6) Share And Share Capital

Share and Share Capital

1

Share and Share Capital

SHARE AND SHARE CAPITAL Meaning and nature of shares: 1) The share capital of a company is divided into a number of indivisible units of

a fixed amount. These indivisible units are known as shares. 10,000 shares of Rs.10 each= 1, 00,000 Rs. 2) According to sec 2 clause 46 “A share is a share in the share capital of the

company and includes stock except where a distinction between stock and share is expressed or implied. 3) According to Supreme Court, a share is right to participate in the profits made by the company, while it is a going concern and decreases a dividend and in the assets of the company when it is wound up. 4) According to the sale of goods act the term goods includes every kind of movable property including stock and shares. 5) A share is not a negotiable instrument. Share and Share Certificate: 1) A company will allot shares to the share holder but will issue a fresh certificate. 2) Share is a movable property transferable in the manner provided in the articles. Share certificate is the certificate issued under the common seal of the company the no. of shares held by the company. 3) Share represents the movable property.

Share certificate is the prima facie evidence of title. It enables a share holder to show his shares and sell his shares. Distinction between Share and Stock Share 1) It has the nominal value or face

Stock 1) It has no nominal value or face

value value 2) It has the distinctive number 2) It has no distinctive number. 3) Shares can be originally issued by a 3) A company cannot originally issue company.

stock first shares will be issued, the 2

Share and Share Capital

shares are fully paid up then can be 4. Shares may be either fully paid up

converted into stock. 4. Stock is always fully paid up and it

or paid up. cannot be partly paid up. 5. Share is an indivisible unit therefore 5. Stock may be transferred in any it cannot be transferred in fraction and

fractions.

it can be transferred only as a whole. 6. Shares of the same class are of

6. Stock may be of different

equal denomination.

denomination. KINDS OF SHARES

Deferred Shares

Preference Shares

Equity or ordinary shares

With Voting rights

Differential rights

Deferred Shares: 1) These Shares may be issued only by private company 2) These are also known as founder’s shares and they are issued only to promoters

and directors of the company. 3) These shares have low denomination carry voting rights. In fact, they have

controls over a company. 4) These share holders receive dividend only after dividend is paid to both preference and equity share holders and known as deferred shares. Preference Shares: Preference shares are those shares which enjoy two preferential rights over the equity shares. 1) During the life time of the company they enjoy a fixed dividend, which is

amount or rate before dividend to equity share holders. 2) On the winding up of the company they enjoy repayment of surplus assets (capital), before capital is repaid to equity share holders. Voting rights of Preference Share Holders: 3

Share and Share Capital

1. Whether preference shareholders are members- YES 2. Whether notice of all the general meeting sent to them- YES 3. Whether they can attend General meeting- YES 4. Whether they can be counted in the Quorum- NO 5. Whether they can Participate and Speak at G.M- NO

6. Whether they can vote at General Meeting- NO Exceptional Circumstances: Generally speaking, preference share holders don’t have voting right however in the following two exceptional circumstances they enjoy voting rights. a) When any matter directly affects their right. Example 1: Reduction of share capital Example 2: Winding Up b) When there is an arrears of cumulative preference dividend for two

years or more. In this case they acquire voting rights for all the matters. Types of Preference shares: Participating and Non Participating Preference Shares: Participating Preference shares are those shares which reduce a fixed preferential dividend during the existence of the company. After dividend is paid to the equity share holders if there is any surplus profit. They have a right to participate in such profits along with the equity share holders. Non participating preference shares receive preference dividend and there after they don’t have the any right to participate in surplus profits. When the company goes into the winding up participation preference shareholders have a right to receive the repayment of capital after the repayment of equity share capital is completed. If there are any surplus assets they have a right to participate in such surplus assets along with the equity share holders. Non Participating Shares preference shareholders don’t have any right to participate in surplus assets along with equity shareholders. Note: If there is provided in the memorandum (or) articles (or) terms and conditions then all preference are shall be contested non participating. Cumulative and Non-Cumulative Preference Shares: 4

Share and Share Capital

Cumulative preference shares those shares which enjoy the right to receive the dividend for the past and the current year out of future profit. If any year, there is no profit, dividend only when these are profits. If in any year there are no profits, dividends will not be paid and there will be no accumulation. Non-Cumulative preference shares receive dividend only when there are profits. If in any year there are no profits, dividends will not be paid and there will be no accumulation. Note: All preference shares contested as cumulative unless there are expressly stated to be non-cumulative. Redeemable and Irredeemable Preference Shares: Redeemable Preference shares or those shares which are redeemable either a fixed date or after certain date from the date of issue. Irredeemable preference shares are those shares which must be redeemable after the expiry of 20 years from the date of issue. Convertible and Non-Convertible Preference Shares: Convertible Preference shares are those shares which are to be converted into equity shares after a certain preference shares. Non-Convertible preference shares cannot be converted into preference shares.

Ordinary (or) Equity shares without voting rights: 1) Equity shareholders don’t enjoy any preferential rights. 2) During the lifetime of the company these shares receive dividend after

dividend is paid to the preference shareholders. 3) When the company is in winding up equity shareholders receive repayment of

capital after the preference share capital is repaid. 4) The rate of equity dividend will be recommended by the B.O.D and declared

by the members at the A.G.M. However, interim dividend may be recommended and declared by the directors at the Board Meeting. 5

Share and Share Capital

5) Equity share holders will have a right to vote on all matters at all general meetings, that A.G.M (or) E.G.M. 6) The voting rights of equity share holders will be in proportion to the amount of paid up share capital. Ordinary or Equity shares with Differential Voting rights. 1) A company may issue equity shares with differential voting rights, provided, it will be provided by the articles such shares are not shares 25% of the total issued. 2) These share holders are entitled to received: a. Higher rate of dividend b. Right shares. c. Bonus shares

