Shares, MBA


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Shares, MBA

  1. 1. Business Law - Shares -
  2. 2. Contents…• The Companies Act, 1956 (Introduction)• Company• Share Capital• Share• Different Types of Shares• Nomination of Share• Share Certificate• Share Warrant• Transfer and Transmission of Shares No: of Slides : 40
  3. 3. The Companies Act, 1956• The Companies Act 1956 is an Act of the Parliament of India, enacted in 1956, which enabled companies to be formed by registration, and set out the responsibilities of companies, their directors and secretaries.• The Companies Act 1956 is administered by the Government of India through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Registrar of Companies (ROC) handles incorporation of new companies and the administration of running companies.• Since its commencement, it has been amended many times, in which amendment of 1988, 1990, 1996, 2000 and 2011 are notable.
  4. 4. Main Features Of Companies Act ,1956 • Full and Fair disclosure of various matters in prospectus • Detailed information of the financial affairs of a company to be disclosed in its accounts • Provision for intervention and investigation by the government in to the affairs of a company • Restriction on the Powers of managing agents and other managerial personnel • Enforcement of proper performance of their duties by company management. • Protection of minority share holders
  5. 5. Company • A company in broad sense may mean an association of individuals formed for some common purpose. • It is a voluntary association of persons formed to carry on some business for profit or to promote art, science, education or some charitable purpose. • It is regarded by the law as a person, a human being. But it has no physical existance.
  6. 6. Share Capital• Share Capital or Capital Stock refers to the portion of a companys equity that has been obtained by trading stock to a shareholder for cash or an equivalent item of capital value.  For example, a company can issue shares in exchange for computer servers, instead of purchasing the servers with cash.• Share Capital denotes the amount of Capital raised by the issue of shares, by a company. It is collected through the issue of shares and remains with the company till its liquidation.
  7. 7. Share• The Capital of the company is divided into different units of a fixed amount which is known as share.• A share is a right to a specified amount of the share capital of a company, carrying with it certain rights and liabilities.• Section 2(46) of the Companies Act defines share means “ share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied”
  8. 8. Features of Share• A share is not a negotiable instrument, but it is a movable property.• It is also considered to be goods under the Sale of Goods Act, 1930.• The company has to issue the Share Certificate.• It is subject to Stamp Duty.• The ‘Call’ on Shares is a demand made for payment of price of the shares allotted to the members by the Board of Directors in accordance with the Articles of Association.
  9. 9. Types Of Shares• Before the commencement of Companies Act, companies used to issue three types of shares  Preference Share  Ordinary Share  Deferred Share• Under the Companies Act, 1956 a company can issue two types of shares  Preference Share  Equity Share
  10. 10. Types Of Shares• Preference Shares  Cumulative Preference Shares  Non Cumulative Preference Shares  Participating Preference Shares  Non Participating Preference Shares  Convertable Preference Shares  Non Convertable Preference Shares  Irredeemable Preference Shares• Equity Shares
  11. 11. Preference Shares:• Preference share are those which have a preferential right for the payment of dividend during the lifetime of the company. They have also a preferential right for the return of capital when the company is wound up.• Preference share holders enjoy more security in regard to income and capital than other share holders.• The dividend on Preference share is fixed by the Articles of the company.• The dividend on Preference share holders is Pre-determined and therefore they will not get any benefit in times of large profits.• They do not enjoy normal voting rights. They can vote only on the matters affecting their own interest.• The dividend specified on preference share is not at all guaranteed.• No dividend will be paid if there is no profit. *• Preference share holders have priority only over the other share holders, but not over the Creditors.
  12. 12. Cumulative Preference Shares:• The dividend payable on these shares goes on accumulating till it is fully paid.• If dividend is not paid in any year due to non availability of profits, the right of the share holder for dividend does not lapse. It will carried over to the subsequent years.• The accumulated dividend is paid to the Cumulative Preference Share holders before any dividend paid to other types of share holders.• If the company goes into liquidation no arrears of dividends are payable unless the Article contains express provisions to this effect.
  13. 13. Non-Cumulative Preference Shares:• These are the shares on which the dividend does not go on accumulating.• If there are no profit or there are inadequate profits in any year, these shares get no dividend or a partial dividend.• These shares will be treated on the same footing as other preference shareholders in the case of capital.
