Financial accounting project of issue of shares


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Financial accounting project of issue of shares

  1. 1. SHARES & DEBENTURE PREPARED BY:- 1. Ms. Neha 2. Ms. Sangita 3. Ms. Vaishali 4. Ms. Priya 5. Ms. Deepali 6. Mr.Dhan Bahadur 1
  2. 2.  Introduction  Meaning of shares & share capital  Types of share & their advantages & disadvantages  Types of Share Capital  Authorised Share Capital  Issued Capital  Subscribed Capital  Called Up Capital  Paid up Capital  Issue of Bonus shares  Meaning of debenture & its types  Real Life Example  conclusion 2 CONTENTS
  3. 3. 3 INTRODUCTION Companies (Private and Public) need capital either to increase their productivity or to increase their market reach or to diversify or to purchase latest modern equipments. Companies go in for IPO and if they have already gone for IPO then they go for FPO. The only thing they do in either IPO or FPO is to sell the shares or debentures to investors. (the term investor here represents retail investors, financial institutions, government, high net worth individuals, banks etc). Whether they issue shares or debentures totally depends upon the concerned company.
  4. 4. 4 A share is one unit into which the total share capital is divided. Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares. A share is a security which represents a portion of the owner’s capital in a business. Shareholders are the owners of the business. They share in the success or failure of the business. This can be measured by the amount of dividends that they receive and by the price of the share, quoted on the stock market . Shares are the marketable instruments issued by the companies in order to raise the required capital. MEANING OF SHARES & SHARE CAPITAL
  5. 5. 5  These are very popular investments which are traded every day in the stock market and the value of the share at the end of the day decides the value of the firm.  In the U.S., shares are referred to as common stock.
  6. 6. 6 The shares which are issued by companies are of two types: • Equity Shares • Preference Shares TYPES OF SHARES
  7. 7. 7 Equity Shares are issued and are traded everyday in the stock market. Equity share holders only get dividend after preference shareholders & debenture holders. The returns on the equity shares are not at all fixed. It depends on the amount of profits made by the company. The board of directors decides on how much of the dividends will be given to equity share holders. Share holders can accept to it or reject the offer during the annual general meeting. Equity shareholders have the right to vote on any resolution placed before the company. EQUITY SHARES
  8. 8. 8 The Equity share is a common name, some of the types of equity shares are: • Blue Chip Shares • Income Shares • Growth shares • Cyclical Shares • Defensive shares • Speculative shares TYPES OF EQUITY SHARES
  9. 9. 9 One more classification of shares is given by one of the most successful and respected investor all around the world Peter Lynch. According to him the shares can be classified into 6 types: • Slow Growers • Fast Growers • Stalwarts • Cyclical • Turn-around • Asset plays FURTHER CLASSIFICATION
  10. 10. 10 ADVANTAGES • High Return • Easily Transferable. • These can be easily liquidated. • Right to vote • 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. ( for e.g. This is what happened when Mr. Ramalinga raju tried to buy Maytas company) DISADVANTAGES • High Risk • In worst cases less privilege given to equity share holders.
  11. 11. 11 These are other type of shares. The preference shares are market instrument issued by the companies to raise the capital. Preference shares have the characteristics of both equity shares and debentures. Fixed rate of dividends are paid to the preference share holder as in case of debentures, irrespective of the profits earned company is liable to pay interest to preference share holders. PREFRENCE SHARE
  12. 12. 12 Preference shares are divided into: • Cumulative & Non cumulative shares • Redeemable & Non-redeemable • Convertible & Non-convertible shares • Participating and non-participating TYPES OF PREFERENCE SHARES
  13. 13. 13 ADVANTAGES • These yield fixed rate of returns • 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.
  14. 14. 14 ISSUE OF SHARES Prospectus Application Repayment / dividend Allotment  Detail of a Company & Shares in Prospectus.  90 % application is necessary  If access application received then company issue shares by pro rata basis  full amount can be called up by company at the time of application or it can be paid up in installments also (calls)  share of the company may be issued in any of the following three ways: 1. At par; 2. At premium; and 3. At discount.
  15. 15. 15  Issue of shares for consideration other than cash (For example: issue of shares to vendors, to promoters etc.)  Forfeiture of shares  Buy – Back of Shares  Right Shares  Redemption of preference shares/ Debenture CONT….
