Chapter 3: Issue of Shares
Select the correct answer from the options given below and rewrite the statement.
______ refers to capital made up of Equity and preference shares
Share capital
Debt capital
Reserve fund
Solution:
Share capital refers to capital made up of Equity and preference shares
______ capital refers to maximum capital a company can raise by issuing shares.
Issued
Authorised
Paid-up
Solution:
Authorised capital refers to maximum capital a company can raise by issuing shares.
______ means shares are offered to the public.
Rights Issue
Private Placement
Public Issue
Solution:
Public Issue means shares are offered to the public.
Under ______ method, issue price of shares is based on bidding.
Book Building
Fixed Price
Bonus Issue
Solution:
Under Book Building method, issue price of shares is based on bidding.
In ______, shares of a company are offered to the public for the first time.
Further Public Offer
Initial Public Offer
Public Offer
Solution:
In Initial Public Offer, shares of a company are offered to the public for the first time.
______ is offered to existing equity shareholders.
IPO
ESOS
Rights Issue
Solution:
Rights Issue is offered to existing equity shareholders
Bonus shares are issued free of cost to ______
existing Equity shareholders
existing employees
Directors
Solution:
Bonus shares are issued free of cost to existing Equity shareholders.
______ are offered to permanent employees, Directors and Officers of a company.
Bonus Shares
Rights Issue
ESOS
Solution:
ESOS are offered to permanent employees, Directors and Officers of a company.
Under ______, a company offers its securities to a select group of persons not exceeding 200.
Private Placement
IPO
Public Offer
Solution:
Under Private Placement, a company offers its securities to a select group of persons not exceeding 200.
The ______ have the power to allot shares.
Director
Board of Directors
Company Secretary
Solution:
The Board of Directors have the power to allot shares.
Letter of ______ is sent to applicants who have been given shares by the company.
Regret
Renunciation
Allotment
Solution:
Letter of Allotment is sent to applicants who have been given shares by the company.
______ is a proof of title to Shares.
Share Certificate
Register of Member
Letter of Allotment
Solution:
Share Certificate is a proof of title to Shares.
The gap between two calls should not be less than ______
14 days
One month
21 days
Solution:
The gap between two calls should not be less than One month.
Company can ______ shares on non-payment of calls.
forfeit
surrender
allot
Solution:
Company can forfeit shares on non-payment of calls.
Voluntarily giving away one's share to another person is called as _______ of shares.
Transfer
Transmission
Surrender
Solution:
Voluntarily giving away one’s share to another person is called as Transfer of shares.
______ of shares takes place due to operation of law.
Forfeiture
Allotment
Transmission
Solution:
Transmission of shares takes place due to operation of law.
Match the pairs.
Solution:
Match the pairs.
Solution:
Write a word or a term or a phrase which can substitute the following statement.
Capital collected by way of issue of Equity and Preference shares.
Solution:
Capital collected by way of issue of Equity and Preference shares. - Share Capital
Part of issued capital subscribed by investors.
Solution:
Part of issued capital subscribed by investors. - Subscribed capital
Capital that will be collected only at the time of winding up of a company
Solution:
Capital that will be collected only at the time of winding up of a company - Reserve capital
Offering of shares by a company to the public for the first time.
Solution:
Offering of shares by a company to the public for the first time. - Initial public offer (IPO)
Subsequent issue of shares after an IPO.
Solution:
Subsequent issue of shares after an IPO. - Further Public Offer/ Follow on Public Offer (FPO)
Pre-emptive right given to existing Equity shareholders to subscribe to new issue of shares by company.
Solution:
Pre-emptive right given to existing Equity shareholders to subscribe to new issue of shares by company. - Rights Issue of shares
It is also called as ‘Capitalisation of Profits’
Solution:
It is also called as ‘Capitalisation of Profits’ - Retained Earnings
Appropriation of shares to an applicant.
Solution:
Appropriation of shares to an applicant. - Allotment of shares
Committee set up to decide the formula for allotment of shares in case of over subscription.
Solution:
Committee set up to decide the formula for allotment of shares in case of over subscription. - Allotment committee
Minimum amount to be collected from subscribers within thirty days of issue of prospectus.
Solution:
Minimum amount to be collected from subscribers within thirty days of issue of prospectus. - Minimum subscription amount
Document which is a prima facie evidence of ownership of certain shares of a company
Solution:
Document which is a prima facie evidence of ownership of certain shares of a company. - Share certificate
Penal action taken by company on non-payment of calls.
Solution:
Penal action taken by company on non-payment of calls. - Forfeiture of shares
Person to whom transferor is transferring the shares.
Solution:
Person to whom transferor is transferring the shares. - Transferee
Transfer of shares due to operation of law.
Solution:
Transfer of shares due to operation of law. - Transmission of shares
State whether the following statement is true or false.
Only fully paidup shares can be forfeited.
True
False
The member transferring shares is called as transferor.
True
False
Share certificate is issued for partly or fully paid up shares.
True
False
Allotment of shares must be done within one month of receipt of application money.
True
False
Sweat Equity shares are offered to Directors or employees of a company.
True
False
Bonus Shares are issued at a discounted price to the Equity shareholders.
True
False
Floor price is the highest bid price under Book Building method.
True
False
Calls not paid by shareholder is called as calls in arrears.
True
False
Shares not offered to the public for subscription is called as subscribed capital.
True
False
Authorised capital is mentioned in capital clause of Memorandum of Association.
True
False
Find the odd one.
Authorised capital
Equity share capital
Issued capital
Paidup capital
ESOS
ESPS
Rights Shares
Sweat Equity
Floor Price
Cap price
Cut-off price
Face Value
Bonus shares
Rights Shares
ESOS
Allotment of shares
Forfeiture of shares
Surrender of shares
Complete the sentence.
Share capital refers to capital made up of Equity shares and ____________
Solution:
Share capital refers to capital made up of Equity shares and Preference shares.
Reserve capital is part of ______
Solution:
Reserve capital is part of Uncalled capital
Transfer of shares due to death, insolvency or insanity of member is called ______
Solution:
Transfer of shares due to death, insolvency or insanity of member is called Transmission of shares.
The two parties involved in transfer of shares are transferor and ______
Solution:
The two parties involved in transfer of shares are transferor and Transferee.
