Promoters Definition There is no definite meaning Facts of each case point out that whether a person should be considered

red as a Promoter In Twycross v Grant (1877) 2CPD 469 CA

The court said that the defendants 1. Framed the scheme 2. Provisionally formed the company 3. Found the directors and qualified them 4. Prepared prospectus 5. Paid for printing, advertising and other expenses incidental to bringing the undertaking Hence by work undertaken by him, it is clear that they are Definition Hence we can say that:Before a company can be formed, there must be some persons who have the intentions to form a company and who take the necessary steps to carry that intention into operation. Such persons are called Promoters . (Charlseworth and Morse, Company Law p48; 14th edition, 1991) Are all persons involved in incorporation of a company are promoters? Definition A person who works under professional capacity is not a promoter. eg:- Solicitor preparing documents of the proposed company; accountant But if he acts outside his professional capacity than he might be treated as Promoter. eg:- If Solicitor helps in getting the subscribers/ shareholders or helps in appointment of Directors Duties and Liabilities If there is any misrepresentation in prospectus, the promoters have civil and criminal liability. It is a fiduciary position somewhat like trustee or agent but not exactly so because company is not in existence. .

His dealing must be fair and open He is not restrained from making profit during the promotion/ incorporation of the company but he has to disclose his interest.

Duties and Liabilities Disclosure If promoter is starting a company for the purpose of buying his property and wants to draw his payment from the money obtained from the shareholders, he must faithfully disclose all facts relevant to the property. If he conceals any fact in relation to character or value of the property or his personal interest than the company is entitled to set aside the transaction (rescind) or claim for compensation/ damages. To whom the Promoter has to disclose? Duties and Liabilities Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 A group of Persons headed by E purchased an island containing phosphate mines for 55,000 pounds A company was then incorporated to take over the island and to work the mines. E named 5 persons as directors. 2 were abroad. Of the three others, 2 were persons entirely under E s control. These 3 directors purchased the island at 1,10,000. A prospectus was then issued. Many persons took shares. The purchase of Island was adopted by the shareholders at their first meeting; but the real circumstances was not disclosed to them. The company failed and the liquidator sued the promoter for refund of the profit. The promoter argued that the BODs had full Knowledge of the facts. The principle laid down:- If the promoters propose to sell their property to the company, it is incumbent upon them to take care that they provide with competent and impartial executive body, who can exercise an independent judgement on the purchase of the property. Duties and Liabilities Every time it is not possible for the promoters to provide an independent BOD as in private or public company consisting of only family members. Gluckstein v. Barnes (1900)AC 240 A syndicate of persons were formed to raise a fund, buy a property, called Olympia and resell it to a company. They first bought up some of the charges upon the party for sums below the amount which the charges afterward realised and thereby made a profit of 20,000 pound. They brought the property

for 1,40,000P, formed a limited company and resold the property for 1,80,000P to the company of which they were first directors. They issued the prospectus inviting applications for shares and disclosing 1,40,000P and 1,80,000P but not the profit of 20,000P. Shares were issued but later company went into liquidation. The defendant (promoter) argued that the fact was known to the parties to the transaction. Principle- Disclosure to the parties to transaction is not a disclosure to the Company. Duties and Liabilities To whom the Promoter/s has to disclose? In case of Public company the independent and competent Board of Directors; Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218 In case of Private company and Public company like Solomon &Co. which consists of only family members, to all possible shareholders Gluckstein v. Barnes (1900)AC 240 Duties and Liabilities Disclosure The disclosure has to be made in prospectus about the amount paid within last two years or to be paid ; His interest in the promotion or the property acquired by the company Prospectus Statement in Lieu of Prospectus Draft prospectus containing the information required by Schedule III of CA is called Statement in Lieu of Prospectus (SILOP) It is issued by those public companies (listed or unlisted) which intend to raise money through private access rather than public issue It s copy must be filed with the ROC at least 3 days before any allotment of shares is done. SILOP If there is any omission or misrepresentation the civil and criminal liability would be same as in case of an issued prospectus Process of issuing securities through a SILOP is a kind of Private Placement.

