ROLE OF A SECRETARY IN CAPITAL FORMATION XII COMMERCE SP NEW SYLLABUS 3:1 Introduction 3.1.1 Issue of shares at par 3.6 Private placement 3.1.2 Issue of shares at premium 3.7 Issue of shares 3:1.3 Issue of shares at discount 3.8 Allotment of shares 3:1.4 Issue of shares at bid price 3.9 Share certificate 3;2 Initial public offer 3.10 Share warrant 3:3 Bonus issue 3.11 Transfer of shares 3.4 Rights issue 3.12 Transmission of shares 3:5 Employees stock option scheme 3.13 Distinction between 3.1 INTRODUCTION A joint stock company requires capital to carry on its business. Company can raise its capital by issuing shares, debentures, inviting public deposits, taking loans from banks, etc. Companies limited by shares have to issue shares to raise the necessary capital for their operations. Issuing shares can be made in different ways. In this chapter, we will discuss the different ways of issuing shares by joint stock companies. We will also discuss about allotment, transfer and transmission of shares and the documentary evidences of shares. Unit objectives : After studying this chapter you will understand, The different ways of issuing shares. Procedure of issue of shares: Allotment of shares. Procedure of Allotment.
Transcript
ROLE OF A SECRETARY IN CAPITAL FORMATION XII COMMERCE SP NEW SYLLABUS
3:1 Introduction3.1.1 Issue of shares at par 3.6 Private placement3.1.2 Issue of shares at premium 3.7 Issue of shares3:1.3 Issue of shares at discount 3.8 Allotment of shares3:1.4 Issue of shares at bid price 3.9 Share certificate3;2 Initial public offer 3.10 Share warrant3:3 Bonus issue 3.11 Transfer of shares3.4 Rights issue 3.12 Transmission of shares3:5 Employees stock option scheme 3.13 Distinction between
3.1 INTRODUCTION A joint stock company requires capital to carry on its business.
Company can raise its capital by issuing shares, debentures, inviting public deposits, taking loans from banks, etc. Companies limited by shares have to issue shares to raise the necessary capital for their operations. Issuing shares can be made in different ways. In this chapter, we will discuss the different ways of issuing shares by joint stock companies. We will also discuss about allotment, transfer and transmission of shares and the documentary evidences of shares.
Unit objectives :
After studying this chapter you will understand, The different ways of issuing shares. Procedure of issue of shares: Allotment of shares. Procedure of Allotment. Transfer and Transmission of shares. The documentary evidences of holding shares.
3.1.1 Issue of shares at parWhen a company issues its shares at its face value or nominal value it
is said to be issued at par. The face value is the value of share written on the face of share certificate. When a share is issued at that value. or at its face value, it is called as the issue at par. e.g. If the face value of a share is Rs. 10 and the company has issued it at Rs. 10/-, then it is said that the share is issued at par.
3.1.2 Issue of shares at premium (Section 78)A company may issue its shares `at premium'. When a share is issued
at a price more than its face value it is said to be issued at premium. e.g. If 'the face value. of the share is Rs. 10 and if it is issued at Rs. 12 then the difference between issue price and face value is known as `premium'. The
Companies Act 1956 doesn't provide any condition or restrictions on issue of share at premium. But as per the provisions of the Companies Act there are restrictions regarding utilization of amount collected by way of premium. As per the provisions of the Act the amount of premium collected on shares must be recorded in a separate account known as `Securities Premium Account'. The amount of premium can't be distributed as dividend. It can be used only for the purposes as stated in the Section 78(2) of the Companies Act such as for issue of bonus shares, meeting preliminary expenses, redemption of debentures, preference shares, etc.
Board of directors is the authority to decide the rate of premium. Reputed and well known companies can issue their shares at premium.
3.1.3 Issue of shares at a discount (Section 79)A company may issue its shares `at discount'. But anew company can't
issue its shares at discount. When a share is issued at a price less than its face value it is said to be issued at discount. e.g. if the face value of share is Z 10 and if it is issued at Z 9 then the difference between issue price and face value is known as discount. Shares are issued at discount to attract investors when market is down. There are certain conditions as per the Companies Act regarding issue of shares at discount.
Conditions as per Companies Act regarding issue of shares at discount.
1. The issue must be sanctioned by the Central Government.2. The issue must be of a class of shares already issued.3. The discount value must not exceed 10% of the face value.4. Shares can be issued at discount only after one year of starting business.5. An ordinary resolution in the general meeting of the company must be
passed.6. The shares to be issued at discount must be issued within two months of the
sanction of the Central Government or within such extended time as may be allowed by it.
List out the names of companies which have issued shares at premium.
3.1.4 Issue of shares at Bid PriceTo start business, a company needs long term capital. Initially the
company requires capital for purchase of fixed assets. It collects this initial amount of capital by issuing securities/shares to the public. When a company offers its shares for sale to the general public for the first time is known as `initial public offer' i.e. IPO. Securities can be issued at a fixed price or through book building. Book building is the process by which the offer price of IPO is fixed on the basis of actual demand from the majority investors. During the specified period bids are collected from the investors at various prices. i.e. equal to the floor price or even above price.
Issuer company specifies the price band i.e. range in which prospective investors may quote the price for the securities. Retail investors who may not be sure in fixing the price can quote cut off price (final price). The lower price of bid is known as, floor price or ask price. This is the minimum price to be quoted. And the upper price is known as the cap price or bid price. This is the maximum/ highest price to be quoted.
After closure of issue all applications are scrutinised and a cut off price is decided on the basis of demand and quotes received for the securities.
Securities are allotted to the bidders who have quoted price equal to or above the cut, off price. If the issue is over subscribed, the allotment is made on prorata basis i.e. in proportion to the securities demanded or applied for.
The book building process aims at tapping both investors i.e. retail (Individual) and wholesale (Institutions). In this method the company has to compulsorily allot at least 25% of its issue to the retail investors and the balance to the qualified institutional buyers.