Conditions For redemption of Preference Shares: (Sec 80) (1) ***The articles of association of the company must permit the issue of such shares. (2) Preference Shares may be redeemed only out of the following sources: a. Out of profits which are available for dividends (Free Reserves) or b. Out of the proceeds of a fresh issue of shares, this is made especially for the purpose of redumption. (3) If the premium is payable on redemption such premium must be provided only

out of the following sources: a. Only out of the profits of the company including capital profit (or)

b. Out of the balance available in securities premium a/c before the shares are redeemed. (4) Only fully paid up preference shares can be redeemed that means partly paid up preference shares cannot be redeemed. (5) ** If preference shares are to be redeemed otherwise than out of proceeds of a

fresh issue, that is redeemed otherwise than out of profits available for dividend then a sum equal to an amount equal to the nominal value of shares redeemed shall be transferred out of profits available for dividend (Free

6

Share and Share Capital

reserves) shall be to be transferred to an account called “Capital Redemption Reserves” (6) The capital redemption reserve will be used for issuing fully paid up bonus shares. (7) Notice of Redemption of preference shares must be sent to R.O.C. Distinction between the Preference shares and equity shares. Preference shares 1) These shares are entitled to receive,

Equity shares 1) The rate of equity dividend depends

dividend either at a Fixed rate or Fixed

upon the availability of profits after the

amount. 2) Preference dividend will be paid

payment of preference dividend. 2) Equity dividend will be paid only after

before dividend is paid on equity shares 3) During winding up preference share

payment of preference dividend. 3) Equity share capital will be repaid as a

capital paid in priority to equity share

lost priority after repayment of

capital 4) In the case of accumulative dividend,

preference capital. 4) Equity dividend will be paid only in

it helps on accumulative

those years in which the companies has

5) These shares must be redeemed. 6) The shareholders enjoy the voting

profits without any accumulation. 5) These shares cannot be redeemed. 6) These shareholders enjoy the

rights only in exceptional circumstances. 7) These share holders does not entitled

unrestricted on all matters. 7) These shareholders are entitled to

to receive the right shares or bonus

receive right shares and the bonus shares.

shares. Stock investment Scheme: 1) These are the shares or debentures or bonds which are issued to the debenture holders (or) investor. 2) They are issued in the denomination of 250, 500, 2500, 5000 and Rs. 10000 and they are valid for 6 months. Employee Stock Option Scheme :( ESOS):

7

Share and Share Capital

1) This is an option which is given to the whole time directors as employees of the companies. 2) They are given a right to purchase/subscribe the securities of the company at a future date and at a predetermined price. Allotment of Shares: 1) According to the Supreme Court the term allotment refer to the appropriated out of the previously unappropraited of a company of a certain no. of shares. 2) Reissue of forfeited shares is not the allotment of shares because it is not an appropriation out of previously unappropriated capital. Process of allotment in terms of contract Act: 1. Company issuing prospectus and share application form- invitation to offer.

2. Applicants submitting completed application forms along with money-offer. 3. Company allotting shares-Acceptance. 4. Relationship between company and shareholders/member-Contract.

Allotment of shares

General principles

Statutory provisions

Non-Compliance

Non-Compliance

Allotment Invalid

Irregular allotment Valid

Void Voidable

General Principles relating to the allotment 1) The allotment must be made only by a proper authorized either by B.O.D or duly authorized by the committee of directors. 2) The allotment must be made only on the basis of a share application form in writing. It cannot be made on an oral request or without application form. 8

Share and Share Capital 3) The allotment must not be made in contravention with any other law

Ex1: Allotment to a minor is void. Ex2: Allotment to a person against the FEMA is void. 4) The allotment must be made within a reasonable time. What is reasonable time

depends on the facts and circumstances. Case: Murugappa Chattier Vs Pudukotai ceramics limited. It was held that an allotment will be valid even though there is an undue delay provided it is accepted by the allotee. The allotment must be communicated in writing by the company, by way of passing a letter of allotment. Re: Universal Banking Corporation 5) The allotment of shares must be absolute and unconditional. However the share application form may contain prorata clause by which the allotee will allot a lesser no. of shares. 6) The share application form can be revoked and withdrawn before the allotment of

shares. Relevant dates for Statutory Provisions: 1) Date of Publishing of Prospectus:

This appears on the face of the prospectus itself. If it the date of which is printed on prospectus. 2) Date of issue of Prospectus:

This is the date of circulation among the public on the date of advertisement in the newspaper. 3) Date of opening of issue:

This is the date on which the company receives completed share application forms. 4) Date of closing or closure of issue:

This is the last date for the submission of completed application forms.

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Share and Share Capital 5) Date of opening of subscription list:

This is the date of first allotment of shares. 6) Date of closing/closure of subscription List:

This is the last date for the completion of allotment. Statutory provisions relating to the Prospectus: 1) A copy of prospectus duly signed by a director/a proposed director must be filed with R.O.C on or behalf of its publication. 2) The share application money received must not be less than 5% (Act) or 25% (SEBI) of the nominal value of shares. 3) The share application money received and the company receives a certificate of commencement of business from R.O.C. 4) The company must have received a sum payable on application which will

satisfy the requirements of minimum subscription. Sec 69 Act-(Unlisted)

SEBI (Listed)

A. It should be received within

A. It should be received

within 60 days

120 days from the date of issue

of closure of issue.

prospectus.

from the date

B. If it is not received the entire received the entire share

share application must be

application money refunded within

the next 10 days

8 days. 130 days,

B. It is not

C. After the expiry of

C. After the expiry of 68 days the

money must be

the application money must be ref-

with into 6%p.a

unded along with 15% interest.

the application refunded along

5) A statement in lieu of prospectus must be filed with the R.O.C in the following circumstances: a. Where the company is capable of raising its own known sources and it does not issue a prospectus to the public (or)

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Share and Share Capital

b. When the company had issued prospectus to the public but it cannot allot shares because it has not received minimum subscription. 6) Date of subscription list:

Allotment of shares by the company can be made commencement of 5th day after the date of issue of prospectus. However a later day is may be specified in the provision. 7) Closing of Subscription list:

The art is silent about this. According to SEBI guidelines the subscription list to be kept open as follows: a. Minimum 3 working days. b. Not more than 10 working days. c. Not more than 21 working days [Infrastructure] d. Not more than 60 days [Right issue]

The above date must be disclosed in the prospectus. 8) If the company has applied for listing permission in any recognized stock exchange. Such permission must be obtained before the expiry of 10 weeks from the date of closing of subscription list. 9) The basis of allotment of shares must be in the marketable lots on some proportionate basis. 10)In the case of over subscription the excess application money must be refunded retention must be according to SEBI guidelines. Meaning of Irregular Allotment: When an allotment of shares takes place by the company without compiling without any statutory procedure, it is an irregular allotment. 1) Effect of Irregular Allotment: a. Nature: Minimum subscription not received b. Effect: Allotment is void.

c. Consequences: i. Share application money must be refunded within 130 /68 days. ii. Interest rate 6% or 15% p.a shall be paid. iii. Director liable to pay both to the company and also to allotee. 11

Share and Share Capital

2) . a. Nature: Copy of prospectus not filed with the R.O.C. b. Effect: Allotment is valid. c. Consequences: The company and every officer in default shall be liable

upto Rs. 50,000. 3) . a. Nature: Statement in lieu of prospectus not filed with the R.O.C. b. Effect: Allotment is voidable at the optional of all allotee.

c. Consequences: i. The company and every officer in default shall be liable upto Rs.

10000 each . ii. The director liable to pay damages both to the company and also to the allotee 4) . a. Nature: Time limit regarding opening of subscription list followed

(Shares allotted before the fifth day). b. Effect: Allotment is valid. c. Consequences: The and every officer in default shall be liable to fine

upto Rs.50000 each. 5) . a. Nature: Application money less than 51% of the nominal value of the

shares. b. Effect: Allotment is voidable at the option of the allotee.

c. Consequences: i. The company and every officer in default shall be liable upto fine Rs. 5000 each. ii. Directors liable to pay damages both to the company. 6) . a. Nature: Application money cannot be deposited with a separate bank a/c

with a schedule bank. b. Effect: Allotment is voidable at the option of the allotee. 12

Share and Share Capital

c. Consequences: i. Every officer in default shall be liable upto fine 50000 each ii. Directors liable to pay damages to both the company and the allotee. 7) . a. Nature: Listing of a shares- stock exchange permission is not granted. b. Effect: Allotment is void.

c. Consequences: i. Application money must be refunded with in 8 days after the expiry of 10 weeks. ii. After the expiry of 78 days Interest @ 15% P.a becomes payable.

iii. Company and every officer in default shall be liable upto 50000 each. iv. If there us a delay beyond 6 months the directors shall be liable for the imprisonment. Summary: a) Minimum subscription and listing permission-Void. b) Prospectus and allotment before fifth day-Valid. c) Other-Voidable.

Return of Allotment 1) According to sec 75, a return of allotment in form 2 must be filed with the R.O.C within 30 days of allotment. 2) The Return must contain the following particulars: a. Allotment of shares for cash b. The allotment of consideration other than cash. c. The allotment of bonus shares. 3) Return on allotment is not required for the reissue of forfeited shares.

Meaning of Underwriting: 1) The term Underwriting refers to a contract between the underwriter and the company whereby (by which) the underwriter agrees to take up and pay for the

13

Share and Share Capital

shares, if they are not taken by the public. In return, the company agrees to pay him. 2) An underwriting agreement is therefore in the nature of Insurance against the

possibility of inadequate subscription. 3) Firm Underwriting:

In this case the underwriter agrees to take up and pay for a certain no. of shares, whether they issue is over subscribed or undersubscribed. 4) Conditions for payment of underwriting Commission: (Sec 76)

a. The payment of underwriting commission must be authorized by the articles. Any authorized in the memorandum of association is not adequate. b. The rate of underwriting commission should not exceed 5% of the issue price of share or 2.5% of the issue price of Debentures. However the articles may prescribe the lower rate. c. The commission may be paid either in cash or either in shares or a lump

sum amount or as a percentage. Note: If the articles prescribe a percentage, a lump sum amount cannot be paid. d. The details of the underwriting agreement including the amount of underwriting commission However detaching sub underwriting agreements are not required to dispose. e. A copy of underwriting agreement must be filed with the R.O.C.

f. Commission may be paid out of any sources available. Example: Out of the proceeds of the share capital.

Brokerage: 1) The term Brokerage refers to the reward paid to the middle men known as broker who brings about a bargain between the Seller (company) and the buyer (allotee).

14

Share and Share Capital

2) Only a payment of a lawful brokerage is allowed. Lawful brokerage means reasonable brokerage paid to a professional carrying on a business of a broker and not a private person. 3) A broker is unlike an underwriter because he does not give any guarantee (or) insurance to take up shares in the case of under subscription. 4) The amount of Brokerage paid (or) Payable must be disclosed in prospectus/SLP.

BUY BACK OF SHARES (Equity shares and Esos) Sec 77(1)

Sec 77A

Sec 77AA

Sec 77A(2)

Restrictions

Sources to

Transfer to

Conditions for

Buy back

C.R.R

Buy Back

Sec 77B Prohibition for Buy Back

1. Restrictions for Buy Back:(sec 77(1)): A company limited by share or a company limited by guarantee having share capital cannot buy shares unless the concept of consequent reduction of capital is effected and sanctioned in pursuance of sec 100 to 104 (or) sec 402. This section is not relevant after the introduction of 77A and 77AA and 77B. 2. Sources to Buy Back (sec 77A) A company may buy back its own equity shares or ESOS out of the following sources: i) Its Free reserves (including security premium) or balance available in the security premium a/c (share premium, Debenture premium or other security premium) ii) The proceeds of any shares or ESOS but not out of the proceeds of the any shares earlier issue of the same kind of the shares or ESOS. 3. Transfer to C.R.R a/c -77AA. If shares are bought back out for reserves including the security premium a/c then the sum equal to the Nominal value of shares shall be transferred to C.R.R a/c. This amount will be used for fully paid up bonus shares. 15

Share and Share Capital

4. Conditions for Buy Back of shares: (sec 77A(2): a) Buy back must be authorized by the articles of association of the company.

b) The type of resolution required for the authorizing the buy back as follows: B.O.D resolution

Special resolution of govt.

a) Where the Buy Back does not exceed

a) Where the buy back does not

10% of the paid up equity share capital

exceed 25% of the paid up equity

free reserves.

