B.com(H/P) | CH-9 Shares | Company law | Sem-2nd |Sol Du| Shares | Company law b.com| sol du | Share

Introduction to Company Law: Shares

Overview of Shares

The discussion begins with an introduction to shares, covering their types, issuance methods, application processes, allotment procedures, and buyback mechanisms.

Different categories of shares are mentioned, including bonus shares and sweat equity shares.

Allotment of Shares

The process of share allotment is explained as a sequence starting from the application phase to the final call for payment.

Companies issue a prospectus detailing the share offering; interested individuals apply for shares based on this information.

Application Process

After receiving applications and funds from potential shareholders, companies proceed to allot shares as a confirmation of acceptance.

Allotment signifies that the company accepts the offer made by applicants to become shareholders.

Acceptance and Evidence

The company's acceptance of funds during the application phase leads to issuing shares as evidence of shareholder status.

The amount received through applications is crucial for determining whether shares can be allotted.

Rules Governing Share Allotment

Two main rules govern share allotments: General Provisions and Statutory Conditions.

General principles include proper authority approval before issuing or allotting shares. Board approval is necessary for any public issuance.

Timeliness and Conditions

Share allotments must occur within a reasonable timeframe (approximately two months after issuing a prospectus).

Understanding Share Allotment and Communication

Importance of Communication in Share Allotment

The allotment must be effectively communicated; it should not be overly complicated. Clear communication ensures that the intended recipient understands the share allocation.

When a company issues shares, they typically send them through an agent rather than directly to the buyer. This process emphasizes the need for proper communication regarding who receives the shares.

If shares do not reach the intended recipient, they remain with the agent. The buyer can request a refund if they do not receive their shares, highlighting the importance of timely communication.

If shares are not received by the buyer, they can cancel their request before completion. However, once received, cancellation is no longer possible without selling to another party.

The key takeaway is that allotments must be communicated clearly to ensure that all parties understand their rights and obligations.

Conditions for Allotment

Allotments can only occur against applications made by individuals who have applied for shares. This means that only those who express interest in purchasing shares will receive them.

Companies cannot allocate shares to family members or others who did not apply; this maintains fairness in share distribution based on actual demand.

General principles dictate that companies must adhere to statutory conditions during allotment processes, ensuring compliance with legal requirements.

Private vs Public Company Regulations

Private companies cannot issue shares to the public; thus, discussions about allotments are irrelevant unless dealing with public companies.

Public companies face two types of restrictions when issuing shares: either through large brokers or directly to the general public. Each method has its own regulatory implications.

Issuing Shares and Prospectus Requirements

For private placements under Section 42 of the Companies Act 2013, specific rules apply when issuing shares privately among partners or select individuals.

When issuing shares publicly, a prospectus must first be issued detailing minimum subscription requirements—this informs potential investors how many shares they need to purchase initially.

Subscription Dynamics in Share Purchases

Shares may often be sold in lots rather than individually; however, platforms like Zerodha allow individual purchases from secondary sellers rather than directly from companies during IPO events.

Understanding Stock Issuance and Allotment Process

Basics of Shares and Lots

A single share is referred to as a "share," while a group of shares is called "lots" or "stock."

Stocks are counted by amount rather than the number of shares; for example, one might say they bought a lot worth 500 or 50,000 instead of specifying the exact number of shares.

Prospectus and Minimum Subscription

When issuing stocks, companies must provide a prospectus that outlines the minimum subscription amount required from investors.

Companies have 30 days to receive at least 90% subscriptions after issuing shares; failure to do so results in cancellation of the entire share issue process.

Application Money and Allotment Process

The minimum application amount for shares should be at least ₹5 per face value. This sets a baseline for public allotments.

The prospectus must include opening and closing dates for applications, which start five days after its issuance.

Handling Received Funds

Any funds received from stock issuance must be deposited into a designated bank account specified in the prospectus.

Non-compliance with these conditions can lead to penalties ranging from ₹5 lakh to ₹50 lakh.

Forfeiture of Shares

If an investor fails to pay subsequent calls on their shares, those shares may be forfeited. This process involves notifying the board of directors about non-payment.

Investors who miss payments can still reclaim their shares by paying owed amounts plus interest accrued during the delay.

Legal Framework for Forfeiture

Specific clauses (28, 29, etc.) in company law outline procedures for forfeiting shares due to non-payment.

