ALL ABOUT SHARES & HOW TO ISSUE AND BUY BACK THEM? by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763
Sec. 2(46) : Share means share in the capital of a company
Types of shares : Equity preference (preference in dividend, wind up etc. ) sweet equity (for employees) share warrant (right to buy shares in future) right shares (right of existing shareholders to buy share) bonus share (freely given to existing shareholders)
Types of capital Authorised / nominal/ registered (mentioned in MOA) issued subscribed called up paid up reserve
Can a company issue irredeemable preference shares ? No only redeemable preference shares can be issued (sec. 80 of company act) – these must be redeemed in max. 20 years
Rules regarding redemption of preference shares : Redemption only out of profit / fresh issue only fully paid shares can be redeemed it must create redemption reserve fund if premium is paid at redemption, it must be from profit / security premium account
Shares with differential voting rights .... Here the shareholders get different voting rights / different dividend articles must authorise it approval of shareholders is necessary max. 25% of total equity (as per 2000 amendment – which deleted sec. 88, which didnt allow such shares)
BUY BACK OF SHARES 1999 amendment brought Sec. 77A,77AA,77B, which allowed buy back and deleted 77(1), 77(2) which didnt allow buy back
WHY BUY BACK? To increaase EPS where there is surplus profit When company has excess funds / liquidity to defend company from possible takeover bids to provide exit route to shareholders to increase market value of shares `
How to have buy back? Out of free reserves or out of security premium account or out of proceeds of fresh equity issues
How much can a company buy back? 10 % of paid up capital + reserves = if authorised by AOA + board resolution by special resolution : Max. 25% of paid up capital + reserves buy back must be completed in 12 months all the shares must be fully paid up SEBI (buy back) regulations 1998 must be followed
Rules of buy back : In 6 months company cant issue bonus / fresh issue / convert warrants into equity / sweat equity fill up form 4a & 4b must be filled with ROC ratio of debt equity ratio 2:1 read : www.sebi.gov.in/faq/buybackfaq.htm www.legalserviceindia.com/articles/shares.htm
Penalty 50000 or 2 years imprisonment for default
Prohibition of buy back (sec. 77B) When a company has defaulted in payment of deposits / repayment of interest / deposit / dividend, it cant buy back its shares when it has defaulted in submitted annual accounts as per sec. 159, 211, 207 it cant buy back shares
Case: Sterlite Buy back under sec 77A cannot be overriding to powers of the court under Sec. 100,101, 391 and therefore buy back cant be unilateral. Read : http://www.financialexpress.com/news/hc-admits-dca-plea-on-sterlite-buyback/50344/
SWEAT EQUITY SHARES SEC. 79A AS PER 1999 AMENDMENT shares of existing class only at least 1 year must have passed Special resolution as per SEBI guidelines www.sebi.gov.in/acts/sweatregu2002.html
Issues regarding sweat equity How to value / price sweat equity shares ? VERMA COMMITTEE RECOMMENDATIONS http://www.hinduonnet.com/2002/10/04/stories/2002100403471800.htm www.financialexpress.com/printer/news/55236/ - Angola
ISSUE OF SHARES AT PREMIUM / DISCOUNT DISCOUNT : MAX. : 10% (MORE – BY CLB PERMISSION) FIRST ISSUE CANT BE ON DISCOUNT PREMIUM IS TRANSFERRED TO SECURITY PREMIUM A/C AND CANT BE TREATED AS PROFIT
HOW TO USE SHARE PREMIUM AS PER 78(2) : FOR BUY BACK OF SHARES FOR ISSUE OF BONUS SHARES WRITING OFF PRELIMINARY EXP / COMMISSION / DISCOUNT FOR PREMIUM ON REDEMPTION OF SHARES
BONUS ISSUES It is for FULLY PAID UP shares http://dpe.nic.in/newgl/glch0312.htm authorised by AOA sanctioned by ordinary resolution out of free reserves (not from revaluation of fixed assets) .
Share allotment Allotment must be unconditional within reasonable time sec : 73(1A),69,72,73 and 70 must be followed – issue of prospectus, minimum subscription, min. Application money etc. Must be followed apply to stock exchanges and take permission otherwise allotment will be void (if Stock exchange refuse, apply to SAT) .