3.2 INITIAL PUBLIC OFFER (I.P.O.)Initial Public Offer means offering shares in the beginning to the
general public for subscription by issue of prospectus. Company needs share capital for its business. A private company collects capital privately but a public company makes an appeal to the general public to purchase shares of the company by issuing prospectus. Prospectus is an invitation to the public to invest their funds in the shares of a company. Prospectus contains detail information about company, its projects and shares. An application form for shares is accompanied by prospectus. This form can be used by the investors/public to apply for the shares of the company. For raising capital from the public by issue of shares a public company has to comply with provisions of the Companies Act and SEBI guidelines.
Collect prospectus of any company which is making Initial Public Offer and discuss about it with your teacher.
3.3 BONUS ISSUEBonus shares are fully paid up shares given by a company as a gift, out
of its accumulated profits or reserves. Only existing equity shareholders are entitled to get bonus shares. Bonus shares are given free of cost to equity shareholders in proportion to their existing shareholdings. Certain proportion is decided for issuing bonus shares; for example if the ratio is decided 2:1, it means that a shareholder holding two shares will get one additional share as bonus share. Company brings its reserves or profits into business by way of bonus shares. Therefore, it is also called as `capitalization of profit.'
Following are the provisions related with issuing bonus shares –
1. Articles of Association of company must have provision regarding issue of Bonus Shares.
2. Bonus issue must be recommended by Board of Directors.3. It must be sanctioned by shareholders in general meeting.4: Bonus shares can be issued out of free reserves, share premium and
accumulated profit.5. No bonus issue shall be made within 12 months of any public/right issue.6. Company can't issue bonus shares if interest is not paid on debentures or
public deposits or it has defaulted repayment of principal amount or if it has defaulted in respect of employee dues like provident. fund, gratuity, etc.
7. Company can't issue bonus shares if the conversion of convertible debentures is pending.
A company which announces its bonus issue after the approval of Board of Directors must implement the proposal within a period of six months from the date of such approval and has no option of changing the decision. Bonus shares stand paripassu with equity shares which means they enjoy the same rights as equity shares like receiving dividend, voting rights, etc.
List out the companies which have issued Bonus share recently.
3.4 RIGHT ISSUE (Section 81)Companies generally do not issue the whole of their authorized share
capital at once. They raise capital as and when required. e.g. for expansion, modernization or diversification. As per the provisions of Articles of Association authority of raising capital by issue of further shares is given to directors, But the directors cannot issue new shares at their discretion as chances are there that they may misuse this right and allot shares to their relatives or friends. So as per the provisions of the Companies Act, Sec.81 such shares must be first offered to the existing equity shareholders of the company. The present equity shareholders are given right to apply for new shares in certain proportion to the shares already held by them. e.g. one share' against every two shares held by a member. Such issue is called `Right issue'. The company must give notice to every equity shareholder giving him option to take the shares offered to him by the company. The members may choose to subscribe for the rights shares and increase their holdings or they may give up this right.
A company has to take following steps in respect of right issue.1. To convene a Board meeting to consider the proposal for right issue and
terms of issue.2. Board has to approve the date of closing the register of members and
transfer book.
3. If the proposed issue implies increase in the authorized capital, Board has to fix up date, time, place and agenda of extraordinary general meeting.
4. To issue notices to members relating to this meeting.5. To pass resolution in the general meeting as per Articles of Association.6. To obtain permission of Reserve Bank of India for allotment of right shares to
non-resident members, if any.7. To prepare provisional allotment sheet showing present shareholdings and
number. of new shares to which members are entitled.8. To convene another Board meeting to approve the `Letter of Rights' and to
decide how the balance of shares which are not taken up by members should be disposed off.
9. To despatch `Letters of Rights' to members by registered post:10. To collect money on shares and acceptance forms through its bankers.11. To convene a Board meeting for passing an allotment resolution to make
necessary entries in the Register of Members and to take steps for preparing and issuing share certificates.
3.5 EMPLOYEE STOCK OPTION SCHEME (E.S:O.S.)As per the Companies Amendment Act, 2000 Section-2 (15-A)
`Employees stock option' means the option given to the whole time - 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.
Companies are allowed to offer stock option scheme. Under this scheme, a company offers certain shares from the new issue to its employees; whole time directors and officers of the company. An option is given to them to get some pre-determined shares in the company within a stipulated period at a predetermined price. Predetermined price is usually less than the prim offered to the general public. ESOS helps to retain the interest of employees in the company.
In order to introduce such a scheme, certain formalities are required to be completed by the company. The Securities and Exchange Board of India(SEBI) has issued certain guidelines in this respect.
As per SEBI guidelines `employee' for the purpose means :a. A permanent employee of the company working in India or out of India orb. A director of the company.
An employee as defined in sub clause (a) or (b) may be of a subsidiary in India or out of India or of a holding company of the company.
The other guidelines for employees stock option scheme are as follows -
1. The company must constitute a compensation committee for administration. and superintendence of the ESOS.
2. The issue of ESOS should be approved by shareholders by passing a special resolution.
3. ESOS would be open to all permanent employees, officers and directors of the company.
4. Option granted to an employee shall not be transferable to any person.5. Option granted can't be pledged, hypothecated or mortgaged. 6. In the event of death, options granted to an employee shall vest in his or her
legal successor or nominee.7. There would be no restrictions on the maximum number of shares to be
issued to a single employee.8. A minimum period of one year between grant of option and its vesting has
been prescribed.9. Directors' Report shall state
i) The total number of shares covered by the ESOS. ii) The pricing formula. . iii) All the details regarding options such as options granted, options exercised,
options forfeited, modification of options, money realized by exercise of option, etc.
iv) Earnings per share, computed in accordance with international accounting standards.
10. Auditor has to certify that this scheme has been implemented as per guidelines of SEBI. This certificate of the auditor is to be placed before the Annual General Meeting of the Company.
Do you think ESOS is beneficial to company ? If so how ?
3.6 PRIVATE PLACEMENT OF SHARESA public company can raise share capital either by making an offer to
public or by placing the shares privately i.e. without inviting the public for subscription of its shares or debentures. When a public company manages to obtain its capital privately, there is no need to issue any prospectus. However, under Section 70 of the Act, such company has to file a `statement in lieu of prospectus' with the Registrar of Companies. SEBI, guidelines should be followed in private placement of shares. As per SEBI guidelines, private placement of its shares by a public company should not be made by subscription of shares from unrelated investors through any kind of market intermediaries. This means promoters' shares should not be contributed by subscription to those shares by unrelated investors through brokers, merchant bankers, etc. However; subscription to such shares by friends, relatives and associates is allowed.
