share and share capital

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Shares and share capital : 

Shares and share capital BY GYAN AGNIHOTRI

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2 Section 2(46) defines a share as a share in the share capital of the company and includes stock except where the distinction between stock and share is expressed or implied. A share signifies the following 1interest of a shareholder in the company, the right to receive dividend, attend meetings,vote at the meeting and share in the surplus as sets of the company, if any,in the event of the winding up of the company (Bacha.F.Guzdar v Commissioner of Income Tax Bombay)

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3 2.the liability of the shareholder to pay all the calls due on the sshares 3.the right of the shareholder to transfer his shares subject to the articles of association. Section 82 classifies shares as movable property. 4,binding covenants on the part of the company as well as the shareholder

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4 A share in a company creates a bundle of rights and obligations in the hands of the shareholder (Viswanath v East India Distilleries) Section 83 requires that each share be identified by a distinct number

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5 Share v Share certificate Section 82 considers share to be movable property transferable in the manner provided in the articles Section 84 describes a share certificate to be a certificate under the common seal of the company specifying any shares held by the shareholder.

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6 A share certificate serves as an estoppel as to payment against a bonafide purchaser of shares from alleging that the amount stated as being paid on the shares has not been paid, A person who knows that the statementainsts in a certificate are not true cannot claim an estoppel against the company (Cricmer Case) (Shree Gopal Paper Mills Ltd v CIT

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7 Meaning of stock The term stock may be definedre as the aggregate of fully paid up shares of a member merged into one fund of equal value It is a set of shares put together. Stock is expressed in terms of money and not so as many shares. Stock may be divided into fractions of any amount and each fraction may be transferred like shares. Such fractions unlike shares have no distinct numbers

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8 A Company cannot make an original issue of its stock. A company may if limited by shares and authorized by its articles by a resolution passed at its general meeting convert all its shares into stock (section 94(1)©.On conversion into stock, the register of members will show the amount of stock held by each member.

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9 Classes of shares Preference shares Equity or ordinary shares Deferred or founders

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10 Preference shares can be cumulative or non cumulative, redeemable or irredeemable. Parrticipatory preference shares are those that carry either one or both the following rights To participate further in the profits either along with or after payment of a certain rate of divie dend on equity shares To participate in the surplus assets in the event of winding up (sec 85)

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11 Cumulative Preference Shares Dividends go on accumulating till they are paid off Articles must provide for the same Convertible preference shares Redeemable preference shares-provision in articles required

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12 Conditions for redemption Shares must be fully paid Such shares shall be redeemable only out of those profits which otherwise will be distributed as dividends or Out of a fresh issue of shares Any premium payable must be out of the profits or share premium account

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13 Where the redemption is made out the profits a sum equal to the inominal value of the shares redeemed must be transferred to capital redemption reserve account. This is treated as equivalent to share capital and can be reduced only if the provisions relating to reduction of share capital is observed. It may also be used by the company to pay up unissued shares as fully paid bonus shares

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14 The redemption of any preference shares shall not be taken as reducing the nominal capital of the company. Section 80(3). The Companies Amendment Act 1988 as further amended in 1996 prohibits the issue of any preference shares that are irredeemable after the expiry of twenty years from the date of issue.Also once the company has redeemed the shares or is about to redeem them, it may issue new shares upto the same nominal amount it will be presumed that the preference shares were never redeemed.

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15 In such a situation the company’s capital is not deemed to be increased and therefore no stamp duty is to be paid. This privilege is available only if redemption takes place within one month after making of the fresh issue. (Section 80(4)) Non compliance with Section 80 will render the company and any officer in default liable to fine upto Rs.1000. Section 80(b).

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16 Voting rights of preference share holders According to Section 87(2) of the Act, preference shareholders can vote on the following matters :- Any resolution for winding up of the company Any resolution for reduction or repayment of the share capital Any resolution at any meeting, if dividend on cumulative preference shares remains unpaid for two years at least.

