this interest is measured by the number of shares he is holding & the amount paid by him to the company on shares.”

Shares – Meaning

A share does not merely represent an interest of a shareholder in a company, it carries certain rights and liabilities while the company is going concern or while the company is being wound up.

A share represents a „bundle of rights and obligations.‟

Kinds of Shares

Section 86, as amended by Companies (Amendment) Act, 2000 provides that the share capital of a company limited by shares shall be of two kinds only, namely:-

(a) Equity share capital(i) with voting rights; or (ii) with differential rights as to dividend, voting or otherwise (b) Preference share capital

  .Preference Shares  Preference share is the one which satisfies the following criteria: With respect to dividend it carries a preferential right to be paid which may be a fixed amount or a fixed rate On winding up or on repayment of capital a preferential right to be repaid the amount .

Dividend at fixed rate is given. after 20% dividend has been paid to equity shareholders. the preference shareholders may share surplus profits equally with equity shareholders.  Non Participating Shares: These shares are not entitled to participate in surplus profit. For e.Kinds of Preference Shares  On the basis of participation :  Participating Preference shares: This type of shares are allowed to participate in surplus profits during the lifetime of the company & surplus assets during winding up. .g.

Dividend at fixed rate is given. For e.  Non Participating Shares: These shares are not entitled to participate in surplus profit.g.Kinds of Preference Shares  On the basis of participation  Participating Preference shares: This type of shares are allowed to participate in surplus profits during the lifetime of the company & surplus assets during winding up. the preference shareholders may share surplus profits equally with equity shareholders. . after 20% dividend has been paid to equity shareholders.

The fixed dividend keeps on accumulating until it is fully paid. .  Non Cumulative Preference Shares These are those shares on which does not carry the right to dividend in arrears.Kinds of Preference Shares  On the basis of cumulation of dividend  Cumulative Preference Shares They are those shares on which carries the right for payment of arrears of dividend from future profits.

500 Year 2 Year 3 (1.Example: Cumulative preference shares Year 1 Net Profit / (Loss) for the year before appropriations 5.000) 50.000) (2.000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 1.000 9 .

Example: Non-cumulative preference shares Year 1 $ Net Profit / (Loss) for the year before appropriations Year 2 $ Year 3 $ (1.000) (2.000 5.000 10% Cumulative Preference Shares of $1 each Dividend Nil Nil 500 10 .000) 50.

Kinds of Shares  On the basis of conversion  Convertible preference shares: The owners of these shares have the option to convert their preference shares into equity shares as per the terms of issue.  Non-convertible preference shares: The owners of these shares do not have any right of converting their shares into equity shares. .

  .Kinds of Shares  On the basis of redemption   Redeemable preference shares These are to be purchased back by the company after a certain period as per the terms of issue. Irredeemable preference shares These are not to be purchased back by the company during its lifetime.

The shares shall be redeemed out of profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption.Redeemable Preference Shares  Requirements for issue of Redeemable Preference Shares The articles must provide for the issue of such shares. Such shares are to be issued as redeemable preference shares. shares issued earlier cannot be converted into redeemable preference shares.     . The shares to be redeemed must be fully paid-up.

Where the shares are redeemed out of profits. to be called the capital redemption reserve account. if any. before the shares are redeemed .Redeemable Preference Shares  Requirements for issue of Redeemable Preference Shares The premium. be transferred to a reserve fund. a sum equal to the nominal amount of the shares redeemed.   . payable on redemption shall have been provided for out of the profits of the company or out of the company's security premium account.

  . apply as if the capital redemption reserve account were paidup share capital of the company.Redeemable Preference Shares  Requirements for issue of Redeemable Preference Shares The provisions of this Act relating to the reduction of the share capital of a company shall. except as provided in this section. The redemption of preference shares under this section by a company shall not be taken as reducing the amount of its authorized share capital.

if Articles of Association are silent Preference shares will be presumed to be: Cumulative  Non-Participating  Irredeemable and   Non-Convertible. .Status of Preference Shares.