Notices regarding forfeiture must detail important information such as dates and names involved in the process.

Understanding the Process of Share Issuance

Foreclosure and Its Implications

The discussion begins with the concept of foreclosure, specifically referring to Clause 30, which outlines actions that can be taken regarding shares.

Two primary options are available: either reissue or cancel the shares. No other alternatives exist for handling these shares.

Sweat Equity Shares Explained

The topic shifts to sweat equity shares, often referred to as sweat equity. These are issued primarily to employees and directors based on their performance and productivity.

Sweat equity shares serve as a motivational tool for employees, encouraging them to work harder by making them feel like part owners of the company.

Conditions for Issuing Sweat Equity Shares

When issuing sweat equity shares, certain conditions must be met according to Section 54. A special resolution must be passed during board meetings.

Approval from at least three-fourths (75%) of board members is required before proceeding with the issuance.

Timeline for Issuance

Once a special resolution is approved, there is a one-year timeframe within which the sweat equity shares must be issued.

Only companies that have been operational for over a year can issue these types of shares; newly established companies are not eligible.

Advantages and Disadvantages of Sweat Equity Shares

Advantages:

Cost savings occur since companies can offer equity instead of cash salaries, thus conserving funds.

Attracting talent becomes easier as employees feel more invested in their roles when they hold ownership stakes in the company.

Disadvantages:

What Are Disputes and Their Impact on Equity?

Understanding Disputes in Equity Issuance

Disputes arise due to varying values associated with equity shares, leading to challenges in determining appropriate share prices for employees.

Employees often express concerns about the fairness of current rates, indicating a need for clarity in equity pricing.

What Are Bonus Shares and Their Purpose?

Definition and Rationale Behind Bonus Shares

Bonus shares are issued by companies to prevent their stock from becoming too expensive for average investors, ensuring accessibility.

For example, MRF's share price has exceeded ₹80,000, making it unaffordable for many; thus, companies may issue bonus shares or split existing ones.

Mechanism of Issuing Bonus Shares

When a company issues bonus shares, existing shareholders receive additional shares without any cost, effectively splitting the value while maintaining overall capital.

This process helps correct share value and increases the company's capital base.

Sources of Funding for Bonus Shares

Where Companies Can Source Funds

Companies can issue bonus shares from free reserves or security premium reserves (SPR).

Capital Redemption Reserve (CRR) is also a potential source for issuing bonus shares.

Understanding Employee Stock Option Plans (ESOP)

What Is an ESOP?

An Employee Stock Option Plan allows employees to purchase company shares at a future date under specified conditions.

Unlike bonuses where free shares are given, ESOP provides employees with the authority to buy shares later at potentially lower prices.

Implementation of ESOP

A company must pass a special resolution to implement an ESOP scheme that grants employees the right to purchase stocks in the future.

Regulatory Requirements for Issuing Shares

Passing Resolutions for Share Issuance

Private limited companies require an ordinary resolution to grant stock options through ESOP.

Understanding Employee Share Schemes

Overview of Employee Share Purchases

Employees purchasing shares directly from the company can benefit from discounts, such as sweat equity shares.

The company has discretion over whether to offer these shares; there is no obligation to do so.

Companies must be operational for more than a year to allow employees to purchase shares through an e-shop.

Conditions for Share Cancellation

Employees cannot cancel their share purchases within one year of allocation; this period is designed to stabilize ownership.

If an employee wishes to cancel their shares, they must wait until after the one-year mark post-allocation.

Rights Issues vs. Bonus Issues

A rights issue allows existing shareholders to buy additional shares at a discount, while a bonus issue provides free additional shares based on existing holdings.

In a rights issue, shareholders must pay for new shares, whereas bonus issues are typically issued without cost.

Financial Implications of Rights and Bonus Issues

Rights issues can be either fully paid or partly paid, while bonus issues are always fully paid.

Cash raised during rights issues is transferred to the company's bank account; no cash is involved in bonus issues.

Exploring Buyback Provisions

Understanding Buybacks

Companies may initiate buybacks when they have excess capital and wish to reduce outstanding shares in circulation.

Legal Framework for Buybacks

There are three key provisions governing buybacks:

Provision 68: Outlines how companies can repurchase their own shares.

Provision 69: Details conditions under which buybacks can occur.

Provision 70: Specifies reporting requirements related to buybacks.

