Share vs. Stock

ShareA Share in the share capital of the company and includes stock except where the difference b/w stock and shares is express & implied (Sec 2(46))A share is a fraction into which the total share capital of company is divided.Is not sum of money but the rights of the shareholder in the company measured in terms of money.

StockA bundle of fully paid shares put together for convenience so that it may be divided into any amount and transferred into any fractions.

Stock vs. Share

Share1. Can be issued in original2. May be fully or partly paid3. Are of fixed denomination4. Has a definite number5. Transferred in its entirety

or in its multiples only.

6. Registration of share capital is compulsory

Stock1. Cannot be issued in original2. Always be Fully paid3. No such fixed denomination4. No such number5. Divisible into any amount

and even transferred into fractional amount

6. Issued after passing OR if AOA permit

Legal Nature of Share

1. Regarded as Goods (Sec 2(7) of Sale of Good Act 1930)

2. U/S 82 – Transferable(movable property)3. U/S 83 – Must bear a distinctive number4. Must have a nominal value

Not Applicable in case shares are held with

depository

SHARE CAPITAL•Amount of capital raised by the issue of shares•Members are liable to pay difference between

reduced and nominal value.

AUTHORISED CAPITAL

ISSUED CAPITAL

SUBSCRIBED CAPITAL

CALLED UP CAPITAL

RESERVE CAPITAL

KINDS OF SHARE CAPITAL

UNCALLED CAPITAL

PAID UP CAPITAL

REDUCTION OF SHARE CAPITAL• To ensure that the company’s assets are not freely distributed to the

shareholders• It is done to:

1. Write off lost capital2. To pay off surplus capital

PROCEDURE:

• Authority of articles must be secured• Special resolution• Petition to the Court• Registration

METHODS OF REDUCTION

According to Section 100 of the Companies Act:1. Reduce liability of members on shares not

fully paid up2. Write off lost capital3. Pay off excess paid-up share capital

SharesPreferencesCumulative

Participating or non participating

Convertible or non-convertible

Redeemable

Non-cumulativeParticipating or non-participating

Convertible or non-convertible

Redeemable

EquityWith voting rights

With differential rights as to dividend and voting

KINDS OF SHARES

Preference sharesProvides Preferential rights• As to Payment of dividend at a fixed rate during the life of the

company• As to Return of capital on winding up of company

Voting rights on:• Resolutions directly affecting preference shareholders

• Winding up of company• Repayment or reduction of company’s share capital

• Entitled to vote on every resolution at any general meeting if dividend or part thereof unpaid• For cumulative shares a period of not less than 2 years

preceding the meeting date• For non cumulative shares, either a period of 2 consecutive

years or for 3 years aggregate in the 6 years ending with the expiry of financial year immediately preceding the meeting date.

Redemption-Paying back of capital

• Company limited by shares authorized to issue redeemable preference shares

• Authorized by articles• Only fully paid up shares to be redeemed• Distributable profits from Capital redemption

reserve account ,’proceeds of a fresh issue of shares’ to be used for redemption of shares

• Premium payable on redemption to be paid out of company’s profits or securities premium account

Equity Shares• Those shares which are not preference shares • Carry the right to receive the whole of surplus profits after the preference shares, if any, have received their fixed dividend• If no profits left after paying fixed preference dividends for equity shareholders

Kinds of Equity Shares - •Equity shares with voting rights – The holders have normal voting rights in the company.•Equity shares with differential rights – The holders have differential rights as to dividends, voting and otherwise in accordance with rules prescribed by the Central Government.

The following are the “Companies Rule 2001”• Every company limited by shares may issue equity shares with

differential rights to the extent of 25 percent of the total share capital only.

• The AOA must authorize the issue of such shares and the approval of shareholders must be obtained in general meeting by passing an ordinary resolution.

• The resolution referred above must inter-alia provide for (a) The rate of voting right and (b) The rate of additional dividend.

• The company will not be allowed to convert its equity capital with normal voting rights into equity share capital with differential voting rights and vice-versa.

• The holders of equity shares with differential rights shall be entitled to bonus shares and rights of the same class and shall enjoy all rights as a member of the company except right to vote as indicated above.

Issue of Securities at Premium Sometimes company with good prospects issues securities at a

premium. No restriction upon the issue of securities at premium and the company is free to make such an issue whenever it so desired.

Certain restrictions upon the use of premium amount The premium amount must be transferred to the Securities

Premium Account and this account is to be treated as share capital for reduction purposes ,except when it is to be used for the following –

• To issue fully paid bonus shares to members.• To write off preliminary expenses of the company.• To write off expenses of, or commission paid or discount

allowed on any issue of shares or debenture of the company

• To provide the premium payable on the redemption of redeemable preference shares or debenture.

• For buyback of own securities under Section 77A.

Issue of Shares at a DiscountA company is permitted to issue shares at a discount

provided – • The shares must be of a class already issued.• At least 1 yr. must have elapsed since the company started

business.• The issue must be authorized by an ordinary resolution in the

general meeting which must state the max. rate of discount.• The issue must be sanctioned by the Company Law Board. No

such issue shall be sanctioned by the Company Law Board if the max. rate of discount specified in the resolution exceeds 10%, unless the board is of the opinion that higher percentage of discount be allowed.

• The issue must be made within two months.

Issue of Sweat Equity Shares Sweat equity shares means equity shares issued by the

company to employees or directors at a discount or for consideration other than cash.

The company may issue Sweat equity shares if the following conditions are fulfilled –

• The shares must be of a class already issued.• At least 1 yr. must have elapsed since the company started business.• The issue must be authorized by a special resolution passed by the

company in the general meeting.• The resolution must specify the no. of shares, their current market

price, consideration, if any, and the class or classes of directors or employees to whom they are issued.