Voluntarily giving up of shares by a member due to inability to pay calls is called as ______
Solution:
Voluntarily giving up of shares by a member due to inability to pay calls is called as Surrender of shares
Company can forfeit only ______ paid shares.
Solution:
Company can forfeit only Partly paid shares.
In case the original Share Certificate is torn or mutilated, company can issue ______
Solution:
In case the original Share Certificate is torn or mutilated, company can issue Duplicate share certificate.
In case of transfer of shares, company has to issue to the transferee a new share certificate within ______
Solution:
In case of transfer of shares, company has to issue to the transferee a new share certificate within ______
Letter sent to applicants for informing them shares are allotted is called as ______
Solution:
Letter sent to applicants for informing them shares are allotted is called as Letter of allotment
When applications received are more than the number of shares offered, it is called as ______
Solution:
When applications received are more than the number of shares offered, it is called as Over subscription.
In Book Building Method, the final price at which shares are offered to investors is called as ______
Solution:
In Book Building Method, the final price at which shares are offered to investors is called as Cut-off price.
Shares issued free of cost to existing Equity shareholders is called as ______
Solution:
Shares issued free of cost to existing Equity shareholders is called as Bonus shares.
Select the correct option from the bracket.
(First time offer of shares, Shares offered to public, Shares offered to existing Equity shareholders, Shares offered to existing employees, Transmission of shares)
Solution:
Answer in one sentence.
When does transmission of share take place?
Solution:
Transmission of share takes place after the death, insolvency, or insanity of the shareholder. Parties involved in transfer.
Name the parties involved in transfer of shares.
Solution:
The parties involved in the transfer of shares are Transferor and Transferee.
What is the time limit to issue a share certificate on allotment of shares?
Solution:
The time limit to issue a share certificate on the allotment of shares is of maximum 2 months.
What is the time limit for filing Return of Allotment with the Registrar on allotment of shares?
Solution:
The time limit for filing Return of Allotment with the Registrar is 30 days after the allotment of shares.
When can a company forfeit shares?
Solution:
When the shareholder fails to pay the full amount of share which he agreed to pay in installments, the company can forfeit his shares.
What is a share certificate?
Solution:
When the shareholder fails to pay the full amount of share which he agreed to pay in installments, the company can forfeit his shares.
What is the minimum application money to be collected by the company as per the Companies Act?
Solution:
As per the Companies Act, the minimum application money to be collected by the company is 25% of the nominal value of shares.
With whom should the prospectus be filed before issuing it to the public?
Solution:
Before issuing it to the public, a copy of the prospectus must be filed with the Registrar of Company (ROC).
What is meant by private placement?
Solution:
If a company offers shares to a selected group of investors, not exceeding 200 to raise capital is called private placement.
To whom is Sweat Equity Shares offered by a company?
Solution:
Sweat Equity Shares is offered to its Directors or Employees at a discount, by a company.
To whom can a company issue Bonus Shares?
Solution:
The company can issue Bonus Shares to its existing equity shareholders.
What is the subsequent issue after IPO called as?
Solution:
The subsequent issue after Initial Public Offer (IPO) is called as Further Public Offer (FPO)
Name the method under which the issue price of shares is fixed through a bidding process.
Solution:
The method under which the issue price of shares is fixed through a bidding process called as 'Book Building Method'.
What is Public Issue?
Solution:
Shares offered to public by a company through the prospectus, is called as a public issue.
Name the capital which is mentioned in the capital clause of Memorandum of Association.
Solution:
The capital which is mentioned in the capital clause of the Memorandum of Association is called as 'Authorised Capital.
Correct the underlined word and rewrite the following sentence.
Issued capital is the maximum capital which a company can raise by issuing shares.
Solution:
Authorised capital is the maximum capital which a company can raise by issuing shares.
Under Fixed price issue method, the price of shares is fixed through bidding process
Solution:
Under book building method the price of shares is fixed through bidding process.
FPO refers to offering of shares to the public for the first time.
Solution:
IPO refers to offering of shares to the public for the first time.
Only fully paid up shares can be forfeited.
Solution:
Only partly paid shares can be forfeited.
Bonus shares are offered to existing employees of a company.
Solution:
Bonus shares are offered to existing equity shareholders of a company.
Company enters into an underwriting agreement with the shareholders.
Solution:
Company enters into an underwriting agreement with the underwriters.
Letter of Allotment is sent to applicants when no shares are allotted to them.
Solution:
Letter of Regret is sent to applicants when no shares are allotted to them.
Duplicate share certificate must be issued within one month from date of application.
Solution:
Duplicate share certificate must be issued within three months from date of application.
Call money cannot exceed 5% of nominal value of shares.
Solution:
Call money cannot exceed 25% of nominal value of shares.
Arrange in proper order.
Forfeiture of shares,
Calls on shares.
Allotment of shares.
Solution:
(c) Allotment of shares
(b) Calls on shares
(a) Forfeiture of shares
Share certificate
Allotment letter
Application form
Solution:
(c) Application form
(b) Allotment letter
(a) Share certificate
Return of allotment
Application form
Minimum subscription
Solution:
(b) Application form
(c) Minimum subscription
(a) Return of allotment
Explain the following term/concept.
Transmission of shares
Solution:
(a) Transmission of shares means the transfer of shares by operation of law, i.e. shares of a member are automatically transferred to another person.
(b) Transmission of shares happens on a specific event such as death, insolvency, or insanity of shareholders.
Bonus shares
Solution:
(a) Bonus issues refers to the fully paid up shares given to its existing equity shareholders without any cost, based upon the number of shares they own.
(b) Such shares are given by the company as a gift to its existing equity shareholders out of its profits or reserves.
Allotment of shares
Solution:
(a) Allotment of shares means the company allots (to give) shares to the general public. Allotment means the distribution of shares among the applicants. When a public company wants to issue the shares to the general public, it has to issue prospectus to invite the general public to subscribe to its shares.
(b) In response to it, the general public may apply for shares of the company, they are known as 'Share Applicants'. The Board of Directors takes the decision regarding the allotment of shares by passing a resolution.
Employees Stock Option Scheme
Solution:
(a) Under this scheme, the company offers certain shares from the new issue to the whole time directors, officers, or employees of the company.
