Module - III

Module - III

Share Capital

Share Capital

Dr. K. Srinivasan

Dr. K. SrinivasanDepartment of Management

Department of Management

StudiesStudiesChrist University, Bangalore

Christ University, Bangalore

Prospectus Prospectus Prospectus is an invitation issued to

the public to purchase or subscribe shares or debentures of, a body corporate.

Every prospectus must be dated. The date of publication and the date of issue must be specifically stated in the prospectus.

The golden rule of the prospectus is that every detail has to be given in strict and meticulously. The material facts given in the prospectus are presumed to be true. (New Brunswick & Canada Railway. Land & Co. Vs. Muggerridge).

Types of ProspectusTypes of Prospectus

Shelf Prospectus: Prospectus issued by financial institution & bank, by issuing one prospectus they can go for multiple issue of shares.

Deemed Prospectus: When the offer is made through Issue Houses, the document issued by them should contain the requirements of prospectus.

Continued….Continued….

Abridge Prospectus: Shorter description of the prospectus & contains all prominent features of a Prospectus. In other words it is executive summary of prospectus. 

Red Herring Prospectus: Share offered to the public in different price range, the shareholder can apply at the price suitable to them, all the information except the price of share is mentioned.

Appointment of Appointment of BankersBankers

Issue of Prospectus & Application of Shares is to be deposited.

Resolution should be passed to CEO & members about Bank & its Operation.

Bank account for specific purposes, later current account for subsequent transactions.

To open a bank account, the secretary should disclose the following documents; they are

Continued….Continued….

Memorandum of Association

Articles of Association

Certificate of Incorporation

Board Resolution & Authorized authority for opening bank account.

Director & Secretary specimen signature.

Registration of Registration of ProspectusProspectus

Consent of the expert to the IssueConsent of the expert to the Issue Copy of every contract, appointing of Copy of every contract, appointing of

fixing the remuneration of managing fixing the remuneration of managing director or manager.director or manager.

Written statement by the persons Written statement by the persons making the report required by Part II making the report required by Part II of Schedule II relating to of Schedule II relating to adjustments.adjustments.

Consent in writing of the person Consent in writing of the person name in the prospectus as the name in the prospectus as the Auditor, Legal Advisor, Banker & Auditor, Legal Advisor, Banker & Broker of the CompanyBroker of the Company

Objects of Objects of Registering Registering ProspectusProspectus

To ensure the copy of the prospectus shall always be available for inspection by the public at the Registrar’s office.

To keep an authenticated records of the terms and conditions of issue of shares or debentures.

To pinpoint the responsibility of the persons issuing the prospectus .

Contents of the Contents of the Prospectus Prospectus

Part I of Schedule II General Information Capital Structure of the Company Terms of Present Issue Particulars of the Issue Company, Management & Projects Company Details & Other listed

company under same Management Outstanding Litigations Management and Perception of

Risk Factor

Continued…..Continued…..

Part II of Schedule II General Information Financial Information

Report by the Auditor Reports by the Accountants Principle terms of Loans &

Assets charged on Security Statutory & Other Information

Minimum Subscription Expenses of the Issue

Continued….Continued…. Underwriting Commission Previous Public Issues Commission & Brokerage of Previous Issue Debentures & Redeemable Preference

Shares Issued at the time of Prospectus. Option to Subscribers Restriction on Transfer & Transmission Revaluation of Assets Right of Member like Voting, Dividend etc. Material Contracts & Inspection of

Documents

Part III of Schedule II Company carrying on business for

less than 5 financial years, referring to 5 financial years means reference to number of financial years

Reasonable time & place at which the copies of all Balance Sheet, P & L Account, Auditors reports & other documents must be inspected.

Time and the year wherever used here is earlier means financial year should be dated & signed by the directors.

Continued….Continued….

Remedies for Remedies for Misstatements in Misstatements in

Prospectus Prospectus Relying on the prospectus if

any person buys shares, the person may rescind the contract. The rescission has to be done within a reasonable time

Damages can be claimed from the directors, promoters or other persons who has authorized their name to be written during the issue of the prospectus

Statement in Lieu Statement in Lieu of Prospectus of Prospectus

(SLOP)(SLOP)When the public company

does not invite public to subscribe for its shares, but arrange to get money from private sectors, it need not issue a prospectus to the public. In such a case, the promoters are required to prepare a draft prospectus known as “Statement in Lieu of Prospectus”

A Company having a share capital, but not having prospectus can allot shares or debentures 3 days before the allotment, there has been delivered to the Registrar for registration in (SLOP).

Shares or debentures are allotted without the SLOP, the director can be punishable with a fine which may extend to Rs. 10,000.

