Share Capital. IPCC Paper 2: Law, Ethics & Communication Chapter 3. CA. Paridhi Sinha, FCA

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1 Share Capital IPCC Paper 2: Law, Ethics & Communication Chapter 3 CA. Paridhi Sinha, FCA

2 Learning Objectives Minimum Subscription & Irregular Allotment 1 Provisional Allotment 2 Underwriting Commission, Buy Back of Shares, Utilization of Security Premium Account 3 Discount and Sweat Equity Shares 4 Redemption of Preference Shares 5 Further Issue, Types of Shares, Calls in Advance 6 Reserve Capital, Diminution & Reduction of Capital 7 Typical Comparisons 8 Forfeiture of Shares 9 Forged Transfers 10 2

3 Section 69: Minimum Subscription Conditions M.S.= 90% (Amt stated in prospectus) Min 5% (NV) = Cash (should be deposited & kept deposited in a sep. A/c in scheduled bank) If MS (x) 120 days (x) Co. should refund the money. After 130 days along with 6% 3

4 Section 71: Consequences of Allotment if S. 69 (X) If S. 69 (X) Refund (X) & allotment is done = Irregular allotment & it is voidable at the option of the allottee Allottee has a right to accept or reject The right should be exercised within 2 months from the date of allotment It is enough if notice is given to the company. Actual legal proceedings may be taken up later Right can be exercised even if the co. goes into liquidation 4

5 Practical Question After receiving 80% amt stated in prospectus, co. Alloted 100 shares in favour of Mr. A. The company deposited the amt. in the bank but withdrew 50% of the amt. before finalisation of allotment for purchase of certain assets. Mr A refuses to accept the allotment of shares on the ground that the allotment is violative of the provisions of the companies Act, Comment Solution: Sec Sec above case... Mr. A has a right to reject the shares 5

6 Sec 70 & Sec 71: Allotment of Shares without issuing a Prospectus / Statement in lieu of Prospectus Irregular allotment VOIDABLE at the option of the allottee + 4 pts. of Sec 71 Practical Question: The BOD of A ltd. Have allotted shares to the investors of the co. without issuing a prospectus / statement in lieu of prospectus. What are the remedies available to the investors as per the provisions of Companies Act, 1956 Solution: Sec 70 & Therefore allottee can reject the shares & claim refund from the co. Directors = liable to compensate the allottee and the co 6

7 Section 73: Provisional Allotment When shares are offered to the public co. makes an application to 1/more stk exchange, to obtain permission for shares to be dealt with at such stock exchange Sometimes Co. makes an allotment when permission is pending If permission is granted within 10 weeks from closure of subscription list, allotment = valid else it is a deemed refusal & allotment = void The co. will have to refund the entire money 7

8 Section 75: Return of Allotment Shares could be issued for cash or COTC Co. should file the return of allotment with the ROC Practical question: A ltd. Forfeited 100 ES & premium of Rs. 2,000 The Co. Did not file return of Allotment with ROC IRO re-issued shares. Explain with reasons whether the co. Has contravened the provisions of the Companies Act, 1956 Solution: Section Reissue does not amount to allotment. Return is not required to be filed IRO reissued shares. Hence the co. has not contravened any provision of the Companies Act,

9 Practical Question A ltd. Owed Mr. X Rs. 25,000. on the debt becoming payable, Co. Offered 250 shares of Rs. 100 each in full settlement of the debt. The said shares were fully paid & allotted to Mr. X. Examine the validity of this allotment Solution: Sec Allotment of fully paid up shares in full settlement of Mr. X's claim is treated as a payment in cash. Hence such an allotment is valid 9

10 Sec 76: Conditions for payment of Underwriting Commission Underwriting contract between the co. and Underwriters The underwriters guarantee the minimum susbcription In case of under susbcription, the shall purchase the shares themselves As the expose themselves to a risk, they are to be paid a commission = uwc It can be paid only in respect of shares/debentures which are offered to the public 10

