This document discusses promoters and share capital under Indian company law. It defines promoters as individuals who help establish a company and may act as initial directors. Promoters can be remunerated for pre-incorporation services through a contract. The document also defines types of share capital like equity shares, preference shares, and sweat equity shares. It discusses how companies can raise capital through private placements, public issues, rights issues, and book building. Companies can issue shares at a premium, do bonus issues to capitalize profits, and implement employee stock option schemes. It outlines rules around buybacks of company shares.

1. Promoters
and
Share capital
Course: LLB II
Subject : Company Act
Unit: 2

2. Promoters
• They can be remunerated for their services, but they have
to enter into a contract before the incorporation of the
company through a pre incorporation of the company
• They will usually act as nominees or as the first directors
of the company
• They enter into contracts after the incorporation and
before the commencement of business.
• But they need not compulsorily participate in the
formation of the company.

3. • Sometimes , a few persons may only act as
professionals who help the promoters on behalf of the
company.. like the solicitor, chartered accountant etc..
and get paid for their services.
• The promoters in most of the cases decide as to …What
is the type of a company to be formed?
• In India promoters generally secure the management of
the company that is formed and have a controlling
interest in the company’s management

4. Legal Position of the Promoters
• They cannot make profit at the expense of the
company, which they have promoted without the
knowledge and consent of the company. In case they do
so , they may be compelled to account for it.
• They cannot sell their property to the company at a
profit unless all the material facts are disclosed at the
independent board of directors or the shareholders of
the company.
• If they do so, the company may repudiate the contract
of sale or confirm the sale after recovering the profit
made by the promoter.

5. Promoters have the following liabilities under the Companies Act, 1956
• They can be liable for non compliance of the provisions of the Act
• Severe penalty may be imposed
• The court may suspend the promoter from taking part in the
management of the company
• Liable for any untrue statement in the prospectus to the person who has
subscribed for any shares or debentures on the faith of the prospectus
The liabilities are ….
a) to set aside the allotment of shares,
b) sued for damages,
c) sued for compensation
d) criminal proceedings

6. The requirements are as follows
• Application for availability of name
• Preparation of MOA and AOA
• Selection and finalization of MOA and AOA- Its
printing, stamping and signing
• Preparation of other necessary documents
• Filling of the required documents for Registration to
obtain certificate of incorporation and Certificate of
commencement of business

7. Share Capital
• In relation to a company limited by share it means share capital
- in terms of rupees divided into specified number of shares of a
fixed amount each.
• The memorandum must state the amount of capital and its
various division.
• (a) Nominal, Authorised or Registered Capital
• (b) Issued Capital
• (c) Subscribed Capital
• (d) Called-up Capital
• (e) Un-called Capital
• (f) Paid-up Capital

8. Meaning and Nature of Shares
• "A share means a share in the share capital of a
company, and includes stocks except where a
distinction between stocks and shares is expressed
or implied." [Section 2(46)]
• "The interest of a shareholder in a company
measured by a sum of money, for the purpose of
liability in the first place and of dividend in the
second." (1)

9. Meaning and Nature of Shares
• "An interest measured by a sum of money and
made up of diverse rights conferred by Articles."
The Supreme Court of India
• "A share is right to participate in the profits made
by a company, while it is a going concern and
declares dividend, and in the assets when it is
wound up."

10. Kinds of Shares
• Two classes of Shares [Sec 86 as amended in 2002] -
(A)Equity Share [Sec 85(2)]
• "Equity Share Capital means all share capital which is not
preference share capital."
• The equity shareholders receive dividend out of profits
declared in AGMs.
• Dividend declared only after depreciation allowance and
payment of preference shareholders.
• Voting right is in proportion to paid-up equity capital. (2)

11. Kinds of Shares
(B)Preference Shares [Sec 85(1)]
• Preference shares capital is that part of share
capital which fulfills following two conditions:
• (i) carries preferential right with respect to
dividend- fixed amount or at fixed rate; and
• (ii)carries preferential right with respect to
repayment of capital on winding up. (3)

12. Sweat Equity Shares
[Sec 79A, 1999)
• Sweat Equity Shares means equity shares issued to
employees or directors
• at a discount for consideration other than cash
• for providing know-how or making available rights in the
nature of intellectual property or
• value addition by whatever name called.
• Issue must be authorised by a special resolution.
• Resolution to specify number, current market price and
consideration of shares, and the class or classes of directors
or employees.