A copy of SILOP and application form are circulated among selected persons which can not be passed on to others.

Book Building Process Private placements are done by banking and financial institutions and is known as Book Building Process. In BBP orders are collected from investment bankers and large investors based on an indicative price. Even in public issue operation, book building is allowed to the extent to which reservation in issues is permissible (SEBI) BBP is advantageous because the demand for and value of the company s securities is discovered by providing price flexibility and bidding. Prospectus (s2(36)) Public appeal for subscription must be accompanied by a memorandum containing such salient features of a prospectus as may be prescribed. Prospectus Definition: Document described or issued as prospectus, includes Any notice, circular, advertisement or other documents Inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in debentures of a body corporate. Prospectus Application form to be accompanied with prospectus or abridged prospectus. Publication cost of prospectus has become very high so 1998 amendment introduced the concept of an abridged prospectus. Full prospectus should be made available on demand, before the closing of subscription. Abridged Prospectus It is substitute of full prospectus. It is a memorandum containing such salient features of a prospectus as may be prescribed.

There should be nothing in AP which is not there in full prospectus Two applications can accompany one AP The provisions of the Act relating to prospectus (misrepresentation, omission) would be only applicable if it is issued. Issued means issued to public. Sec.67 says that no offer or invitation shall be treated as made to the public if it is not calculated to become available to persons other than addresses or is otherwise a domestic concern of the persons making and receiving the offer etc. The Amendment of 2000 says any circulation to more than 50 persons would become a public offer. Case Nash v Lynd A document marked strictly private and confidential but in form of a prospectus (did not contain all the material facts as required by the Act) was prepared by the defendant, the MD of the company. A copy of it along with application forms was sent to a solicitor who in turn sent it to the plaintiff. An action for compensation for omission of certain facts was brought by the plaintiff. It was held that it did not amount to an issue and hence the plea was dismissed. Prospectus It should be dated. (s.55) The date shall, unless the contrary is proved, be taken as the date of publication of the prospectus. Disclosures to be made (s.56) Expert s consent.(s.58) Expert should not be one who is himself engaged or interested in the formation, promotion or management of the company. It should be registered.(s.60) Copy of every Prospectus is to be registered with the ROC on or before the publication of the prospectus. Registration of Prospectus Copy of the Prospectus sent for Registration must be signed by every person who is named therein as a director or proposed director of the company or by his agent. It should be accompanied with Consent of the expert (if a report of an expert is to be published;

Copy of every contract relating to appointment and remuneration of managerial personnel; A copy of every material contract, unless it is entered into in the ordinary course of business or two years before the date of the prospectus; A written statement relating to the adjustments, if any, (profits or losses or assets and liabilities) dealt in any report in pursuance to Part II of Schedule II. The statement should give reasons for the adjustments and be signed by an expert; The consent in writing of the person, if any, named in the prospectus as the auditor, attorney, banker, broker etc., to act in this capacity. Registration of Prospectus The Prospectus must be issued within 90 days of its registration. The company and every person who knowingly issues a prospectus without registration is punishable with a fine which may extend up to Rs.50,000 It must be stated on the face of the prospectus that it has been registered and that the requisite documents have been filed. Shelf Prospectus It is like information contained in a file lying on a shelf. It is issued by public financial institution or public sector bank. It is valid for certain period The institutions will not have to file a prospectus every time it issues securities within the validity period. The company is required to file an information memorandum on all material facts to new charges created, changes occurring in the financial positions in the period from first offer of securities, previous offer of securities and the succeeding offer within such time as may be prescribed by the central Gov. prior to making second or subsequent offer of securities under the shelf prospectus. Duties and Liabilities Disclosure The golden rule as to framing of prospectus must be observed which was laid down in New Brunswick and Canada Rly and Land Co v Muggereridge (1860) 3 LT 651 and was described as a golden legacy in Henderson v Lacon (1867) 17LT 527 Duties and Liabilities

