PROCEDURE FOR ISSUE AND ALLOTMENT OF SHARES

PROCEDURE FOR ISSUE AND ALLOTMENT OF SHARESSUBMITTED TO - PROF. RAJINDER MISHRA

PRESENTED BY - VRINDA GUPTA (59) SHARES The Capital of the company is divided into no. of indivisible units called shares

Sec 2(46) of THE COMPANIES ACT,1956:A share is an unit in the share capital of a Company.

TYPES OF SHARESEQUITY SHARES Equity shareholders are the owners of the company .The dividends of equity shares are not fixed. It depends on the profits of the company. Equity shareholders are paid only after all other claims have been met. Equity shareholders usually have voting rights.

PREFERENCE SHARES Preference shareholders are entitled to fixed % of dividends before any equity shareholders are paid. The Preference shareholders have no voting rights.

Different kinds of issues

Primarily, issues made by an Indian company can be classified as Public, Rights, Bonus and Private Placement. While right issues by a listed company and public issues involve a detailed procedure, bonus issues and private placements are relatively simpler. The classification of issues is as illustrated below:

(a) Public issue (b) Rights issue (c) Bonus issue (d) Private placement

Public issue When an issue / offer of securities is made to new investors for becoming part of shareholders family of the issuer it is called a public issue. Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO).

Initial public offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuers securities in the Stock Exchanges.

Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public , it is called a FPO.

Rights issue When an issue of securities is made by an issuer to its shareholders existing as on a particular date fixed by the issuer (i.e. record date), it is called an rights issue. The rights are offered in a particular ratio to the number of securities held as on the record date.

Bonus issue When an issuer makes an issue of securities to its existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The share are issued out of the Companys free reserve or share premium account in a particular ratio to the number of securities held on a record date.

Private placement When an issuer makes an issue of securities to a select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private placement. 9 Pricing of an Issue Indian primary market ushered in an era of free pricing in 1992. SEBI does not play any role in price fixation. The issuer in consultation with the merchant banker on the basis of market demand decides the price. The offer document contains full disclosures of the parameters which are taken in to account by merchant Banker and the issuer for deciding the price. The Parameters include EPS, PE multiple, return on net worth and comparison of these parameters with peer group companiesModes of issue of shares

A company can issue shares in two ways:1. For cash.2. For consideration other than cash.

Issue of shares for cash: When the shares are issued by the company in consideration for cash such issue of shares is known as issue of share for cash. In such a case shares can be issued in following ways.at par at a premium at a discount.

Issue of shares at par: Shares are said to be issued at par when they are issued at a price equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued at par.

Issue of shares at premium: When shares are issued at an amount more than the face value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is issued at Rs. 15; such a condition of issue is known as issue of shares at premium. The difference between the issue price and the face value [i.e. Rs. 5 (Rs.15 Rs.10)] of the shares is called premium.

Issue of shares at discount: Shares are said to be issued at a discount when they are issued at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is said that the share has been issued at discount. The excess of the face value over the issue price [i.e. Re.1 (Rs. 10 Rs. 9)] is called as the amount of discount. PROCEDURE IN ISSUE OF SHARES1. Issue of prospectus2. To receive application3. Allotment of shares4. To make calls on shares STEP-1 Issue of PROSPECTUS When a Public company intends to raise capital by issuing its shares to the public, it invites the public to make an offer to buy its shares through a document called Prospectus. According to Section 60 (1), a copy of prospectus is required to be delivered to the Registrar for registration on or before the date of publication thereof. It contains the brief information about the company, its past record and of the project for which company is issuing share. It also includes the opening date and the closing date of the issue, amount payable with application, at the time of allotment and on calls, name of the bank in which the application money will be deposited, minimum number of shares for which application will be accepted, etc. STEP-2 To receive application After reading the prospectus if the public is satisfied then they can apply to the company for purchase of its shares on a printed prescribed form. Each application form along with application money must be deposited by the public in a schedule bank and get a receipt for the same. The amount payable on application for share shall not be less than 5% of the nominal amount of share.STEP -3 Allotment of shares

Allotment of shares means acceptance by the company of the offer made by the applicants to take up the shares applied for. The information of allotment is given to the shareholders by a letter known as Allotment Letter, informing the amount to be called at the time of allotment and the date fixed for payment of such money. It is on allotment that share come into existence. STEP 4- To make calls on sharesThe remaining amount left after application and allotment money due from shareholders may be demanded in one or more parts which are termed as First Call and Second Call and so on.