13. Sweat Equity Shares
• One years has, at the date of the issue,
elapsed since the company was entitled to
commence business.
• If shares are listed, the issue must be in
accordance with SEBI regulations.
• All limitation, restriction and provisions of
equity shares are applicable.

14. Sources of Capital

15. From Promoters
• Private companies cannot invite general public
to subscribe its share capital.
• Public companies can raise the necessary
capital by private placement without inviting
the general public to subscribe. (not made to
more than 49 persons at a time)

16. From Public
• By issuing a prospectus.
• By an offer for sale or by deemed prospectus:
• a) Company offers/agrees to allocate shares to a
financial institution or an Issue House for sale to public.
• (b) The issue house publishes a document called an
Offer For Sale at a price higher than what its holder/s
had paid or at par.
• The document is deemed to be a prospectus u/s 64(1).

17. From Public
• By placing of shares:
• a) A broker or an underwriter finds
persons who wish to buy shares.
• (b) The broker acts merely as an agent.
• (c)No need to issue a prospectus.

18. From Existing Shareholders
• By issue of right shares to existing shareholders
[Sec 81] allotted in proportion to their existing
holding. Eg. 2 shares for every lot of 5 shares.
• Companies are required to issue Letter Of Offer
to the existing shareholders of the company.

19. Book Building
• A process by which demand for proposed securities
is build up and a fair price and quantum of the issue
is determined.
• The Book Runner Lead Manager (BRLM) maintains a
book wherein bids by individual and institutional
investors (through syndicate member-merchant
banker) are recorded.
• Syndicate member have an underwriting agreement
with BRLM and BRLM in turn enter into an
underwriting agreement with the company.

20. Book Building
• Two scheme of book building process - 75% Scheme (i.e.
75% of the issue size is offered by book building process
and the balance 25% by fixed price method) and 100%
Scheme (i.e. the entire issue size is offered by way of
book building process).
• SEBI has allowed all companies to make issue through
Book Building (earlier upwards of Rs 25 crores issue).
• 60% of issue size through Book Building Process be
issued to QIBs failing this, the company is required to
make maximum public offering of 25%.

21. Issue of Shares at a Premium [Section
78]
• Companies may issue shares at premium irrespective
of the fact whether the shares are listed or not.
• No restriction in Companies Act on issue at premium,
the only restriction is on the utilization of premium
amount.
• Premium cannot be treated as profit as such the
amount not available for distribution as dividend.
• Premium amount must be kept in separate account
called Securities Premium Account.

22. Issue of Shares at a Premium
• If premium is received in kind, an amount equal to premium
amount must be transferred to Securities Premium
Account.
• Premium to be used only for the following purposes as
mentioned in Section 78(2):
• (i) for issuing fully paid bonus shares;
• (ii) for writing off preliminary expenses;
• (iii) for writing off commission, discount expenses on
issue of debentures; and
• (iv) for providing for premium payable on redemption of
Redeemable Preference Shares or debentures.

23. Further Issue of Shares
[Section 81]
• Called Right Shares.
• May be issued at any time after two years from
incorporation or one year from first allotment, whichever is
earlier.
• Must be offered to the existing shareholders in proportion
to their holding.
• For listed company, information on quantum and
proportion shall be supplied to the concerned stock
exchange.
• Company must give notice of offer and the number of
shares offered to existing shareholders.

24. Further Issue of Shares
• Give shareholders 15 days to decide.
• The notice must state the shareholder's right to renounce
the offer in whole or in part in favour of some other
person.
• The board may dispose of the shares in a manner
beneficial to the company.
• Condition of issue of shares to persons other than existing
shareholders.
• [Section 81 (1A)]:
• 1. Pass a special resolution in general meeting, and
• 2. In case of ordinary resolution Central Govt.'s approval
must be obtained.

