Module 3: Shares PDF

Module 3 : Shares Share Capital The term share capital denotes the amount of capital raised or to be raised by the issue of shares by a company. It is a long term source of finance through which shareholders gain a share of ownership in the company. Kinds of Share Capital: Authorized,...

Module 3 : Shares Share Capital The term share capital denotes the amount of capital raised or to be raised by the issue of shares by a company. It is a long term source of finance through which shareholders gain a share of ownership in the company. Kinds of Share Capital: Authorized, Registered or Nominal capital - Authorized Share Capital is the total Capital that a company accepts from its investors by issuing shares which are mentioned in the official document of the company. It is also called as Registered Capital or Nominal Capital because with this Capital a company is registered. The limit of Authorised Capital is given under the Capital Clause in the Memorandum of Association. The company has the discretion to take the required steps necessary to increase the limit of authorised capital with the purpose of issuing more shares, but the company is not allowed to issue shares that are exceeding the limit of authorised capital in any case. Issued Capital - Issued Share Capital is the part of Authorized Share Capital issued to the public for subscription. And this Act of issuing Share is called Issuance, allocation or allotment Subscribed Capital - is the part of issued Capital which has been taken off by the public. It is not mandatory that the issued Capital is fully subscribed to by the public. It is that part of the issued Capital for which the application has been received by the company. Let’s understand this with an example – If a company offers 16000 shares of Rs. One hundred each and the public applies only for 12000 shares, then the issued Capital would be Rs 16 lakh, and Subscribed Capital would be Rs 12 lakh. Kinds of Share Capital (contd.) Called-up Capital Called up Capital is the part of the Subscribed Capital, which includes the amount paid by the shareholder. The company does not receive the entire amount of Capital at once. It calls upon the part of subscribed Capital when needed in installments. The remaining part of the Subscribed Capital is called Uncalled Capital. Paid-up Capital The part of Called-up Capital which is paid by the shareholder is called Paid-up Capital. It is not mandatory that the amount called by the company is paid by the shareholder. The shareholder may pay half the amount of the called up Capital, which is called as Reserved Capital. As the name reserve means to keep some amount in the treasury of the company. This is quite useful in case of winding- up of the company. Meaning of Share and Stock Share A share in a company is one of the units into which the total capital of the company is divided Section 2(84) of the Companies Act, 2013 defines share, “A share in the share capital of a company and includes stock except where a distinction between stock and share is expressed or implied” ‘A share in a company is not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred to its holders by the articles of the company which constitute a contract between him and the company.’ Meaning of Share and Stock Stock Stock in a company means a bundle of fully paid up shares put together for convenience, so that it may be divided into any amount and transferred into any fractions and sub-divisions without regard to the original face value of the shares. A company cannot issue stock originally Stock can only be obtained by conversion (a) if shares are fully paid (b) the Articles of Association empower the company to convert shares into stock. The conversion requires passing of an ordinary resolution by the members.  Shares Stock Can be issued originally and directly to Company cannot make original issue of shareholders stock, only shares when fully paid up can be converted into stock May be fully or partly paid up Must always be fully paid up Always of a fixed denomination No such fixed denomination Registration of share capital with the No Registration with the Registrar is Registrar is compulsory before issuing required shares Share can be transferred in its entirety or in Stock is divisible into any amount required its multiples only and as such may be transferred even in fractional amounts ESOP – Employee Stock Option Plan under Companies Act, 2013 for un-listed Companies The idea that employees should have an ownership stake in the company led to the emergence of concept of Employee Stock Option Plan (ESOP) Objective of issuing ESOP A. Provide incentive to retain and reward employees of the company based on their contribution. B. Motivate employees to contribute to the growth and profitability of the company in future as well. Important Terms and flow of actions A. OPTION: a right but not an obligation – to purchase the shares of the company on the fulfillment of the conditions mentioned in the ESOP plan at the price decided at the time of grant of options. B. GRANT : The eligibility of a particular employee (depending on the criteria set) for grant of stock options based on his role and performance is known as grant of option C. VESTING: It is the entitlement of the option to an employee. Before exercise of the option, the employee has to wait for a limited period as a condition of ESOP grant. It has two components – Vesting percentage and vesting period. Vesting period is the period on the completion of which the said portion can be exercised. Vesting percentage refers to that portion of total options granted, which the employee will be eligible to exercise. Important Terms and flow of actions D. EXERCISE: – The activity of converting the options granted to an employee into shares by paying the required exercise price, i.e., allotment. The companies have freedom to determine the exercise price in conformity with the applicable accounting policies, if any. E. The effective date of exercise is the date on which the Company allots the shares. F. The companies have freedom to determine the exercise price in conformity with the applicable accounting policies, if any. G. There shall be a minimum period of one year between the grant of options and vesting of option. H. The company shall have the freedom to specify the lock-in period for the shares issued. Eligibility for ESOP Approval of shareholders - Private Companies : To offer ESOP, approval of shareholders by way of ordinary resolution is required. (Notification dated 5th June, 2015). - Listed Companies: Rule 12(11) specifically provides that where the equity Shares of the Company are listed, the ESOP shall be issued as per the SEBI Regulations. - Other than the Private Companies ( i.e., Unlisted Public Companies): Approval of shareholders by way of special resolution is required as per Sec 62(1)(b) of Companies Act, 2013, read with Rule 12 of The Companies (Share Capital and Debentures) Rules, 2014. Applicable Rules and Regulations Sec 2(37) of Companies Act, 2013 defines “employees stock option” read with Sec 62(1)(b) of Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. This Rule specifies that on complying certain terms and conditions only the unlisted company can offer shares to its employee’s under ESOP Applicable Rules and Regulations 1. Sanction by Special Resolution 2. Employees to whom ESOPs may be issued 3. Pricing 4. Minimum vesting period 5. Lock-in-period for shares issued on exercise of option 6. Right to receive dividends 7. Forfeiture/ Refund of amount paid by employees under ESOP 8. Register of Employees Stock Options Applicable Rules and Regulations Disclosures in Board of Directors Report- Employees Stock Option Scheme: (a) options granted; (b) options vested; (c) options exercised; (d) the total number of shares arising as a result of exercise of option; (e) options lapsed; (f) the exercise price; (g) variation of terms of options; (h) money realized by exercise of options; (i) total number of options in force; (j) employee wise details of options granted to;- (i) key managerial personnel; (ii) any other employee who receives a grant of options in any one year of option amounting to five percent or more of options granted during that year. (iii) identified employees who were granted option, during any one year, equal to or exceeding one percent of the issued capital (excluding outstanding warrants and conversions) of the company at the time of grant; Sweat Equity Sweat equity is a party’s contribution to a project in the form of labor, as opposed to financial equity such as paying others to perform the task. Such employees of the company are appreciated not just by way of salary or remuneration hike but also giving something extra for their sweat invested in company. The term sweat equity refers to a person or company's contribution toward a business venture or other project. Sweat equity is generally not monetary and, in most cases, comes in the form of physical labor, mental effort, and time. Sweat equity is commonly found in real estate and the construction industry, as well as in the corporate world—especially for startups. That is why the concept of Sweat equity shares in introduced. Sweat Equity “Sweat Equity Shares” means such equity shares issued by the Company to its Directors or Employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called. In cash-strapped startups owners and employees typically accept