Disclosure The rule of golden legacy is Public is invited to take shares on the faith of the representations contained in the prospectus. The public is at the mercy of the promoters. Everything must, therefore, be stated with strict and scrupulous accuracy . Any misrepresentation would make all involved, liable (civil & criminal) Remedies for Misrepresentation Following remedies for misrepresentation are available:Damages for Deceit (Liability of Directors and company) Compensation under Section 62 Rescission for misrepresentation Liability under section 56 Damages for Deceit Derry v Peek (1889) 14 AC 337(Fraudulent Misstatement) A special Act incorporating a tramway company provided that carriages might be moved by animal power and with the consent of the Board or Trade, by steam power. The directors issued a prospectus containing a statement that by because of passing of special Act, the company had the right to use steam power instead of horses and that a saving would be effected thereby. Consequently, the company had to be wound up. The plaintiff having taken shares on the faith of the statement brought an action of deceit against the directors. The statement was certainly untrue because the power to use steam was stated to be an absolute right, when it was conditional on the approval of the Board of Trade. But the directors honestly believed that once the Act of Parliament had authorized the use of steam the consent of the Board of Trade was practically concluded. Hence Damages for Deceit Edgington v Fitzmaurice (1885) 29 Ch D 459 (false representation must relate to some existing facts which are material to the contract of Purchasing shares)

The directors of a company issued a prospectus inviting subscriptions for debentures stating that the objects of the issue of the debenture was to complete alterations in the buildings of the company, to purchase horses and vans and to develop the trade of the company. Relying on the statement plaintiff advanced money. However the real object was to enable the directors to pay off pressing liabilities The company became insolvent and plaintiff sued the directors for fraud. Damages for Deceit Edgington v Fitzmaurice (1885) 29 Ch D 459 Judgment: There was misrepresentation of facts. Whether this was fraudulent? Fraud is proved if false representation has been made1. Knowingly, or 2. Without belief in its truth, or 3. Recklessly, carelessly whether it be false or true Principle laid down Anyone who has been induced to invest money in a company by a fraudulent statement in a prospectus can sue the persons responsible for issuing it. If his action is successful he recovers full compensation for the loss sustained by him directly as a result of the fraud. But the burden of proof lie on him to establish the following main points of action. Damages for Deceit Peek v Gurney (1873) 43 LJ Ch 19: (Remedy for Direct allottees) A deceitful prospectus was issued by the defendants on behalf of a company. The plaintiff received a copy of it but did not take any shares originally in the company. The allotment was completed and several months afterwards the plaintiff bought 2000 shares from the stock exchange.

The action against directors for deceit was ------The objective of Prospectus is to invite people to become allottees and once the allotment is closed, the validity Damages for Deceit Possfund Custodian Trustees Ltd v Diamond (1996) 2 BCLC 665 Ch D : (Buyers in Secondary Market) The prospectus here was for flotation of securities on the unlisted securities market. A majority of the complainants were original allottees and others were buyers in the open market. The company went into receivership. There were action actions against the company for false statements in the prospectus. The company applied for striking out the claims of after market purchasers. The court said that such purchasers would have to establish that they had reasonably relied on the representation made in the prospectus Damages for Deceit Liability of Company The company may be sued for damages provided that the fraud was committed by the directors within the scope of their authority. But the action against company is beset with the limitation laid down by the House of Lords in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 that The contract of allotment must first be rescinded and then claim damages because -one cannot remain in the company as a shareholder and yet sue it for damages. Damages for Deceit Liability of Company Present View English Misrepresentation Act, 1967 entitles the Court to award damages in lieu of rescission. Thus, rescission is no longer necessary as a prerequisite for liability of the company in England. Compensation under Sec.62 In Derry v Peek the Directors were not held liable for the payment of damages because they believed in what they quoted. But it was argued that investor is only interested in his loss and not on the misrepresentation being innocent or fraudulent. Hence section 62says:

Every person who is a director of the company at the time of the issue of the prospectus. Every person who has authorized himself to be named as a director in the prospectus. Every promoter who was a party to the preparation of the prospectus Every person who authorized the issue of the prospectus. They are liable to compensate the investor for any loss sustained by him by reason of any untrue statement contained in the prospectus Compensation under Sec.62 Greenwood v Leather shod Wheel Co. (1900) 1 Ch 421 The prospectus issued by a wheel manufacturing company stated: Orders have already been received (inter alia), from the House of Commons Wheels for the trolleys in the House of Commons have been ordered and are now in use. In fact no single order had been obtained except for trial and by way of experiment. It was held that the prospectus contained untrue statement. Under this section, the plaintiff does not have to prove fraud. If the statement is false, the directors cannot escape liability even if they had made bona fide and not with the intent to deceive. But they have certain defenses under the section, S. 62(2) Defenses under the section, S. 62(2) Withdrawal of consent- Director not liable if he had withdrawn his consent to become a director before the issue of the prospectus and the same was issued without his authority or consent Issue without knowledge- By proving that Prospectus was issued without his knowledge or consent and on becoming aware he forthwith gave a public notice to that effect Ignorance of untrue statement- He was ignorant and on becoming aware, he withdrew his consent by a reasonable public notice, before allotment Reasonable ground for belief- he as to show that he honestly believed the statement to be true and belief was based on reasonable ground. (Derry v Peek) Statement of expertDefenses under the section, S. 62(2)

An action was brought by the plaintiff to recover compensation from a director of a company in respect of false statements in a prospectus. The director contended that the statements were prepared by the promoters and before issuing he enquired from one of them whether everything is alright and he replied in affirmation. So he is not liable as he believed the statement to be true. Duty of Director? Interest of Promoter? Legal standing of statement made by promoter or any other competent party? Rescission for misrepresentation Sec. 18, 64, 75 of Indian Contract Act, 1872 is applicable Sec. 18- An allotment of shares can be avoided at the option of the allottee if it was caused by misrepresentation whether innocent or fraudulent Sec. 64 - By avoiding the contract he is able to get rid of his shares and claim the money he paid for them. Sec. 75 A person who lawfully rescinds a contract is entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract. Essential requisites for rescission False representation Of facts and not of Law Reliance and Inducement By or on behalf of company

Limits of Recission and loss of right By affirmation By unreasonable Delay By commencement of Winding up Criminal Liability

For any untrue statement in the prospectus, every person who authorized the issue of the prospectus shall be punishable with Imprisonment for a term which may extend to two years, or with fine which may extend up to Rs.50,000/ or both Person involved can take a defense by showing that The statement was immaterial or He had reasonable ground to believe and Up to the time of the issue of the prospectus believed that the statement was true. Shares Allotment - Acceptance by the company of the offer to take shares Offer and Acceptance = Contract/ Allotment Contract Deed = Share certificate A share is Not a sum of money but Interest of a shareholder in the company which is Measured by a sum of money For the purpose of liability and interest Shares Vishwanathan v. East Tndia Distilleries- It is movable property (but can be transferred only in the manner provided by the AOA of the company). S. 82. It is intangible A share is not a negotiable interest CIT v Associated Industrial Development Co. It is an expression of proprietary relationship between a shareholder and the company Shree Gopal Paper Mills Ltd. V CIT- Life of share:- part of share capital converted to stock (if mentioned in AOA) Shares issued

When share is associated with any person it becomes movable party whose transfer is governed by Sale of Goods Act and AOA of the company

Shares Share Certificate (S.84) Shree Gopal Paper Mills Ltd. V CIT Certificate under the common seal of company Prima facie evidence of the title of shares or stock Presently no share certificate is issued, shares transferred in demat form Share Capital Amount of share capital not necessary to disclose during registration In case if the company desires to be registered it must state (where?) the amount of capital and the no. of shares into which it is to be divided Share Capital Nomenclatures Authorised Capital Issued Capital Subscribed Capital Paid-up Capital Reserve Capital Shares

Shares Capital may be divided into shares of one class or two Kinds of shares 1. Equity share capital/shares 1. With voting rights; or 2. With differential rights as to dividend, voting or subject to conditions prescribed (Amendment 2000)