3.7 ISSUE OF SHARESA public company can raise capital by issuing shares to the public by
following particular procedure.
In this procedure two main steps are involveda) Preliminary workb) Issue of shares Let us discuss the steps involved in the procedure.
a) Preliminary workFinancial planning
Drafting and Filing of prospectus
Appointment of bankers
Appointment of underwriters
Listing of shares with stock exchange
i) Financial planning : Before issuing shares some important decisions are required to be taken by the Board of Directors like types of shares to be issued, number of shares to be issued, face value of shares; etc.
ii) Drafting and filing of prospectus : A resolution is passed in the board meeting for issue of prospectus. Accordingly prospectus is drafted. It contains information like kinds of shares, face value, application money, date and place of payment of application money and other particulars which make terms and conditions of issue of shares clear. A copy of prospectus is to be filed with the Registrar of Companies.
iii) Appointment of bankers : When the company issues prospectus to the public, it has to open a separate account for the deposit of share application money. The board of directors has to pass a resolution for appointment of banker. Application money for shares has to be deposited in a special account namely `Share Application Money Account', opened for this purpose, with a scheduled bank. Bankers receive application money and share applications on behalf of the company.
iv) Appointment of underwriters : Company enters into an agreement with underwriters before the issue of shares to the public. Underwriters guarantee the company to purchase the unsold shares. They work on commission basis. This agreement is not compulsory but it is desirable to ensure raising of minimum subscription amount. Underwriters assure the collection of minimum subscription. Details regarding underwriters should be disclosed in the prospectus.
v) Listing of shares with Stock Exchange : Stock exchange is an organization established ' for facilitating buying and selling of securities. It assigns, controls and regulates the business in buying and selling of securities. According to SEBI guidelines every company that wants to issue shares has to list its shares with a recognized stock exchange. Listing of
shares means the entry of shares of company on the official list of stock exchange. A company can list its shares on more than one stock exchange. Listing increases marketability of securities and creates confidence in the minds of public.
b) Issue of SharesIssue of Prospectus
Receiving applications
Sorting out Applications
Preparation of list
i) Issue of Prospectus : A copy of draft prospectus must be filed with the Registrar of Companies. The prospectus should be issued within 90 days from filing of it with the Registrar. Company gives an advertisement in all leading newspapers regarding the issue. Investors also get information about issue on website.
ii) Receiving applications : An application form is supplied along with every copy of prospectus. The prospective subscribers are requested to forward the applications to the company's bankers along with application money. On receipt of applications, bank issues receipts to the applicants. The amount of application money is credited to the Share Application Money Account of the company. After the last date of issue, bank sends all the application forms to the company along with details of application money received.
iii) Sorting out of applications : After collecting applications from the bank they are scrutinized and sorted out. Incomplete, incorrect and invalid applications are taken out. Valid applications are arranged serially, either alphabetically or according to number of shares applied for.
iv) Preparation of list : After sorting out applications, the share applications are entered in application sheet. The particulars of each application are entered in application sheet. The list is then put before the Board of Directors for further necessary action.
There can be two conditions/ possibilities in case of issue.1. Under subscription: The issue is said to be undersubscribed when number
of applications for purchase of shares are less than number of shares offered by the company for sale. In this situation, all the applicants are allotted shares as per their demand and balance shares are purchased by the underwriters as per agreement. Underwriters, therefore, become useful in case of under subscription.
2. Oversubscription: The issue is said to be oversubscribed when number of applications for purchase of shares are more than the number of shares that the company wants to sell. In such situation, Board of Directors has to take the decision regarding the basis on which allotment is to be made. The application money of the share applicants, to whom shares are not allotted, must be refunded within stipulated time.
3.8 ALLOTMENT OF SHARES
3.8.1 Meaning of AllotmentOffer for shares by the share applicants is made on share applications
supplied by the company. Allotment is the acceptance by the company of that offer. The term allotment is not defined in the Act. It means giving shares to share applicant or to specific persons with whom company has entered into contracts. Allotment means distribution of shares among the applicants. When a public company wants to issue the shares to the general public it has to issue prospectus to invite general public to subscribe to its shares. In response to it, the general public may apply for purchasing shares of the company, they are called `share applicants'. Board of Directors takes decision regarding allotment of shares by passing resolution.
Shares are allotted to share applicants. Sometime shares are allotted to specific persons with whom company has entered into agreements for payment of consideration in the form of shares. e.g. commission to underwriters is paid in the form of shares.
Effects of Allotment1. Shares of the company get separate existence as distinctive numbers (serial
numbers) are given to the shares.
2. Once the shares are allotted they cannot be realloted.
3. A contractual relationship between shareholder and company comes into existence. A shareholder agrees to pay face value of the share and company agrees to give him rights of membership.
3.8.2 Conditions for valid allotment
While allotting the shares to the applicants a company has to follow certain conditions. These conditions are classified as statutory conditions and general conditions.
Conditions of Allotment
Statutory conditions General conditionsi) Registration of prospectus i) Proper authorityii) Application money ii) Allotment against
application onlyiii) Depositing the application money iii) Allotment not to be in contravention of lawiv) Minimum subscription iv) Reasonable time
v) Opening of subscription list v) Communicationvi) Closing of the subscription list m) Absolute and unconditionalvii) Permission to deal in stock exchangeviii) Oversubscription.
Statutory conditions : The Companies Act 1956 prescribes certain conditions regarding allotment of shares by public companies. These conditions are known as statutory conditions.
i) Registration of prospectus (Sec. 60(1)) : The company has to file a copy of prospectus with the Registrar of Companies while raising its capital by issuing shares to general public. When the company is raising capital privately it has to prepare `Statement in lieu of prospectus' and it has to file this statement with Registrar of Companies.
ii) Application money (Sec. 69 (3) : The part of the face value of shares which' is collected by the company along with share application is known as `Application money'. Application money should not be less than 5% of the face value of share. The capital issued should be made fully paid within 12 months from the date of issue.
iii) Depositing the application money (Sec 69 (4) : As per this condition all money received on application of shares, should be deposited in a separate account known as `Share Application Money Account' opened in a scheduled bank by the company. Company is not allowed to withdraw this amount unless it gets trading certificate.
iv) Minimum subscription (sec.69 (1) : The minimum subscription must be raised by the company for obtaining trading certificate and to start the work of allotment of shares.