How to transfer share in private company ? Generally answer is No – private company doesnt allow share transfer (i) Transferor should give a notice in writing for his intention to transfer his share to the company. (ii) The company in turn should notify to other members as regards the availability of shares and the price at which such share would be available to them. (iii) Such price is generally determined by the directors or the auditors of the company.(iv) The company should also intimate to the members, the time limit within which they should communicate their option to purchase shares on transfer.
Minimum subscription 90% - in 120 days from prospectus otherwise return in 130 days othersie interest 6% as per SEBI guidelines, these rates have changed – so read latest SEBI guidlines www.sebi.gov.in/commreport/rep245.html www.sebi.gov.in/acts/ipguidelines.pdf
Calls Make a call - at least 5% on application, (minimum 25%) board resolution must be passed 14 day notice for calls interval of 1 month between two calls sec. 92 : advance call may be taken up
Forfeiture At least 14 day notice AOA must authorise Board resolution is necessary a person is responsible for unpaid money even after forfeiture of his shares
Underwriting commission 2.5% on debentures 5% on shares must be mentioned in prospectus agreement with underwriter must be submitted to ROC
Sebi guidelines http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=4
What is minimum subscription It must be mentioned in prospectus – as per SEBI guidelines : 90% is minimum subscription
Issue norms Issue norms must be given in prospectus. Issue must be made in 30 days of public issue closure (otherwise penal interest @15%) refund orders (if any must be despatched in 78 days). Allotment must be made by board of directors / proper authority
Transfer of shares Now it is through Demat (NSDL or CDSL) – so it is a request to these Demat companies to transfer the shares –, but earlier you had to sign a transfer deed – sec 108, to 111A gave details of transfer of shares - which was applicable in the case of physical shares.
Nomination Every shareholder can nominate a person as per sec. 109A. Thus if a person dies, his nominee will get the shares. Nominee can be minor also.
Difference between transfer & transmission ? Transfer is a voluntary act, you intentionally transfer your shares – but transmission takes place by law – suppose X dies, his shares transmitted to his nominee. Cases when tranmission takes place : 1. death 2. insovency 3. lunancy 4. any other situation prescribed by law
Transfer deed (physical shares) When you want to transfer shares, get a transfer deed, get it endorsed by registrar of companies and then it should be signed by both tranferor and transferee. It must contain particulars of shares, address of transferee. Then it should be lodged to company, which will enter name of transferee in register of shareholders. If the company wants to refuse transfer it has to inform in 2 months with reasons (like signature mismatch etc.)
GOLDEN RULE Kindersely : in Brunswick etc. v/s Muggeridge (1860) : the person issueing prospectus must give every information stricktly and scrupulously and must not omit any material information
Important rules Experts opinion only after obtaining written consent by experts Director names only after obtaining written consent by director to become the director the experts mentioned must not be connected to formation of the company (indemnify if there is false information)
When can registrar refuse to register a prospectus It is not dated it is not signed it is not accompanied with documents it is not as per company law & SEBI guidelines
STATEMENT IN LIEU OF PROSPECTUS 1. when a private company becomes a public company (within 30 days) 2. when public company is not issueing shares to public, they have to issue this. 3. when a public company doesnt allot shares to public it must have contents similar to prospectus, penalty if untrue statement : 10000 http://www.vakilno1.com/bareacts/companiesact/s44.htm
BE A PROMOTOR A Promotor is a person who sets up a company. As a promotor, you have to think about the idea and convert this idea into a company. As a promotor, you have to set up initial contracts so that company becomes operational.
Steps ...... Prepare Memorandum of association (as per format) in at least 3 copes Prepare Articles of association (as per format) in at least 3 copes (or apply Table A of schedule I) Prepare agreements with directors Submit declaration to Registrar of company that all formalities have been fulfilled (by company secretary) prepare prospectus go ahead for raising money for your dream ideas
LEGAL FORMS Form NO. 1 : declaration of all the formalities of company (to be filed with registrar of comapnies ). for other forms and their structure, click on the following link : http://www.mca.gov.in/MCA21/dca/downloadeforms/Download_eForm_choose.html http://www.vakilno1.com/froms_html/co_form.htm
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