Funding Sources for Buybacks

Companies can fund buybacks through:

Free reserves available within the company,

Security premium reserves,

Buyback Procedures and Regulations

Conditions for Buyback

The Articles of Association must specify the buyback procedure, detailing how shares will be repurchased and what will happen to the shares post-buyback.

A special resolution needs to be passed in a general meeting to authorize the buyback, which shareholders must approve.

The total amount for buyback should not exceed 25% of the total paid-up capital plus free reserves available.

Example Calculation

If a company has issued 60,000 shares but only 40,000 are requested, the remaining 20,000 are considered unpaid. Only fully paid-up shares count towards the buyback limit.

With an example where there is a reserve of 10,000, the maximum allowable buyback would be calculated as 70,000 (total paid-up capital + free reserves), with limits set at 25%.

Debt-to-Equity Ratio Considerations

Post-buyback, the debt-to-equity ratio must remain below 2.1; otherwise, it indicates increased liabilities contrary to the purpose of reducing them through buybacks.

If taking loans to finance a buyback increases liabilities instead of decreasing them, it defeats the purpose of conducting a buyback.

Regulatory Requirements

Listed companies must inform SEBI about their intention to conduct a buyback; unlisted companies need permission from the central government.

Timing Restrictions on Buybacks

There must be at least one year between consecutive buybacks; this ensures that companies do not engage in frequent repurchases without sufficient time for evaluation.

Declaration of Solvency

Companies must provide a declaration of solvency to confirm they will not become insolvent due to conducting a buyback. This declaration is signed by managing directors and board members.

Share Destruction Requirement

Shares bought back must be destroyed within seven days after repurchase completion as part of compliance with regulations.

Restrictions on New Issuance After Buybacks

Buyback Regulations and Membership in Companies

Buyback Process and Compliance

The buyback process requires maintaining a register detailing the buyback transactions, including amounts and dates, which must be submitted to the ROC (Registrar of Companies) and SEBI (Securities and Exchange Board of India).

Non-compliance or fraudulent activities during the buyback can lead to penalties ranging from 1 lakh to 3 lakhs, with potential imprisonment for up to three years.

Section 69 mandates that all amounts used for buybacks must be transferred to the Capital Redemption Reserve (CRR), which should also be reflected in the company's balance sheet.

Section 70 prohibits buybacks by subsidiary companies of holding companies or financial institutions like banks or LIC, ensuring that only eligible entities can engage in such practices.

Understanding Company Members

Definition and Eligibility

A member of a company is defined as anyone whose name appears in the Memorandum of Association (MOA). This includes shareholders who are entitled to membership rights.

Minors cannot become members unless they have a guardian. Individuals deemed unsound mind or disqualified by law are also excluded from membership eligibility.

Modes of Acquiring Membership

Membership can be acquired through various means:

Subscribers: Initial subscribers to shares automatically become members.

Agreements: Written agreements can establish membership without immediate share acquisition.

Shares can also be transferred between individuals, allowing new members to join if they receive shares from existing shareholders.

Transmission of Shares

In cases where shares are inherited due to death, the inheritor becomes a member upon receiving those shares.

Who Can Become a Member?

Eligible Entities

Any individual holding shares qualifies as a member. This includes partnerships, LLPs (Limited Liability Partnerships), foreign entities, and even government bodies that hold company shares.

Special Cases for Minors and Insolvents

Member Rights and Responsibilities in Corporate Governance

Overview of Member Rights

Members have the right to vote, attend general meetings, and receive notices for these meetings. This ensures they are informed about company activities.

Members can elect directors, which is crucial for influencing company leadership and direction.

They also have rights to dividends and bonuses, reflecting their stake in the company's profits.

Legal Rights and Liabilities

Members possess the right to obtain copies of important documents from the company, ensuring transparency.

If a company issues calls for partially paid shares, members must fulfill their payment obligations. This highlights financial responsibilities tied to share ownership.

In cases where members have provided guarantees for the company's debts, they are liable to fulfill these guarantees if the company winds up.

Conclusion of Chapter

The chapter concludes with an encouragement for viewers to like, share, and subscribe if they found the content helpful.

The speaker mentions upcoming videos related to semester courses that will be available after January 10th.

Differences Between Members and Subscribers

A brief discussion on differences between members and subscribers is promised as a concluding point in this session.

Content Creation Challenges

The speaker addresses challenges faced in creating video content due to time constraints while preparing comprehensive educational material.