SLOP includes untrue statement, any person who authorized can be punishable with imprisonment for 2 years and fine extended to Rs. 50,000 or with both.

Continued….Continued….

Allotment of Allotment of SharesShares

Palmer defines “the appropriation to an applicant by a resolution of the directors of a certain number of shares in response to an application”.

After the subscription list has been closed and all the share application have been received by the bank, the share application and allotment list is prepared. The directors then proceed for allotment.

The provisions relating to allotment of shares may be studied under two heads; they are General Provisions contained in Indian

Contract Act 1872 and Special Provisions contained in Companies

Act 1956.

Continued….Continued….General Provisions

Proper AuthorityWithin Reasonable TimeMust be CommunicatedAbsolute and UnconditionalRevocation of Offer to take

Shares & Allotment

Specific ProvisionsWhen No Public Offer is MadeWhen Public Offer is Made

Secretarial Duties Secretarial Duties Before AllotmentBefore Allotment

Arrange for Company Special Bank Arrange for Company Special Bank Account for receiving Application Money.Account for receiving Application Money.

Check share applications & money Check share applications & money received by the company has been sent received by the company has been sent to the bank.to the bank.

Scrutinizing & Sorting out the Application Scrutinizing & Sorting out the Application on receipts and marking with serial on receipts and marking with serial number.number.

Incomplete, Irregular or Insufficient Incomplete, Irregular or Insufficient Money applicants are requested to remit Money applicants are requested to remit the balance.the balance.

Issue Public notification through Press Issue Public notification through Press about the last date of subscription.about the last date of subscription.

Check the Application Form & Money Check the Application Form & Money collected is proper with the bank.collected is proper with the bank.

Share CapitalShare Capital

Share Capital means the Investment raised by the

Company by issue of Shares.

A share is a share in the share capital of the company including the stock.

Share gives a right to participate in the profits of the company, or a share in the assets when the company is going to be wound up.

Classification of Classification of InstrumentsInstruments

Pure Instruments

Hybrid Instruments

Derivative Instruments

Equity SharesEquity Shares

Equity Shares, other than Non-Voting Shares, have voting rights at all general meetings of the company. Thus, it affect the controlling power of the management.

Equity shares have the rights to share the profits of the company in the form of Dividend or Bonus Shares. Non-voting Shares enjoy larger benefits in this regard. But, higher dividend can be declared by Board of Directors.

Continued…..Continued….. If Company wound up, payment

towards Equity Share Capital will be made after Preference Share Holders, Debentures and Creditors.

Equity Share holders has the rights to Fresh Issue of Capital, Rights to apply to the Court, Receive Copy of Statutory Report before holding of Statutory Meeting, Rights to call AGM, Meetings, Extra-ordinary Meeting, Auditors Report, Directors Report and Other Information

Non-Voting SharesNon-Voting Shares

Due to Globalization, Corporate, Foreign Investors like FII, FDI are now permitted to bring their low cost finance and invest in Indian leading Companies.

But Foreign Investors and NRI’s who are looking for a source of Investment and Not for taking over Management control, so they can attract adequate resources for expansion & Growth.

Non-Voting Shares are now permitted to issue the capital as per Company Act 1956 with certain restrictions

Continued….Continued….

It is separately listed and pay higher dividend on these shares.

In case, if the dividends are not paid for a specific period, the shareholders gets the voting rights as per Equity Share.

Due to Non-Voting shares, Company can Garner additional Net Worth.

Pherwani Committee & Abid Hussain Committee

Recommended

Preference SharesPreference Shares Cumulative Preference Shares

Non-Cumulative Shares

Convertible Preference Shares

Redeemable Preference Shares

Irredeemable Preference Shares

Participating Preference Shares

Non-Participating Shares

DebenturesDebentures Naked or Unsecured Debentures Secured or Mortgage Debentures Redeemable Debentures Perpetual Debentures Bearer Debentures Registered Debentures

Based on Convertibility

Fully convertible Debentures Non Convertible Debentures Partly Convertible Debentures

Alteration of Share Capital

A limited company with a share capital may, if so authorized by its articles to alter its share capital as follows

Increase its capital by creation of new shares

Consolidate & Divide all part of its share capital into shares of larger number.

Convert fully paid-up shares into stock. Sub-divide its shares into smaller

amount & equal proportion between the amount paid & the holding amount .

Cancellation of shares as per the rules of Company Act 1956.

Depositories Act Depositories Act 19961996

A depository is a provider for holding and transacting securities in

electronic form. A depository functions somewhat similar to a

commercial bank. Free Transferability of securities with

speed, accuracy and security with these major specifications;

Making Securities of Public Limited Companies freely transferable subject to certain expectations.

Dematerializing the securities in Demat mode.

Providing for maintaining of ownership records in a book entry form