Shares

PRESENTATION BY MAHENDER VIJAYPAL

Definition
Ordinary share represent the ownership position in the

company. The holders of ordinary shares are called the shareholders and they are the legal owners of the company.
By a share it also means right to participate in the profits

made by a company, while it is a going concern and declares dividend, and in the assets of the company when it is wound up.
A stock is defined as consolidated value of fully paid up

shares of a member.

Types of shares capital

Equity shares capital Preference shares capital: Preference share is the one

which satisfies the following criteria - With respect to dividend it carries a preferential right to be paid which may be a fixed amount or a fixed rate - On winding up or on repayment of capital a preferential right to be repaid the amount .

Features of Preference Share

Claims on income and assets

Fixed Dividend
Cumulative dividend Redemption

Sinking fund
Call feature Participation feature

Hybrid Security

Ordinary share Non payment of dividend does not force the company to insolvency Dividends are not deductible for tax purpose In some cases there is no fixed maturity date.

Debenture Dividend rate is fixed

Pref shareholders do not share in the residual earnings

They have claim on income and assets prior to ordinary shareholders

Types of Preference Shares

Participating preference shares.:- they carry a right to participate in the surplus profit along with equity shareholders after dividend at certain rate has been paid to equity shareholders. Cumulative and non-cumulative shares Redeemable preference shares

Fully or partly convertible preference shares.

Voting rights for preference shareholders

Every member of a company holding any preference shares

has a right to vote only on resolutions placed before the company which directly affect attached to his preference shares
Apart from this preference shareholders are entitled to vote

if dividend has remain unpaid in case of cumulative as well as non cumulative for two years.

Pros Risk less leverage advantage Dividend postpondability

Fixed dividend
Limited voting right

Cons Non tax deductibility of dividend Commitment to pay dividend

Equity shares

Types of Equity Shares

Authorized share capital Issued share capital

Subscribed share capital

Paid up share capital

Issue price of shares: the price at which share is issued in the market. Paid up share capital = issue price * no. of ordinary shares. Issue price has two components
1. 2.

Par value Share premium

Par value is the price per ordinary share stated in the memorandum of association. Generally they are in the denomination of 10 or 100. Any amount in excess of par value is called the share premium. Shareholders equity = paid up share capital + share premium + reserves and surplus = Net worth Book value per share = Net worth / no. of ordinary shares Market value of a share is the price at which it trades in the market. It is generally based upon the expectations about the performance of the economy in general and company in particular.

Features of Equity Shares

Residual claim to income
Residual claim on assets Right to control Voting system Pre-emptive right Limited liability

Evaluation
Merits - it is a permanent source of fund without any repayment liability - It does not involve any obligatory dividend payment Demerits - high cost of fund reflecting the high required rate of return of

investors as a compensation for higher risk - High floatation cost in terms of underwriting, brokerage and other issue expenditure - Dilution of control

Method of Raising Capital

By issue of prospectus
Rights issue of equity shares. Private placement of shares

Rights Issue of Equity Share

It involves selling of ordinary shares to the

existing shareholders.
Law in India requires that the new ordinary

shares must be first issued to the existing shareholders on a prorata basis

No. of rights = existing share/ new share

Shareholder
A shareholder (or stockholder) is an individual or company

(including a corporation) that legally owns one or more shares of stock in a joint stock company.
Shareholders are granted special privileges depending on the class of

stock, including the right to vote (usually one vote per share owned) on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors.

Regulations
Special resolution

- company must pass special resolution - government must grant special approval under section 81(1A) Pricing price should not be lower than the higher of the average of the weekly high and low of the closing price of the shares quoted on the stock exchange during six months before the relevant date or two weeks before the relevant date. Open offer- a preferential allotment of more than 15% of equity necessitates an open offer. Lock-in-period one year lock-in-period

Types of capital

1.
2.

Each company has 2 types of capital Share capital Loan capital

Meaning of Share
The capital of a company is divided into a number of equal parts. Each part is called a Share. The Companies Act of 1956 defines a share as a share in the share capital of the company The persons who contribute money through shares are known as shareholders. The certificate stating the number of shares a shareholder holds is called a share certificate.

 1. 2. 3.

Types of Shares Preference Share

Cumulative Preference Share Non-cumulative Preference Share Participating Preference Share in this case surplus profits are also distributed amongst the preference shareholders. Non-participating Preference Share Redeemable Preference Share Convertible and non-convertible preference shares a convertible preference share can be converted into equity shares. Equity Share

4. 5. 6.

Share capital
The memorandum of associations must state the amount of capital with which the company is desired to be registered & the number of shares into which it is to be divided. Total capital of company is divided into shares, therefore, it is called share capital.

Kinds of Share Capital

Authorized Capital given in the MoA, this is the

maximum amount with which the company is registered and which it is authorized to raise from the public by issue of shares. Also called registered or nominal or authorized capital. Issued Capital the portion of authorized capital which is offered to the public for subscription is called issued capital and the remaining portion not yet offered to the public for subscription is called unissued capital. Subscribed Capital the portion of issued capital which has been subscribed for by the public, I.e., applied for and allotted by the company. The balance os issued capital not subscribed for by the public is called the unsubscribed capital.

Principal sources of Capital Reserve

Profit on sale of fixed asset 2. Profit on revaluation of assets & liabilities 3. Profit on forfeiture & re-issue of forfeited shares 4. Profit on redemption of debentures at a discount 5. Profit earned by a company prior to its incorporation Capital reserve is shown in the liabilities side of balance sheet under the head reserves and surplus
1.

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