2. Preference Share Capital 3. Shares Issue of share capital with differential voting rights (DVR); Rules,2001 shares with DVR + non-voting shares= 25% total issued share capital Company issuing should have 3 yrs distributable profit in the three financial years preceding such issue Equity capital with regular voting rights will not be allowed to be converted into DVR share and vice-versa Issue of DVR has to be approved by the shareholders resolution in a general meeting and listed company may obtain the shareholder s approval through postal ballot A company which has defaulted in filing annual returns during immediately preceding three financial years or has failed to repay its deposits or interests thereon on due date or pay dividend shall not be eligible to issue shares with differential rights Shares Issue of Equity share capital with differential voting rights (DVR); Rules,2001 Company should not have defaulted in addressing investor s grievances It should be permissible in AOA The Company should not have been convicted of any offence under: 1. SEBI Act, 1992; 2. Securities Contracts (regulation) Act; 1956; and 3. FEMA, 1999 Members holding equity shares with equity share with differential rights shall be entitled to bonus and rights issue of the same class Shares Equity shares This do not enjoy any preferential right in the matter of payment of dividend or repayment of the capital Dividend is not fixed but varies from year to year depending on the profits available.

Rate of dividend is recommended by BODs and declared by shareholders in the AGM In public company and deemed public company equity shareholders have right to vote on every resolution placed in the meeting and the voting rights shall be in proportion to the paid up equity capital Shares Nature of Preference Shares/ Share Capital Assured preferential dividend (fixed amount or fixed rate payable and may be paid back and shares acquired/redeemed) Payment made before equity shareholders are paid (during the life of company and winding up) Voting Rights given only when their interests are affected like in winding up or repayment or reduction of its share capital. However, if preference dividend is not paid fully for more than two yrs, they shall also get voting right on every resolution placed before the company.(s.87) Safe source of investment than equity shares Shares Types of Preference Shares/ Share Capital Participating or Non- Participating Cumulative or Non-Cumulative Redeemable or Irredeemable Preference Shares ( Amendment 1988 prohibits the issue of Irredeemable Preference Shares and in 1996, redeemable after 20 yrs from the date of its issue) Pre-class handout for 16-4-2010 How capital is raised by companies limited by shares and guarantee? Who helps in raising of capitals? Can existing companies raise capital from the shareholders of fully paid up capital? Can a shareholder who has partly paid up share be called to raise capital? Statutory restriction on Allotment Minimum Subscription and Application Money(s.69)

Statement in lieu of Prospectus Opening of Subscription list Shares to be dealt in on Stock Exchange Statutory restriction on Allotment Minimum Subscription and Application Money(s.69) Not to be less than 90% of the whole issue offered to the public S. 69(1) No shares can be allotted unless at least so much amount has been subscribed and Application Money (which must not be less than 5% of the nominal value of the share) has been received in cash It is condition precedent to valid allotment that the allotment money should have been paid to and received by the company The application money has to be kept in separate bank account with the bankers to the issue and can be transferred to company s account when the allotment is done Statutory restriction on Allotment Minimum Subscription and Application Money (s.69) To constitute a valid offer the application has to be accompanied by payment Allotment of shares made without the application money paid is invalid and the directors are guilty of misfeasance Failure to attracting minimum subscription within 120 days of the issue of prospectus application money should be repaid without interest if not repaid within 130 days, the directors become personally liable for it with interest unless they prove that the fault was not theirs Application money can only be used for allotment or for refund and not to settle any other account of the applicant Statutory restriction on Allotment Statement in lieu of Prospectus No allotment shall be made at least three days before the registration of SILOP with ROC If allotment done against above condition than it is voidable at the instance of the applicant provided

