Module - III Share Capital Module - III Share Capital Dr. K. Srinivasan Department of Management Studies Christ University, Bangalore

Prospectus   Prospectus is an invitation issued to the public to purchase or subscribe shares or debentures of, a body corporate.   Every prospectus must be dated. The date of publication and the date of issue must be specifically stated in the prospectus.   The golden rule of the prospectus is that every detail has to be given in strict and meticulously. The material facts given in the prospectus are presumed to be true. (New Brunswick & Canada Railway. Land & Co. Vs. Muggerridge).

Types of Prospectus   Shelf Prospectus: Prospectus issued by financial institution & bank, by issuing one prospectus they can go for multiple issue of shares.   Deemed Prospectus: When the offer is made through Issue Houses, the document issued by them should contain the requirements of prospectus.

Continued….   Abridge Prospectus: Shorter description of the prospectus & contains all prominent features of a Prospectus. In other words it is executive summary of prospectus.   Red Herring Prospectus: Share offered to the public in different price range, the shareholder can apply at the price suitable to them, all the information except the price of share is mentioned.

Appointment of Bankers   Issue of Prospectus & Application of Shares is to be deposited.   Resolution should be passed to CEO & members about Bank & its Operation.   Bank account for specific purposes, later current account for subsequent transactions.   To open a bank account, the secretary should disclose the following documents; they are

Continued….   Memorandum of Association   Articles of Association   Certificate of Incorporation   Board Resolution & Authorized authority for opening bank account.   Director & Secretary specimen signature.

Registration of Prospectus  Consent of the expert to the Issue  Copy of every contract, appointing of fixing the remuneration of managing director or manager.  Written statement by the persons making the report required by Part II of Schedule II relating to adjustments.  Consent in writing of the person name in the prospectus as the Auditor, Legal Advisor, Banker & Broker of the Company

Objects of Registering Prospectus   To ensure the copy of the prospectus shall always be available for inspection by the public at the Registrar’s office.   To keep an authenticated records of the terms and conditions of issue of shares or debentures.   To pinpoint the responsibility of the persons issuing the prospectus.

Contents of the Prospectus Part I of Schedule II   General Information   Capital Structure of the Company   Terms of Present Issue   Particulars of the Issue   Company, Management & Projects   Company Details & Other listed company under same Management   Outstanding Litigations   Management and Perception of Risk Factor

Continued….. Part II of Schedule II   General Information   Financial Information Report by the Auditor Reports by the Accountants Principle terms of Loans & Assets charged on Security   Statutory & Other Information Minimum Subscription Expenses of the Issue

Continued…. Underwriting Commission Previous Public Issues Commission & Brokerage of Previous Issue Debentures & Redeemable Preference Shares Issued at the time of Prospectus. Option to Subscribers Restriction on Transfer & Transmission Revaluation of Assets Right of Member like Voting, Dividend etc. Material Contracts & Inspection of Documents

Part III of Schedule II   Company carrying on business for less than 5 financial years, referring to 5 financial years means reference to number of financial years   Reasonable time & place at which the copies of all Balance Sheet, P & L Account, Auditors reports & other documents must be inspected.   Time and the year wherever used here is earlier means financial year should be dated & signed by the directors. Continued….

Remedies for Misstatements in Prospectus   Relying on the prospectus if any person buys shares, the person may rescind the contract. The rescission has to be done within a reasonable time   Damages can be claimed from the directors, promoters or other persons who has authorized their name to be written during the issue of the prospectus

Statement in Lieu of Prospectus (SLOP) When the public company does not invite public to subscribe for its shares, but arrange to get money from private sectors, it need not issue a prospectus to the public. In such a case, the promoters are required to prepare a draft prospectus known as “Statement in Lieu of Prospectus”

  A Company having a share capital, but not having prospectus can allot shares or debentures 3 days before the allotment, there has been delivered to the Registrar for registration in (SLOP).   Shares or debentures are allotted without the SLOP, the director can be punishable with a fine which may extend to Rs. 10,000.   SLOP includes untrue statement, any person who authorized can be punishable with imprisonment for 2 years and fine extended to Rs. 50,000 or with both. Continued….