  16. 16.  Authorised Share Capital  Issued Capital  Subscribed Capital  Called up Capital  Paid up Capital 16 Types of Share Capital
  17. 17.  The maximum value of securities that a company can legally issue. This number is specified in the memorandum of association (or articles of incorporation in the US) when a company is incorporated, but can be changed later with shareholders' approval.  Authorized share capital may be divided into (1) Issued capital: par value of the shares actually issued. (2) Paid up capital: money received from the shareholders in exchange for shares. (3) Uncalled capital: money remaining unpaid by the shareholders for the shares they have bought. Also called authorized capital, authorized stock, nominal capital,nominal share capital, or registered capital. 17 Authorised Share Capital
  18. 18.  The total of a company’s shares that are held by shareholders. A company can, at any time, issue new shares up to the full amount of authorized share capital. Also called subscribed capital, or subscribed share capital. 18 Issued Capital
  19. 19. Subscribed Capital  Subscribed Capital is the portion of the issued capital, which has been subscribed by all the investors including the public. This may be less than the issued share capital as there may be capital for which no applications have been received yet ("unsubscribed capital"). 19
  20. 20. Called up Capital  Called up share capital is the total amount of issued capital for which the shareholders are required to pay. This may be less than the subscribed capital as the company may ask shareholders to pay by instalments. 20
  21. 21. Paid up Capital  Paid up share capital is the amount of share capital paid by the shareholders. This may be less than the called up capital as payments may be in instalments ("calls-in-arrears") . 21
  22. 22.  Bonus Shares may be issued at par or at premium  Before Bonus shares are issued all the existing shares must be either fully paid or made fully paid  Whenever Bonus is declared Share Capital increases and Reserves decrease  Declaration of Bonus is known as Capitalization of reserve 22 Issue of Bonus Shares
  23. 23.  Instrument of debt executed by the company  A certificate of loan  Company pays pre specified percentage of interest  Part of the company's capital structure  Debentures are generally secured against the company’s assets  Convertible debentures can be either fully or partly converted into Shares  Convertible debentures may carry a lower rate of interest 23 DEBENTURES
  24. 24. 24  Security Point of View i. Secured Debentures ii. Unsecured Debentures  Tenure Point of View i. Redeemable Debentures ii. Perpetual Debentures  Mode of Redemption Point of View i. Convertible Debentures ii. Non-Convertible Debentures  Coupon Rate Point of View TYPES OF DEBENTURES
  25. 25. 25 ADVANTAGES 1. Control of company is not surrendered to debenture holders because they do not have any voting rights. 2. Interest on debenture is an allowable expenditure under income tax act, hence incidence of tax on the company is decreased. 3. Debenture can be redeemed when company has surplus funds. DISADVANTAGES 1. Cost of raising capital through debentures is high of high stamps duty. 2. Common people cannot buy debenture as they are of high denominations. 3. They are not meant for companies earning greater than the rate of interest which they are paying on the debentures.
  26. 26. 26 Today, I sat out on the balcony of my primary residence, overlooking the river in the forest behind my house reading through annual reports. A lot of time was spent on precious metals companies as part of the ongoing series I've been rolling out here at Investing for Beginners. Several hours, however, was spent delving into the details of car companies; specifically Ford. I was impressed by the move to repurchase their own debt at 35 cents on the dollar in the open market so I thought it would be worth a closer examination. As I was reading page 115 of the annual report, I came across a statement that is routine when studying companies with dual class structures but I realized that many of you may not know how it works. Here's the paragraph: "If liquidated, each share of Common Stock will be entitled to the first $0.50 available for distributions to holders of Common Stock and Class B Stock, each share of Class B Stock will be entitled to the next $1.00 so available, each share of Common Stock will be entitled to the next $0.50 so available and each share of Common and Class B Stock will be entitled to an equal amount thereafter."
  27. 27. 27 Looking at the most recent quarterly filing with the SEC, you discover that Ford has 2,802,397,653 shares of regular common stock and 70,852,076 shares of Class B stock. As you research further, you discover that the regular shares are entitled to elect 60% of the Board of Directors with the Class B shares entitled to elect 40%. Based upon the paragraph quoted above, they are also entitled to different amounts if the company goes into bankruptcy and there is anything remaining after the debts have been paid. Why does this exist? The Ford family owns all 70+ million shares of the Class B stock. It is a way for them to ensure they keep control of the company no matter how much stock they have to issue to avoid bankruptcy. Some argue that dual class structures are inherently unfair because you are decoupling ownership from voting power. I'm not sure I agree simply because everyone accepted those terms when the shares were first issued so you knew what you were getting into at the outset. The liquidation provisions, if I'm reading the details correctly, help to ensure that the Ford family walks away with more than the regular stockholders who bought their shares on the open market through a brokerage account in the event of a catastrophic liquidation.
  28. 28. 28 Doesn't Anyone Remember Ford's $10 Billion Dividend? One thing that interest me is that Ford burned through $21 billion in cash last year as a result of the global economic collapse. Yet, it was only nine years ago in 2000 that the company restructured and paid out a $10 billion special dividend. According to an article from that time - which, keep in mind, this is old - "The Ford family holds all 71 million shares of the company's Class B stock, along with a small number of the company's 1.1 billion common shares. Under rules designed to preserve family control and drafted when the company went public in 1956, the family holds 40 percent of the voting power at the company as long as it continues to own at least 60.7 million shares of the Class B stock -- even though the Class B shares make up only 6 percent of the company's overall equity."The article goes on to point out, "If the family sells too many shares of its Class B stock, whether to pay estate taxes, cover personal expenses or simply participate in a stock buyback, then the family's influence shrinks. If the family's holdings fall to between 33.7 million and 60.7 million shares of Class B stock, the family wields only 30 percent of the voting power. And if the family's holdings fall below 33.7 million shares then all special voting privileges are lost.
  29. 29. 29 When Class B shares are sold outside the family, they revert to common stock. Under today's plan, each holder of Ford's common or Class B stock will be given a choice of receiving $20 a share in cash or additional common stock. William C. Ford Jr., Ford's chairman and one of Henry Ford's 13 great-grandchildren, said that the members of the Ford family would take additional stock for all of their Class B stock. Most if not all family members will put the additional distribution into the family's voting trust, he added." You can accuse the car companies of completely inept management but you certainly have to give credit to the members of the Ford family for putting their money where their mouth is. They are married into the business lock, stock, and barrel.
  30. 30. 30 CONCLUSION 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.
  31. 31. 31 THANK YOU