salaries that are below their market values in return for a stake in the company, which they hope to profit from when the business is eventually sold. Conditions of the Issue It has to be authorised by the special resolution. Special resolution specifies the number of shares to be issued, their price, class of directors, employees to whom shares are to be issued, current market price of the same shares, consideration etc. If the shares issued under sweat equity shares are listed on any recognized stock exchange then SEBI regulations are also applicable on the company. All the rights, limitations, restrictions, provision, as are applicable to equity shares are also applicable to swat equity shares. Issue of Sweat Equity Shares The sweat equity shares shall be issued to the following category of employees which includes: Permanent employee of the Company whether working in India or outside India; Director of the Company, whether a whole-time Director or not; Employee or Director as mentioned above of a Subsidiary in India or outside India, or of a Holding Company of the Company. For issue of sweat equity shares, Listed Company shall comply with the provisions of Securities and Exchange Board of India (SEBI) Regulations on Sweat Equity and the Company other than listed company shall comply with the provisions of Section 54 of the Companies Act, 2013 and Rule 8 of Companies (Share Capital and Debentures) Rules, 2014. What is the procedure to issue sweat shares? The issue of sweat equity shares, following broad procedure needs to be followed: Convene and hold a board meeting to consider the proposal of issue of sweat equity shares and to fix up the date, time, place and agenda for general meeting and to pass a special resolution for the same. Issue notices in writing to Shareholders for general meeting along with explanatory statement. The explanatory statement to be annexed to the notice for the general meeting pursuant to section 102 of the Act. Convene the General Meeting and Pass a special resolution Call the Board Meeting and Allot sweat equity shares in the meeting. The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide. The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.  Basis of Difference ESOP Sweat Equity Meaning ESOPs are given in the nature of Sweat Equity Shares are issued as Incentive and retention plan these can consideration for creation or be issued to employees and officers. transfer of intellectual Property ESOP is not an obligation rather it is a Rights to the company or as other right of the employee to purchase value addition. certain amount of share of the company at a pre decided price. Consideration The consideration has to be paid in cash. The consideration can be partly cash and partly IPRs/value addition or fully noncash consideration. Lock in Period Not Specified as such 3 years Restrictions on Issue Company has no such restrictions in In a year 15% of paid up capital issuance or grant of ESOP or issued capital which ever is higher Never exceed 25% of total paid up capital Shareholder’s Agreement A shareholder is someone who invests money into the company. In exchange for his money, he is given a certain number of shares in the company. These shares entitle him to become one of the owners of the company and empowers a shareholder with the right to vote on certain matters related to the company. A shareholders' agreement, also called a stockholders' agreement, is an arrangement among shareholders that describes how a company should be operated and outlines shareholders' rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders.  What is a Shareholder’s Agreement? A shareholder’s agreement is a contract between the company and its shareholders. It outlines the rights, obligations of the shareholders and provisions related to the management and the authorities of the company. The purpose of the agreement is to protect the interests of the shareholders. The agreement includes sections outlining the fair and legitimate pricing of shares (particularly when sold). It also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions. A shareholders' agreement includes a date; often the number of shares issued; a capitalization table that outlines shareholders and their percentage ownership; any restrictions on transferring shares; pre-emptive rights for current shareholders to purchase shares to maintain ownership percentages (for example, in the event of a new issue); and details on payments in the event of a company sale. Contents of a Shareholders’ Agreement 1. Rights of a shareholder As a shareholder, a person is entitled to certain rights with respect to the company. Some of them are: Right to vote Right to call for a General Meeting Right to appoint directors Right to appoint the company auditor Right to copies of the financial statements of the company Right to inspect the registers and books of the company Contents of a Shareholders’ Agreement 2. Regulations with regard to sale and transfer of the share of the company When it comes to the issue of transfer of shares, to protect the interest of the shareholders, there are certain rules put in place so as to ensure that such transfer happens only upon receiving the consent of the parties involved. 3. Financial needs of the company As the shareholders are given copies of the financial statements, they are able to track the progress and the needs of the company. In the event where the shareholders find the need for an influx of funds which they think will be beneficial to the growth of the company, they will then discuss the most lucrative source of funding and then proceed towards obtaining it. The procedure for obtaining such finances are laid down in the Shareholders Agreement. Contents of a Shareholders’ Agreement 4. Requirements with respect to a quorum A quorum refers to the minimum number of members required for a meeting to be considered as a valid meeting. The requirements with respect to a quorum will be clearly mentioned in the Shareholders’ Agreement. 5. Valuation methods for the shares of the company As the market is prone to constant fluctuation, the value of the company shares varies too. However, in order to aid in the proper preparation of the financial statements, the method of valuing the company’s shares also plays a significant part and has a material impact on the financial statements. The methods of valuation are also finalized. Contents of a Shareholders’ Agreement 6. The manner in which the company will be run In order for there to be smooth and free-flowing operations, there must be certain policies and procedures set in place. The Shareholders’ Agreement contains the guidelines with respect to how the company will be run on a day to day basis so as to ensure consistent and uninhibited workflow. 7. Liabilities of a shareholder Shareholders are not liable for the acts of the company Shareholders are held liable only to the extent of the unpaid amount of share capital with regard to the shares held by them Where it is a company limited by guarantee, the shareholder is liable only to the extent of the amount guaranteed by him The reason behind the limited liability of the shareholders boils down to the fact that the company is a separate legal entity, hence separate from the shareholders. Contents of a Shareholders’ Agreement 8. Protection of minority shareholders Minority shareholders are those who do not enjoy much in terms of powers when it comes to the management of the company. Since the introduction of the Companies Act, 2013, the rights of the minority shareholders have been given importance. Right to apply to the Board in case of oppression or mismanagement Right to institute a class action suit against the company and the auditors The requirement to appoint Small Shareholder Director Pointers while drafting a Shareholders’ Agreement It is imperative to understand the purpose behind the Shareholders’ Agreement, the necessity to create a balance of interests The terms of the agreement need to be clearly defined so as to avoid any further confusion The rights, duties and obligations of the company and shareholders must be specified in a concise manner The agreement must be airtight bearing in mind the mutual benefit of both the company and the shareholders The policies, procedures and guidelines set out in the agreement must be brief and coherent All matters set out in the agreement must be provided for in accordance with the relevant laws in place Differential Voting Rights The differential rights are in respect of voting power and dividend. So generally equity shares with less voting rights carry higher rate of dividend but whereas the equity shares with higher voting shares carries with lesser rate of dividend. Equity shares with higher voting rights are generally given to promoters, key managerial persons, Managing directors In the case of differential voting rights, one share carries more than one voting right or carries with lesser than one voting rights. Differential Voting Rights Differential Voting Rights (DVRs) shares provide shareholders with either higher or lower voting rights in comparison to ordinary shareholders of the company. When a shareholder has higher voting rights in a ratio of 10:1, it means they have 10 votes per share held. Conversely, lower voting rights in a ratio of 1:10 means having 1 vote for every 10 shares held. However, Indian regulations prohibit companies from issuing equity shares with higher