(b) The company offers the shares at a predetermined price which is usually less than the price offered to the general public.
Surrender of shares
Solution:
(a) Surrender of shares means the return of shares by the shareholder to the company for cancellation. Holder in this case voluntarily abandons all his shares in favour of the company.
(b) The power to accept the surrender of shares cannot be exercised by a company unless expressly given by the Articles of Association. Only partly paid-up shares can be surrendered. Surrendered shares can be reissued in the same way as forfeited shares.
Sweat Equity shares
Solution:
(a) Sweat equity shares are such equity shares, which are issued by a company to its directors or employees at a discount or for consideration, other than cash.
(b) The issue of sweat equity shares allows the company to retain the employees by rewarding them for their services.
Share certificate
Solution:
(a) Share certificate is a registered document of title to the shares issued by the company under its common seal, duly stamped by at least two directors and counter signed by the secretary of the company.
(b) It is issued by both public and private companies in respect of partly or fully paid up shares. Since it is a registered document of the title of share, it only is transferred by following the procedure laid down in Articles of Association.
Authorised capital
Solution:
(a) This is the amount of capital stated in the capital clause of the Memorandum of Association. It is also known as "Nominal Capital" or "Registered Capital”.
(b) The company is entitled to raise finance by the issue of shares only up to the amount of authorised capital. However, the company can increase the amount of authorized capital by altering the Memorandum suitably.
Forfeiture of shares
Solution:
(a) Forfeiture of shares is a process where the company forfeits the shares of a member or shareholder who fails to pay the call on shares or installment of the issue price of his shares within a certain period of time after they fall due.
(b) In other words, when the shareholder fails to pay the full amount of share which he agreed to pay in installments, the company can cancel his shares. The company will give 14 days' notice; after 14 days if the shareholder does not pay the company will forfeit his shares and strike his name from the register of shareholders.
Paid-up capital
Solution:
(a) Paid-up Capital is the part of called up capital which is actually paid by the shareholders.
(b) In other words, paid-up capital is the total amount of money actually paid by shareholders when the company has called up or demanded them to pay.
Calls on shares
Solution:
(a) Calls on shares mean the demand made by the company on its shareholders holding partly paid shares to pay part or full unpaid amount on the shares.
(b) A call may be defined as "A demand made by the company on its shareholders to pay whole or part of the balance remaining unpaid on each share at any time during the lifetime of a company".
Subscribed capital
Solution:
(a) It is that part of the issued capital which is taken up by the public. Sometimes, the public may not take up all the shares that are offered to the public, for a subscription.
(b) In such a case, the subscribed capital shall be less than the issued capital. If the public subscribe to all the shares, it shall be equal to the issued capital.
Minimum subscription
Solution:
(a) Minimum subscription is the minimum amount raised by the company for obtaining a trading certificate and to start the work of allotment of shares. This amount is mentioned in the prospectus.
(b) It must be collected within thirty (30) days from the issue of prospectus. The minimum subscription amount should be 90% of the issued capital.
Transfer of shares
Solution:
(a) Transfer of shares means the transfer of ownership of shares from one person to another.
(b) Transfer of shares takes place when the shareholder wants to sell his shares or give as a gift to another person. Shares can only be transferred by following the procedure laid down in the Articles of Association.
Initial Public Offer
Solution:
(a) An Initial Public Offer (IPO) is a process of offering shares to the general public for the first time. A public company makes an appeal to the general public to purchase its shares by issuing the prospectus
(b) The prospectus contains detailed information about the company, its project, and shares. It also includes an application form free of cost.
Blank transfer
Solution:
(a) When a member signs the Instrument of transfer without filling in the name of the transferee and hands it over to the transferee along with the share certificate, it is called 'Blank Transfer'.
(b) Blank transfers can be deposited with a bank when shares are being used as security for a loan. A blank transfer can also be used when shares are held by nominees, the beneficial owner holding the blank transfer.
Further Public Offer
Solution:
(a) Follow-on Public Offering or Further Public Offer, is the process of offering shares to the public, after the process of IPO.
(b) In FPO, the company goes for a further issue of shares to the general public with a view to diversifying its equity base. The shares are offered for sale by the company through the prospectus.
Forged transfer
Solution:
(a) An instrument on which the signature of the transferor is forged is called forged transfer. It is a null transfer and does not confer any title.
(b) It is so because in the case of forgery there is not merely an absence of free consent but there is no consent at all.
Rights Issue
Solution:
(a) The Company issue shares to its existing equity shareholders in the proportion of shares held by them. Such shares issued is called as Rights Issue' of shares.
(b) Under the Rights issue, such shareholders are given pre-emptive rights to apply for new shares.
Private placement
Solution:
(a) If a company offers shares to a selected group of investors, not exceeding 200 to raise capital, is called private placement.
(b) The selected group can be mutual funds, banks, insurance companies, pension funds and so on.
Study the following case/situation and express your opinion.
Eva Ltd. Company's capital structure is made up of 1,00,000 Equity shares having face value of ₹ 10 each. The company has offered to the public 40,000 equity shares and out of this, the public has subscribed for 30,000 equity shares. State the following in ₹.
Authorised capital
Subscribed capital
Issued capital
Solution:
In the above case, Eva Ltd. Company has 1,00,000 equity shares having face value of ₹10 each. Therefore, the Authorised capital is Rs. 10,00,000 (1,00,000 equity shares @ ₹ 10 per share)
In the above case, the public has subscribed for 30,000 equity shares. Therefore, the subscribed capital is Rs 3,00,000 (30,000 equity shares @ ₹ 10 per share)
In the above case, the company has offered to the public 40,000 equity shares. Therefore, the issued capital is ₹ 4,00,000 (40000 equity shares @ 10 per share)
TRI Ltd. Company is newly incorporated public company and wants to raise capital by selling Equity shares to the public. The Board of Directors are considering various options for this. Advise the Board on the following matters :
What should the company offer - IPO or FPO?
Can the company offer Bonus Shares to raise its capital?
Can the company enter into Underwriting Agreement?
Solution:
In the above case, TRI Ltd. Company is newly incorporated public company and wants to raise capital by selling equity shares to the public. Therefore, the company should offer IPO (Initial Public Offer).