11 Sec 76: Underwriting Commission - 2 The Payment should be authorised by AOA Rate: Max 5% (Issue price) IRO shares Max 2.5% (Issue price) IRO deb AOA may provide a lower rate Copy of agreement - ROC along with prospectus UWC payable on basis of shares /debs guaranteed & not subscribed UWC payable even if a single share/deb is not subscribed by UW's UWC can be paid out of P/L A/c as well as SC Details should be disclosed in the prospectus 11

12 Practical Question BoD of A ltd decides to pay 5% (issue price) as UWC. The AoA permits only 3% UWC. The BOD further decides to pay the UWC out of the proceeds of the share capital. Are the decisions taken by BoD valid? Solution: Sec permissible UWC=3%. Decision 1=(X). Payment of UWC out of share capital allowed 12

13 Section 77A: Buy Back A co. can buy back shares from Existing shareholders. Open market Employees Conditions: Sources Free reserves Security Premium Proceeds of fresh issue Completion- Within 12 months Resolution- SR by Shareholders Register Maintained containing details of Buy back 13

14 Sec 77A: Continued AOA Should be authorised by AOA Fully Paid UP Shares should be fully paid up & Co can buy back max 25% of Equity PUSC Prohibition On further issue of same shares for next 6 months Extinguish- Physically destroy such shares Declaration of Solvency to the ROC & Debt to Equity Ratio 2:1 14

15 Practical Question A ltd = OR to buyback 30% of its ESC. Authorised by AOA The payment is to be made out of the proceeds of Co's earlier issue. Sources? If the proposal in order? What if 20% Solution: Sec 77 A... Above case...or (X) 30%. Even 20% OR. 15

16 Section 78: Security Premium 5 Purposes: Redemption of preference shares & debts W/o Preliminary Expenses W/o Shares & debs issue exp Issuing Fully pd up bonus shares Buy back 16

17 Practical Question Security Premium balance is utilised for payment of dividend Solution: S 205 dividend can be paid only out of Free Reserve Section 78 Security Premium is not Free Reserves Invalid treatment Security Premium balance is used to W/o debit balance in P/l A/c Solution: Schedule VI P&L Debit balance can be W/o only against Free Reserves S. 78 SP is not FR Invalid treatment 17

18 Sec 79 Conditions for Issuing Shares at Discount 1)Issuing shares at Discount if Sec.79 conditions is 2) All details of the Issue=disclosed in the prospectus. 3)Shareholders should pass an ordinary Meeting Ordinary Resolution should specify the maximum rate of discount. 4)Approval of CLB should be obtained. 5)Over 1 year should have passed from the date of commencement of business. 6)Shares should be of the same class already issued 7)Rate should not exceed 10%/allowed by CLB 8)Shares should be issued within 2 months of obtaining sanction of the CLB/extended time allowed by CLB.

19 Sec 79A Conditions for issuing Sweat Equity Shares Company-> Sweat Equity Shares -> Employees/Directors May be discount/consideration other than cash for providing know-how, Intellectual Property etc.. Conditions: The shares should be of the same class already issued. Over 1yr should have passed from the date of commencement of business. Employee & Directors details, no. Of shares issued, consideration, market price should be specified in the Special Resolution passed by the Shareholders It should be authorized by AOA. Compliance of rules(terms and Conditions) Listed Companies - Shall comply with SEBI regulations Unlisted Companies - Shall comply with Central Government rules.

