Shares

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. Par value
2. 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

 Issuing of securities
• Filing of offer document
• Application for listing
• Issue of securities in dematerialized form
• Book building: It is a process undertaken by which demand
for securities proposed to be issued is elicited and built up and
price for such issue is assessed for determination of quantum
of such securities to be issued.
• Issue of share at a discount

• Issue of share at a premium

• Call on shares: application, allotment and

other calls

• Forfeiture of shares
 Green Shoe option
• A provision contained in an underwriting agreement that gives the underwriter
the right to sell investors more shares than originally planned by the issuer.
This would normally be done if the demand for a security issue proves higher
than expected. Legally referred to as an over-allotment option.

• It provides additional price stability to a security issue because the underwriter

has the ability to increase supply and smooth out price fluctuations if demand
surges.
•  
• Greenshoe options typically allow underwriters to sell up to 15% more
shares than the original number set by the issuer.

• However, some issuers prefer not to include greenshoe options in their

underwriting agreements under certain circumstances, such as if the issuer
wants to fund a specific project with a fixed amount of cost and does not want
more capital than it originally sought.
The term is derived from the fact that the Green Shoe Company was the first to
issue this type of option.
 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

 Private placement of shares
• It involves sale of shares (or other securities) by
a company to few selected investors, particularly
the Institutional Investors like the Unit Trust of
India (UTI), the Life Insurance Corporation of
India (LIC), IDBI etc.

• Private placement has the following advantages

- It is helpful to raise small amount of fund
- It is less expensive
- It is a much faster way of raising fund.
 Allotment
size of public offer: 2,00,000 equity shares of Rs 10 each
no. of times over subscribed: 3 times
total no. of shares applied for: 6,00,000 equity shares
S.No No. of shares No. of Total no. of Proportio No. of No of Total no
applied for applican shares nate shares successfu of shares
category wise ts applied allocation allocated l allocated
by applicant
rounding

1 100 1500 150000 50,000 100 500 50,000

+3300
2 200 400 80,000 26,700 100 267 26700
3 300 300 90,000 30,000 100 300 30,000
4 400 300 1,20,000 40,000 100 300 30,000

5 500 200 1,00,000 33,300 200 200 40,000

6 600 100 60,000 20,000 200 100 20,000
6,00,000 2,00,000 2,00,000
 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.