Dividend is paid after dividend at a fixed rate is paid on preference shares. . Equity shareholders have voting rights & thus. control the working of the Company. Equity shareholders are the virtual owners of the Company..Equity Shares        The equity shares or ordinary shares are those shares on which the dividend is paid after the dividend on fixed rate has been paid on preference shares. At the time of liquidation. capital on equity is paid after preference shares have been paid back in full. Characteristics: No fixed rate of dividend.

offers the shares for sale to the public By inviting the public to subscribe for shares in the company through a prospectus.Issue of Shares/ Raising of Capital 1. By private placement of shares By allotting entire shares to an issue-house. which in turn. . 3. 2.

Its shares are issued privately. It also need not file statement in lieu of prospectus.Private Placement of Shares  A private company limited by shares is prohibited by the Act and the articles from inviting the public to subscribe in shares or debentures. to a small number of persons known to the promoters or related to them by family connections.   .

In this kind of arrangement. A company is required to file with Registrar a statement in lieu of prospectus. without inviting the public to subscribe to its shares or debentures. at lest 3 days before making allotment of any shares or debentures.Private Placement of Shares  A public company can also raise its capital by placing shares privately and. an underwriter or broker finds persons.   . normally his clients who wish to buy the shares.

On receipt of applications from the public.By an Offer for Sale  Under this arrangement. the issue house renounces the allotment of number of shares mentioned in the application in favor of applicant purchaser who becomes direct allottee of the shares. with an application form attached.   . The issue-house publishes a document called an offer for sale. offering to the public shares or debentures for sale at a price higher than what is paid it or at par. the company allots or agrees to allot shares or debentures at a price to a financial institution or an issue-house for sale to public.

By inviting the public through prospectus  The company invites offers from members of the public to subscribe for shares or debentures through prospectus. .

if the face value of a share is Rs. 10 and the buyer is required to pay thereon Rs.Issue of Shares at Par  Shares are deemed to have been issued at par when subscribers are required to pay only the amount equivalent to the nominal or face value of the shares issued.  .g. E. 10 only.

Issue of Shares at Premium  The shares are deemed to have been issued at premium when subscribers are required to pay a price higher than the par value of the shares.    . The amount of premium received in cash and an equivalent of it received in kind. The amount of share premium is to be maintained with same sanctity as the share capital. The premium cannot be treated as profit and therefore cannot be distributed as dividend. must be kept in separate in bank account known as the „Share Premium Account‟. The difference between the issue price and the par value of the shares is share premium.

it is in nature of capital reserves. any issue of shares or debentures To provide for the payment of premium payable on the redemption of redeemable preference shares or dentures .Issue of Shares at Premium   The share premium account be treated as free reserves. 78(2). share premium can be utilised only for the following purposes:  To issue bonus shares    To write off preliminary expenses of the company To write off the expenses or commission paid or discount allowed on. According to sec.

Issue of Shares at Discount  The shares are deemed to have been issued at discount when subscribers are required to pay a price lower than the par value of the shares. .  The issue must be of a class of shares already issued. 79):  Issue of shares at discount is authorised by a resolution passed in general meeting and sanctioned by NCLT. The difference between the issue price and the par value of the shares is share discount  Requirements for Issue of Shares at Discount ( sec.  The maximum rate of discount must not exceed 10 % or such higher amount as NCLT may permit any special case.

 The issue must be of a class of shares already issued.Issue of Shares at Discount  The shares are deemed to have been issued at discount when subscribers are required to pay a price lower than the par value of the shares. 79):  Issue of shares at discount is authorised by a resolution passed in general meeting and sanctioned by Central Govt. The difference between the issue price and the par value of the shares is share discount  Requirements for Issue of Shares at Discount ( sec. . may permit any special case.  The maximum rate of discount must not exceed 10 % or such higher amount as Central Govt.