voting rights. As a result, the DVR shares available in the market typically have limited voting rights. These shares are traded on the stock exchange similar to ordinary shares but often at a discounted price and with a higher dividend. Reasons for issuing DVRs Prevention of hostile takeover: Since DVRs are issued with limited voting rights, they do not dilute the promoters voting rights and make it difficult for hostile takeovers. Bring in Passive/Retail investors: Passive/Retail investors may not want to indulge in the managerial operations of a business in which they are investing. In most cases, such investors are looking only to make profits. DVR shares are ideal as investors can focus on the dividend generation aspect, without needing to deal with the decision- making aspect of the company. DVR shares are offered at a discount compared to ordinary shares because of the lower voting rights. In turn, investors can acquire more shares at a lower price, thus increasing their dividend earning potential. Differential Voting Rights Section 43(2) of the Companies Act, 2013 and Companies (Share Capital & Debenture) Rules, 2014 provides that companies can issue equity shares with differential rights subject to the following conditions: 1. Articles of association of the company must provide for issue of equity shares with differential voting rights 2. The company shall have a consistent track record of distributable profit for last three years 3. The company shall obtain approval of shareholders by passing general resolution in General Meeting 4. The company shall not have defaulted in filing annual returns /financial statements for the last three years immediately preceding the financial year in which it was decided to issue such shares Differential Voting Rights 5. The company shall not have defaulted in repayment of matured deposits or declared dividend to the shareholders. 6. In case of listed companies, the issue of such shares shall be approved by postal ballot. 7. The company shall not have defaulted in redemption of its preference shares /debentures which are due for redemption. 8. The company shall not have defaulted in repayment of instalment of term loan taken from any public financial institution or state level financial institution or from a scheduled bank that has become due and payable. Differential Voting Rights The company having shareholders with superior voting rights are subject to enhanced corporate governance as follows: a) At least ½ of the Board and 2/3rd of the committee (excluding audit committee) as prescribed under the SEBI (Listing obligation & Disclosure requirements) regulations 2015 SEBI (LODR) regulations shall comprise of independent directors b) Audit committee shall comprise only of independent directors Differential Voting Rights Post the initial public offering by the issuer company, the shares with superior voting rights shall be treated as Ordinary shares in terms of voting rights (One superior voting right share shall have only one vote) in the following circumstances: i. Appointment or removal of independent director and/or auditor ii. In case where promoter is willingly transferring control to another entity iii. Voluntary winding up of the company iv. Changes in the company’s Memorandum or Articles of Association except for changes affecting the shares with superior voting rights Differential Voting Rights v. Initiation of a voluntary resolution plan under the Insolvency and Bankruptcy Code; vi. Utilization of funds for purposes other than business; vii. Passing of special resolution in respect of delisting or buy-back of shares; and viii.Any other provision, as may be notified by SEBI in this regard, from time to time. Differential Voting Rights Further the shares with superior voting rights shall be converted into ordinary shares in the following circumstances a) On completion of 5th anniversary of the listing. The validity can be extended once by 5 years through a resolution. But shareholders with superior voting rights are not permitted to vote in such resolutions. b) On happening of certain events like death, resignation, mergers or acquisitions where control of the management would no longer with the existing shareholder enjoying superior voting rights Disclosure in Boards Report Further the Board of directors is required to disclose the following information in their Board report pertaining to the year in which the issue of shares with differential voting rights has been completed : 1. Number of shares with DVRs issued 2. Details of DVRs either in respect of dividend or voting rights. 3. % of shares with differential rights to the total post issue of equity share capital 4. % of shares with differential rights issued at any point of time 5. % of voting rights enjoying by the shares with differential voting rights to the total voting rights of the share capital Disclosure in Boards Report (Contd.) 6. Details of the Shareholders to whom such shares have been issued i.e. either promoter/ director (including relatives)/ KMPs/ employees or public offerings. 7. The price at which such shares have been issued. 8. Pre and Post issue of shareholding pattern along with voting rights. 9. Diluted earnings per share pursuant to the issue of shares with differential voting rights. 10. Change of control in the affairs of the company if any post issue of such shares. Reduction of Share Capital The Reduction of Share Capital means reduction of issued, subscribed and paid up share capital of the company. Previously, reduction of share capital was governed by section 100 to 104 of the Companies Act, 1956, now it is governed by section 66 of the Companies Act, 2013. As per old act, it was subjected to the confirmation of high court, but under new Act, the said powers of high court has been transferred to National Company Law Tribunal (NCLT). Need of Reduction of Share Capital Returning of surplus to shareholders; Eliminating losses, which may be preventing the payment of dividends; As a part of scheme of compromise or arrangements; Simplify capital structure; When the company is making losses, the financial position does not present a true and fair view of the company. The assets are overvalued and the balance sheet consists of fictitious assets with debit balance in profit and loss account. In order to reduction of capital will write-off that portion of capital which is already lost and will make the balance sheet look healthy. Modes of Reduction of Share Capital 1. Extinguish or reduce the liability Company may reduce share capital by reducing or extinguishing the liability on any of its partly paid up shares. For example: if the shares are of face value of Rs. 100 each of which Rs. 50 has been paid, the company may reduce them to Rs. 50 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of Rs. 50 per share. Modes of Reduction of Share Capital 2. Cancel any paid-up share capital Company may reduce share capital by cancelling any shares which are lost or is unrepresented by available assets. For example: if the shares of face value of INR 100 each fully paid-up is represented by Rs. 75 worth of assets. In such a case, reduction of share capital may be effected by cancelling Rs. 25 per share and writing off similar amount of assets. Modes of Reduction of Share Capital 3. Pay off any paid-up share capital Company may reduce share capital by paying off fully paid up shares which is in excess of the wants of the company. For example: shares of face value of Rs. 100 each fully paid-up can be reduced to face value of Rs. 75 each by paying back Rs. 25 per share. Procedure for Reduction of Share Capital 1. Convene a Board Meeting To approve the reduction of share capital To fix the date of general meeting of the company to get approval of members 2. Dispatch notice of general meeting to all the shareholders at least before 21 days 3. Hold the general meeting and pass Special Resolution approving reduction of share capital 4. If you have secured creditors, take NOC from them in writing 5. File Special Resolution along with e-form MGT-14 with ROC within 30 days of passing Procedure for Reduction of Share Capital 6. Apply to NCLT by filing an application in Form RSC-1 to confirm reduction. The application shall be accompanied with the following attachments: List of creditors Certificate of auditor to the effect that list of creditors is correct Certificate of auditor that Company is not having any arrears of repayment of deposit and interest thereon Certificate of auditor that Accounting Treatment proposed by the company for reduction of share capital is in conformity with the Accounting standards Any other relevant documents 7. The NCLT shall within 15 days of submission of the application give a notice to ROC, SEBI in Form RSC-2 and to every creditors of the company in Form RSC-3 8. The NCLT shall also give direction for the notice to be published in Form RSC- 4 within 7 days of such direction in a leading English and vernacular language newspaper and for uploading on the website of the company Procedure for Reduction of Share Capital 9. The company shall file an affidavit in Form RSC-5 confirming the dispatch and publication of the notice within 7 days from the date of issue of such notice 10. The NCLT may dispense with the requirement of giving notice to the creditors or publication of notice, if every creditor has been discharged or secured or given his consent in writing 11. Representation by ROC, SEBI and creditors shall be sent to NCLT within 3 months of receipt of notice and copy of which shall also be sent to the company. If no such representation has been received by NCLT within the said period, it shall be presumed that they have no objection 12. Company shall send the representation or objections so received along with responses of the company thereto within 7 days of expiry of period up to which objections were sought Procedure for Reduction of Share Capital 13. NCLT may hold any enquiry on adjudication of claim and/or give direction for securing the debts of the creditors. 