Shares

A PROJECT ON

SHARES

AKSHI TANDON 5TH semester Ballb (hons)

Faculty Name-: RASHMI NAGPAL

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Inde x pg

Shar es and Natur e 10

Shar es All ot ment 11-14

Shar es Ce r tif ic ate 14-18

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SHARES DEFINITIONS The Companies Act defines a share as “Share in the Share Capital of the company, and includes stock except where a distinction between stock and share is expressed.” According to J.Farwell a share is “ the interest of a shareholder in a company measured by the sum of money, for the purpose of liability in the first place and of interest in the second

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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.

STOCKS: Share clubbed together is known as stock

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When you issue share certificate then it is STOCKS

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 shares are fully paid up then can be converted into stock. 4. Stock is always fully paid up and it

4. Shares may be either fully paid up

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.

TYPES OF SHARES • Before passing Companies Act, 1956, shares used to be in three types • Ordinary Shares 5

• Preference Shares • Deferred Shares • After Companies Act , companies issued only two types of shares • Preference Shares • Equity Shares

Types of preference shares: In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows: Cumulative Preference Shares: Cumulative preference shares are those shares on which the amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid divided will accumulate and will be paid in the subsequent years before any divided is paid to the equity share holders. Preference shares are always deemed to be cumulative unless any express provision is mentioned in the Articles.

1)

2)

Non-Cumulative Preference Shares: Non-cumulative preference shares are those shares on which arrear of dividend do not accumulate. Therefore if divided is not paid on these shares in any year, the right receive the dividend lapses and as such, the arrear of divided is not paid out of the profits of the subsequent years. Participating Preference Shares: Participation preference shares are those shares, which, in addition to the basic preferential rights, also carry one or more of the following rights: 6

(a)

(b)

4)

To receive dividend, out of surplus profit left after paying the dividend to equity shareholders. To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.

Non-Participating Preference Shares: Non-participation preference shares are those shares, which do not have the following rights: (a)

To receive dividend, out of surplus profit left after paying the dividend to equity shareholders.

To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company. Preference shares are always deemed to be non-participating, if the Article of the company is silent. 5) Convertible Preference Shares: Convertible preference shares are those shares, which can be converted into equity shares on or after the specified date according to terms mentioned in the prospectus. (b)

6)

Non-Convertible Preference Shares: Non-convertible preference shares, which cannot be converted into equity shares. Preference shares are always being to be non-convertible, if the Article of the company is silent.

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7)

Redeemable Preference Shares: Redeemable preference shares are those shares which can be redeemed by the company on or after the certain date after giving the prescribed notice. These shares are redeemed in accordance with the terms and sec. 80 of the Company’s Act 1956.

Irredeemable Preference Shares: Irredeemable preference shares are those shares, which cannot be redeemed by the company during its life time, in other words it can be said that these shares can only be redeemed by the company at the time of winding up. But according to the sec. 80 (5A) of the Company’s (Amendment) Act 1988 no company can issue irredeemable preference shares Equity shares: According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the share, which is not preference shares. In other words equity shares are those shares, which do not have the following preferential rights: (a) Preference of dividend over others. (b) Preference for repayment of capital over others at the time of winding up of the company. These shares are also known as ‘Risk Capital’, because they get dividend on the balance of profit if any, left after payment of dividend on preference shares and also at the time of winding up of the company, they are paid from the balance asset left after payment of other liabilities and preference share capital. Apart from this they have to claim dividend only, if the company in its A. G. M. declares the dividend. The rate of dividend on such shares is not pre-determined, but it depends on the profit earned by the company.

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The equity shareholders have the right to vote on each and every resolution placed before the company and the holders of these shares are the real owners of the company.

Distinction between Preference Shares and Equity Shares: Basis of difference Rate of dividend

Payment of dividend

Participation in management Winding up

Arrears of dividend

Voting rights

Preference Share Equity Share The rate of dividend on The rate of dividend on preference share is fixed. equity share is changed from year to year depending upon the availability of profits. They have a right to Dividend on equity shares receive dividend before is paid, after any any dividend is paid on dividend is paid on equity shares. preference shares. Preference shareholders Equity shareholders are are not entitled to entitled to participate in participate in management. management. On the winding up, they In this case, they have have a right to return of been paid only when capital ahead (before) of preferences capital is paid the capital returned on in full. equity shares. If dividend is not paid on In case of equity shares, these shares in any year, dividend cannot the arrear of dividend accumulate. may accumulate. Preference shareholders Equity shareholders enjoy do not have any voting voting rights. rights.

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ALLOTMENT OF SHARES Offers are made on application forms supplied by the company. When an application is accepted, it is an allotment. “Allotment” is generally neither more nor less than the acceptance by the company of the offer to take shares. It is an appropriation out by the directors of shares to a particular person. A valid allotment has to comply with the requirements of the Act and the principles of the law of contract relating to acceptance of offers. 10

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

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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. 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.

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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.

5)

Date of opening of subscription list: This is the date of first allotment of shares.

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6) Date of closing/closure of subscription List: This is the last date for the completion of allotment

STATUTORY RESTRICTIONS ON ALLOTMENT

• Minimum subscription and application money [s.69]: It means the amount which is, in the estimate of the directors, enough to meet the needs like purchase price of any property partly or wholly, preliminary expenses, and working capital. • Statement of lieu of prospectus [s.70]: Where prospectus has not been issued, no allotment shall be made unless at least three days before a statement in lieu of prospectus has been filled with the register. • Opening of subscription list [s.72]:Shares can not be allotted at once after the issue of the prospectus . No allotment shall be done until the beginning of the 5th day from the date of the issue of the prospectus. SHARES TO BE DEALT IN ON STOCK EXCHANGE [S.73] : Every company intending to offer shares to the public by the issue of a prospectus has to make an application before the issue to anyne or more of the Stock Exchanges for permission for the shares to be dealt with at Stock Exchange. An allotment shall be void if the permission has not been granted. • over-subscribed prospectus [s.73(2-A)] : where the permission of a stock 14

exchange has been granted and,therefore , the allotment completed valid, the prospectus being oversubscribed portion of the money received must be sent back to the applications forthwith.

CERTIFICATE OF SHARES

• An allottee of shares is entitled to have from the company a document called share certificate, clarifying that he is the holder of the specified number of shares or debentures or debenture-stock is obliged to deliver to the allottee a certificate of shares within three months of allotment

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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 .

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Share certificate: (sec 113) It is a document issued by a company to its share holders certifying the no. of shares hold by them. 1) Every company must issue a share certificate within 3 months from the date of receipt of application for transfer. 2) Under the depository system the company send an intimation to the shareholder immediately after the allotment. 3) According to sec 84, a share certificate is issued under the common seal of the company. 4)

Estopell as to title: A share certificate once issued binds the company. It is a declaration by

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the company to all the world, that a person whose names the share certificate. Case: Dixon vs. Kennaway 5) 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. 6)

Held, The company liable to pay damages to Mrs. D that it could not allotted any share.

7)

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. 8) 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. 9) Every share certificate may contain common seal and the signature of the company secretary and two directors. 10)In the following two circumstances the company will issue duplicate certificates to the share certificate:

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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.

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