Share capital.

b) Only one resolution authorizing

b) Where the buy back of ESOS

the buy back in a period of 365 days.

Does not exceed 25% of the total paid up equity share capital and free reserves.

3) After the buy back the ratio of debt owed by the company must not be more than the twice the aggregate of the share capital and free reserves. The term debt includes both secured and unsecured debts: DEBT

Share Capital + Free Reserve

2

(2-1)

2

1

Total

3

4) Only fully paid up equity shares and ESOS can be buy back that means partly paid up shares cannot me bought back. 5) The buy back must be incompliance with SEBI regulations and guide line. 6) Before passing the special resolution at the GM. The company must send notice to its members. That notice must be accompanied: (a) Full and complete disclosure. 16

Share and Share Capital

(b) Necessity for Buy back. (c) Class of shares. (d) Amount to be invested to buy back. (e) Time limit for completion of buy back. (f) Price at which the shares will be bought back. (g) Quantum of shares offered by the promoters. 7) Every buy back shall be completed with a period of 12 moths from the date of the passing of B.O.D/special resolution. 8) After passing the B.O.D/special resolution but before the buy back, a declaration of solving must be prepared and signed by two directors two directors one of them to be M.D. If the company has an M.D. It must be filed with the R.O.C and it should be contain a statement that the company is a payable of the meeting all its liabilities and will not be rendered insolvent within the a period of 1 year. 9) All the equity share/ESOS which are bought back or physically destroying (or) extinguished within 7 days of the company in the presence of the R.O.C and the auditor. The company must not issue the further shares/ESOS of the same kind including rights shares within the period of 6 months. However the issue of bonus shares and the conversion of the preference shares, debentures into the equity shares will be allowed. The company must maintain a separate book showing all details of buy back shares such as Price, quantum.

Prohibition for Buy Back Under the Certain Circumstances: (sec 77B) 1) Through any subsidiary. 2) Through any investment company. 3) If there is any subsisting default in the repayment of deposit interest on deposit thereon. 4) If there is any subsisting default in redemption of debentures. 5) If there is any subsisting default in the redemption of preference shares or in the payment of preferential dividend. 6) If there is any subsisting default in the repayment of term loan due in the payment there on to any financial institution or bank. 17

Share and Share Capital

7) If there us any default u/s 159- Annual return not filed with R.O.C. 8) If there is any default u/s 207- Failure to distribute dividend with in thirty days of declaration. 9) If there is any default u/s 211- Balance sheet and P&L a/c not showing true and fair view.

Issue of shares/securities at a premium (Sec 78) Nominal Value of 1 share

100

Issue Price

120

Premium

20

The companies act 1956 does not impose any conditions restrictions regarding issue price. The rate of premium will be decided by the B.O.D.

Utilization of securities Premium: (sec 78) 1) For issuing fully paid up bonus shares to equity share holders.

(Note: According to SEBI only the amount received in kind). 2) For writing off the balance available in preliminary expenses. 3) For writing off the commission paid, discount allowed, expenses incurred on the issue of shares, debentures, and other securites. 4) For providing premium payable on the

5) For the buy back own equity shares/ESOS. Issue of shares at a discount: Sec 79 Nominal value of 1 shares

100

Issue price

90 10

Conditions for Issue of Shares at a Discount: 1) The share must belong to a class of shares already issued. 2) As on the date of issue, not less than 1 year must have elapsed since the date on which the company became entitled to commence its business. 3) The issue must be authorized by way of an ordinary general meeting resolution and sanctioned by C.G. 4) The rate of discount must not exceed 10% or such higher rate as may be permitted by the C.G. 18

Share and Share Capital

5) The shares must be issued within two months from the date of sanction with the C.G (the C.G may permit an extended time) 6) Every prospectus issued by the company must mention the exact of discount

written off. Issue of Sweat Equity Shares: Sec 79A. 1) These are the equity shares which are issued by the company to the employees at a discount (or) for consideration other than cash. They are issued for providing know how or making available intellectual property rights. Ex: Patents or value addition, by whatever name called. 2) Companies incorporate under the company’s act 1956 and their subsidiaries incorporated in a country outside inside incorporated. Conditions for issue of sweat equity shares. 1) The shares must belong to a class of shares already issued. 2) As on the date of issue not less than 1 year must have elapsed since the date on which the company became entitled to commence business. 3) The issue must be authorized to special general meeting resolution. 4) The general meeting resolution must specify the no. of shares, current market

shares, for consideration, directors and employees. 5) The issue must be in accordance with SEBI regulation. 6) All the limitations restrictions relating to equity shares shall be equally applicable. Share certificate: (sec 113) 1) It is a document issued by a company to its share holders certifying the no. of shares hold by them. 2) Every company must issue a share certificate within 3 months from the date of receipt of application for transfer. 3) Under the depository system the company send an intimation to the shareholder immediately after the allotment. 4) According to sec 84, a share certificate is issued under the common seal of the

company. 5) Estopell as to title:

A share certificate once issued binds the company. It is a declaration by the 19

Share and Share Capital

company to all the world, that a person whose names the share certificate. Case: Dixon vs. Kennaway Mr. D applied for 300 shares in a company. A clerk who actually had no shares ex`ecuted a transfer deed in favor of Mr. D. The company issued a share certificate in favor of Mrs. D for 300 shares without any proper verification. Held, The company liable to pay damages to Mrs. D that it could not allotted any share. 6) Estoppel as to payment:

If the share certificate states that the shares are fully paid. The company later denied and the state that the shares are not fully paid up. Case: Bloomenthal Vs Ford. 7) For issuing a share certificate a board resolution is necessary also a letter of allotment must be surrendered. Surrendering the letter of allotment is not applicable in the case of transfer of shares. 8) Every share certificate may contain common seal and the signature of the company secretary and two directors. 9) In the following two circumstances the company will issue duplicate certificates to the share certificate: a. When the original certificate is mutilated (or) defaced (or) torn and is surrendered to the company. b. When the original certificate is stoled, destroyed and FIR and

advertisement is given in the news paper is given as directors by the company.