Issue of Shares at Discount  Requirements for Issue of Shares at Discount ( sec. elapsed since the date on which the company was entitled to commence business. 500. or within such extended time as it may allow. the company and every officer of the company who is in default. shall be punishable with fine which may extend to Rs.  Every prospectus at the date of its issue must mention particulars of the discount allowed on the issue of shares. 79):  Not less than 1 year has. or the exact amount of the discount as has not been written off. at the date of issue. .  The shares to be issued at a discount must be issued within 2 months of the sanction by Central Govt.  In case of default.

Allotment is defined as the “appropriation out of the previously unappropriated capital of the company of certain number of shares to a person. When an application is accepted.   .Allotment of Shares  Offer for shares are made on application forms supplied by the company. it amounts to an allotment.

e. .    Allotment against Application Only No valid allotment can be made on an oral request. Sec.41 provides that for becoming a member. the BOD or a committee authorized to allot shares on behalf of the Board.General Principles Regarding Allotment   Allotment by Proper Authority The allotment should be made by a proper authority i. a person should agree in writing.

General Principles Regarding Allotment   Allotment not to be in Contravention of any other Law If shares are allotted on an application of a minor. What is reasonable time is a question of fact in each case. An applicant may refuse to take shares if the allotment is made after a long time.      . the allotment will be void. The interval of about 6 months between application and allotment was held unreasonable. Reasonable Time Allotment of shares must be made within a reasonable time.

    . Shares must be allotted on same terms on which they were applied for and as they are stated in the application for shares. Posting of letter of allotment or allotment advice will be taken as a valid communication even if the letter is lost in transit. Allotment of shares subject to certain conditions is also not be valid one. Absolute and Unconditional The allotment should be absolute and unconditional.General Principles Regarding Allotment    Communication The allotment must be communicated.

but before the allotment of shares is made. .General Principles Regarding Allotment   Revocation An application for shares or debentures may be revoked only after the expiry of 5th day after the opening of subscription list or after the public notice.

.Statutory Provisions Regarding Allotment   Registration of Prospectus A copy of prospectus signed by every person.   Application Money An amount payable on the applications which must not be less than 5% of the nominal value of the share. who is named therein as a director or proposed director or by his agent authorized in writing shall be duly filed with the Registrar on or before the date of its publication.

a) b) .Statutory Provisions Regarding Allotment   Money to be deposited in a separate bank account All money received from application for shares shall be kept deposited in a scheduled bank account Until the certificate to commence business has been obtained or. Where such certificate has already been received. until the entire amount payable on application for shares in respect of the minimum subscription has been received by the company.

a. the entire application money must be refunded without any interest within the next 10 days. If the company fails to refund application money. . then the directors shall be liable to repay the same with interest at 6% p.Statutory Provisions Regarding Allotment   a) b) Minimum Subscription A public limited company cannot make any allotment of shares unless: The amount stated in the prospectus as the minimum amount has been subscribed The sum payable on application for such an amount has been paid to and received by the company In case the minimum subscription is not received within 120 days from the first issue of prospectus by the company.

. it must file a statement in lieu of prospectus with the Registrar at least 3 days before the first allotment is made.Statutory Provisions Regarding Allotment   Statement in lieu of Prospectus In case the public company arranges capital privately.

Statutory Provisions Regarding Allotment   Opening of the Subscription List When shares or debentures of a company are offered in pursuance of a prospectus issued generally. The object of this provision is to give sufficient time to study the prospectus and to withdraw their application if they are not satisfied with the prospectus.  . no allotment may be made until the beginning of the fifth day from the date of the prospectus or on such later day as may be specified in the prospectus.

Statutory Provisions Regarding Allotment    Closing of the Subscription List SEBI‟s Guidelines. provide that the subscription list for public issue must be kept open for at least 3 working days and for not more than 10 working days. Public issues of infrastructure companies may be kept open for 21 working days. 2000. .