14. The order confirming the reduction of share capital shall be in Form RSC-6. 15. The company shall deliver a certified copy of the order of the NCLT under sub-section (3) and of minute approved by the Tribunal to the ROC and file E-form INC-28 within 30 days of the receipt of order. 16. The ROC shall issue a certificate to that effect in Form RSC-7 Borrowing For running a new business effectively and successfully and adequate amount of capital is required In some of the case is the capital is arranged through internal sources that is by the way of issuing equity share capital Whereas in some cases external resources are also used this can be external - commercial borrowing, debentures, public fixed deposits, bank loans. Borrowing can be defined as under which money is arranged with an external sources Types of Borrowing 1.Long term borrowings Under the long term the funds are borrowed from a period ranging from 5 years or more. 2.Short term borrowings Under the short-term borrowed for a very short period that is up to 1 year. These funds are generally borrowed so that working capital amount can be made. 3.Medium term borrowings These are the borrowing under which the funds would be borrowed from a period of 1 to 5 years. Types of Borrowing 4.Secured borrowing Under the secured borrowing, if a creditor has the re-course of assets of the company or a proprietary then a debt obligation is considered as security 5.Unsecured borrowing Under the unsecured borrowing the debt comprises of financial obligations 6.Syndicated borrowing Under the syndicated borrowing, if a borrower requires a large fund, it is generally provided by a group of lenders. Under this one agreement is used by borrower covering the whole group of bank and different types of facilities rather than entering into series of separate loans Types of Borrowing 7.Private borrowing The private borrowing consists of bank loan obligations. Under this the company take loan from Bank of financial institution 8.Public borrowing Public borrowing consists of all the financial institutions that are freely tradable on a public exchange Debentures Section 2 (30) of the Companies Act, 2013 defines the term Debentures as “debenture includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not” Debenture is a debt acknowledged by a Company whether constituting a charge on the assets of the Company or not, whether convertible into shares at a later stage or not. Which means that a Debenture can be Secured or Unsecured, it can be Convertible (either wholly or partly) or Non-convertible. As Debentures are in the form of debt, unlike shares they don’t carry voting rights.  Advantages of Debentures 1. To Investors Fixed Income for Investors: A company has to pay interest on the issued debentures, whether it earns profits in a financial year or not. So, the investors get a fixed income. This is not the case with equity shareholders, whose dividend depends solely on the profit earned. Secured Investment: Since debt securities are usually secured by way of a charge against the issuing company’s assets, the holders can sell off the asset in case of the company goes bankrupt or insolvent. Fixed Return even during Inflation: The rate of interest on debentures does not fluctuate with the changes in price levels, thereby ensuring a fixed level of income. 2. To the Company No Dilution of Ownership: Since debenture holders do not have any voting rights or any participation in company meetings, the ownership of the company’s management remains intact, as opposed to companies issuing equity capital where control is diluted owing to voting rights to the holders. Cheaper Source: Flotation costs and listing costs for debentures are way lesser than those of equity capital, making them a cheaper source of funds for the company.  Disadvantages of Debentures 1. To Investors No Voting Rights: Debenture holders are not allowed to participate in company meetings and do not have voting rights. Thus they do not have any say in the company matters or policies. 2. To the Company Rigidity as to Interest Payment: A company issuing equity capital can fix the dividend rate as per the profit earned, but the same is not possible for a company issuing debentures, where the rate of interest is fixed, and interest has to be paid whether there is profit or not. Less control over Mortgaged Assets: Assets against which charges are made cannot be employed freely for the company’s uses because they are under the control of the creditors. This leads to the underutilization of assets and resources.  Types of Debenture A. On the basis of Security: Secured Debentures: Debentures that are issued against a security/collateral are called secured debentures. In other words, a charge is made against the assets of the issuing company. Unsecured Debentures: Debentures which are issued without any charge against the issuing company’s assets are called unsecured debentures. B. On the basis of Tenure: Redeemable Debentures: Such debentures, which are due to be repaid at the end of a certain period, either in a lump sum or in installments, either at a premium or at face value, during the lifetime of the entity are called redeemable debentures. Irredeemable Debentures: Such debentures are not redeemed or repaid during the lifetime of the company. In the event of the winding-up of the company, such redemption may be possible.  Types of Debenture (contd.) C. On the basis of Convertibility: Convertible Debentures: Debentures that can be converted into either equity capital or any other security are called convertible debentures. This can be done at the will of the holders of the company. Non- Convertible Debentures: Debentures which cannot be converted into equity shares or any other form of security are called non-convertible debentures. D. On the basis of Coupon Rate: Specific Coupon Rate Debentures: These debentures are issued at a specific rate of interest, called the coupon rate. This interest is payable to the holders periodically, regardless of whether the company made a profit that year or not. Zero-Coupon Rate Debentures: Such debentures do not carry any interest rate. To compensate the holders, these are usually issued at a discount so that the difference between the face value and the issue price can be treated as the interest income earned by the holder. E. On the basis of Registration: Registered Debentures: Debentures against which all information about their holders, like names, addresses, etc. are kept in a special register at the company’s head office are called registered debentures. Such debentures cannot be transferred just by delivery, but require a transfer deed. Bearer Debentures: These debentures are transferred via simple delivery and no special record is kept in the company register for such documents. Debenture Trustee Informally debenture trustee is a person who is responsible for issuance and distribution of debentures. A debenture trustee is a person or entity that serves as the holder of debenture stock for the benefit of another party. When a company is looking to raise capital, one method of accomplishing this is by issuing stock as a form of debt with the obligation to repay the debt at a specific interest rate. The trustee serves as a liaison (the person who keeps in contact with different groups) between the company that issued the debentures and the debenture holders that are collecting interest payments. According to SEBI Rules, 1993- “debenture trustee” means a trustee of a trust deed for securing any issue of debentures of a body corporate (Applicable to public companies only) Debenture Trustee A Debenture Trustee is a person who is entrusted with the Responsibility of ensuring the Rights of the Debentures The Objective is to ensure that Assets of company are sufficient to discharge the debentures and to ensure that company has not committed any breach to provision of TRUST DEED Every company issuing a Prospectus or Offer letter for the Subscription of Debenture should Appoint a Debenture Trustee. Conditions for Appointment- The name of Debenture Trustee should be mentioned in the Letter for Offer for subscription of debentures Before the Appointment of Trustee, A WRITTEN CONSENT should be obtained Eligibility for a debenture trustee To act as debenture trustee, the entity should either be a scheduled bank carrying on commercial activity, a public financial institution, an insurance company, or a body corporate. The entity should be registered with SEBI to act as a debenture trustee. Rights of Debenture Trustee The company cannot issue debentures before obtaining the consent of the debenture trustee The company has to specify the name of the debenture trustee in the offer letter The debenture trustee can call for periodical performance report of the company The trustee can call for reports regarding the use of funds raised through issue