No. The company cannot offer Bonus Shares to raise its capital. This is because Bonus Shares are given to its existing equity shareholders and it is given out of accumulated distributable profits or reserves. Whereas, TRI is newly incorporated company, so it will not have sufficient profit to give bonus shares.
Yes. The company can enter into an Underwriting Agreement with underwriters by paying them a commission. The underwriters assure the company to take up the unsold shares so that the company is able to raise its minimum subscription.
Silver Ltd. Company has recently come out with its public offer through FPO. Their issue was over subscribed. The Board of Directors now wants to start the allotment process. Please advise the Board on:
Should the company set up allotment committee?
How should the company inform the applicants to whom the company is alloting shares?
Within what period should the company issue share certificate?
Solution:
In the above case, the board of directors now wants to start the allotment process. Therefore, the company must set up an allotment committee, Allotment committee will decide the basis of allotment and submit a report to the board of directors.
At the board meeting, a resolution is passed to allot shares. After passing the resolution, the secretary has to issue a Letter of Allotment to those applicants whom the company is allotting shares
The company should issue a share certificate within two months from date of allotment.
Red Tubes Ltd. has made a demand on its shareholders to pay the balance unpaid amount of ₹ 20/- per share (having a face value of ₹ 100) held by them. The company has sent letters asking the shareholders to pay the money to its Bankers within the specified time.
Are the shareholders liable to pay ₹ 20 for the shares held by them?
Name the letter sent by the company to its shareholders asking them to pay ₹ 20/-
What happens if a shareholder fails to pay the money within the specified time?
Solution:
Yes. The shareholders are liable to pay ₹ 20 for the shares held by them. This is because it is the responsibility of every shareholder to pay the call money as demanded by the company.
The company has to send the call letter to shareholders for the payment of call money. This letter is sent by ordinary post.
If a shareholder fails to pay the money within the specified time, then the company sends a warning letter and after that, the company can forfeit (cancel) the shares of the shareholders.
X owns 100 shares while Y owns 500 shares of Red Tubes Ltd. The company has asked all its shareholders to pay the balance unpaid amount of ₹ 20. X pays the full money demanded by the company. Y, who is in a bad financial position is unable to pay any money.
Can the company forfeit the shares of Y?
Can the company forfeit the shares of X?
Can X transfer his shares?
Solution:
In the above case, Y owns 500 shares and unable to pay any money due to a bad financial position. Therefore, the company can forfeit the shares of Y.
In the above case, X owns 100 shares and pays the full money demanded by the company. Therefore, the company cannot forfeit the shares of X.
Yes. X can transfer his shares. For this, X has to fill-up the form for renunciation and have to submit it with the original copy of the Letter of Allotment to the company. After the approval of the Board, the secretary enters the name of new allottees in the application and in the allotment list.
Distinguish between the following.
Initial Public Offer and Further Public Offer
Fixed Price Issue and Book Building
Rights Shares and Bonus Shares
Transfer of Shares and Transmission of Shares.
Answer in brief.
What is the Book Building Method?
Solution:
Under this method, the issuer company determines the number of shares and the issue price at which its shares will be sold by the bidding process.
The company issues a Red Herring Prospectus which contains a price range or price band and asks the investors to bid on it.
Here, the minimum price of bid is called 'Floor Price' or 'Ask Price and the maximum price of bid is called 'Cap Price or 'Bid Price'.
The final price at which shares are offered to the investors is called as 'Cut-Off price. The bids along with the application money is to be submitted to the Lead Merchant Bankers called as 'Book Runners' who enter the bids in a book.
After bidding is over, the company fixes 'cut off-price' based on the highest or best price at which all shares on offer can be sold.
State the provisions for Rights Issue.
Solution:
The Company issue shares to its existing equity shareholders in the proportion of shares held by them. Such shares issued is called as Rights Issue' of shares.
The provisions related to the Rights Issue are as follows:
Rights shares are sold to the existing shareholders at a price which is lesser than its market price.
A company has to send a Letter of an offer to the existing shareholders at the time of issuing Rights shares.
The letter of offer shall mention:
- The number of shares offered.
- The period of offer i.e. offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of the offer.
- The right to renounce i.e. the shareholders have a right to give up their shares in favour of any other person.
The letter of offer can be sent by registered post, speed post, courier, or through electronic mode.
If the shareholder does not respond to the Rights Issue offer within a stipulated time, it is implied that he is not interested in the offer and the company can offer the unsold shares to new investors.
The company has to obtain a minimum subscription i.e. 90% of the issue.
State the provisions related to Bonus Shares.
Solution:
Bonus issues refer to the fully paid-up shares given to its existing equity shareholders without any cost, based upon the number of shares they have. Provisions related to Bonus Shares are as follows:
A company can issue Bonus Shares only out of:
• Free reserves or
• Securities Premium Account or
• Capital Redemption Reserve Account
A company cannot issue Bonus Shares only out of reserves created by the Revaluation of Assets.
The company also cannot issue bonus shares instead of paying a dividend.
Once the announcement for Bonus Shares is made by the Board of Directors then it cannot be withdrawn.
Bonus shares are fully paid up shares. Shareholders cannot give away their bonus shares to another person.
There is no minimum subscription to be collected.
State the general principles/rules for allotment of shares.
Solution:
Allotment of Shares means Company allots (to give) shares to the general public. Allotment means the distribution of shares among the applicants.
The general principles/rules for allotment of shares are as follows:
Communication: The decision regarding allotment must be communicated to the applicants. It means the company should inform the investors in writing and then share the applicant and the company enters into a contract.
Absolute and unconditional: The allotment must be absolute and unconditional, i.e. it must be made on the same terms as stated in the application.
- No change in the terms of allotment or new conditions can be added at the time of allotment.
Proper authority: The allotment should be made by proper authority, i.e. Board of Directors of the company or authorized committee on behalf of the Board of Directors. An allotment made without proper authority will be invalid.
Allotment should not be in contravention (violation) of any other laws:
- A Company cannot allot shares by violating or contradicting any other existing laws. For instance, Shares cannot be allotted to a minor.
- But in the event of any such contravention, the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs. 5,000.
Allotment against applications only: A company can allot shares only if it has received a written application for shares from the applicant.