Allotment of Shares   Palmer defines “the appropriation to an applicant by a resolution of the directors of a certain number of shares in response to an application”.   After the subscription list has been closed and all the share application have been received by the bank, the share application and allotment list is prepared. The directors then proceed for allotment.   The provisions relating to allotment of shares may be studied under two heads; they are General Provisions contained in Indian Contract Act 1872 and Special Provisions contained in Companies Act 1956.

Continued…. General Provisions Proper Authority Within Reasonable Time Must be Communicated Absolute and Unconditional Revocation of Offer to take Shares & Allotment Specific Provisions When No Public Offer is Made When Public Offer is Made

Secretarial Duties Before Allotment  Arrange for Company Special Bank Account for receiving Application Money.  Check share applications & money received by the company has been sent to the bank.  Scrutinizing & Sorting out the Application on receipts and marking with serial number.  Incomplete, Irregular or Insufficient Money applicants are requested to remit the balance.  Issue Public notification through Press about the last date of subscription.  Check the Application Form & Money collected is proper with the bank.

Share Capital Share Capital means the Investment raised by the Company by issue of Shares.   A share is a share in the share capital of the company including the stock.   Share gives a right to participate in the profits of the company, or a share in the assets when the company is going to be wound up.

Classification of Instruments   Pure Instruments   Hybrid Instruments   Derivative Instruments

Equity Shares   Equity Shares, other than Non-Voting Shares, have voting rights at all general meetings of the company. Thus, it affect the controlling power of the management.   Equity shares have the rights to share the profits of the company in the form of Dividend or Bonus Shares. Non-voting Shares enjoy larger benefits in this regard. But, higher dividend can be declared by Board of Directors.

Continued…..   If Company wound up, payment towards Equity Share Capital will be made after Preference Share Holders, Debentures and Creditors.   Equity Share holders has the rights to Fresh Issue of Capital, Rights to apply to the Court, Receive Copy of Statutory Report before holding of Statutory Meeting, Rights to call AGM, Meetings, Extra-ordinary Meeting, Auditors Report, Directors Report and Other Information

Non-Voting Shares   Due to Globalization, Corporate, Foreign Investors like FII, FDI are now permitted to bring their low cost finance and invest in Indian leading Companies.   But Foreign Investors and NRI’s who are looking for a source of Investment and Not for taking over Management control, so they can attract adequate resources for expansion & Growth.   Non-Voting Shares are now permitted to issue the capital as per Company Act 1956 with certain restrictions

Continued….   It is separately listed and pay higher dividend on these shares.   In case, if the dividends are not paid for a specific period, the shareholders gets the voting rights as per Equity Share.   Due to Non-Voting shares, Company can Garner additional Net Worth. Pherwani Committee & Abid Hussain Committee Recommended

Preference Shares   Cumulative Preference Shares   Non-Cumulative Shares   Convertible Preference Shares   Redeemable Preference Shares   Irredeemable Preference Shares   Participating Preference Shares   Non-Participating Shares

Debentures   Naked or Unsecured Debentures   Secured or Mortgage Debentures   Redeemable Debentures   Perpetual Debentures   Bearer Debentures   Registered Debentures Based on Convertibility   Fully convertible Debentures   Non Convertible Debentures   Partly Convertible Debentures

Alteration of Share Capital A limited company with a share capital may, if so authorized by its articles to alter its share capital as follows   Increase its capital by creation of new shares   Consolidate & Divide all part of its share capital into shares of larger number.   Convert fully paid-up shares into stock.   Sub-divide its shares into smaller amount & equal proportion between the amount paid & the holding amount.   Cancellation of shares as per the rules of Company Act 1956.

Depositories Act 1996 A depository is a provider for holding and transacting securities in electronic form. A depository functions somewhat similar to a commercial bank. Free Transferability of securities with speed, accuracy and security with these major specifications;   Making Securities of Public Limited Companies freely transferable subject to certain expectations.   Dematerializing the securities in Demat mode.   Providing for maintaining of ownership records in a book entry form