20 Sec 80: Conditions for Redemption of Preference shares Only fully paid up can be redeemed It should be authorised by AOA and a special resolution should be passed by the shareholders. Sources-free reserves, Security Premium,Proceeds of fresh issue. The Balance transferred to CRR can be utilised only for issuing fully paid up bonus shares

21 Practical Question Dividend is paid out of CRR Ans- Sec 205-source- dividend can be paid only out of Free Reserves Sec 80 CRR is FR= Committed Reserve Therefore sec205 sec 80 =Invalid Treatment

22 Sec81 Further Issue of Shares/ Right Shares/ Right of Pre Emption Whenever a Co goes for further issue after 2 yrs from formation(incorporation) OR 1 yr from first allotment of shares (whichever is earlier) the issue should be off the existing SH s only Notice- Every existing SH- Particulars no of shares offered, time (min 15days), if time assumed to be declined, right to renounce Issue can be offered to outsiders if:- SR by SHS QR by SHS + Sanction of CG Offer =declined by SH then BOD= allotment Issue is within 1 yr from formation or 1 yr from first allotment Conversion of debts into shares Reissue of forfeited shares Right of Renunciation Above right is available only to ESH and not to PSH

23 Practical Question Can a public co refuse to offer further shares to an existing ESH who already holds 40% eq shares Ans- Sec 81.above case. Invalid Refusal

24 Sec 85: Preference Vs. Equity Shares Definition Preferential Right for Payment of Divident and Repayment of Capital Shares other than Preference Shares Time of Payment of Dividend Before Equity Share Holders After Preference Share Holders Rate of Dividend Fixed Varies Voting Rights, Bonus Shares, Rights Shares Not Available Available Redumption Redeemable Irredeemable

25 Sec 92 Calls received in Advance A company may if AOA accept from any MEMBER whole/part of the amount remaining unpaid on any shares held by him, although that amount has not yet been called.when a Company receives/accepts calls-in-advance the rights & liabilities of the members are as follows. Sec 93 Dividend is paid on the nominal value of a share. However the company may pay dividend in proportion to the paidup capital held by each member if AOA. Sec 92 Voting Rights only when the amount paid becomes payable. On payment of calls in advance the member becomes the unsecured creditors of the company.he has a right to receive Interest on specified in AOA. Regulation 18 of Table A Schedule I permits The amt paid is Non-Refundable. In case of time of winding up (closing of the company)the amount paid as calls in advance along with interest will be refunded to the member before repayment of capital to the members. Liability to pay future calls is extinguished to the extent of calls paid in advance by him.

26 Sec 92 Calls received in Advance TQ Rights&Liabilities of members in respect of calls paid in advance? PQ Applicant paid rs.25,000 in excess to the company by mistake. If the claims a refund is the company bound to pay him? Ans: Sec 92...excess amount of rs cannot be treated as calls-in-advance as it is not paid by a member.it is only paid by an applicant and tha too by mistake. Therefore applicant can claim the refund &company to refund the excess amount.

27 Sec 99 Reserve Capital That part of share capital that can be called up time of winding up of the Co RC can be used only for the purpose of winding up SR is required for creation of RC

28 Sec 94 Diminution of Capital Vs. Sec 100 Reduction of Capital Cancellation of unsubscribed Sh Cap/ Authorised Sh cap Meaning Cancellation of subscribed Sh Cap Resolution Ordinary Resolution is required. AOA Special Resolution is required. AOA Confirmation No Confirmation from the Court is required Confirmation from the Court is required The words And Reduced need not be added at the end of the name of the Co. AND REDUCED The words AND REDUCED need to be added at the end of the name of the co 28

29 Sec 94: Authorizes a company to convert fully paid-up shares into stock. Shares Vs Stock Smallest unit of share capital. Bundle of Shares Originally only shares can be issued Originally stocks only fully paid up Fully paid / Partly paid Always Fully Paid up Shares have a Nominal Value Stock has nominal value Shares cannot be transferred in fractional amounts Stock can be transferred in fractional amounts Every share = distinctive Number Stock does not have distinctive number Equal denomination (Nominal Value) Unequal amount also AOA authorization not required AOA authorization required