Thus, no valid allotment can be made on oral requests. It must be against written application only.
Reasonable time: The allotment must be made within a reasonable time. Otherwise, the applicant is not bound to accept it, i.e. applicant can reject it.
As per the Act, allotment shall be done within 60 days of receipt of application money. The allotment can be made from the fifth day from date of the issue of prospectus.
State the contents of Shares Certificate.
Solution:
Share certificate should be in Form SH-1 as prescribed under Companies (Share Capital and Debenture) Rules, 2014. Following are the contents of a share certificate:
Name of the Company, CIN, Registered office address,
Folio Number,
Share Certificate Number,
Name of Member,
Nature of share, number of shares and a distinctive number of the shares,
Amount paid on shares,
Common Seal, if any, and signature of two
Directors and Company Secretary.
What are the effects of forfeiture of shares?
Solution:
Forfeiture of Shares:
Forfeiture of Shares is a process where the company forfeits the shares of a member or shareholder who fails to pay the call on shares or installments of the issue price of his shares within a certain period of time after they fall due.
In other words, when the shareholder fails to pay the full amount of share which he agreed to pay in installments the company can cancel his shares.
The effects of forfeiture of Shares are as follows:
The effects of forfeiture of shares are as follows:
Cessation of membership:
- A person whose shares have been forfeited ceases to be a member in respect of forfeited shares.
- The member's name removed from the Register of Members,
- This is provided under regulation 32(1) of Table F of Schedule 1 of Companies Act, 2013.
Liability of Members:
- The liability of a person whose shares have been forfeited comes to an end when the company receives the payment in full of all such money in respect of shares forfeited.
- A member is liable for unpaid calls even after the forfeiture of shares.
- This is provided in Regulation 32(2) of Table F.
Liquidation of the company:
- In the case of, liquidation of the company takes place within one year of the forfeiture, then the liability of a former shareholder remains as a liability of a past member to pay calls.
- In other words, if the company goes for liquidation, a member whose shares have been forfeited is liable to pay the calls as a past member.
Forfeited shares become the company's property:
- The forfeited shares become the property of the company on forfeiture.
- Accordingly, these may be re-issued or otherwise disposed of on such terms and in such manner which the board of directors thinks fit.
This provided under Regulation 31(1) of Table F.
When can the Board of Directors refuse the transfer of shares?
Solution:
Refusal to Transfer of Shares:
If a company refuses to register the transfer of shares, it shall send a notice of refusal to the transferor and the transferee or to the person giving intimation of such transfer within thirty days from the date on which the instrument of transfer was delivered to the company.
The notice should contain a valid reason for such refusal. The Board of Directors has the authority to refuse registration of transfer of shares. A member may appeal to the NCLT against the refusal by the Board within a period of thirty days from the date of receipt of the refusal notice.
If no notice is received, the member can appeal within 60 days in case of a Private Company and within 90 days in case of a Public Company.
It is important to note that the Board may refuse the transfer in the following cases:
- Where the member transfers the shares to his/her representative(s).
- When the provisions for transfer of shares as given in the Articles of Association is not fulfilled by the member.
When the instrument of transfer is not as per the rules prescribed under the Companies Act.
- When the Instrument is not accompanied by the Share Certificate.
- When the company has a lien on the shares to be transferred.
Explain Employee stock option scheme.
Solution:
Employee Stock Option Scheme (ESOS):
This is a scheme through which a company encourages employee participation in the business of a company.
Under this scheme, the company offers certain shares, from the new issue to the whole time directors, officers, or employees of the company.
The company offers the shares at a predetermined price which is usually less than the price offered to the general public.
The Employee Stock Option Scheme (ESOS) must be approved by passing a special resolution in the general meeting.
Provisions related to ESOS are as follows:
A company may offer the shares directly to the employees or through an Employee Welfare Trust.
The shares are offered at price less than the market price.
There is a minimum vesting period* of one year.
Usually, the company will specify the lock-in period i.e. period during which the employee cannot sell his shares. The Lock-in period is a minimum of 1 year between the grant of option and vesting.
Shares issued under this scheme do not enjoy any dividend or voting rights till the employees buy the shares.
The company has to get the approval of shareholders through a special resolution to issue ESOS.
The employee cannot transfer his option to any other person nor can he pledge or mortgage* the shares issued under ESOS.
The company has to set up a compensation committee to administer ESOS. The company has to fulfill the provisions of SEBI (Share Based Employee Benefits) Regulations, 2014.
What is calls on shares?
Solution:
"Calls on shares" means the demand made by the company on its shareholders holding partly paid shares to pay part or full unpaid amount on the shares.
The board of directors of the company makes such a call on shares in accordance with terms and conditions of the issue of shares and as per articles of association of the company.
A call may be defined as "A demand made by the company on its shareholders to pay whole or part of the balance remaining unpaid on each share at any time during the lifetime of a company".
For instance, the price of a share is Rs.100/. At the time of applying for shares, the investor has to pay Rs. 5/- of the nominal value of a share, so Rs. 95/- is balanced on each share. As and when the company needs money it asks its shareholders to pay, it is known as calls on shares.
The company has to send a call letter/notice to the shareholders asking them to pay the call money and give them a minimum 14 days' notice to pay the call money to the Company's Banker,
No call can be made for more than 25% of the nominal value of shares. The gap between two calls should not be less than one month from the date fixed for the payment of the last preceding call.
What is transfer of shares?
Solution:
Transfer of share means the transfer of ownership of shares from one person to another. In other words, a shareholder can transfer the share to another shareholder.
Transfer of shares takes place when the shareholder wants to sell his shares or give as a gift to another person.
Shares can only be transferred by following the procedure laid down in the Articles of Association. A shareholder can sell either a part of a share or entire shares held by him.
In the case of public companies, shares are freely transferable subject to the provisions of the Articles of Association. Whereas, in the case of Private Company, there are restrictions on the free transfer of shares.
Once, the shares are transferred, the liability of the transferor ends. It takes place when both the transferor and transferee are living.
Justify the following statement.
Company has to fulfill certain provisions while making Right Issue.
Solution:
Justification:
The following provisions company has to fulfill while making Rights Issue:
Rights shares are sold to the existing shareholders at a price which is lesser than its market price.