  14. 14. Participating & Non-ParticipatingPreference Shares:• Participating Preference Shares:  The preference shares which are entitled to a share in the surplus profit of the company in addition to the fixed rate of preference dividend are known as participating preference shares.  These shares are not only entitled to a fixed rate of dividend, but also to a share in the surplus profits, which remain after the claims of the equity share holders have been met.  Thus participating preference shareholders obtain return on their capital in two forms • (i) fixed dividend • (ii) share in excess of profits.• Non-Participating Preference Shares:  Those preference shares which do not carry the right of share in excess profits are known as non-participating preference shares.  The Preference Shares are presumed to be Non-Participating unless expressly provided in the memorandum or the articles or the terms of issue.
  15. 15. Convertable & Non-ConvertablePreference Shares:• Convertable Preference Shares:  The holder of these shares have a right to convert them into equity share with in a certain period.  This exchange may occur at any time in maturity period the investor chooses, regardless of the market price of the common stock.  It is a one-way deal; one cannot convert the common stock back to preferred stock.• Non- Convertable Preference Shares:  The preference share without a right of conversion into equity shares are called Non-Convertible Preference Shares
  16. 16. Redeemable PreferenceShares:• Normally capital that is raised by the issue of shares can be returned by the company only on its winding up.• But a company limited by shares, if authorized by its article can issue Preference Shares which are to be redeemed.• The capital received on such shares can be returned after the expiry of a stipulated period or when ever the company wants as per the terms of issue and after proper notice.• The redeemable shares are redeemed within the life time of the company or before the company closes down or to say that these shares have a maturity period• Note : According to Section 100 of the Companies Act, 1956 : If a company collects the money through redeemable preference shares, this money must be returned on its maturity whether company is liquidated or not.
  17. 17. Irredeemable Preference Shares:• Those preference shares, which can not be redeemed during the life time of the company, are known as Irredeemable preference shares.• The amount of such shares is paid at the time of liquidation of the company.• No companies limited by shares shall issue any Preference Share which is irredeemable or redeemable after the expiry of a period of ten years from the date of its issue.(Amendment 1988, Sec 80A)
  18. 18. Conditions for issuingRedeemable PreferenceShares:• Section 80 of the Companies Act, 1956 deals with the redemption of preference shares.• There should be provision in the Article authorizing a company to issue such shares.• The Premium if any, payable on redemption must be provided for out of the profits of the company or out of the company’s share premium account before the shares are redeemed.• Where redemption is made out of profits, a sum equivalent to the nominal value of the shares redeemed must be transferred to the ‘Capital Redemption Reserve Account’. This amount shall be treated as capital of the company.• The capital redemption account may be applied by the company in paying up fully paid bonus shares.• The balance sheet of the company which has issued such shares shall state the terms of redemption or conversion and the date of redemption or conversion.• The redemption of shares shall not to be taken to be reduction in the capital of the company and the company shall have the powers to issue shares up to the nominal amount of the shares redeemed.
  19. 19. Advantages & Disadvantages –Preference Shares:Advantages• These yield fixed rate of returns• Preference is given compared to equity share holders while distributing the dividends and once the company is dissolved.• It’s a hybrid instrument having some of the characteristics of debentures and equity shares.Disadvantages• They do not provide the investor with any of the voting rights.• If the company gets huge profits then they won’t get any extra bonus
  20. 20. Equity Shares:• Equity shares, with reference to any company limited by shares, are those which are not Preference Shares [Sec.85(2)]• The holder of these shares are entitled to dividend after the fixed dividend of Preference Shares has been paid.• If no profit is left after paying dividend of Preference shares, the Equity Shares get no dividend.• Similarly at the time of winding up of the company Equity shareholder will get back their capital only after the capital has been returned to Preference Share holders.• The rate of dividend is not fixed on the Equity Shares.• These share holders generally stand to receive relatively high rate of returns in years of prosperity.• This rate of dividend is determined by directors and in case of larger profits, it may even be more than the rate attached to preference shares.
  21. 21. Advantages – Equity Shares:• Equity shares give greater returns if the company makes profits.• There is a tremendous amount of capital appreciation if the shares are of a good performing company.• The equity shares are easily transferable.• The equity shares are traded at the stock exchanges so they can be bought and sold easily. These can be easily liquidated.• The equity share holders have got the right to vote in the annual general meeting.• Only the equity share holders have the right to choose the board of directors.• Equity share holders have the right to oppose any of the decisions taken by the board of directors.