A public limited company can't make any allotment of shares unless
(a) The amount stated in the prospectus as the minimum amount has been subscribed and
(b) The sum payable on application for such amount has been paid to and received by the company. If the company fails to receive minimum subscription amount within 60 days of closure of issue, the entire application money must be refunded to the applicants within next 8 days. If the company fails to refund the amount within the prescribed time limit, as per
the provisions of Companies Act Sec. 73, it has to pay interest @ 15% p.a. on the amount.
v) Opening of subscription list : When the company is filing prospectus, it can start the work of allotment after 5 days (Sec. 72) or such later date as may be specified. inprospectus. When it is filing statement in lieu of prospectus, the allotment can be started after 3 days (Sec. 70). The object of the provision is to give an opportunity to the prospective subscribers to go through the contents of the prospectus before taking decision regarding purchase of shares.
vi) Closing of the subscription list : There is no provision in the Companies Act, regarding closing of subscription list but as per SEBI guidelines the subscription list for public issue must be kept open for at least 3 working days and for not more than 10 days. (21 days in case of infrastructure companies.) and this fact must be disclosed in the prospectus.
In case of right issue, SEBI guidelines provide that the issue shall not remain open for more than 60 days.
vii) Permission to deal on stock exchange (Sec. 73) : According to Section 73, it is compulsory for every company, intending to offer shares to the public for subscription, by issue of prospectus, to make application to one or more recognized stock exchanges. Application for permission should be made within 10 days from the date of issue of prospectus.
If the prospectus states that an application has been made to the stock exchange, for permission, the allotment made shall be void, if permission is not given by the stock exchange within 10 weeks from the date of closing the subscription list. In such case, the company has to return the money collected on application. If such money is not refunded within 8 days, company is liable to pay interest @ 15% on the refund amount.
viii) Over Subscription : According to SEBI guidelines a company has to refund excess application money on oversubscription. In case money is not refunded in time, every officer of the company, responsible for the same is punishable.
General conditions : For the allotment of shares, the following general conditions should be observed in addition to the provisions of the Companies Act.
i) Proper authority : The allotment should be made by proper authority i.e. the Board of directors of the company or a committee authorized to allot shares on behalf of the Board of directors. An allotment made without proper authority will be invalid.
ii) Allotment against applications only : No valid allotment can be made on an oral request. Thus no allotment can be made without a written application for allotment.
iii) Allotment not to be in contravention of any other law : If shares are issued in a manner prohibited by foreign exchange regulations, the issue would be invalid and void. Similarly, an allotment of shares made for any improper motive is bad and can be struck. If shares are allotted to minor, the allotment will be void.
iv) Reasonable time : The allotment must be made within reasonable time, otherwise the applicant is not bound to accept it.
v) Communication : The decision of allotment must be communicated to the applicant. It means the company should inform the investor in writing about the allotment. A share applicant and the company enter into contract after allotment.
vi) Absolute and unconditional : The allotment must be absolute and unconditional i.e. it must be made on the same terms as stated in the application.
Irregular allotment : If allotment of shares is made in contravention of the provisions of the Companies Act, then the allotment is termed as irregular. Thus, an allotment will be considered irregular in the following cases as may be applicable.
a) Where minimum subscription has not been received.b) Where a copy of the prospectus has not been filed with the Registrar of
Companies.c) Where a copy of the statement in lieu of prospectus has not been delivered
to the Registrar at least 3 days before the allotment.d) Where subscription list is opened before the beginning of the 5th day from
the date of issue of prospectus.e) Where a minimum of 5% of the nominal value of shares. has not been
received by way of application money.f) Where the application money has not been kept in a scheduled bank.g) Where stock exchange has either not listed shares within 10 weeks or has
refused permission.
Effects of Irregular allotment
The effects of an irregular allotment are as follows -
a) Voidable at the option of the allottee : An irregular allotment shall be voidable at the option of the allottee within two months of the statutory meeting or within two months of the allotment when no statutory meeting is to be held. An allottee can refuse to purchase shares by using the option.
b) Director's liability : The Directors authorizing the irregular allotment shall be fully liable to compensate the company and the allottee respectively, if any loss is incurred by the company or allottee.
c) Fine : Every director who is knowingly responsible for,the default shall be punishable with fine.
3.8.3 Procedure of Allotment of sharesPreparation of Application list
Appointment of Allotment committee
Decision about basis of allotment
Finalization of Allotment
Board Meeting
Nominee of SEBI
Sending Allotment and Regret letters
Receiving Allotment money
Making entries on Allotment sheet
Filing Return of Allotment
Issuing share certificates
Preparation of Register of members
When the company satisfies the conditions of allotment, the directors can, proceed with the work of allotment. Generally, the following procedure is adopted.
i) Preparation of Application list : After the last date for submission of share applications secretary collects the applications and verifies them. Irregular and incomplete forms are kept aside. Then the secretary prepares Application list.
ii) Appointment of Allotment committee : The power to allot shares is of the Board; but generally a sub-committee of directors is appointed to look into the matter of allotment.
iii) Decision about basis of allotment : If the issue is undersubscribed or just subscribed then there is no difficulty in making the allotment of shares. Shares can be allotted to applicants as per the actual number of shares applied by them. If the issue is over subscribed the problem of deciding the allotment policy arises. Generally allotment is done in one of the following ways.
a) Lottery method : Shares can be allotted by lottery method by drawing lots.
b) Pro-rata method : In this method shares are allotted to every applicant but in proportion to the number of shares applied for.
c) Preference method : Allotment can be done by giving preference on certain base like allotting shares to those who have applied for less number of shares or more number of shares etc.
