6) Share and Share Capital

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Share and Share Capital

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Share and Share Capital

SHARE AND SHARE CAPITALMeaning 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, the2

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 it can be transferred only as a whole. 6. Shares of the same class are of equal denomination. fractions. 6. Stock may be of different denomination. KINDS OF SHARES Deferred Shares Preference Shares Equity or ordinary shares Differential rights

With Voting rights Deferred Shares: 1) These Shares may be issued only by private company

2) These are also known as founders 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- NO5. 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 dont 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 Upb) 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 dont 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 dont 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 dont 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

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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, dividend either at a Fixed rate or Fixed amount. 2) Preference dividend will be paid before dividend is paid on equity shares 3) During winding up preference share capital paid in priority to equity share capital 4) In the case of accumulative dividend, it helps on accumulative 5) These shares must be redeemed. 6) The shareholders enjoy the voting rights only in exceptional circumstances. 7) These share holders does not entitled to receive the right shares or bonus 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): Equity shares 1) The rate of equity dividend depends upon the availability of profits after the payment of preference dividend. 2) Equity dividend will be paid only after payment of preference dividend. 3) Equity share capital will be repaid as a lost priority after repayment of preference capital. 4) Equity dividend will be paid only in those years in which the companies has profits without any accumulation. 5) These shares cannot be redeemed. 6) These shareholders enjoy the unrestricted on all matters. 7) These shareholders are entitled to receive right shares and the bonus shares.

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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 Non-Compliance Allotment Invalid

Statutory provisions Non-Compliance 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) A. It should be received within within 60 days of closure of issue. received the entire share application money refunded within 8 days. 130 days, C. After the expiry of 68 days the the application money must be refunded along with 15% interest. money must be with into 6%p.a prospectus. B. If it is not received the entire share application must be the next 10 days C. After the expiry of the application refunded along B. It is not 120 days from the date of issue SEBI (Listed) A. It should be received from the date

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 lis...