of debentures The trustee should communicate promptly to the debenture holders’ defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee The trustee can appoint a nominee to board of director of the company Before the trustee appoints the nominee the conditions must be satisfied: two consecutive defaults in payment of interest to the debenture holders; or default in creation of security for debentures; or default in redemption of debentures Duties of Debenture Trustee It shall be the duty of every debenture trustee to: (a) satisfy itself that the prospectus or letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed; (b) satisfy itself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders; (c) call for periodical status/ performance reports from the issuer company within 7 days of the relevant board meeting or within 45 days of the respective quarter whichever is earlier; (d) communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee therefor (e) appoint a nominee director on the Board of the company in the event of: (i) two consecutive defaults in payment of interest to the debenture holders; or (ii) default in creation of security for debentures; or (iii)default in redemption of debentures. Duties of Debenture Trustee (contd.) (f) ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach; (g) inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed (h)call for reports on the utilization of funds raised by the issue of debentures; (i) take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held; (j) ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of debentures.  What is an IPO? An IPO is an initial public offering, in which shares of a private company are made available to the public for the first time. An IPO allows a company to raise equity capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes a share premium for current private investors. Meanwhile, it also allows public investors to participate in the offering. Companies must meet requirements by exchanges and the Securities and Exchange Commission (SEC) to hold an IPO. IPOs provide companies with an opportunity to obtain capital by offering shares through the primary market. Companies hire investment banks to market, gauge demand set the IPO price and date, and more. An IPO can be seen as an exit strategy for the company’s founders and early investors, realizing the full profit from their private investment. When the company makes its first IPO to the public, the relationship is directly between the company and investors, and the money flows to the Company as its “Share Capital”. Shareholders thus become owners of the Company through their participation in the Company’s IPO and have ownership rights over the company. This is the largest source of funds for a company, which enables the company to create “Fixed Assets” which will be employed in the course of the business. The shareholders of the Company are free to exit their investment through the secondary market.  What is an IPO? (contd.) The Capital market represents the “Primary Market” and the “Secondary Market. The capital market has two interdependent and inseparable segments, the new issuers (the primary market) and stock (secondary) market. The primary market is used by issuers for raising fresh capital from the investors by making initial public offers or rights issues or offers for sale of equity or debt. An active secondary market promotes the growth of the primary market and capital formation, since the investors in the primary market are assured of a continuous market where they have an option to liquidate their investments. A corporate may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. An IPO is an important step in the growth of a business. It provides a company access to funds through the public capital market. An IPO also greatly increases the credibility and publicity that a business receives. In many cases, an IPO is the only way to finance quick growth and expansion. In terms of the economy, when a large number of IPOs are issued, it is a sign of a healthy stock market and economy.  Terms associated with IPO Terms Description Issuer An issuer can be the company or the firm that wants to issue shares in the secondary market to finance its operations. Underwriter An underwriter can be a banker, financial institution, merchant banker, or broker. It assists the company to underwrite their stocks. The underwriters also commit that they will subscribe to the balance shares if the stocks offered at IPO are not picked by the investors Fixed Price IPO Fixed Price IPO can be referred to as the issue price that some companies set for the initial sale of their shares. Price Band A price band can be defined as a value-setting method where a seller offers an upper and lower cost limit, the range within which the interested buyers can place their bids. The range of the price band guides the buyers Draft Red Herring The DRHP is the document that lets the public know about the company’s IPO listings Prospectus (DRHP) after the approval made by SEBI.  Terms associated with IPO Terms Description Under Subscription Under Subscription takes place when the number of securities applied for is less than the number of shares made available to the public. Over Subscription Oversubscription is when the number of shares offered to the public is less than the number of shares applied for. Green Shoe Option It refers to an over-allotment option. It is an underwriting agreement that permits the underwriter to sell more shares than initially planned by the company. It happens when the demand for a share is seen higher than expected. Book Building Book building is the process by which an underwriter or a merchant banker tries to determine the price at which the IPO will be offered. A book is made by the underwriter, where he submits the bids made by the institutional investors and fund managers for the number of shares and the price they are willing to pay. Flipping Flipping is the practice of reselling an IPO stock in the first few days to earn a quick profit. Eligibility criteria Any individual who is an adult and is capable of entering into a legal contract can serve the eligibility norms to apply in the IPO of a company. However, there are some other inevitable norms an investor needs to meet. The eligibility criteria are- It is required that the investor interested in buying a share in an IPO has a PAN card issued by the Income Tax department of the country. One also needs to have a valid demat account. It is not required to have a trading account, a Demat account serves the purpose. However, in case an investor sells the stocks on listings, he will need a trading account. It is often advised to open a trading account along with the Demat account when an investor is looking forward to investing in an IPO for the first time. IPO Process The IPO process essentially consists of two parts. The first is the pre- marketing phase of the offering, while the second is the initial public offering itself. When a company is interested in an IPO, it will advertise to underwriters by soliciting private bids or it can also make a public statement to generate interest. The underwriters lead the IPO process and are chosen by the company. A company may select one or several underwriters to manage different parts of the IPO process collaboratively. The underwriters are involved in the IPO due diligence, document preparation, filing, marketing, and issuance. Steps to an IPO 1.Proposals. Underwriters present proposals and valuations discussing their services, the best type of security to issue, the offering price, the amount of shares, and the estimated time frame for the market offering. 2.Underwriter. The company chooses its underwriters and formally agrees to underwrite terms through an underwriting agreement. 3.Team. IPO teams comprise underwriters, lawyers, certified public accountants (CPAs), and Securities and Exchange Commission (SEC) experts. 4.Documentation. Information regarding the company is compiled for required IPO documentation. The S-1 Registration Statement is the primary IPO filing document. It has two parts—the prospectus and the privately held filing information.1 The S-1 includes preliminary information about the expected date of the filing.2 It will be revised often throughout the pre- IPO process. The included prospectus is also revised continuously.  Steps to an IPO (contd.) 5. Marketing & Updates. Marketing materials are created for pre-marketing of the new stock issuance. Underwriters and executives market the share issuance to estimate demand and establish a final offering price. Underwriters can make revisions to their financial analysis throughout the marketing process. This can include changing the IPO price or issuance date as they see fit. Companies take the necessary steps to meet specific public share-offering requirements. Companies must adhere to both exchange listing requirements and SEC requirements for public companies. 6. Board & Processes. Form a board of directors and ensure processes for reporting auditable financial and accounting information every quarter. 7. Shares Issued. The company issues its shares on an IPO date. Capital from the primary issuance to shareholders is received as cash and recorded as stockholders' equity on the balance sheet. Subsequently, the balance sheet share value becomes dependent on the company’s stockholders' equity per share valuation comprehensively. 