iv) Finalization of Allotment : The Allotment committee has to consider the number of applications received and decide about the basis of allotment. The committee prepares its report and submits it to the Board of Directors.
v) Board meeting : Board is the proper authority to take decision about allotment of shares. Therefore Board meeting is convened to consider the report of allotment committee and to pass the resolution of allotment.
vi) Nominee of SEBI : The policy of allotment of shares finalized by the Board of Directors is required to be approved by the Nominee of SEBI. (Especially in case of over subscription.)
vii) Sending Allotment and Regret letters : The decision of Board of directors about allotment must be communicated properly to the share applicants. Secretary sends allotment letters to whom the shares are allotted and regret letters to whom the shares are not allotted. A cheque of refund of application money is, sent along with letter of regret.
viii) Receiving allotment money : The secretary has to make necessary arrangement with the company's bank, for collecting allotment money.
ix) Making entries on Allotment sheet : The secretary has to make entries in Application and Allotment sheets, on receiving allotment slips from the company4s bank.
x) Filing Return of Allotment : (Sec. 75) Return of Allotment is a statement containing details of allotment. It is to be filed with the Registrar of Companies, within one month from the date of allotment of shares.
xi) Issuing share certificates : Company has to prepare and issue share certificates within 3 months from the date of allotment of shares. Share
certificate is issued in exchange of letter of allotment and receipt of allotment money.
xii) Preparation of Register of Members : The secretary prepares Register of Members from share application and allotment lists.
ln case of oversubscription of shares of your company how would you allot shares ? Justify it.
3.9 SHARE CERTIFICATE (SEC. 113)
3.9.1 Meaning of share certificate - An Allottee of shares is entitled to receive a document, called share certificate from the company, certifying that he is the holder of the specified number of shares in the company.
A share certificate is a registered `evidence of title' to the share, issued by the company under its common seal, duly stamped and signed by at least two directors and countersigned by the secretary of the company.
When the shareholders invest their money in shares of the company, they must be given some proof that they are holding shares of the company. For this purpose, the- share-certificate is issued by the company under its common seal. It is a document of title to the share. The word `title' means ownership right. It is a registered document and hence not transferable by mere delivery. It can be transferred by following the procedure given in the Articles. Every member of the company has right to receive a share certificate.Contents of the share certificate
A Share certificate must contain the following .i) The name and address of the registered office of the company.ii) Share certificate numberiii) Name and address of the holderiv) Number and class of shares. v) Distinctive numbers of shares included in share certificate.vi) Nominal value and amount paid on each share.vii) Day and date of issue.viii) Common seal of the company.ix) Signatures of at least two Directors and counter signature of the secretary.
Seal and signature Entry in the Register of Members Preservation of documents Dispatch by registered post
Shares in demat for
i) Time limit : As per section 113, as amended by the Companies (Amendment) Act 1988, every company must issue or despatch a share certificate to the allottee within three months, after the allotment of shares.
ii) Default : In case of default in compliance with the above provision, the company and every officer responsible for default shall be punishable with a fine not exceeding T 500 per day till the default continues.
iii) Sanction of the Board : The issue of share certificate must have prior sanction of Board of directors. A resolution should be passed in the Board meeting, for issuing share certificate.
iv) Contents of certificate : Every share certificate specifies the name of the holder, the number of shares held and the amount paid on each, share.
v) Seal and signature : Every share certificate should be s~gned at least by two directors and secretary. Every share certificate must be issued under the seal of the company which shall be affixed in the presence of two directors or such other persons, appointed by the Board and the secretary.
vi) Entry in the Register of Members : All the particulars of a share certificate must be entered in the Register of Members. 'These entries must be authenticated by the secretary or signatories of the share certificate.
vii) Preservation : All the books and documents relating to the issue of share certificates must be preserved permanently.
viii) Dispatch by registered post : According to SEBI's latest circular, companies are required to send share certificates by registered post.
ix) Shares in demat form : Where the shares are dealt in a depository system, the company shall inform the details of allotment of securities to depository, immediately on allotment of such shares.
3.9.3 Procedure of Issue of share certificate
Printing of share certificate
Filling the details
Board meeting
Public notice and circular letter
Dispatch of share certificate
Procedure : After the allotment of shares the company sends allotment letters to communicate decision of allotment. Allotment letters are treated as evidence of ownership till the share certificates are issued. According to Section 113 of the Companies Act, company shall within three months after the allotment, complete and keep ready for delivery of the share certificate for all shares.
The procedure of issue involves following stepsi) Printing of share certificate : Share certificates are printed in the
prescribed form. These share certificate forms should be serially numbered.ii) Filling the details : The necessary details are filled up in each share
certificate.iii) Board Meeting : As soon as the share certificates are ready, a Board
meeting is called to pass a resolution for sealing and signing of all the share certificates.
iv) Public notice and circular letter : When the share certificates are duly signed and sealed, the secretary gives a public notice announcing that the share certificates are ready for delivery. A circular letter is also sent to each share holder, requesting him to take delivery of share certificate against the submission of the Letter of Allotment and receipt for allotment money.
v) Dispatch of share certificates : The share certificates are dispatched by registered post or the shareholders can collect them personally from the registered office of the company.3.10 SHARE WARRANT (SEC.114)
3.10.1 Meaning - A share warrant is a bearer document of title to the shares issued by the company under. its common seal, duly stamped and signed by at least two directors of the company.
A share warrant is a document issued by a public company stating that its bearer, is entitled to the shares specified there in. It is transferable by mere delivery and is substitute for the share certificate.
A public company may convert its share certificate of fully paid up shares, into share warrant. One big advantage of issuing warrants is that shares can be transferred by mere delivery of the share warrant. The registration of such transfer of shares is not necessary with the company.
3.10.2 Statutory provisions regarding share warrantSection 114 of the Companies Act 1956, lays down the following
provisions for the issue of share wan-ant.
i) Only a public company, limited by shares can issue share warrants.ii) The Articles of Association must authorize the issue of share warrants.iii) Approval of central government must be obtained for issuing share wan-ant.iv) Share warrants cannot be issued originally. Only share certificates for fully
paid shares, can be converted into share warrants. No share warrants can be issued against partly paid shares.
v) The company can issue share warrant only on the request of the shareholder.