Any allotment will be void if permission has not been granted by the stock exchange or each stock exchange.Statutory Provisions Regarding Allotment  Listing of Shares  The prospectus may state that an application has been made for permission for the shares to be dealt in on one or more recognized stock exchanges.  . before the expiry of ten weeks from the date of the closing of the subscription list.

The company may appeal to the Central Govt. When a stock exchange fails to dispose of the application within 10 weeks. . then the same shall be deemed to have been rejected.Statutory Provisions Regarding Allotment    Listing of Shares Where an appeal against the decision of any recognized stock exchange refusing permission for the shares or debentures to be dealt in on that stock exchange has been preferred. Within 15 days from the date of refusal ii. Within 15 days from the expiry of 10 weeks. whichever is earlier. against the refusal: i. such allotment shall not be void until the dismissal of the appeal.

Statutory Provisions Regarding Allotment  Listing of Shares   Where the allotment is void under section 73. the company and every director of the company who is officer in default shall be jointly and severally liable to repay it with interest @ 15% p. If it is not repaid within 8 days after the company becomes liable to repay.a. the company has to repay the entire application money at once to the applicants. for the period of delay in making the payment. .

Statutory Provisions Regarding Allotment  Refund of Excess Money (Oversubscription) .

. makes an allotment of shares. then it will be considered irregular allotment. in particular.Irregular Allotment  If company without complying with the provisions of Act in general and of Sec. 69 and 70.

Company an every person knowingly a party to the issue of such prospectus . liable for damages to the company as well as allottee b) Company and every officer punishable with fine which may extend to Rs. 50. 5000 2. a) Director willfully authorizing contravention. 000. Application money being less than 5% of nominal value of share Allotment is voidable . Copy of prospectus not delivered to the Registrar Legal Effects on Allotment Allotment is Valid Liability of Company/ Directors etc. punishable with fine which may extend to Rs.Irregular Allotment – Its Effects Nature of Irregularity 1.

3.Irregular Allotment – Its Effects Nature of Irregularity Legal Effects on Allotment Liability of Company/ Directors etc. and after 8 days directors liable to pay money with interest @ 15 % p. liable for damages to the company as well as allottee .a. b) Director willfully authorizing contravention. Minimum subscription not subscribed for Allotment is Voidable a) On closure of the issue. all money to be refunded to applicants without interest.

Application money not kept deposited with a scheduled bank Legal Effects on Allotment Allotment is Voidable Liability of Company/ Directors etc. a) Every promoter. liable for damages to the company as well as allottee . b) Director willfully authorizing contravention. director or other officer knowingly responsible for such contravention shall be punishable with fine which may extend to Rs.Irregular Allotment – Its Effects Nature of Irregularity 4. 50. 000.

a) Company and every director responsible for contravention punishable with fine upto Rs.Irregular Allotment – Its Effects Nature of Irregularity 5. liable for damages to the company as well as allottee Company and every officer who is in default liable for fine which may extend to Rs. 10.000 6. A statement in lieu of prospectus not delivered to the Registrar Legal Effects on Allotment Allotment is voidable Liability of Company/ Directors etc. 50. Time limit as to opening of subscription list not observed Allotment is valid . 000 b) Director willfully authorizing contravention.

application money to be refunded. b) Company and every officer punishable with fine which may extend to Rs. 5. .a. in case refund delayed beyond 6 months. If not refunded within 8 days directors liable to pay money with interest @ 15 % p.Irregular Allotment – Its Effects Nature of Irregularity 7. a) If permission not granted within 10 weeks from the date of closing of the subscription list. Condition as to listing of shares on a recognized stock exchange not observed Legal Effects on Allotment Allotment is Void Liability of Company/ Directors etc. the guilty director shall also be liable to imprisonment upto 1 year.000.