8. Post IPO. Some post-IPO provisions may be instituted. Underwriters may have a specified time frame to buy an additional amount of shares after the initial public offering (IPO) date. Meanwhile, certain investors may be subject to quiet periods.  Benefits of investing in an IPO Increased Recognition - When weighing the advantages and cons of an IPO, this good factor comes out on top. It assists management in gaining more reputation and credibility by becoming a trustworthy organization. Companies that are publicly traded are typically more well-known than their private competitors. In addition, a successful process attracts media attention in the financial sector. Access to Capital - A corporation may never receive more capital than it raises by going public. A company's growth trajectory might be substantially altered by the substantial cash available. An ambitious company may enter a new period of financial stability following its IPO. This decision can help R&D, hire new employees, establish facilities, pay off debt, finance capital expenditures, and purchase new technologies, among other things. Diversification Opportunity - When a corporation becomes public, its shares are traded on an exchange amongst investors. This increases investor diversity because no single investor owns a majority of the company's outstanding stock. As a result, purchasing stock in a publicly listed company can help diversify investment portfolios. Management Discipline - Going public encourages managers to prioritize profitability over other objectives, such as growth or expansion. It also makes contact with shareholders easier because they can't hide their issues. Third-Party Perspective - When a company goes public, it gains an independent perspective on its business model, marketing strategy, and other factors that could hinder it from becoming profitable.  Disadvantages of investing in an IPO More Costs - IPOs can be quite costly. Aside from the continuous costs of regulatory compliance for public firms, the IPO transaction process necessitates the investment of capital in an underwriter, an investment bank, and an advertiser to ensure that everything runs well. Lesser Autonomy - Public companies are led by a board of directors, which reports directly to shareholders rather than the CEO or president. Even if the board delegated authority to a management team to oversee day-to-day business operations, the board retains the final say and the authority to fire CEOs, including those who founded the company. Some businesses circumvent this by going public in a way that grants its founder veto power. Extra Pressure - In the midst of market turmoil, publicly traded firms are under enormous pressure to keep their stock values high. Executives may be unable to make hazardous decisions if the stock price suffers as a result. This occasionally foregoes long-term planning in favour of immediate gratification. IPO Alternatives Direct Listing - A direct listing is when an IPO is conducted without any underwriters. Direct listings skip the underwriting process, which means the issuer has more risk if the offering does not do well, but issuers also may benefit from a higher share price. A direct offering is usually only feasible for a company with a well-known brand and an attractive business. Dutch Auction - In a Dutch auction, an IPO price is not set. Potential buyers can bid for the shares they want and the price they are willing to pay. The bidders who were willing to pay the highest price are then allocated the shares available.  Book Building As per SEBI regulations, book building is essentially a method used in Initial Public Offering (IPO) to obtain an effective price. An IPO is opened for a specific time period, and then bids are gathered from investors at a range of values that fall within the price range set by the issuer. This process is directed forward to both institutional investors as well as retail investors. The issue price is determined when demand is generated in the process. In simple terms, book building is a process used by companies raising capital through IPO to use it for price and demand discovery. Book building is a capital-distribution method used primarily for promoting an equity share offering to the general public by aiming at both wholesale and retail investors. Following the bid closing date, the issue price is chosen based on a set of evaluation criteria. In India, book building is done using a method where the issuer establishes a base price and a price band that is roughly equivalent to the filing range used in the US. This is the main reason why this term is getting popular and used more frequently in the Investment banking sector. Characteristics of Book Building The number of securities to be offered, as well as the price range for the bids, is specified by the Issuer. The book is generally available for a period of five days. Bids must be submitted within the price range that has been indicated. Bidders have the option to amend their bids before the book closes. The book runners analyze bids on the basis of demand at different price levels once the book-building period has come to an end. The issuer who intends to make an offer appoints one or more lead merchant bankers to act as ‘book runners’. Types of Book Building There are also two different sorts of book-building processes: 75% book building and 100% book building. 75% Book Building: In accordance with this procedure, 25% of the issue must be sold at a fixed price and the remaining 75% must be offered through the Book Building procedure. 100% Book Building: In this type, either 100% of the total profits from the book-building process are offered to the public or 75% of the net offer to the public is made through the Book Building process, and 25% of the net offer made to the public at the amount decided through the Book Building process. Difference between fixed-pricing and book- building Price disclosure: In a fixed pricing issue, the price is decided before the issue of IPO. Whereas on the other hand, the issue prices of the IPO are not revealed in the beginning. They are computed by looking at the demand of the investors. Bidding: In a fixed pricing issue, the investors are bound to purchase the shares issued in the Initial Public Offering at the mentioned price only. But in the other method, the bids of the investors willing to purchase the shares issued in the company's IPO are within the pricing range given to them. Efficiency: This process is more efficient than the fixed price issue method, as the price is determined by analyzing the demand of the issue. Advantages of Book Building Book building can help to determine a security’s price and the intrinsic worth of its shares. When we issue the company we can get the benefit of selecting quality investors. The book-building process results in saving money as we know funds that are being spent on marketing and advertising activities are saved after using the book-building process. Share price can be determined rationally by looking at the demand for the same in the market. Book building process informs the general public about the bidding information due to which there is a higher probability of transparency. Book Building Process of IPO Step 1 - Appointment of Investment Banker -The main role of this person is to conduct due diligence. The investment banker also proposes a price band for the shares to be sold. If the management agrees with the propositions of the investment banker, the prospectus is issued with the price range suggested by the investment banker. Step 2 – Collecting Bids - The market participants are asked to submit bids in the second step to purchase the shares. They are asked to submit a bid for the number of shares they are prepared to purchase at various price points. It is suggested that these bids be sent to the investment bankers together with the application fee. It should be highlighted that not a single investment banker is in charge of collecting bids. Instead, the main investment banker can designate sub-agents to use their network specifically for gathering bids from a bigger number of people.  Book Building Process of IPO (contd.) Step 3: Price Discovery - This is the third step in which lead investment bankers aggregate all the bids, then they begin the process of price discovery. The final price chosen is simply the weighted average of all the bids that have been received by the investment banker. This price is set to be the cut-off price. Step 4: Publicizing - Stock markets all throughout the world demand that businesses disclose the specifics of the bids they received for the sake of transparency. Investment bankers are responsible for running advertising for a specified amount of time that includes information on the bids received for the purchase of shares. Several markets’ authorities also have the option of physically inspecting the bid applications. Step 5: Settlement - Finally, shares must be distributed and the application amount that has been credited from the individual bidders must be adjusted. For instance, a call letter requesting payment of the remaining balance must be sent if a bidder offers a lower price than the cut-off price. But, if a bidder placed a bid that was higher than the cut-off, a refund check must be prepared for them. The settlement procedure makes sure that investors are only paid the cut-off amount, not the shares that were sold to them. Book Building Process Example Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80- 100. When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range. Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price. Provisions of Companies Act related to the issue and allotment of securities 1. Issue of Prospectus The first step towards raising money for a company is done by issuing the shares. A Prospectus is an invitation to the public for the purchase of shares in the company. The company has to submit a copy of the prospectus to the SEBI whereas the private companies do not need to issue any prospectus. The prospectus of a company gives the information about the issuing company – names of Directors, terms of issue, opening and closing date of the share issue, application fees, bank details for deposit and minimum shares for application. 2. Receiving of Application After going through the prospectus of the company, interested investors applies for shares along with the application fee. When the number of shares applied for is more than the number of shares issued, this is termed as Over- subscription while the number of application for the issue of share is less than expected then this is known as Under-Subscription. The amount paid for the application money must be at least 5 percent of the nominal amount of share.  Provisions of Companies Act related to the issue and allotment of securities 3. Allotment of Shares The decision of the allotment of shares is taken by the company. Allotment of shares to its shareholders is called Acceptance and is not possible until subscription. Minimum Subscription is the minimum amount stated in the prospectus that is required to run the Business. It is unlikely that all the applicants will receive the allotment letter. Some applicants receive regret letters and their application money is returned to them. After Allotment of shares by the company, the shareholders have to pay the remaining amount due on shares according to the procedures mentioned in the prospectus. The minimum subscription amount of 90 percent of the issue is to be achieved by the company in 60 days from the date of closure of the issue. In case if it is not met, the company will have to refund the entire subscription amount. There is a relaxation of 18 days. For any delay after 78 days, the company will have to pay an interest of 6 percent per annum as a penalty.  Procedure for the Allotment of Shares after Company Incorporation Procedure for the Privately Placed Shares A notice is sent to all the shareholders for convening the Extra Ordinary General Meeting for the approval of the private placement offer letter. A private placement offer letter is being drafted. Resolution is passed in the Extra Ordinary General Meeting (EGM) Form MGT-14 is filed with ROC (Registrar of Companies) within 30 days of passing a special resolution in the meeting of shareholders. An offer letter is issued in Prospectus and Allotment of Securities ( PAS-4) within 30 days of passing Special resolution. After this, a complete record of Private placement is prepared in Prospectus and Allotment of Securities( PAS-5). Form PAS-4 and Form PAS-5 are filed with the ROC within 30 days of the issue of the offer letter in Form GNL-2. Allotment of shares is made within 60 days of receipt of Money from the persons to whom the right was given. A Board meeting for Allotment of shares is called. PAS 3 is filed with ROC within 30 days of Allotment.  What is the Restriction on the Allotment of Securities by the Public Listed Company? Minimum Subscription According to Section 69(1) of the Companies Act, no allotment can be made by the company until the minimum Subscription has been received. Application money In accordance with Section 69(3), the amount payable on each share should not be less than 5 per cent of the Nominal Value of the shares. Money to be deposited in a Scheduled Bank According to Section 69(4), the Money received from the applicants must be deposited in Schedule Banks until the certificate of commencement of Business has been obtained. Returns of Money According to section 69(5), if the minimum Subscription has not been raised or the Allotment cannot be made within 120 days from the date of publication of the prospectus, the Director has to return the money received from the applicant. Opening of the Subscription List According to Section 72, no allotment can be made until the beginning of the 5th day after the publication of the prospectus or any time later as mentioned in the prospectus. Rejection of Application If any person gives public notice of withdrawal of the consent to the issue of the prospectus, any applicant can revoke this application. Underwriting “Underwriting is an agreement entered into before the shares are bought by the public that in the event of the public not taking up the whole of them the underwriter will take an allotment of such part of the shares as the public has not applied for.” Need For Underwriting When a company goes in for an initial public offer (IPO), it may face certain uncertainty about whether its offer of shares or other securities will be subscribed in full or not. As per SEBI Guidelines 14(4)(b) , it is required that if the company is not able to collect 90% of the offer amount, then it needs to compulsorily return the money to those who have subscribed to the shares and causing lot of issue expenses to go waste. This uncertainty could be avoided by the help of a specialized group of risk-redeemers — called Underwriters. Types of Underwriting 1. Full Underwriting It is an agreement under which the underwriter undertakes the guarantee of buying the whole of shares or debentures placed before the public in the event of non-subscription. The liability of the underwriter is to buy and pay for the entire unsubscribed portion of the issue. 2. Partial Underwriting Under this type of agreement, the underwriter undertakes the guarantee for only part of the issue offered to the public and his liability is limited to the extent of unsubscribed portion of the issue underwritten by him. Types of Underwriting 3. Syndicate Underwriting Under this type of underwriting, a number of underwriting firms enter into an agreement among themselves to undertake the guarantee of buying shares or debentures of a large issue offered to the public involving huge funds and risk. In syndicate underwriting two types of separate agreements take place, one between the issuing company and the syndicate of underwriters, and the other among the underwriters who are members of the syndicate. 4. Firm Underwriting When an underwriter undertakes to buy or subscribe a certain number of shares or debentures irrespective of the subscription from the public, it is called firm underwriting. The liability of underwriters in case of firm underwriting is both for shares underwritten as well as such part of the shares as the public has not applied for. Firm underwriting generates confidence among investors and increases the chances of success of the issue. Types of Underwriting 5. Sub-Underwriting: Sometimes, the underwriter enters into agreement with some other underwriters to undertake guarantee for the issue of whole or part of the issue underwritten by him. Such an agreement between the underwriter and the other underwriters (called sub-underwriters) is known as sub- underwriting. The sub-underwriters have no agreement with the issuing company and work under the main underwriter who pays them some commission out of his underwriting commission. 6. Outright Purchases of Issues: In all the five forms of underwriting agreements discussed above, the underwriters provide the services on commission basis. However, in some cases the underwriters, instead of undertaking guarantee to buy shares or debentures not subscribed by the public, may enter into an agreement to out-rightly purchase the issue (shares or debentures) at an agreed price and arrange to sell the same latter through their own arrangements. Role of Underwriter The primary role of the underwriter is to purchase securities from the issuer and resell them to investors. Underwriters act as intermediaries between issuers and investors, providing for an efficient flow of capital. The underwriters take the risk that it will be able to resell the securities at a profit. Such an activity helps to enhance the goodwill of the issuing company by purchasing securities either directly from the company or from the market, they vouch for the financial soundness of the company. By undertaking to take up the whole issue or the remaining shares not subscribed by the public, it helps a company to undertake project investments with the assurance of adequate capital funds.  