3.10.3 Procedure of Issue of share warrantThe following are the steps involved in the procedure of issue of share warrant .Written applicationLodgement TicketComplying legal conditionsBoard sanctionPreparation of share warrantEntries in Register of Members
Letter to applicant
i) Written application : Whenever any shareholder holding fully paid shares wants to convert his share certificate into a share warrant, he has to make an application on printed form to the company along with the relative share certificate. He has to pay necessary duty and other prescribed fees and charges.
ii) Lodgement Ticket : When a duly completed application is received, the secretary will issue a `Lodgement Ticket' to the applicant. It is an acknowledgement given by the company for the receipt of the documents and states that the ticket is to be exchanged for the share warrant.
iii) Complying legal conditions : The secretary ensures that all the relevant provisions of the Companies Act relating to the issue of share warrants are complied with.
iv) Board sanction : A meeting of Board of Directors is convened to pass a resolution for issue of share warrants.
v) Preparation of share warrant : The secretary prepares the share warrants and gets them duly sealed and signed as per the Board resolution. Share warrant forms are printed in three parts. a) The counterfoil b) The share warrant c) The dividend coupons.A `talon' is also attached to the warrant which is to be submitted to the company for demanding a fresh set of dividend coupons.
vi) Entries in Register of Members : The original share certificate will be cancelled. Necessary entries for the issue of share warrant will be made in the Register of Members.
vii) Letter to the applicant : The applicant is advised by a circular letter to take delivery of share warrant from the registered office of the company in exchange of the `Lodgement Ticket'.
3.11 TRANSFER OF SHARES
3.11.1 MeaningOne of the important features of the joint stock company is that its
shares are transferable. Section 82 empowers every shareholder to transfer his shares in the manner laid down in the Articles and in accordance with the various provisions of law.
A transfer of share takes place when a registered shareholder transfers his shares by sale or otherwise to another person voluntarily.
3.11.2 Statutory provisions regarding transfer of shares Instrument of transfer Transfer by legal representative Application for transfer Power to refuse transfer Time limit for issue of share certificates
i) Instrument of transfer(Sec:108) : An application for transfer of shares must be submitted in the prescribed form called as instrument of transfer. It must be duly filled, stamped and signed by transferor and transferee. The instrument of transfer should be submitted in company's office along with share certificate.
ii) Transfer by legal representatives (Sec.109) : In case of deceased member, a transfer executed by the legal representative of deceased member is valid.
iii) Application for transfer (Sec 110) : An application for the registration of a transfer of the share may be made either by the transferor or by the transferee. Transferor is the shareholder who wants to transfer shares. Transferee is the one in whose favour shares are transferred. When the application made by the transferor relates to partly paid shares, the transfer shall not be registered unless the company gives notice to the transferor and transferee to receive no objection to the transfer.
iv) Power to refuse transfer (Sec. 111) : Directors have right to refuse transfer of shares. The right of transfer is restricted by the Articles on the following grounds.
a) When the transferee is a minor. b) When a company has a lien on the shares, to recover any amount payable
by the shareholder to the company. c) When the intention of the transferee is malafide i.e. he wants to take
transfer of large number of shares with the object of controlling the management.
d) When the Central Government gives a direction to the company not to give effect to the transfer of shares.
e) When the instrument of transfer is incomplete.
v) Time limit for issue of share certificatesEvery company has to issue share certificate within two months from the date of registration of the transfer of shares.
3.11.3 Procedure of transfer of shares :When a share warrant is issued to the shareholder no procedure for
transfer of such shares is to be followed as share warrant is a bearer document which is transferable by mere delivery. A share certificate holder has to follow the procedure of transfer for transferring his shares. The Articles of Association contains the following procedure for transfer of shares –
Submission of instrument of transfer (Transfer form)
Verification of transfer form
Notice of Lodgement
Board sanction
Registration of transfer
Issue of share certificate
i) Submission of instrument of transfer (transfer form) : Transferor has to obtain the prescribed transfer form, called Instrument of Transfer. It must be duly filled and signed by both the transferor and transferee. It must also be duly dated and stamped. Transfer form then is submitted to the company's office along with share certificate.
ii) Verification of Instrument of Transfer : After receiving Instrument of Transfer, the company secretary verifies all the details of transfer and share certificate. If he is satisfied, he accepts the transfer form and issues transfer receipt. Transfer receipt is an acknowledgement for receiving instrument of
transfer and share certificate enclosed with it. When a transferor holds one certificate for number of shares and wants to transfer only a part of shares, the secretary issues balance ticket to the transferor. Balance ticket confirms that share certificate has been received, out of which transfer is lodged for few shares and transferor is entitled to the balance shares.
iii) Notice of lodgement : After receiving the transfer application form, notice of lodgement is sent to both Transferor and Transferee. This notice informs that transfer form has been lodged with the company and if they have any objection they should inform the company within 15 days.
iv) Board sanction : If no objection is received from parties to transfer, the secretary submits the transfer form to the Board for its sanction. If satisfied, Board passes resolution for transfer of Shares.
v) Registration of Transfer : After getting sanction of Board for transfer of shares, secretary has to make entries in the Register of Transfer. He also has to make changes in the Register of Members i.e. to remove the name of the old shareholder and to enter the name of new shareholder. (if he has transferred all shares.)
vi) Issue of share certificate : Secretary has to make arrangement for issuing share certificate to the new shareholder. The secretary informs the transferee that a new share certificate is ready and he can take it, in exchange of transfer receipt. Share certificate must be issued to the transferee within two months from the date of lodgement of transfer. A listed company has to issue share certificates within one month from the date of lodgement of transfer.
If a shareholder has transferred I only a part of shareholdings, secretary has to make an arrangement to issue a new share certificate to the transferor for the shares which he has not transferred. The secretary informs transferor to take this share certificate in exchange of balance ticket.
3.12 TRANSMISSION OF SHARES
3.12.1 MeaningTransmission of shares means transfer of shares by operation of law.
When shares are transmitted there is transfer, of shares i.e. change in ownership of shares. But this transfer of shares takes place because of a specific reason and to a specific person.