1. He moves within two months of the statutory meeting of company 2. Within two months after the date of allotment where statutory meeting is not required to be held or allotment is done after statutory meeting 3. Only notice giving is sufficient, to start legal proceeding in this time is not necessary Where contravention is willful, the guilty directors are liable to compensate the allottee and the company, provided the party suing has suffered loss and brought the action within two years of the allotment. Statutory restriction on Allotment Opening of Subscription list (s.72) Time of opening of subscription List - No allotment shall be made until the beginning of the 5th day from the date of the issue of the prospectus. This time may be extended but cannot be cut short by the directors A statement to extend this time has to be made in the prospectus Any contravention to this does not make the allotment void, although it would attract penalty on the company and its officer Application for shares are revocable only from the 6th day from the opening of the subscription list Statutory restriction on Allotment Shares to be dealt in on Stock Exchange (S. 73) Every company intending to offer shares or debentures to the public by the issue of a prospectus has to make an application before the issue to any one or more of the recognized stock exchange for permission for the shares/debentures to be dealt with at the exchange. This is compulsory (Amendment 1988) An allotment shall become void if the permission has not been granted before the expiry of ten weeks from the date of the closing of the subscription list If the allotment becomes void under S.73, the applicants money should be refunded within 8 days other wise the directors would be personally liable to repay it with interest of 4% - 15% per annum. Statutory restriction on Allotment

Shares to be dealt in on Stock Exchange (S. 73) Objective of this section UOI vs Allied International Products Ltd.(1970) 3 SCC 574 SC said that the object of the provision is to enable shareholders to find a ready market for their shares so that they can convert their investment into cash whenever they like. SC held that even if one out of several stock exchange applied for and granted recognition it would be sufficient to validate the function. Amendment of 1974 nullified this judgment. Now, if out of the stock exchanges applied for, a single stock exchange refuses to grant listing, the allotment, if already made, becomes void. Than What Company is supposed to do? Statutory restriction on Allotment Shares to be dealt in on Stock Exchange (S. 73) Than What Company is supposed to do? The company may appeal to the Central Government. If the appeal is successful, the decision of stock exchange is set aside and the listing would be granted. The allotment would be saved. Statutory restriction on Allotment Present position of S. 73 1. S.73 (1) The name of the stock exchange/s to which an application for permission has been made to be specified in the prospectus itself 2. S.73 (5) If any stock exchange has not granted its permission or has not disposed off the application within 10 weeks the allotment shall become void, even if some other stock exchange/s have granted the permission 3. Earlier an application had to be disposed off within 4 weeks or could have been extended by the exchange to 7 weeks. Now the time is that of 10 weeks from the date of the closing of the subscription list Restriction on Transfer Private Companies or Public Companies (not listed) For the convenience of trading in unlisted securities (investors in new and small companies) an Over the Counter Exchange of India ( OTCEI) has been established which provides liquidity facilities to such investors. Sec 3(iii)

Pvt. company can impose restriction on the right of share transfer through it s constitutional document. Case Article provided that shares can be transferred to outsider only if no existing members accept them at face value. Q. What should a share holder wishing to transfer his shares do? Q. Do the Board of Directors have the right to refuse the transfer of the shares done to an outsider? Explain. Case Smith and Fawcett, Re (1942) Ch 304 Article provided that directors may at any time in their absolute and unconditional discretion refuse to register any transfer of shares. Issued capital consisted of 8002 shares, each holding 4001 shares each. One director died, son applied to get the shares registered in his name Director transferred only 2001 shares, rest to himself. Q. Is the refusal valid? Q. Do the Director have the right to refuse the transfer of the shares? Explain. Restriction on Transfer In the following circumstances, however there can be judicial or quasi-judicial intervention: Mala fide intention of the director Inadequacy of reasons Irrelevant considerations Allotment Effective allotment has to comply with the requirements of the law of contract relating to acceptance of an offer Allotment by proper authority Within reasonable time reasonable time must remain a question of fact in each case. On the expiry of reasonable time application must be deemed to have been revoked. Application in June allotment in Nov invalid.