A company has to send a Letter of an offer to the
existing shareholders at the time of issuing Rights shares.
The letter of offer shall mention:
-The number of shares offered.
-The period of offer i.e. offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of the offer.
-The right to renounce i.e. the shareholders have a right to give up their shares in favour of any other person.
The letter of offer can be sent by registered post, speed post, courier, or through electronic mode.
If the shareholder does not respond to the Rights Issue offer within a stipulated time, it is implied that he is not interested in the offer and the company can offer the unsold shares to new investors.
The company has to obtain a minimum subscription i.e. 90% of the issue.
To Issue Bonus Shares, a company has to fulfill certain provisions.
Solution:
Justification:
The following provisions company has to fulfill to issue Bonus Shares:
A company can issue Bonus Shares only out
of:
- Free reserves or
- Securities Premium Account or
- Capital Redemption Reserve Account
A company cannot issue Bonus Shares only out of reserves created by the Revaluation of Assets.
The company also cannot issue Bonus Shares instead of paying a dividend.
Once the announcement for Bonus Shares is made by the Board of Directors then it cannot be withdrawn.
Bonus shares are fully paid up shares. Shareholders cannot give away their Bonus shares to another person.
There is no minimum subscription to be collected.
Thus, it is rightly justified that, to issue bonus shares, a company has to fulfill certain provisions.
ESOS is offered by a company to its Permanent employees, Directors, and Officers.
Solution:
ESOS is offered by a company to its permanent employees, Directors and Officers
Justification:
Employee Stock Option Scheme (ESOS) is a scheme, through which a company encourages employee participation in the business of a company.
Under this scheme, the company offers certain shares from the new issue to the whole time directors, officers, or employees of the company.
The company offers the shares at a predetermined price which is usually less than the price offered to the general public.
ESOS must be approved by passing a special resolution in the general meeting. Thus, it is rightly justified that, ESOS is offered by a company to its permanent employees, Directors, and Officers.
Company has to fulfill general principles/rules for allotment of shares.
Solution:
Justification:
The following are the general principles/rules for allotment of shares.
Communication: The decision regarding allotment must be communicated to the applicants. It means the company should inform the investors in writing and then share the applicant and the company enters into a contract.
Absolute and unconditional: The allotment must be absolute and unconditional, i.e, it must be made on the same terms as stated in the application, No change in the terms of allotment or new conditions can be added at the time of allotment.
Proper authority: The allotment should be made by proper authority, i.e, Board of Directors of the company, or authorized committee on behalf of the Board of Directors. An allotment made without proper authority will be invalid.
Allotment against applications only: A company can allot shares only if it has received a written application for shares from the applicant. Thus, no valid allotment can be made on oral requests. It must be against written application only.
Reasonable time:
- The allotment must be made within a reasonable time. Otherwise, the applicant is not bound to accept it, i.e, the applicant can reject it.
- As per the Act, allotment shall be done within 60 days of receipt of application money. The allotment can be made from the fifth day from date of the issue of prospectus. Thus, it is rightly justified that, the company has to fulfill general principles/rules for allotment of shares.
A company can issue duplicate share certificates.
Solution:
Justification:
A company can issue a duplicate share certificate if the Original share certificate has been defaced,
- mutilated or torn and is surrendered to the company.
- It has been proved by the holder that the original share certificate is lost or destroyed.
In case of loss of share certificate, the company puts up a notice in the newspapers to announce the loss of the share certificate and asks the finder, if any, to return it to the company.
If the company does not get any response from the public, within the specified time, then the company can issue a duplicate share certificate.
A duplicate share certificate should be issued within three months from the date of application. The company issues it only to registered shareholders. Thus, it is rightly justified that, a company can issue a duplicate share certificate if the original certificate is lost, destroyed, or torn.
Board of Directors have the authority to forfeit shares.
Solution:
Justification:
Forfeiture of shares is a process where the company forfeit the shares of a member or shareholder who fails to pay the call on shares or instalments of the issue price of his shares within a certain period of time after they fall due.
In other words, when the shareholder fails to pay the full amount of share which he agreed to pay in instalments the company can cancel his shares.
If a shareholder fails to pay calls on shares within a certain period, the Board of Directors, if authorised by the Articles of Association, can forfeit i.e. take away the ownership of a member.
The company will give 14 days' notice after 14 days if the shareholder does not pay the company will forfeit his shares and strike his name from the register of shareholders. Thus, it is rightly justified that, Board of Directors has the authority to forfeit shares.
A member of a Public company can transfer shares.
Solution:
Justification:
Transfer of shares means the transfer of ownership of shares from one person to another. In other words, a shareholder can transfer the share to another shareholder.
Transfer of shares takes place when the shareholder wants to sell his shares or give as a gift to another person.
Shares can only be transferred by following the procedure laid down in the Articles of Association. A shareholder can sell either a part of a share or entire shares held by him.
In the case of public companies, shares are freely transferable subject to the provisions of the Articles of Association. Whereas, in the case of Private Company, there are restrictions on the free transfer of shares. Thus, it is rightly justified that, a member of a Public company can transfer shares.
The Board of Directors can refuse transfer of shares.
Solution:
Justification:
If a company refuses to register the transfer of shares, it shall send a notice of refusal to the transferor and the transferee or to the person giving intimation of such transfer within thirty days from the date on which the instrument of transfer was delivered to the company.
The notice should contain a valid reason for such refusal. The Board of Directors has the authority to refuse registration of transfer of shares. A member may appeal to the NCLT against the refusal by the Board within a period of thirty days from the date of receipt of the refusal notice.
If no notice is received, the member can appeal within 60 days in case of a Private Company and within 90 days in case of a Public Company.
Thus, it is rightly justified that, the Board of Directors can refuse the transfer of shares.
Answer the following question.
Explain the classification of share capital.
Solution:
Meaning of Share Capital:
The term capital, in general, means the amount of money invested in a business. It includes not only the money invested at the time of inception of the business firms but also all the money invested subsequently.
The capital raised by the company by issuing Equity Shares and Preference Shares is called share capital.
Usually, in share capital, the proportion of Equity Shares is more than Preference Shares. The Companies Act uses the term capital in several senses.