Transmission of shares means-passing of title to the shares by operation of law of inheritance upon the happening of death, bankruptcy or lunacy of a shareholder to his legal representative. Shares are transmitted due to death, insolvency or lunacy of shareholder.
In case of death : If a shareholder dies testate (after making Will), the person named in the Will, becomes the legal successor and the shares are transmitted to him/her. When shareholder dies intestate (without making Will) the administrator appointed by court acts as legal heir and shares are transmitted in his/her name.
In case of insolvency : When a shareholder becomes insolvent, shares are transmitted in the name of person appointed by the court as official receiver.
In case of Lunacy : When a shareholder becomes lunatic, shares are transmitted to the guardian of shareholder appointed by the court.
When a joint holder of shares dies the surviving member is entitled to shares.
3.12.2 Provisions regarding Transmission of shares : The Regulations 25 to 28 of Table A contains the provisions regarding transmission of shares.
1. Ownership of shares : When a shareholder is the single owner of shares his shares will be transmitted to the legal representative and if the shares are in joint names the shares will be transmitted to survivor.
2. Rights of legal representative : The legal representative has two options. a) He may get himself registered as a member of the company. b) He may transfer the shares to some other person.
3. Notification to company : The legal representative should inform the company about his decision in time whether he wants to get himself registered as member or wants to transfer the shares to some other person.
4. Powers of Board : If the legal representative fails to inform the company his decision, company sends notice to him asking for a decision about the shares. If he does not comply within 90 days, then the directors may withhold the payment of dividend, bonus or other money payable on these shares.
3.12:3 Procedure for transmission of shares :As mentioned above, the legal representative has two options
a) To get himself registered as member or b) To transfer the shares to some other person.
Procedure when legal representative wants to get himself registered as member. - When the legal heir wants to get the shares registered in his name he has to write letter of request to the company and has to submit it with relevant share certificate and satisfactory evidence about his legal status. If satisfied with the genuineness of the documents, the company will enter his name in the Register of Members. A new share certificate will be issued to the legal representative.
Procedure when Legal representative wants to transfer shares - If the legal representative wants to transfer his shares to some other person, he will have to follow usual procedure of transfer. i. e. he has to submit Instrument of Transfer along with share certificate and succession certificate. The transfer is then made according to usual procedure of transfer.
The name, of the transferee is then entered in the Register of Members by removing the name of original shareholder.
For transmission of shares the legal representative has to submit the following documents.
a) In case of death : i) Copy of death certificate. ii) Probate of Will or letter of Administrator, appointed by court when
shareholder dies without making will.b) In case of Insolvency : Copy of appointment order of court as official
assignee or receiver.
c) In case of Lunacy : Copy of appointment order of the court as guardian. If the company refuses to register the transmission of shares, the legal representative, should be intimated about it within two months. He has right of appeal to the Company Law Board, which can be exercised within two months of the date of receipt of refusal.
3.13 DISTINCTION BETWEEN
Share certificate and Share warrantSr. No.
Point Share certificate Share warrant
1. Meaning Share certificate is a registered document of title to the shares issued by the company under its common seal, duly stamped and signed by at least two directors and
Share warrant is a bearer document of title to the shares issued by the company under its common seal, duly stamped and signed by at least two directors of the
counter signed by secretary of the company
company
2. Which company can issue?
Both private as well as public companies can issue share certificate
Share warrant can be issued only by public limited companies
3. For which shares?
Share certificate is issued in respect of partly or fully paid shares.
Share warrant can be issued only in respect of fully paid shares
4. Approval Issue of share certificate does not require the approval of the central government.
Issue of share warrant requires prior approval of the central government
5. Transfer Share certificate is a registered document of title to the share. It can be transferred by following the procedure laid down in the Articles of Association.
Share warrant is a bearer document. It can be transferred by more delivery without undergoing the regular procedure of transfer of share
6. Negotiability Share certificate is a not-negotiable document. It acts like evidence of the validity of title and ownership.
Share warrant is a negotiable instrument.
7. Status/Rights of the holder
A holder of share certificate is a registered member of the company and enjoys normal rights to receive notices of meeting, attending meetings voting rights, etc.
A share warrant holder is not a registered member of the company and does not enjoy normal membership rights.
8. Qualification shares
Shares included in a share certificate can be considered as qualification shares for a director.
Shares included in the share warrant cannot be considered as qualification shares for a director.
9. Distribution of dividend
Dividend is paid through dividend warrant posted by the company at the registered address of the member.
Dividend is paid through 'dividend coupon'.
10 Petition for winding up to the company
The share certificate holder can submit a petition for the winding up
The share warrant holder cannot submit a petition for winding up of the
of the company company11 Stamp duty Share certificate require
nominal stamp duty.Share warrant requires heavy stamp duty.
Transfer of shares and Transmission of sharesSr. No.
Point Share certificate Share warrant
1. Meaning Transfer of shares means transfer of ownership of shares from one person to another
Transmission of shares means transfer of shares by operation of law.
2. Kind of action Transfer of shares is a voluntary act of the parties i.e. transfer and transferee
Transmission of shares is a kind of compulsory action on happening of specific event like death, insolvency or lunacy of share holder.
3. Reason Transfer of shares takes place when both the transferor and transferee are living. It takes place only when the transferor submits instrument of transfer.
Transmission of shares takes place only on death or insolvency or lunacy of a shareholder. The legal representative has to submit an evidence proving his legal status.
4. Initiative Transfer of shares is affected by the shareholder i.e. transferor or by a person authorized by him.
Transmission of shares is affected by the legal representative of the share holder.
5. Consideration Transfer of shares takes place against some consideration unless shares are transferred by way of gift.
The question of consideration does not arise in case of transmission.
6. Stamp duty In case of transfer of shares, stamp duty is payable on the market value of share.
No stamp duty is payable in case of transmission as it is passing of property without consideration.
SUMMARY
Share is one of the important sources of capital. Public company can raise capital by issuing shares to the public. Shares may be issued 1) At Par 2) At premium 3) At discount 4) At bid price:
IPO : When a company in the beginning makes public offer to raise share capital, it is called as initial public offer.