Must be communicated Posting of properly addressed and stamped letter of allotment is a sufficient communication even if the letter is delayed or lost in the course of post. Household Fire and Carriage Accident Insurance Co. v Grant Absolute & unconditional The applicant must promptly reject the allotment when shares have been allotted to him without his condition being fulfilled. An acquiescence on his part would amount to waiver of the condition. Share Certificate It is a document certifying that he is the holder of the specified number of shares in the company. Shares in depository record is not given their distinctive number Objective of share certificate 1. Estoppel as to title 2. Estoppel as to payment Pre-class handout for 16-4-2010 What are Sweat Equity shares? What is Underwriting Commission (S. 76) What is Brokerage? Difference between Underwriting Commission and Brokerage Issue of Shares at Premium (S. 78) (S. 79) Issue of Shares at discount Allotment of shares at discount is ultra vires. So if allottee (got shares at discounted value) has been registered as member become bound to pay the full value of shares. Contract to take shares at discounted rate is unenforceable Issue of shares at discount even in indirect manner is also not permissible Mosely v Koffyfontein Mines Ltd., (1904) 2 Ch 108 Company issued debentures at discount, which is allowed by Act, and gave each debenture holder the right to convert his debentures into shares

It was held that it was colourable scheme for issuing shares at a discount and therefore was not legal. (S. 79) Issue of Shares at discount Subject to following strict conditions, company may issue its shares at discount Shares of the class issued for the first time are not allowed to be sold at a discount The Company contemplating such an issue must have become entitled to commence business at least one year before the date of issue Procedure A resolution (specifying the rate of discount not exceeding 10%, except with the approval of CG) authorizing the issue must be passed. Finally within 2 months, from the date of approval by BOD, Sanction from CG should be obtained and the share should be issued. Example Sweat equity shares (S.79-A)

Sweat Equity Shares (S.79-A) Sweat equity shares issued at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions. This section enables the companies to issue shares in lieu of services. The shares should be of a class which has already been issued. The issue should be authorized by a special resolution at a general meeting of the company. The resolution should specify the number of shares and their current market price and also the class or classes of directors or employees to whom they are issued At least one year must have elapsed between the commencement of business by the company and the date of such issue. SEBI Regulations governs it. (S.76)Underwriting Commission S.76 allows a company to pay commission to any person for his subscribing or agreeing to subscribe for Shares or debentures or for procuring of agreeing to procure subscription for shares or debentures of the company. Underwriting is now compulsory

Financial Institutes work as underwriters. Underwriting agreement is not only guarantee, but also an application of shares which are not taken up by public. The underwriter may relieve himself of the burden by entering into sub-underwriting contracts. The sub-underwriter becomes bound to the company in the same way as the original underwriter. Conditions governing Underwriting Commission The payment of the commission must be authorised by the article. The rate of commission should not exceed 5% of the price at which the shares are issued or any less amount prescribed by article. In case of debentures it should not exceed 2.5%. The rate should be disclosed in the prospectus or statement in lieu of prospectus. No. of shares/debentures underwritten has to be declared in the prospectus. A copy of underwriting contract should be delivered to the Registrar along with the Prospectus. Brokerage Reasonable Brokerage should be allowed. Commission of 2.5% to brokers was held to be reasonable A broker does not undertake to subscribe for shares to the extent of public default. The brokerage can be paid only to a person who carries on the profession of broker and not to a person who has casually induced others to subsribe. Call on Shares S.36(2) says that all money payable by any member to the company shall be a debt due from him to the company . But the liability to pay this debt arises only when a valid call has been made. Voting rights are regulated only by the amount actually called by the company. (S.92 gives the company the power, if so authorized by its article, to accept from any member the whole or a part of the amount remaining unpaid on any shares held by him, although no part of that has been called up. Such payment will not entitle the member to more voting rights as compared with other members until all have been called upon to pay.) An enforceable call shall have to conform to the provisions of the Act and the AOA of the company.