  22. 22. Disadvantages – Equity Shares:• No doubt equity shares have attractive and better returns but in case the firm has not performed well or is going for diversification or is investing in some venture then the profits carried forward will be more and the dividends paid will be less.• In worst cases if the company goes bankrupt then it is dissolved.• No doubt equity shares have both advantages and disadvantages but the fact is that equity shares are the most sought financial instruments for both investment or for speculation.
  23. 23. Deferred Shares:(Manager’s Share or Founder’sShare)• These are shares often issued to the Promoters or Founders of the company in consideration of the service rendered by them in forming the company• The holders of deferred shared carries a right to dividend after the rate of dividend was paid to the Preference and Equity Share holders.• The issue of these shares is prohibited on the Public Companies after passing the Companies Act of 1956.• How ever an independent Private company is still entitled to issue Deferred Shares.
  24. 24. Bonus Shares:• Bonus shares implies the payment of dividend in the form of shares.• The advantage to the company is that its issued capital increases and while its asset remain intact.• The share holders get a few more fully paid up shares instead of getting the divident in cash.• Issue of Bonus Share has been for this reason known as “Capitalization Of undistributed Profits”
  25. 25. Its time to relax ….. 
  26. 26. Nomination Of Shares:• Sec 109 A of Companies Amendment Act 1999, confers a right on the shareholders of a company to nominate at any time in the prescribed manner a person to whom their shares or debentures in the company shall vest in the event of their death.• The nominee can be either an individual or a company.• Minor can be a nominee.• If the shares are held by more than one person jointly the joint holders may together nominate a person
  27. 27. Share Certificate:• A share certificate is a registered evidence of title to the shares, issued by the company under its common seal, duly stamped and signed by one or more directors and countersigned by the secretary of the company, as per Articles.• In case shares are held by more than one person jointly with others, company shall issue only one share certificate to the holder .• Contents of the Certificate :  Name of the company and the amount and division of authorized capital.  Serial number of the certificate.  Name of the shareholder.  Number and class of shares held by him and their distinctive number.  Amount paid on each share.  Provision for endorsement of transfer.  Signature of two Directors and Secretary.  Common seal of the company
  28. 28. Sample Share Certificate..
  29. 29. Sample Share Certificate..
  30. 30. Share Warrant• A share warrant is a document issued by the company under its seal specifying that its bearer is entitled to the shares specified therein.• Share warrant is just like a negotiable instrument.• A share warrant can be issued only when the shares are fully paid up.
  31. 31. Share Warrant - Sample
  32. 32. Difference b/n Share Warrant andShare Certificate• A share warrant can be issued only when the shares are fully paid up whereas a share certificate can be issued at any stage without the shares being fully paid up.• A share warrant is a negotiable instrument but a share certificate is not.• A share certificate is a document showing prima facie title to the shares represented thereby but a share warrant is the share security itself capable of easy transfer.• A share certificate can be issued both by a public and a private company but a share warrant is issued only by a public company.
  33. 33. Transfer and Transmission ofShares• AOA provides for the procedure of transfer of shares. It is a voluntary action of the shareholder.• It can be made even by a blank transfer –In such cases the transferor only signs the transfer form without making any other entries.• In case it is a forged transfer, the transferor’s signature is forged on the share transfer instrument.• Board can refuse the transfer of share:  Defect in instrument of transfer.  Unpaid or partly paid shares.  Shares transferred may be refused.• Transmission of shares is by operation of law, e.g. by death, insolvency of the shareholder etc.
  34. 34. Some ???• Calls on Shares• Par value of a share• Issue of share at a premium (Sec.78)• Issue of share at a discount (Sec.79)• Underwriting of shares  Underwriting Commission
  35. 35. Main Points..• The Companies Act, 1956 (Introduction)• Main Features Of Companies Act ,1956• Company (Introduction)• Share Capital (Introduction)• Share• Features of Share• Features of Share• Different Types Of Shares• Types Of Shares• Preference Shares:• Cumulative Preference Shares• Participating & Non-Participating Preference Shares
  36. 36. Main Points..• Convertable & Non-Convertable Preference Shares• Redeemable Preference Shares• Irredeemable Preference Shares• Conditions for issuing Redeemable Preference Shares• Advantages & Disadvantages – Preference Shares• Equity Shares• Advantages & Dis advantages – Equity Shares• Deferred Shares: (Manager’s Share or Founder’s Share)• Bonus Shares• Nomination Of Shares• Share Certificate• Sample Share Certificate• Share Warrant
  37. 37. Main Points..• Share Warrant - Sample• Difference b/n Share Warrant and Share Certificate• Transfer and Transmission of Shares
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