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17 Holders of non cumulative shares shall have a right to vote on all resolutions if their dividends are in arrears for the two financial years immediately preceding the meeting or three years during a period of six years ending with the financial year preceding the meeting Section 87(2)

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18 Equity Shares According to section 85 an equity share is one that is not a preference share. Equity shares do not carry a fixed rate of dividend. Dividend is recommended by the directors and then ratified at the Annual General Meeting of the company.

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19 Section 86 of the Act as amended by the Companies Amendment Act of 2000 provides that new issues of share capital of a company limited by shares shall be of two kinds only Equity share capital With voting rights With differential rights as to dividends voting or otherwise in accordance with such rules or such conditions as may be prescribed. Preference share capital

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20 The holders of equity shares carrying voting rights shall have voting rights in proportion to the paid up equity capital of the company. Section 87(1) Deferred or founders shares it may issue A pure private company can issue shares of a type other than discussed earlier –section 90. Thus it may issue what are known as deferred shares. As deferred shares are normally held by promoters and directors of the company, they are usually called founders shares.

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21 They are usually of smaller denomination say 1 rupee each but they are given equal voting rights with equity shares of higher denomination. As per SEBI guidelines 2000, it is permissible to issue shares of any par value subject to the condition that the value should not be less than Re.1 or being other than the multiple of Re.1

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22 Companies whose shares are dematerialised or who have applied for it would be eligible to alter the par value of the share indicated in the Memorandum and Articles of Association.

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23 A company may issue shares at par, premium or discount. The Companies Act, 1956 imposes conditions regulating the utilization of the amount collected as premium. 1.The premium cannot be treated as profit and cannot be distributed as dividend.

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24 2.The amount of premium shall be kept in a separate bank account called securities premium account. 3. The amount of securities premium shall be kept with the same sanctity as share capital. 4.Securities Premium Account cannot be treated as free reserve

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25 5.The amount in the securities premium account shall be used only for the purposes mentioned in section 78(2) Section 78(2) The amount in the securities premium account shall be used for To pay for unissued shares of the company to be issued to the members as fully paid bonus shares.

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26 To write off preliminary expenses of the company To write off expenses or the commission paid or discount allowed on any issue of shares or debentures of the company To provide for payment of premium payable on the redemption of redeemable preference shares or debentures.

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27 Issue of shares at a discount Section 79 provides for certain conditions to be complied with Resolution in general meeting and sanction by company law board. The issue must be of a class of shares already issued The maximum rate of discount must not exceed 10 per cent or such higher rate as prescribed by Company Law Board.

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28 The Company Law Board allowed a discount of more than 10% in the case of Mare Steel Castings P Ltd since the proposal was found to be technically feasible. Not less than one year has, at the date of issue, elapsed since the date on which the company was entitled to commence business.

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29 The shares to be issued at a discount must be issued within 2 months of the sanction by the Company Law Board or uch extended time as the Company Law Board may specify. Every prospectus at the date of issue must mention particulars of the discount allowed or the exact amount of discount that has been written off.

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30 Sweat Equity Shares Section 79A These are equity shares issued by the company to employees or directors at a discount or for consideration other than cash. Sweat equity may be issued for providing technical know how or making intellectual property rights.

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31 Conditions for sweat equity It must be of a class of shares already issued Resolution passed at the general meeting Resolution specifies number of shares, current market price, consideration and the employees or directors to whom the issue is made. Not less than one year has elapsed since the date on which the company was entitled to commence business

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32 Those sweat equity shares of a company which are listed in a stock exchange are issued in accordance with SEBI regulations (Section 79 A(1)) For the purpose of this subsection, the expression a company means a company incorporated, registered and formed under this Act and includes its subsidiary company incorporated outside India. All limitations, restrictions and provisions relating to equity shares shall be applicable to such sweat equity shares issued under subsection (1) of section 79A (23).

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33 Employees Stock Option Plan means the option given to wholetime directors, officers or employees of a company which gives such directors,officers or employees the benefit or right to purchase or subscribe at a future date the securities offered by the company at a predetermined price Section 2(15A)

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34 Employees Stock Purchase Plans 1. An employee shall be eligibole to participate in the ESPS. 2.An employee who belongs to the promoter group shall not be eligible to participate in the ESPS. 3.A director who either by himself or through his relatives or through any body corporate directly or indirectly holds more than 10 per cent of the outstanding equity shares of the company shall not be eligible to participate in the ESPS.