Bonus issue : When a company accumulates large free reserves and uses them to pay for new, fully paid shares, the shares so issued are called. Bonus shares. The process is called capitalization of profit.
Rights issue : When a company raises capital by issue of further shares, the present equity shareholders are given right to apply for new shares in proportion to shares already held by them. Such issue is called `Rights issue.'
Employee stock option : The whole time directors, officers or employees of a company may be given the benefit or right to purchase or subscribe the securities offered by the company, within specific period at a predetermined price. This scheme is known as Employee stock option.
Private placement : Issuing shares privately without inviting public for subscription.
Issue of shares : A public company can raise capital by issuing shares to the public. It can be done by following particular procedure - a) Preliminary Work b) Issue of shares i) Financial planning i) Issue of Prospectus ii) Drafting and filing Prospectus ii) Receiving applications
iii) Appointment of bankers iii) Sorting out applications iv) Appointment of underwriters iv) Preparation of list v) Listing of shares on stock exchange
Allotment of shares means distribution or appropriation of shares. Shares are allotted to applicants or according to contracts made with different persons. While making allotment of shares the conditions of allotment must be fulfilled to make it regular allotment. The conditions are statutory and general.
A particular procedure for allotment of shares is required to be followed while allotting shares.
Share certificate is a registered document of title to the shares. It contains name and address of holder, number of shares, serial numbers, type of shares, value of shares, amount paid on share. It is issued under company's common seal with signatures of two directors and secretary. Share certificate should be issued by the company as per the provisions in the Companies Act. Company must follow the procedure for issue of share certificate.
Share warrant: is a bearer document of title to'shares issued by the company under its common seal. It is issued only by public company. It can
be issued only when authorized by Articles of Association and with the prior approval of the central government.
Transfer of shares: Shares are personal property of shareholder and he has right to transfer them. Transfer of shares means transfer of ownership of shares from one person to another. It takes place when shareholder sells his shares or gives as gift to other person.
There are certain provisions regarding transfer of shares which are required to be followed while transferring shares.
On the same line a particular procedure is also required to be followed while transferring shares.
Transmission of Shares: Means transfer of shares by operation of law. There is change in ownership of shares due to certain reasons like death, insolvency or lunacy of shareholder, to the legal representative of shareholder. The legal representative can register himself as a member of the company or may transfer the shares to some other person. Accordingly, he has to submit `Letter of Request' or instrument of transfer along with share certificate and succession certificate.
Key Terms : Issuing shares at face value. : Issue price is more than face value. : Issue price is less than face value. : Highest price a buyer will pay to buy a specified number of shares or stock
at any given time. : Offering shares in the beginning to public for subscription. : Capitalization of profits. : Right given to existing equity shareholders to apply for new shares.
Employee stock option scheme : Option given to employee to purchase at future date the securities offered by the company at a predetermined price.
: Placing the shares privately without inviting the public for subscription. : Giving shares to share applicant or to specific persons. : Registered document of title to shares issued by company under its
common seal, duly stamped and signed by two directors and secretary. : A bearer document of title to shares issued by public company under its
common seal, duly stamped and signed by directors and secretary of company.
: Passing ownership of shares from shareholder to another person.Transmission of shares : Transferring ownership of shares by operation of law.
EXERCISEQ.1 A Select the correct answer, from the. possible choices given below
and rewrite the statements.
1. Return of Allotment is to be filed by the company with the registrar within ............... days of the date of allotment.
a) 60 b) 45 c) 30
2. If a share of ? 100 is issued at Rs. 110, it is said to be issued at .............. a) par b) discount c) premium
3. The secretary has to make an application for listing shares on the stock exchange within ............... days from the date of issue of the prospectus.
a) 10 b) 20 c) 30
4. Transfer of shares is ............... a) a voluntary act b) an arbitrary act c) an involuntary act
5. Transfer of shares by operation of law is called ............... a) transfer of shares b) allotment of shares c)
transmission of shares
6. Shares are transmitted when ............... a) full payment is done b) a call on shares is not paid in time c) a shareholder dies
Q.1 B Match the pairs . Group A Group B a) Share certificate 1) Bonus shares b) Capitalization of reserves 2) Transfer of shares due to c) Under subscription operation of law d) Transfer of shares 3) Bearer document e) Private placement 4) More applications than expected 5) Sale or gift of shares to another person 6) Private company collecting capital privately 7) Rights issue 8) Registered document 9) Public company collecting capital privately 10) Less applications than expected
Q.1 C Write a word or a term or a phrase which can substitute each of the following statements .
1. A bearer document of title to shares issued by the company under its common seal.
2. Issuing shares at face value. 3. Offering shares in the beginning to public for subscription. 4. Highest price quoted by a buyer to buy a specified number of shares or
stock at any given time. 5. Transfer of ownership of shares by operation of law. 6. A document which is an invitation to general public to subscribe for shares
of company. 7. Giving shares to share applicant or specific person with whom company has
entered into . contract.
Q.2 Distinguish between the following. 1. Transfer of shares and Transmission of shares. 2. Share certificate and Share warrant.
Q.3 Write notes on. 1. Bonus issue 2. Conditions of valid allotment 3. Share certificate 4. Employee stock option scheme (ESOS) 5. Initial Public Offer (IPO)
Q.4 State, with reasons, whether the following statements are True of False .
1. Issue of bonus shares is compulsory. 2. A share certificate is a bearer document. 3. It is compulsory to allot share to every applicant. 4. Rights shares are issued to general public. 5. Transfer of share is initiated by the company.
Q.5 Answer in brief . 1. What is private placement? 2. Explain the general conditions of allotment of shares. 3. Explain the procedure of issue of share warrant. 4. What are the contents of share certificate? 5. State the circumstances under which transmission of shares is done.
Q.6 Answer the following questions . 1. What is allotment of shares? Explain the procedure of allotment of shares. 2. Explain in detail procedure of issue of shares. 3. What is share certificate? State the procedure for issue of share
certificate. 4. What are the provisions of Companies Act regarding transfer of share? 5. What is transmission of shares? Explain the procedure of transmission of
shares.Labels: ROLE OF A SECRETARY IN CAPITAL FORMATION XII COMMERCE SP NEW SYLLABUS