30 Share certificate Vs Share warrant Compulsory for every Co having a share capital to issue SC Not compulsory SC is to be issued whether the shares are partly paid up or fully paid up Only when the shares are fully paid up Publice Co;s and private Co s are required to issue SC only public companies Person named in the SC= owner holder/ bearer of SW is the owner Holder is a member in the Co. holder is not a member in the company No power in reqd in AOA to issue SC AOA should authorize Not a negotiable instrument Negotiable instrument Approval of CG is not required to issue SC Approval of CG is required to issue SW

31 Sec 117: In Respect Of Debentures. Sec 117A: There is an agreement between company and debenture holders. It is called the Debenture Trust Deed. Sec 117B: Board of Debenture Trustees is formed to administer the DRR. Sec 117C: Compulsory creation of DRR which can be utilized only for redemption of Debentures.

32 Practical Question Dividend is paid out of DRR Ans: Sec 205: Sources of dividend: Dividend can be paid only out of Free reserves. Sec 117C: DRR is not a free reserve. DRR is a Committed Reserve. Sec 205 X Sec 117C X = Invalid treatment

33 Shares Vs Debentures Shares Debentures Part of capital Part of loan SHS=Owners DHS=Creditors SHS=Voting rights DHS have no voting rights No charge on the assets DHS=charge on the assets Dividend income Interest income Only if profits Even if loss Paid after DHS Paid before SHS

34 Right shares Vs Bonus shares Issue of RS does not require authorization in AOA Required When RSare allotted, Co receives consideration No consideration When RS are issued the shares already held need not be fully paid up When BS are issued the shares already held should be fully paid up RS need not be fully paid up BS must always be fully paid up Existing shareholder has a right to renounce the shares offered Existing shareholder does not have the right to renounce the shares

35 Forfeiture of Shares AOA should provide for Forfeiture of shares Forfeiture can be done only when calls are unpaid Co is required to send a notice IRO forfeiture to the defaulting shareholder specifying -the last day upto which unpaid calls can be paid -the amt payable by the shareholder - clear warning that shares shall be forfeited in case of non-payment of calls within the time specified in the notice (min 14days) If the shareholder fails to pay the amt then BOD passes a resolution effecting forfeiture Forfeiture should be bonafide and in the interest of the Co. Forfeiture results in Termination of membership and the amt already paid by the defaulting shareholder stands forfeited

36 Transfer Vs Transmission Transfer of shares is a voluntary act. Transmission is an operation of law Execution of a transfer deed is a must. Optional Stamp duty is payable. Not payable Transfer of shares is generally made for consideration Transmission takes place without consideration

37 Forged Transfer Transfer of shares is made on the basis of transfer deed on which the transferor s signatures are forged. Forged Transfer is void ab initio. Therefore original owner continues to be the member, the transferee does not become the owner. Where a company has registered the transferee as shareholder in forged transfer, the original owner can compel the company to restore his name on the register of members. The company shall cancel the share certificate issued to the transferee & the transferee shall cease to be member of the company. Where transferee has transferred the shares to a person acting in good faith. The c can refuse to register the transfer. New purchaser can recover damages from the company. Company can recover damages from the person who had forged the transfer deed.

38 Practical Question A Commits forgery and thereby obtains a certificate of trf of share from a co and transfers the share to B for value acting in good faith. Co refuse to transfer the shares to B. Whether the Co can refuse? Decide liability of A and of the Co towards B 1. Forged transfer 2. Rights of true owner- He can compel the Co to restore his name on the ROM as FT= void=ab-initio and he continues to be the member of the co. 3. liabilities of A- A is liable to compensate the loss casued to the Co since he had lodged the F.T deed 4. Rights of B- Co is liable to B. since the co had issued a share certificate to A and therefore co shall be stopped from denying the liability arising due to its own default.

39 Lesson Summary So friends,all the concepts related to share capital have been explained in the order of the sections of The Companies Act,1956. The theoretical concepts have been combined with practical case studies. For best results,you could prepare a list of sections for revision and future reference. So,All the Best and Happy Studying!!! 39

40 Thank You

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