Share Warrant: (sec 114&115) 1) A share warrant can be issued by a company if the following four conditions are satisfied a. It is a public co. limited by shares. 20

Share and Share Capital

b. Authorized by articles c. Shares are fully paid up. d. The previous approval of C.G. 2) It is issued under the common seal of the company stating that the bearer is entitled to the shares specified therein. 3) Payment of dividend in future will be on the basis of coupons attached or in any other manner. 4) A share warrant is a bearer document which is transferable by mere delivery. 5) It is treated like a negotiable instruments , 6) When share warrant is issued the name of the share holders strike from the register of membership. Distinction between share warrant and share certificate Sl.No Share Warrant 1 This can be issued only by the

Share Certificate It must be issued by the both the

2

public company. It requires the provision of articles,

private and public company. It is a statutory obligation therefore

3

the previous approval of C.G Shares must be fully paid up

authorization of C.G not required. Shares may either fully paid up or

4

The barer of warrant is not the

partly paid up. The holder of the certificate is also

5 6

member of the company It is a transfer by mere delivery Stamp duty is not payable on

the member of the company. It is transferable The instrument of transferable must

7

transfer It is treated as the negotiable

be duly stamped. It is not treated as the negotiable

8

instrument. The bearer of the share warrant

instrument. The holder of share certificate has the

does not qualify as holding share

necessary share qualification to

qualification The bearer of the warrant cannot

become a director. The holder of the share certificate is

petition for winding up the

entitled to make a petition for the

company.

winding up the company.

9

Right shares (or) Share holders right of pre-emption: (sec 81) 21

Share and Share Capital

1) Provisions relating to right shares are applicable only to the public company limited by shares. 2) At any point after the date of 2 years from the date of incorporation (or) from 1

year for the first allotment is made which ever is earlier where the company offer a share the offer such share must be made to the existing equity share holders proportions to the amount on which the shares held by him. 3) If the issue of the right shares is not within the limits prescribed by authorized

share capital then the capital clause of memorandum needs to alter. Procedure for issue of Right shares: 1) The company/directors must give notice to all the existing share holders. 2) The notice must clearly mention the no. of the shares offered to each share holder and the amount paid on the each share. 3) The share holder must be given atleast 15 days time to exercise his option. 4) The notice must also state that the shareholders may either take up the shares

himself (or) renounce his right in favor of the another person, who may or may not be the member of the company. However the articles may provide otherwise the renunciation must be made in favor of a member. 5) If share holders does not communicate with the company within the stipulated time he shall be deemed to be declined thereafter. 6) There after, the directors may dispose of the shares in any manner as they deemed to be fit.

Exceptions to Sec 81 (or) Circumstances in which rights shares need not to be offered to existing share holders: 1) A private company need not offer right shares because sec 81 is not applicable. 2) When the shares offered by the public company within 2 years from the date of

incorporation (or) one year after the first allotment. 3) Where a general meeting is held and the special resolution is passed an application is passed to the affect that right shares should not be offered to the existing share holders.

22

Share and Share Capital 4) Where the necessary special resolution cannot be passed the ordinary resolution is passed

an application is made by the B.O.D and the C.G is satisfied and the not to offer right shares is most beneficial to the company. 5) Where loans and debentures of the company are converted into the equity shares and before raising the loan or issuing debentures a special resolution was passed and approval of C.G obtained. Special and C.G approval is not required when the lender or debenture holder is government itself and any institution recognized by C.G. 6) Where allotment of equity shares takes place to creditors against the settlements due.

Case: Sree Ayannar spinning and waiving mills limited Vs. V.V.V Rajendran 7) When the allotment of unsubscribed portion of the issued share capital takes place as and when application are received (unlisted public company) 8) When sale of forfeited shares takes place, sec 81 is not applicable. Reduction of share capital: (Sec 100) A company limited by shares may reduce its share capital if the following 3 conditions are satisfied: 1) It is authorized by the articles. 2) A special resolution is passed at a general meeting. 3) It is confined by the tribunal.

Methods of reduction of share capital: [5 Methods] 1. By reducing or extinguishing the liability of members on uncalled capital Ex: Nominal value of shares Amount paid up

Rs. 10 Rs. 6

Uncalled/Unpaid amount

4

Treating the share as Rs. 6 fully paid. The share holders revealed from the liability on uncalled capital of Rs. 4. 23

Share and Share Capital

2. By paying off (or) returning capital which is excess of the wants of the company. Nominal value of shares

Rs. 10

Amount paid up

Rs. 10

Unpaid amount

0

Treating the share as Rs. 6 fully paid up. Returning Rs. 4 to the share holder. Liability of the share holders is nil or extinguished. 3. By paying off paid up capital on the understanding that it may be. Nominal value of shares

Rs. 10

Amount paid up

Rs. 10

Unpaid amount

0

Returning Rs. 4 to the share holder. Not treating the share Rs. 6 fully paid up. Liability of share holder Rs. 4 (not extinguished) 4. By any combination of above 3 methods. Nominal value of shares