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35 No ESPS shall be offered to employees of the company unless the shareholders approve of the same by a special resolution in the general meetings of the company. The explanatory statement to the notice shall specify the price and the number of shares as well as the appraisal process for eligibility of the employee.

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36 The number of shares may be different for different employees. The special resolution shall state that the company shall conform to the specified accounting policies. The company shall be free to determine price of the shares to be issued. There should be a lock-in period of minimum one year from the date of allotment. If the ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue,the shares issued under ESPS shall not be subject to lock-in.

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37 The Director’s Report or Annexure thereto shall contain inter alia the following disclosureso Details of the number of shares issued in ESPS The price at which the shares are issued Employees wise details Diluted EPS pursuant to ESPS Consideration received

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38 Bonus shares If the articles so provide a company may capitalize its profits by issuing fully paid up shares to its members thereby transferring the Reserve Account to Share Capital Account (Section 205(3)) SEBI’s guidelines regarding bonus shares

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39 No bonus issue to be made within 12 months of IPO/rights issue The bonus issue shall be made only out of the free reserves built out of the genuine profits or share premium collected in cash only Reserves created by revaluation of fixed assets are not capitalized The declaration of bonus issue in lieu of dividend is not made The bonus issue shall not be made unless partly paid shares are fully paid up. The company has not defaulted in payment of interest or principal in respect of fixed deposits or debentures or principal in redemption thereof. The company has not defaulted in respect of statutory dues of employees. A company that announces the bonus issue after the approval of the Board of Directors has to implement the same within six months of the date of approval .

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40 There should be a provision in the Articles of the company. If on account of the bonus issue, if the subscribed and paid up capital exceed the authorized share capital resolution should be passed at the general meeting to increase the authorized capital.

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41 Rights Shares Further issue of share capital has to be first offered to the already existing shareholders Rights issue two years from the date of incorporation or one year from the IPO whichever is earlier.

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42 As per section 81 of the Companies Act, 1956 the directors of the company must first offer any further issue of share capital to the existing shareholders in proportion to their share holding as nearly as circumstances admit. The company must give notice to the existing shareholders about the option to take up additional shares. The shareholder must have at least fifteen days to decide whether to exercise the option or not. Unless the Articles otherwise provide, the directors must state in the notice of the offer the fact that the shareholder shall have the right to renounce the offer in whole or in part in favor of some other person.

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43 Exceptions The company may by a special resolution passed at the general meeting decide that the directors need not offer further issue of equity share capital to the existing shareholders and that they may dispose them off in such manner as they may think expedient to do so.

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44 In Om Prakash Gupta and others v Hicks Thermometer and Another, 50000 equity shares of Rs.10 each were allotted to the Managing Director at par with a lock in period of 5 years. A resolution under Section 81(1A) had been duly passed for the purpose as was evident from the minutes of the general meeting.

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45 Held that in the explanatory statement it had been stated that the issue was being made to the Managing Director to meet the long term working capital needs of the company as the banks had expressed their inability to provide the same. Thus the legal requirements regarding further allotment of shares were complied with and hence the allotment was valid.

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46 But where it has been possible to obtain ordinary majority only, the directors may not offer the shares to the existing shareholders if permission is obtained from the Central Government. Section 81 does not apply to a private company. Section 81 does not apply to a scheme of conversion of loans or debentures into shares.

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47 Duty of the Transferor to transferee There may be pending transfers at a time when the rights issue takes place. This raises the question whether the transferor of an unregistered transfer in under any obligation towards his transferee to apply for rights shares for the benefit of the transferee. The Bombay High Court in the case of D.Venkatarama Reddy v Padampat Singhania held that it was the duty of the transferor to apply for the new shares and hold them in trust for the transferee. But the Supreme Court in the case of R.Mathalone v Bombay Life Insurance Company Limited observed that after the transfer form has been executed, the transferee cannot be held to undertakewher any additional financial burden in respect of the shares at the instance of the transferee where after the transfer of the shares but before the company regis ters the transfer the company offers rights shares to the members.

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