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.

KINDS OF SHARES

 Deferred Shares
 Preference Shares
 Equity or ordinary shares ; a) With voting rights b) 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:

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.

Cumulative and Non-Cumulative Preference Shares:

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.

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
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) 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 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 Equity shares

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

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 a) Valid
b)void and 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.

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.

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

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)

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.
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.
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 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.

Sec 77(1) Restrictions

Sec 77A Sources to buy back
Sec 77AA Transfer to C.R.R
Sec 77A(2) Conditions for 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.
4. Conditions for Buy Back of shares: (sec 77A(2):
a) Buy back must be authorized by the articles of association of the company.