Rs.10

Paid up amount

Rs.10

Unpaid amount

0

Returning Rs. 4 to the share holder on the understanding. Rs. 2 may be called up later. Not treating the share as Rs. 8 nominal value. Liability of the share holders Rs. 2 (not extinguished) 5. By writing off or canceling capital which is lost any which is not represented

by the available assets. This is a very popular and common method of reducing and common methods of reducing share capital. The assets side of balance sheet may include useless items like, ficticious goodwill preliminary expenses, discount on issue of shares. These amounts are written off and the amount of shares capital correspondingly reduced. Balance Sheet Share capital

400000 24

Share and Share Capital

General reserves

----

P&L A/c

----

Bank

400000

Miscellaneous expenses And losses (Commission ,Preliminary expenses)

600000

Procedure for reduction of share capital: [sec 101-105] Sec 101: 1) After passing the special resolution at the general meeting the company will

have to submit a petition to the tribunal for necessary confirmation. The creditors may object the reduction particularly when any paid up capital is returned on the liability in respect of uncalled capital is extinguished. Therefore the tribunal may require the company to either pay off the creditors or secured their payment and obtain the consent of the creditors in writing. Sec102: 2) The tribunal may confirm the reduction after satisfying itself about the

arrangement with creditors. The tribunal may also order the company to add the words “and reduced” to the companies name for a specific period.

25

Share and Share Capital

26

Share and Share Capital

Sec 103: 3) The company must send the order of tribunal to the R.O.C for the registration along with the necessary documents and details of the reduction. The R.O.C will issue a fresh certificate of incorporation to the company which will be conclusive evidence under the act duly complied with. Sec 104: 4) The member cease to be liable for the amount which the nominal value of the shares to be reduced. Sec 105: 5) If any officer of the company gives any words representation regarding the consent of creditors he shall be liable for the fine, Imprisonment upto 1 year or both. Circumstances for reduction of share capital without the sanction of tribunal: 1. Forfeiture of shares for non-payment of calls as authorized by the articles. 2. Surrender of shares authorized by the articles. 3. Diminution of share capital. 4. Redemption of preference shares. 5. Buy Back of shares and ESOS. 6. Purchase of shares of a member on account of fraudulent conduct u/s 402 as ordered by the tribunal. Distinction between Diminution and the Reduction of share capital Sl.NO Diminution Reduction 1. It is the reduction of unsubscribed It is the reduction of the subscribed

2.

3.

4.

portion of the issued share

or paid up capital.

capital. It involves the authorization of

It involves the authorization of

articles and the ordinary

articles and the special resolution

resolution of the general meeting. Confirmation of tribunal is not

of General Meeting. The reduction of share capital will

required.

be valid only when it is confirmed

Addition of words to the name of

by the tribunal. The word “and reduced” may have

the company is not required.

to be added to the companies name 27

Share and Share Capital

as ordered by the tribunal for a 5.

Notice of R.O.C must be given

specified period. The order of the tribunal along

within 30 days thereof.

with the documents and details of reduction must be submitted to the R.O.C which involves a detailed procedure.

Bonus shares (or) Capitalization of Profits: A company may capitalize its profits by issuing fully paid up equity shares to its members. If it is authorized by the articles for the purpose of amount will be transferred from the P&L a/c, Reserve to the share capital. Bonus shares are issued to the existing equity share holders with free of charge. SEBI guidelines for the issue of the bonus shares: 1) These guidelines are applicable to listed public company. 2) Bonus shares shall be made only out of free reserves (or) genuine profits (or) security premium collected in cash, including the debenture redemption reserve. 3) Reserve created by reduction of fixed assets shall not be capitalized.

4) Bonus shares cannot be issued under the existing partly paid up shares are made as fully paid up. 5) Bonus shares cannot be issued unless the existing partly paid up shares are made as fully paid up preference shares. 6) The company must not have a. Defaulted in the repayment of fixed deposits or in the payment of fixed Interest thereon. b. Defaulted in the redemption of debenture (or) c. Defaulted in the payment of statutory dues of employees relating to P.F, Gratuity, Bonus etc., 7) Bonus shares must be issued with in 6 months from the date of approval by the B.O.D and the board approval cannot be taken back later.

28

Share and Share Capital

8) Bonus issue must be authorized by the articles. If it is not authorized by the articles, a special resolution must be passed at a general meeting for including the necessary provision in the articles. 9) After the Bonus issue the capital clause of the memorandum may have to be altered for the increase in the capital if necessary. 10) If any PCD (Partly Convertible Debentures) and FCD (Fully Convertible Debentures) are pending conversion, Bonus shares cannot be issued unless a similar benefit is reserved for the holders of such FCD’s or PCD’s thereafter. Bonus shares must be paid at the time of conversion. Distinction between Right shares and Bonus shares: Sl.NO Right shares 1. Share holders must pay for the

Bonus shares Share holders take the shares free

2.

shares taken up. These shares may be either partly

of charge. These shares are always fully paid

3.

paid up or fully paid up. If minimum subscription not

up. There is no requirement for the

received the entire share

minimum subscription.

application money must be 4.

5.

6.

refunded. The share application money

No money will be received by the

must be deposited in a separate

company.

a/c with a scheduled bank. Share holders may either take up

Renunciation facility is not

the shares (or) renounce the

available.

shares in favor of another. Issue of right shares is governed

Bonus issue shall be governed by

by the provision in sec 81.

articles and SEBI guidelines.