The classification of Share Capital
1. Paid-up Capital and Calls in Arrears
2. Issued Capital and Unissued Capital
3. Called up Capital, Uncalled Capital, and Reserve Capital
4. Subscribed Capital or Unsubscribed Capital
5. Authorized Capital
(1) Paid-up Capital and Calls in Arrears:
- The Called-up capital may not be fully paid. Some shareholders may pay only part of the amount required to be paid or may not pay at all. Paid-up Capital is the part of called-up capital which is actually paid by the shareholders.
- The remaining part indicates the default in payment of calls by some shareholders, known as Calls in Arrears. In other words, the amount not paid by shareholders is called as Calls in Arrears or Unpaid Calls.
(2) Issued Capital and Unissued Capital:
- Issued Capital is that part of nominal capital which is issued to the public. Companies generally do not issue all its capital at once.
- They issue their capital in installments and so the issued capital is generally less than the nominal capital. It never exceeds the authorized capital.
- Whereas, Unissued Capital is the balance of nominal capital remaining to be issued to the public. The company can issue shares from the unissued capital, in the future.
(3) Called up Capital, Uncalled Capital, and Reserve Capital:
- The Called up Capital is the part of subscribed capital which the company has actually called upon the shareholders to pay.
- Called - up Capital includes the amount paid by the shareholder from time to time on the application, allotment, various calls, etc.
- The remaining part of subscribing capital not yet called up is known as Uncalled Capital. The Uncalled Capital may be converted into Reserve Capital by passing a special resolution.
- Reserve Capital is a capital that a company keeps aside a part of uncalled capital. It can be called up only in case of winding up of the company, to meet the liabilities arising then. It is kept reserved for the Creditors in case of the winding-up of the company.
(4) Subscribed Capital or Unsubscribed Capital:
- Subscribed Capital is that part of the issued capital which is taken up by the public. Sometimes, the public may not take up all the shares that are offered to the public, for a subscription.
- In such a case, the subscribed capital shall be less than the issued capital. If the public subscribe all the shares, it shall be equal to the issued capital
- Unsubscribed Capital is that part of the issued capital which is not allotted to the public.
- The unsubscribed capital is also known as Treasury shares, which are shares held by the corporation itself and have no exercisable rights.
(5) Authorised Capital:
- This is the amount of capital stated in the capital clause of the Memorandum of Association. It is also known as "Nominal Capital" or "Registered Capital".
The company is entitled to raise finance by the issue of shares only up to the amount of authorised capital. However, the company can increase the amount of authorized capital by altering the Memorandum suitably. The promoters generally fix the amount of nominal capital after considering both the long-term and short-term requirements of the proposed company.
Explain the two methods a company can use to make its public offer of shares.
Solution:
Public Issue or offer means offering the shares to the public. This is the most common method used by companies. The company invites the public to subscribe for its shares by issuing a prospectus.
The two methods a company can use to make its public offer of shares are as follows:
(1) Initial Public Offer (IPO):
An Initial Public Offer (IPO) is a process of offering shares to the general public for the first time.
A public company makes an appeal to the general public to purchase its shares by issuing the prospectus.
The prospectus contains detailed information about the company, its project, and shares. It also includes an application form free of cost.
(2) Follow on Public Offer (FPO):
Follow-on Public Offering or Follow on Public Offer is the process of offering shares to the public, after the process of IPO. In FPO, the company goes for a further issue of shares to the general public with a view to diversifying its equity base. The shares are offered for sale by the company through the prospectus.
Explain briefly the different types of shares offered by a company to its existing equity shareholders.
Solution:
The different types of shares offered by a company to its existing Equity shareholders are as follows:
(1) Rights issue:
The Company issue shares to its existing equity shareholders in the proportion of shares holding by them. Such shares issued are called as 'Rights Issue' of shares. Under the rights issue, such shareholders are given pre-emptive rights to apply for new shares.
However, if the shareholder does not opt to subscribe to such shares, then the company has the option to sell it to the general public.
A company can make a Rights Issue when it is making a private placement.
The main aim of issuing the right shares is to raise additional funds by offering shares to the existing equity shareholders.
The provisions related to Rights Issue are as follows:
Rights shares are sold to the existing shareholders at a price which is lesser than its market price.
A company has to send a 'Letter of offer' to the existing shareholders at the time of issuing Rights shares.
The letter of offer shall mention:
• The number of shares offered.
• The period of offer i.e. offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of the offer.
• The right to renounce i.e. the shareholders have a right to give up their shares in favour of any other person.
The letter of offer can be sent by registered post, speed post, courier, or through electronic mode.
If The shareholder does not respond to the Rights Issue offer within a stipulated time*, it is implied* that he is not interested in the offer and the company can offer the unsold shares to new investors.
The company has to obtain a minimum subscription i.e. 90% of the issue.
(2) Bonus issues:
Bonus issues refer to the fully paid-up shares given to its existing equity shareholders without any cost, based upon the number of shares they have.
Such shares are given by the company as a gift to its existing equity shareholder out of its profits or reserves.
For this purpose, a certain proportion is decided. For instance, if a person holds 100 shares and the company declares 1:2 bonus issues, then for every 2 shares held, he gets 1 share free of cost.
The process of issuing the bonus shares out of the company's profits or reserves is known as 'Capitalisation of Profits'.
Provisions related to Bonus Issues are as follows:
A company can issue Bonus Shares only out of:
• Free reserves or
• Securities Premium Account* or
• Capital Redemption Reserve Account*
A company cannot issue Bonus Shares only out of reserves created by Revaluation of Assets*.
The company also cannot issue bonus shares instead of paying dividend.
Once the announcement for Bonus Shares is made by the Board of Directors then it cannot be withdrawn.
Bonus shares are fully paid up shares. Shareholders cannot give away their bonus shares to another person.
There is no minimum subscription to be collected.
Explain the statutory provisions for allotment of shares.
Solution:
Allotment of Shares:
(1) Allotment of shares means the company allots (to give) shares to the general public. Allotment means the distribution of shares among the applicants.
(2) When a public company wants to issue the shares to the general public, it has to issue prospectus to invite the general public to subscribe to its shares.