Requisites of a valid call By Resolution Of Board of Directors - Directors making it are duly appointed and qualified and the meeting of the directors has been duly convened, the proper quorum is present and the resolution making the call is duly passed. Amount and time of Payment- The resolution must state the amount of the call and the time at which it is to be paid, otherwise the call will be invalid. Bona fide in interest of company- The amount called up must be used scrupulously for the objects of the company and the amount uncalled must be called onlky it is necessary for those objects. Uniform basis- Calls shall be made on a uniform basis on all shares falling under the same class. Issue of Shares at Premium Shares are allotted at greater than the nominal value. SEBI guidelines have to be followed when fixing the rate of premium. An amount equal to the extra value of shares shall be deposited in separate account to be known as The Securities Premium Account. The fund in the share/securities premium account can be used in the following four ways:1. It may be applied to issue to the members as fully paid by way of bonus the unissued shares of the company 2. It may be used to write-off preliminary expenses 3. It may be uused to write-off commission or discount account. 4. It may be spent in providing for the premium payable on the redemption of preference shares or debentures of the company. Purchase of its own share(S.77) No company limited by shares and no company limited by guarantee and having a share capital, shall have power to buy its own shares, unless the consequent reduction of capital is effected and sanctioned in pursuance of S. 100 to 104 or of S. 402. Buy-Back of Shares(S.77-A) Brought by Companies (Amendment) Act, 1999

S.77-A (1) indicates the fund out of which the exercise of buy-back is to be financed. The sources allowed are the (i)Company s free reserves, (ii) securities premium account, (iii) proceeds of an earlier issue. No buy back of any kind of shares or other specified securities can be made out of the earlier proceeds of the same kind of shares/specified securities. S.77-A (2)prescribes formalities. (i)There should be provision of buy-back in AOA. (ii)A special resolution at a shareholder s meeting or a resolution of the BOD should be passed. (iii)The amount involved in buy-back should be less than 25% of the company s total paid up capital and free resources. (iv) Buy-back of equity shares in any financial year shall not exceed 25% of the company s total paid-up equity capital in that financial year. (v) The shares bto be bought back should be fully paid. (vi) Buy-back of listed securities should be in accordance with the regulations made by the SEBI. 5 Buy-Back of Shares(S.77-A) Amendment in 2001 provides an exception to the S.77-A(2). The requirement of (2) is not to apply where the buy-back is 10% or less than that, of the total paid-up equity capital and free reserves of the company and has been authorized by a resolution of the BOD passed at its meetings. No offer of buy-back can be made within one year reckoned from the date of the proceeding offer of buy-back. S.77-A(3)-The notice for convening the meeting of shareholders for passing a special resolution should carry following information:1. Full and complete disclosure of all material facts 2. The necessity for buy-back 3. The class of security intended to be purchased 4. The amount to be invested in buy-back 5. The amount involved 6. Time-limit for completion of the transaction 7. Buy-Back of Shares(S.77-A) S.77-A(4)- Every transaction of buy-back of shares must be completed within 12 months from the date of the special resolution passed by the shareholders.

Company can buy-back shares from existing shareholders of the company either 1. Directly or 2. From the open market or 3. From odd lots or 4. From the employee s stock option shares or 5. Sweat equity shares From odd lots- Means the lot of securities in a listed public company which is smaller than the number of shares which can be traded in a particular stock exchange in one transaction. Buy-Back of Shares(S.77-A) Before the resolution of buy-back is implemented, 1. A declaration of solvency has to be filed with the Registrar and SEBI 2. On a prescribed form it has to be stated that BOD has made full inquiry into the affairs of the company and have found that it is capable of meeting all its liabilities and will not be rendered insolvent for a period of 12 months from the date of declaration. It has to be verified by an affidavit. 3. It has to be signed by at least two directors, one of whom should be MD, if any. 4. A company whose shares are not listed at a stock exchange has not to file this declaration with SEBI Physical destruction of securities. S.77-A(7)- within 7 days of the last day on which the buy-back process is completed. Further issue after buy-back S.77-A(8)- Where a company has resorted to the buying back of its securities, it can not make a further issue securities within a period of 24 months. (i) It may make bonus issue or (ii) go for conversion of warrants, stock option schemes, sweat equity or (iii) conversion or preference shares/ debentures into equity shares. Buy-Back of Shares(S.77-A) Register of bought back securities S.77-A(9) 1. Particulars of bought back securities 2. Consideration paid for them 3. Date of cancellation, etc.

Return of buy-back S.77-A(10)- After completion the company has to file a return with SEBI and Registrar within 30 days from the date of completion. Penalty- S.77-A(11)- company and every officer involved will face 2 yrs imprisonment and/ or Rs. 50,000