A word Final word is added to the last call. The amount of call must not exceed 25% of the nominal value of the shares and at least 1 month have elapsed since the date which was fixed for the payment of the last preceding call, for which at least 14 days notice specifying the time and place must be given.

Intermediaries involved in the Issue ProcessMerchant Banker: Merchant banker does the due diligence to prepare the offer document which contains all the details about the company. They are also responsible for ensuring compliance with the legal formalities in the entire issue process and for marketing of the issue.

Registrars to the Issue: They are involved in finalizing the basis of allotment in an issue and for sending refunds, allotment etc.

Bankers to the Issue: The Bankers to the Issue enable the movement of funds in the issue process and therefore enable the registrars to finalize the basis of allotment by making clear funds status available to the Registrars. Underwriters: Underwriters are intermediaries who undertake to subscribe to the securities offered by the company in case these are not fully subscribed by the public, in case of an underwritten issueAllotment is the acceptance by the company of that offer which is made by the applicant

Allotment result in a binding contract between the company and the applicantAllotment of shares

Provision regarding allotment of shares General provision regarding allotment

Special provision regarding allotment

General principles regarding allotmentGeneral authorityAbsolute and unconditionalWithin reasonable time Must be communicatedRevocation of the offer Proper authorityThe allotment must be made by proper authority in accordance with the provision of articles of the company

In other words , it must be made by a resolution of the board of directors of the company Absolute and unconditionalThe allotment must be absolute and unconditional Eg:S wrote to a hotel company offering to take 300 shares if the contract for renovation of the hotel was given to him. The company accepted his offer and the shares were alloted to him. The contract for renovation was not given to S. The hotel company before entering into the contract with s went into liquidation. It was held that s was not liable as his offer was conditional

Within reasonable timeAn application for shares must be accepted within a reasonable time Eg :X applied for shares on June 28. Shares were alloted on Nov 23. X refused to take them. It was held that offer had lapsed and X was not liable to pay for them

Must be communicatedThe allotment must be communicated to the person making the application so that it is legally completed.Eg:G applied for some shares in a company. He sent the application by post. A letter of allotment was despatched by the company soon after. But the letter never reached G. It was held that G was liable as a shareholder in a company

Revocation of the offerAn application for shares can be revoked at any time before acceptance is communicatedEg:H applied for shares in a company. Shares were alloted to him. The letter of allotment was sent to the companys agent to deliver by hand to H. Before the letter was delivered H withdrew his application. It was held that there was no allotment

Special provision The companies Act 1956 prescribes the following restriction regarding the allotment of shares to public companies. The special provision of law of contract relating to allotment of shares are :Registration of prospectusMinimum subscription Application money Money to be deposited in scheduled bankStatement in lieu of prospectusPermission of the stock exchange

Registration & issue of prospectusUnder Sec 60(1) of the companies Act , no prospectus can be issue by a company to the public untill a copy of it has been for registered with the registrarNo allotment can be made on any shares of a company until the beginning of the 5th day after on which the prospectus is first so issued or such later time, if any ,as may as specified in the prospectus Minimum subscription Sec 69 of the act provides that no allotment which are offered to the public for subscription can be alloted unless:The amount stated in the prospectus as the minimum amount has been subscribed, &and the amount payable on application has been received in cash by the companyThe minimum subscription must be received within 120 days of first issue of prospectus. Otherwise ,all money received from the applicants shall be repaid without interest within next 10 daysSchedule 11 : if minimum subscription is not received within 90 days of closure of the issue ,money received from the aplicant shall be refunded Application money Under Sec 69(3), the amount payable on application on each share shall not be less than 5 % of the nominal value

Money to be deposited in scheduled bankThe application money received by the company shall be kept in a separate bank account maintained with a scheduled bankThe money so received by the company shall not be withdrawn from the separate bank account untill The entire amount payable on application for shares in respect of minimum subscription is received by the company Allotment upto minimum subscription is made by the company

Statement in lieu of prospectus Sec 70 states as a company having a share capital which does not issue on prospectus , shall not allot any of its shares unless a statement in lieu of prospectus has been filed with the registration of atleast 3 days before the first allotment of shares.Permission of the stock exchangeWhen the shares are offered to the public the company shall make an application to one or more recognised stock exchange for obtaining permission for the shares to be dealt with in such stock exchange(s). If permission is not given by any of the stock exchange within 10 weeks from the date of closure of the subscription list the allotment shall be void .THANK YOU

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