Calls on shares (or) Share Call Money 1. Usually the issue price of the shares are payable in installments. Installments other than those payable by way of application and allotment money are known as calls on shares (or) Shares call money. 29

Share and Share Capital

2. The authority for making calls will be as follows: a) B.O.D- When a company is going on b) Liquidation- When a company is going into winding up. 3. Generally a public company must ensure that all the shares are made as fully paid up within 12 months from the date of allotment. 4. The calls must be made by company by serving a notice on members specified amount and time of paying. 5. Calls may be paid in cash or in kind. 6. The company may accept calls in advance from share holders are authorized by

the articles. In that case: a) According to Table-A, the company may pay interest 6% p.a. b) According to Sec 93, Regulation 88 of Table-A, dividends may be paid in calls in advance if authorized by the articles. c) The share holders shall not be entitled to any extra voting rights. (only on paid up capital minus advance). Forfeiture of Shares 1. The articles of association of company usually payable for the forfeiture of shares of a member who fails to pay calls or other installments of issue price within a certain time after they fall due. 2. Shares of a member cannot be forfeited unless the articles confer such a power on the B.O.D. Rules Regarding the Forfeiture of shares 1. The forfeiture will be valid only when it is affected in accordance with the

provision. Shares can be forfeited for non-payment of any call. However the articles may lawfully incorporate any other ground for forfeiture. Case: Naresh Chandra Sanyal Vs. Calcutta Stock Exchange Ltd. 2. Before, the shares are forfeited a paper notice must be served on notice. The notice must be clearly mention the amount due together with interest and the member must be given 14 days for making the payment. The notice must also mention the shares are liable to be forfeited in the event of non payment. 30

Share and Share Capital

3. If the share holder does not pay the amount within specified time the B.O.D may pass a resolution for forfeiting the shares. However the B.O.D is not required if the notice clearly states that in the ever names of shares are deemed to been forfeited. 4. a. The power to forfeit shares must be exercised bonafide and for the benefit

for

the company. b. The power to forfeit the cannot be exercised to release a shareholder from his liability and who is unwilling to pay. c. The power to forfeit cannot be forfeited at the request of share holders. It abuse

authorization and a fraud on the other. d. After forfeiting the shares, a further notice intimated. 5. Forfeiture of fully paid up shares:-

Fully paid up shares may also be forfeited if authorized by the articles in cases like expulsion of member on some valid grounds. However, Forfeiture of fully paid up shares must be made in the bonafide interest of the company. Re: Shyam Chand 6. Effect of Forfeiture:(Consequences) 1. A person whose shares have been forfeited (eases to be a member in respect

of only forfeited shares. Mr. X 100 shares

Rs. 1000 shares

fully paid up

partly paid up.

Continues to be meber

Forfeited ceases to be a member

2. The liability of the person whose shares has been forfeited ceases only when the company reissues them and receives full money on such shares that means the liability for unpaid calls continues even after the forfeiture of shares.

31

Share and Share Capital 3. When partly paid shares are forfeited shares the formal share holder will

remain a past member to present. If the company goes into liquidation within one year of forfeiture. 4. On the forfeiture shares become the property of the company. They may be either reissued or otherwise disposed of as deemed fit by the company. 5. Reissue of Forfeited Shares:

Forfeited shares may be reissued at any price, provided, the amount already received together with the reissue price is not less than the nominal value of shares. That means the discount allowed on reissue of forfeited share of the amount of the shared. 6. Surplus on Reissue of forfeited shares: a. Where the forfeited shares are reissued by the company and the company

receives any surplus, that is more than the nominal value of shares then if the nominal value of shares then if the articles are silent of such amount Re: Supreme Court in Naresh Chandra Sanyal vs Calcutta stock exchange ltd. b. If the articles provide expressly the surplus belongs to the company. It constitute premium and therefore must be transferred to securities premium or capital. Annulment of forfeiture: Forfeiture of shares annulled at the request of the former share holder before the forfeitured shares are sold or other wise disposed of for this purpose a board resolution must be passed and such annulment must be bonafide and for the benefit of the company. The Former share holder must pay amount due together will interest and expense. Thereafter the name of the former share holder must be restored in the register of members Surrender of Shares 1) The term “Surrender” refers to a voluntary return of shares by the shareholders to the company for cancellation.

32

Share and Share Capital

2) There is no provision either in companies act as in Table A regarding the surrender of shares. Therefore, a company may accept a valid surrender of shares if authorized by articles. 3) Only partly paid up shares may be surrendered to the company as a shortcut to forfeiture. Forfeiture involving long and time consuming procedure. 4) Surrendered shares may be reissued by the company in the same way as forfeited shares. Provisions Relating to the Transfer of Shares: 1) Sec 82: Empowers every share holder to his shares in the manner laid down in the

articles and in accordance with the provisions of the act. 2) The articles of association of a private company must contain restriction on free transferability Sec 3(1)(iii). Therefore, there may be pre-emption clause that any member who wants to sell his shares must sell them only to existing members at a price determined by the B.O.D. 3) In a public company, there may be restrictions on the free transferability of shares.

Eg: The B.O.D may refuse to the transfer partly paid up shares to a transferee whom they do not approve. There may be an objection on the transfer of shares on which the company has the lien. 4) Every company must register the transfer and issue a share certificate within 2 months after receiving the application for transfer. 5) Any refusal to transfer share must be by way of a board resolution and only in the

bonafide interest of the company. Case: Satyanarayana Rathi Vs. Annamalair Textiles Pvt. Limited

Procedure for transfer: (Sec 108) 1) A share transfer form (STF 7B) must be submitted to R.O.C in blank. The R.O.C will date it and sign it. There after, it must be duly stamped and executed by both 33

Share and Share Capital

the transferer and the transferee, finally it should be presented to the company for registration. 2) The time limit for lodging the transfer documents with company for registration as follows: a. Unlisted Company: Within two months from the date of presentation to R.O.C. b. Listed Company: Within 12 months from the date of presentation to R.O.C (or) before the closure of the registrar of members. Blank Transfer In this case the share transfer form is dully executed by the transferer but the name of the transferer is not filed stamp duty will be paid by last transferee who lodges the documents with the company for registration within the prescribed statutory time limits. 2 months (or) 12 months as the case may be. Transfer of Fully Paid Up shares In this case the company will have to give a notice to the transferee. If the transferee does not object within two weeks from the date of receipt of notice, his name will be entered in the registrar of members. When the shares are fully paid up notice by the company to the transferee is not required. Transfer of shares held in Joint names In this case the share transfer form must be signed by all the joint share holders. If there is a specific authorization. It may be signed by some of them (or) one of them as the case may be. Completion of transfer: A transfer of shares becomes complete only when the name of the transferee is entered by the company in the registrar of members. Case: Mathru Bhumi Printing and Publish company Limited Vs. Vardhaman Publishers Limited 34