• The shares must be issued in accordance with SEBI guidelines in case of listed shares or Central Govt. in case of unlisted shares.

Payment of Underwriting Commission and Brokerage

UNDERWRITING• It is an agreement entered into before the shares are

brought before the public.• Kind of insurance against risk.

BROKERAGE• It is the reward or commission paid to a sort of middle

man.• Lawful brokerage.• Payable brokerage is to be disclosed in the prospectus.

• SECTION 76• provides for the payment of commission to the underwriters,

broker’s and public.• Shares are offered to the public first.• Authorized by articles of association.• Rate of commission should not exceed 5% in case of shares

and 2.5% in case of debentures.• Rate of commission agreed should be disclosed in prospectus.• A copy of contract should be delivered to the registrar.

SUB SECTION• The commission is paid to the first mention person.

Restriction on Purchase by a Company of its Own Shares

• Public or private ltd. – no company can buy its own shares.

• CONDITIONS UNDER WHICH COMPANY CAN BUY ITS OWN SHARES-

• Section 100-104• Special sanction of court is needed for reduction of

share of capital.• Section 402• Buy its shares from certain oppressed members.

• Unlimited companies are free from such restrictions.

• Sub section(2) – no public co. can give any financial assistance to buy its own shares.

• EXCEPT-• When loan is made by banking company.• When provision of money is under scheme.• When loan are made by company to employers

other than director.

Buyback of own securities• Companies (Amendment) Act, 1999 permits the companies to

buyback their shares

• Rationale – Repurchase of shares reduces the number of shares outstanding and

thus improves EPS – increases market price of share– Buyback maybe used to prevent a hostile takeover– A means of investment

• Funds out of which buyback may be financed [Sec. 77A(1)]– Free reserves– Securities premium account– Proceeds of any shares or other specified securities

• Transfer of certain sum to “Capital Redemption Reserve Account” [Sec. 77 AA]– When co. purchases its own shares out of ‘free reserves’, then a sum

equal to the nominal value of shares so purchased must be transferred to CRR a/c

• Conditions to be fulfilled before resorting to buyback [Sec. 77A(2),(3) & (4)]– There should be a provision in AoA authorizing buyback– Special resolution must be passed in the general meeting of co.

authorizing buyback, notice for convening the meeting should be accompanied by explanatory statement disclosing all material facts of the buyback

– Amount of buyback should not exceed 25% of total paid up capital and free reserves of the co., in case of buyback of equity shares, amount should not exceed 25% of co.’s total paid up equity capital

– After buyback, ratio of debt to capital and free reserves should not be more than 2:1

– Shares or securities sought to be bought back must be fully paid up– Buyback should be in accordance with SEBI guidelines in case of listed

securities or in accordance with guidelines prescribed by Central govt. in case of unlisted securities

– Buyback operations must be completed within 12 months from date of passing special resolution

• Methods of buyback [Sec. 77A(5)]– From the existing security holders on a proportionate basis– From the open market– From odd lots i.e. Securities of listed public co.– By purchasing the securities issued to employees

• Declaration of solvency[Sec. 77A(6)]– To be filed with Registrar of Co. and SEBI

• Physical destruction of securities [Sec. 77A(7)]– Within 7 days of completion of buyback

• Further issue after buyback [Sec. 77A(8)]– Co. is free to issue other types of securities other than the type

bought back– Same kind cannot be issued before 6 months

• Register of bought back securities [Sec. 77A(9)]– Register has to be maintained with all particulars of securities bought

back

• Return of buyback [Sec. 77A(10)]– After completion of buyback a return is to be filed with Registrar of Co.

and SEBI within 30 days

• Penalty [Sec. 77A(11)]– Imprisonment up to 2 years and fine up to Rs. 50000 in case of non-

compliance with the above provisions

• Buyback methods– Tender method

• Co. fixes and announces a price at which it intends to buyback• If no. of shares offered for buyback is more than what is sought,

they are bought back proportionately– Open market purchases

• Stock exchange purchase method• Dutch auction method

FURTHER ISSUE OF SHARE CAPITAL

Additional funds for expanding business

Further issue of sharesUnder two conditions:1.Shared Capital already issued < Authorized Capital2.Shared Capital already issued = Authorized Capital

Need authorization by its Articles + Board of Directors’ resolution for cond. 1

Need authorization by its Articles + Board of Directors’ resolution + a sanction of Shareholders by means of ordinary/special resolution for cond. 2

Manner of allotment of further issue of shares

• Equitable distribution of shares without disturbing the established equilibrium of shareholding in the company.

A public company proposes to increase its subscribed capital (whichever is earlier): After the expiry of 2 years from incorporation of the company After the expiry of 1 year from the first allotment of sharesFollowing conditions must be fulfilled: Offers must be made to present equity shareholders on a pro-rata basis (i.e., in

proportion to their present shareholdings) Pro-rata offer is to be made by giving a notice specifying no. of shares offered. Offer must be made kept open for a period of at least 15 days. Members have the right of renunciation of the offer in favour of hid nominee.

Contd..On expiry of notice period or receipt of earlier declination ,the board of

directors may dispose of them in most beneficial manner.Right of Pre-emption to Shareholders or Issue of Right Shares

EXCEPTIONS:Further shares aforesaid may be offered to outsiders, in following two cases:1. If a special resolution is passed 2. If an ordinary resolution is passed + Approval of Central Govt. is obtained Above restrictions do not apply

To private companies To public companies , in case increase in subscribed capital is due to

use of convertible debentures or loans and the terms of issue are given by central govt. or by a special resolution