Statutory provisions of allotment of shares
1.Registration of Prospectus
2. Oversubscription
3. Application money
4. Depositing the application money
5. Minimum subscription
6. Appointment of Managers to the issue and various other agencies
7. Permission to deal on Stock Exchange
8. Closing of the subscription list
9. Beginning of allotment work
The statutory provisions for allotment of shares are as follows:
Registration of Prospectus:
- The Company has to file a copy of the prospectus with the Registrar of Companies (ROC) while raising its capital by issuing the shares to the general public.
- When the company raises the capital privately, it has to prepare 'Statement in lieu of Prospectus'.
Over Subscription:
- In the case of oversubscription, the company has to refund the excess application money to the applicants.
- If it is failed to do so in the prescribed time then every officer of the company would be punishable.
- SEBI does not allow any allotment in excess of securities offered through offer document or prospectus.
– However, it may permit to allot not more than 10% of the net offer.
Application Money: The part of the face values of shares which are collected by the company along with share application, is known as 'Application Money. Application money should not be less than 5% of the face value of the share. SEBI has specified (for public companies) the application money should not be less than 25% of the nominal amount of shares.
Depositing the Application Money: As per this condition, the company has to deposit the money into separate account known as Share Application Money Account' opened in a scheduled bank by the company. The company is not allowed to withdraw this amount.
Minimum Subscription: Minimum subscription is the minimum amount raised by the company for obtaining a trading certificate and to start the work of allotment of shares. This amount is mentioned in the prospectus.
- It must be collected within thirty (30) days from the issue of prospectus. The minimum subscription amount should be 90% of the issued capital.
- SEBI has stated minimum subscription should be 90% of the issue:
- Usually, when a company does not collect minimum subscriptions, it means its issue has been undersubscribed i.e. the number of shares applied for is less than the shares offered by the company.
- If a minimum subscription is not collected within the specified time, the entire amount received as application money should be returned to the subscribers within fifteen days of closure of the issue.
- To avoid such a situation, the company may enter into an underwriting agreement* with the underwriters.
Appointment of Managers to the issue and various other agencies:
- The company has to appoint one or more Merchant Bankers to act as managers to the public issue.
It also has to appoint:
• Registrar to the issue,
• Collecting Bankers,
• Underwriters to the issue and Brokers to the issue.
• Self-certified syndicate banks,
• Advertising agents etc.
Permission to deal on Stock Exchange:
- Every company, before making a public offer shall apply to one or more recognized Stock Exchanges to seek permission for listing* its shares with them. For this, the prospectus shall mention the name of the Stock Exchange.
- In addition, an application for permission to list in that stock exchange has to be made by the company.
- If permission is not given by the stock exchange, the allotment made shall be considered void.
Closing of the Subscription List:
- There is no provision in the Companies Act regarding the closing of the subscription list.
- But as per SEBI guidelines, the subscription list must be issued for a minimum of 3 and a maximum of 10 working days.
- In the case of the Rights issue, the subscription list is open for not more than 60 (sixty) days.
Beginning of allotment work:
- The company can start the work of allotment after 5 days of opening the issue (in case of filing of prospectus) and within 3 days (in case of filing statement in lieu of prospectus). This enables the member of the public to go through the prospectus thoroughly and decide.
Explain briefly the procedure for allotment of shares.
Solution:
(1) Allotment of shares means the company allots (to give) shares to the general public. Allotment means the distribution of shares among the applicants.
(2) When a public company wants to issue the shares to the general public, it has to issue a prospectus to invite the general public to subscribe to its shares.
Procedure for allotment of shares are as follows:
Appointment of Allotment Committee:
- When the subscription list is closed the secretary informs the Board of Directors to make preparations for allotment of shares. If the issue is par subscribed or under subscribed, the Board can do the allotment of shares.
- But if the issue is oversubscribed, the Board has to appoint an Allotment Committee to undertake the work of allotment.
- Allotment committee which consists of Directors and Secretary. This committee decides the basis of allotment and submits a report to the Board. It prepares the formula for allotment of shares.
Hold Board Meeting to Decide the Basis of Allotment:
- The secretary makes the necessary arrangement for the Board Meeting, to deal with the allotment of shares.
- Board Meeting is held to approve the allotment formula suggested by the Allotment Committee.
- Once the allotment formula is approved, the application and allotment lists are made.
- This list contains the names of the allottees i.e. the applicants who will be allotted shares. The list has to be signed by the Chairman and Secretary.
Pass Board Resolution for Allotment:
- The decision regarding the allotment of shares is taken at the Board. Hence, at the board meeting, a resolution is passed to allot shares.
- The resolution also authorises the Secretary to issue letters of allotment and letters of regret.
Collection of Allotment Money:
- The secretary must need to make the necessary arrangements with the company's bank for the collection of allotment money.
- The letter of allotment states the money to be paid by the applicant on the allotment of shares.
- The money has to be paid in the Bank specified by the company within the stipulated time. For all public issues and Rights Issues (from Jan. 2016) ASBA is mandatory.
Arrangement Relating to Letters of Renunciation:
An applicant who has been allotted shares can renounce the shares in favour of another person.
- The applicant has to fill up a form for renunciation and submit it with the original copy of the letter of allotment to the company.
- After approval from the Board, Secretary enters the name of the new allottees in the application and allotment list.
Arrangement Relating to Splitting of Allotment Letters:
- Splitting means putting the shares in one or more names. Sometimes, the applicant who has been allotted shares can request for the splitting of allotment letters.
- After getting the approval of the Board for the splitting, Secretary enters the details of the split in the list of split allotments. Secretary has to also issue split letters.
File Return of Allotment:
- A statement containing details of allotment is called ‘Return of Allotment’. Secretary has to file a 'Return of Allotment with the Registrar of companies within 30 days of allotment of shares.
- The return of allotment contains details of allotment of shares including the names and addresses of allottees, the value of shares allotted, the amount paid or payable on each share, etc.
Prepare Register of Members and Issue Share Certificate:
- The secretary prepares the Register of members on the basis of share application allotment lists. Secretary has to enter the names of all those applicants who have paid the allotment money in the Register of Members.
- Secretary also has to prepare the Share Certificates and distribute it to all the members within two months of allotment of shares.
- A share certificate is issued in exchange for a letter of allotment and receipt of allotment money.