Share and Share Capital

Certification of Transfer (or) Splitting of shares: This happens when some of the shares covered by a share certificate or sold/transfer. The transferer sends the share certificate to the company with a request of necessary certification. There after the necessary formalities completed by the company, transferer and the transferee, that is affixing of necessary stamp etc. The company cancels the old share certificate and issues a new share certificate to the transferee for the no. of shares sold and also to the transfer for the balanced shares. Refusal of transfer by the company Where a company refers to register a transfer. It shall send a notice both to the transferee with in two months form the date on which the share transfer form was lodged with the company for registration giving necessary reasons. Aggrieved person (transferer/transferee) may appeal to the tribunal within two months form the date of receipt of refusal notice (or) within for month from the date of lodging documents in the case of non receipt of refusal notice. Priority between transferees: 1. When two or more persons lay their claim to the same shares the transferee who is earlier in the point of time will be preferred. 2. However, if the transfer is registered by the company. The transferee who first will get priority over the other irrespective of date when his claim arose. Forged Transfer: 1. An instrument of transfer (STF form No. 7B) on which the signature of transferer

is forged is called a forged transfer. 2. Forgery does not confer any title because there is no consent the transferer at all. 3. When STF is forged but the company registers the transfer, then the company will

be liable. Therefore the true owner can apply to the company for the necessary in rectification and his name must be restored in the register of members. 4. If any officer of the company issued a forged share certificate then the company. Case: Ruben Vs Great fingal consolidated Consequences: 1. A forged transfer is a nullity and void ab initio. 35

Share and Share Capital 2. The original owner continues to be the shareholder. Therefore he will have the

right receive dividend, bonus shares etc. therefore his name must be restored in the register of members. 3. If the company has issued a share certificate to the transferee and the transferee

has sold to an innocent purchaser then the company must either register the purchaser as a share holder (or) damages (refer Dixon vs. kennavey) will recover its loss from the person who procured registration even though he may acted good faith. Transmission of Shares 1. Transmission of shares takes place in the following circumstances: a. When the registered share holder dies.’ b. When the registered share holder become a person on unsound mind.

c. When a registered share holder as adjudicated as an insolvent and d. When the registered share holder is a company and that the company goes into liquidation 2. When a individual shareholder dies or becomes a person of unsound mind, his

shares will be transmitted to his legal heirs. For this purpose, they have to produce a succession certificate or a letter of administration or probate. The legal heirs can either become the members a member in the company. He can only sold the shares to the another. Distinction between the transfer and the transmission Sl.no 1 2

3

Transfer This involves voluntary or deliberately

Transmission This is the result of operation of law.

act of the transferer. This instrument of transfer must be

The heirs will have to produce proof of

duly executed both by the transferer

title like succession certificate.

and the transferee. This is the normal method of the

This takes place in the extraordinary

transferer of the property of

situations.

transferring property in share Lien on shares:36

Share and Share Capital

1. The term lien refers to a form of security like a pledge or mortgage. 2. It is an equitable charge on shares to secure any debt which may be due from any member. 3. The articles of association usually authorize the company to exercise a right of lien

on the shares of members again the debts owned by him to the company. 4. When shares are held in the joint name the company will have a lien against debts

due by the any of the joint share holders. Case: Narrendar Vs. The Indian Manufacturing Co Ltd. 5. The right of the company to exercise its lien also extends to the dividend payable to the members, 6. The articles may provide for lien even after the death of the share holder.

7. A lien of a company is transferable. E.g. By the company to its creditors. 8. The company must not enter word “lien” either on the share certificate or in the register of members. 9. Enforcement of Lien: Where the company enforces it lien and sells the shares of a member and the sale price is more than the amount due by the member then the surplus excess belongs to the former owner (Articles cannot provide otherwise) Distinction between Forfeiture and Lien Sl.NO 1

2 3

4

Forfeiture If the forfeited shares are not

Lien This never involved reduction of share

reissued but cancelled, it involves

capital because shares are necessarily

reduction of share capital. This is a penal proceeding. There may be non payment of

sold It is a form of security It can be exercised only for the non

calls or any other valid reasons

payment of debt due not for any other

When the forfeited shares are

reason. When shares are sold, the surplus is paid

reissued, the surplus not payable

to former share holder the articles not

to former owner if articles so

provide so otherwise.

provides expressed 37

Share and Share Capital

Reserve capital: (sec 99) 1. This is applicable only to a company limited by the share.

The term Reserve capital refers to a portion of share capital which the company

2.

has decided by the way of special resolution passed at a general meeting to call up only in the event of the winding up of the company. E.g. Nominal value of share

Rs. 10

Paid Up Amount

Rs. 8

Reserve Capital

Rs. 2

3. Reserve capital is different from capital reserve which is created out of the securities premium. E.g. Securities Premium. Variation of Rights of holders of any class of shares: (sec 106-107) 1. Meaning of class of shares: Equity shares Rs. 100 each

Preference shares Rs. 10 each

Rs. 100 each

Rs. 100 each

9% dividend

10% dividend

Redeemable on

Redeemable on

31-12-2010

31-12-2012

2. The right shares are allowed to any class of shares may be varied with the consent of not less than ¾th of the holders of shares of that issued clause in writing. E.g. Reducing the rate of preference dividend from 9% to 6%. 3. The variation of rights will be valid only when: a. It is authorized by the provisions of memorandum (or) articles and b. It is not prohibited by the terms and conditions issue of that class of shares. 4. The holders of not less than 10% of the shares of that class who have not consulted may applied to the tribunal for setting aside the variation. In that case, the variation shall not be effective unless it is confirmed by the tribunal.

38

Share and Share Capital

-----------**** THE END****------------COMPILED BY: PABBARAJU LAXMI NARASIMHA RAO [email protected] [email protected]

39