25. Bonus Issue
• When company accumulates large distributable
profits it convert it into capital.
• Divide the capital among the existing shareholders
in proportion to their entitlement.
• Members do not have to pay for such shares.
• Bonus issue is a machinery for capitalizing
distributable profits.
• Bonus shares is not income and hence not taxable.

26. Bonus Issue
• Paid-up capital increases.
• Conversion of free reserves, like general reserve,
capital redemption reserve, development rebate
reserve, securities premium account, etc.
• Must be authorised by the Articles.
• Must be sanctioned in the AGM on the
recommendation of the board.
• Authorised capital must be increased wherever
necessary.

27. Employee Stock Option Scheme
• "Employee 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 pre-
determined price." [Section 2(15A)]

28. Employee Stock Option Scheme
• The offer is subject to approval of shareholders
by a special resolution.
• Minimum one year period is prescribed between
the grant of offer and its vesting.
• After the lapse of one year the period would be
determined by the company.
• ESOP Scheme to be under the superintendence
and direction of Compensation Committee of the
board.

29. Prohibition on Buy Back
• A company cannot buy its own shares as it
amounts to reduction of share capital without
court's consent. [Section 77(1)]
• A company may not get another person to buy
its share on its behalf, indirectly.
• A public company or its subsidiary must not
finance the purchase, directly or indirectly, of
its own shares or of its holding company.

30. Exceptions
• Company may redeem redeemable preference shares u/s
80.
• A banking company may lend money in the ordinary
course of business to buy shares.
• Financial assistance for purchase of fully paid shares by
trustee of or for share held for the benefit of employees
of the company.
• Loan may be advanced to the bona fide employee other
than directors, or managers to purchase fully paid shares
for amount not exceeding six months' salary / wages.
• Company may buy its share from a member under a Court
order under Section 402.

31. Buy back of own share u/s 77A
• Subject to provision of Sub section (2) of Section 77A
& 77B a company may purchase its own shares or
other specified securities, out of:
• Its free reserve, securities premium account, or
proceeds of any shares or specified securities.
• Buy back may be in one of the following modes:
• From existing security holder on proportionate basis
(tender method).

32. Buy back of own share u/s 77A
• From the open market (through Stock
Exchanges).
• From odd lot holders.
• From employees securities issued under ESOP
or Sweat Equity.
• All shareholders must have same right of
participating in the buy-back.

33. Conditions of Buy-back
• Must be authorised by the Articles.
• Special resolution is AGM authorizing Buy-back.
• Buy-back is, or less than, 25% of paid-up capital
or free reserves in that financial year.
• Debts owned by company is not more than
twice its capital and free reserves after such
buy-back. (Central Govt. may relax the ratio)
• Buy-back should complete within 12 months
from passing of special resolution.

34. Conditions of Buy-back
• Declaration of solvency (Form 4A) signed by the
MD and one director must be filled with the
RoC and SEBI.
• After buy-back is complete the securities must
be physically destroyed within 7 days.
• Company shall not make a further issue of
shares / securities for 6 months, except by way
of bonus shares.
• Prescribed return in Form 4C to be filled with
RoC and SEBI within 30 days.

35. Conditions of Buy-back
• The company must maintain a register of buy-
back mentioning the consideration paid, date of
cancellation / destruction of securities.
• Contravention of Section 77A would make the
company or officer punishable with fine up to Rs
50,000 and /or imprisonment up to 2 years.
• If buy-back is out of free reserve, a sum equal to
the nominal value of shares be transferred to
securities premium account and disclose in the
balance sheet.

36. references
• 1. www.zitima.org
• 1a.http://www.mca.gov.in/Ministry/pdf
/Companies_Act_1956_13jun2011.pdf pg266
• 2.http://www.mca.gov.in/Ministry/pdf
/Companies_Act_1956_13jun2011.pdf pg:307
• 3.http://www.mca.gov.in/Ministry/pdf
/Companies_Act_1956_13jun2011.pdf pg:307

37. Thank you