Underwriting Commission A company may pay commission to any person in connection with the subscription or procurement of subscription to its securities, whether absolute or conditional, subject to the following conditions: (a) the payment of such commission shall be authorized in the company’s articles of association (b) the commission may be paid out of proceeds of the issue or the profit of the company or both (c) the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five percent of the price at which the shares are issued or a rate authorized by the articles, whichever is less, and in case of debentures, shall not exceed two and a half per cent of the price at which the debentures are issued, or as specified in the company’s articles, whichever is less (d) the prospectus of the company shall disclose - (i) the name of the underwriters (ii) the rate and amount of the commission payable to the underwriter (iii) the number of securities which is to be underwritten or subscribed by the underwriter absolutely or conditionally (e) there shall not be paid commission to any underwriter on securities which are not offered to the public for subscription (f) a copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of the prospectus for registration  Buy Back of Shares (as per Companies Act, 2013) Brief Introduction and Purpose of Buy Back: A Company having excess fund and does not have any good investment solution and considering it that unused Cash is costly for the Company therefore by using that Cash Company can Bay back its shares from the Market, though Companies do buybacks for various reasons, including company consolidation, equity value increase, and to look more financially attractive. A buyback of shares is buying back of own shares by a company that was issued earlier. It is a corporate action event wherein a company makes a public announcement for the buyback offer to acquire the shares from existing shareholders within a given timeframe. The company announces an offer price for the buyback that is generally higher than the current market price. Sources of Buy-back A company may purchase its own shares or other “specified securities” - its free reserves; - the securities premium account; or - the proceeds of the issue of any shares or other specified securities. However, no buy-back of any kind of shares can be made out of the proceeds of an earlier issue of the same kind of shares. “Specified Securities” include ESOP or other securities as may be notified by the Central Government from time to time. Reasons for Buy back of shares There are several reasons associated with it that urge a company to announce a buyback. -Undervalued Stock -Excess cash with not many project opportunities -Strengthening promoter holding in the Company -To achieve optimum capital structure Methods of Buyback of shares: Buyback may be done in following manner: -Buyback of shares from existing shareholders on the proportionate basis -Buyback of shares from an open market -Buy-back of securities issued to employees under ESOP or sweat equity Condition of Buy- back As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are: Authorization for Buy-Back: Articles of Association(AOA) of the company should authorize Buy-Back, if no provision in AOA then first alter the AOA. Approval:: Approval of Board of Directors- up to10% of the total paid-up equity capital and free reserves of the company; or Approval of Shareholders- up to25% of the aggregate of paid-up capital and free reserves of the company. Post buy-back debt-equity ratio cannot exceed 2:1. Only fully paid up shares can be brought back in a financial year. Time limits: The buy-back should be completed within a period of one year from the date of passing of Special Resolution or Board Resolution, as the case may be. Condition of Buy- back (contd.) Cooling Period: from the date of completion of Buy-back Company can not issue same kind shares including right issue of shares within a period of 6month except Bonus issue or discharge of subsisting obligations. Withdrawal of offer: No withdrawal of offer is allowed once it is announced to the shareholders. Basis of arriving at Buy-back price: Calculation of Buy-back needs to be done on the basis of : Audited account which is not more than 6month old from the date of offer document; or Unaudited account not older than 6 month from offer document subject to limited review by Auditor of the Company Procedure for Buy-back of shares for unlisted Companies: Convene the meeting of the Board of Directors of the Company, Notice of General Meeting: Send Notice of General Meeting at which special resolution to be passed accompanied by Explanatory statement in which the particulars required to be mentioned as per section 68(3) [a to e] and Rule 17(1) [a to n] of Companies (Share Capital and Debentures) Rules, 2014 should be disclosed. Letter of Offer (Form SH-8): Before the buy-back of shares, the company shall file with the Registrar of Companies a Letter of Offer in e-form SH-8 and the Letter of Offer shall be dispatched to the shareholders immediately after filing the same with the Registrar of Companies, ensuring the matters as prescribed in the Sub-rule 10 of Rule 17 of The Companies (Share Capital and Debentures) Rules, 2014. Offer Period: The offer for buy back shall remain open for a minimum period of 15 days but not more than 30 days from the date of dispatch of letter of offer. (Period may be less than 15 days, if all the members agree.) Procedure for Buy-back of shares for unlisted Companies: (contd.) Declaration of Solvency (Form SH-9): The company shall file with the Registrar of Companies, along with the letter of offer, a declaration of solvency in e-Form SH-9 and verified by affidavit Acceptance of Offer: In case the number of shares offered by the shareholders is more than the total number of shares to be bought back by the company, the acceptance per shareholder shall be on proportionate basis out of the total shares offered for being bought back. Separate Bank Account: After the closure of the buy-back offer, the company shall immediately open a separate bank account and deposit therein, such sum, as would make up the entire sum due and payable as consideration for the shares tendered for buy-back. Verification: The company shall complete the verifications of the offers received within fifteen days from the date of closure of the offer and the shares or other securities lodged shall be deemed to be accepted unless a communication of rejection is made within twenty one days from the date of closure of the offer Procedure for Buy-back of shares for unlisted Companies: (contd.) Payment: Within 7 days from the date of verification of the offers: Make payment of consideration in cash to those shareholders whose shares has been accepted Return the share certificate to those whose shares are not accepted Extinguishment of Shares: A Company should extinguish and physically destroy shares bought back within 7 days of completion of the buy-back. Return of Buy-Back (Form SH-11): Submit Return of buy-back in Form SH-11 Annexed with Compliance Certificate in Form SH-15, Signed by 2 Directors out of which One must be a Managing Director, if any. Register of Buy-Back (Form SH-10): The Company shall maintain a register of shares which has been bought back in Form SH-10. Demat Account The Demat full form stands for a Dematerialised Account. Demat is a form of an online portfolio that holds a customer’s shares and other securities. It has negated the necessity of holding and trading physical share certificates. A Demat account is used to hold shares and securities in an electronic (dematerialised) format. These accounts can also be used to create a portfolio of one’s bonds, ETFs, mutual funds, and similar stock market assets. Demat trading was first introduced in India in 1996 for NSE transactions. As per SEBI regulations, all shares and debentures of listed companies have to be dematerialised in order to carry out transactions in any stock exchange from 31st March 2019. Features of Demat Account Easy Access - It provides quick & easy access to all your investments and statements through net banking. Easy Dematerialization of Securities - The depository participant (DP) helps to convert all your physical certificates to electronic form and vice versa. Receiving Stock Dividends & Benefits - It uses quick & easy methods to receive dividends, interest or refunds. It is all auto-credited in the account. It also uses Electronic Clearing Service (ECS) for updating investors’ accounts with stock splits, bonus issues, rights, public issues, etc. Easy Share Transfers - Transfer of shares has become much easier and time-saving with the use of a demat account. Liquidity of Shares - Demat Accounts have made it simpler, faster and more convenient to get money by selling shares. Loan Against Securities - After opening a demat account, one can also avail of a loan against the securities held in your account. Freezing Demat Account - One can freeze a certain amount or type of their demat account securities for a certain period of time. This eventually will stop the transfer of money from any debit or credit card into your account. Dematerialisation It is the conversion of the physical share and debenture certificates to an electronic form. Managing investment in shares and securities becomes much easier when all physical certificates are present in the dematerialised form. It reduces the chances of forgery and fraud that had become rampant when electronic entries were unavailable. In the case of dematerialisation, the electronic records are stored at a depository. In India, the National Securities Depository Limited (NSDL) and Central Depository Services (India) Ltd (CDSL) are the authorized depositories.  Process - Dematerialisation Dematerialization of shares primarily includes 4 different parties. These are: The share-issuing firm The Depository The Owner or the beneficiary The Depository Participant (DP) The share-issuing firm: Every firm planning to issue dematerialized shares must amend its Articles of Association, which set forth the rules for how the company will be run, in order to trade in dematerialized shares. Post the revision of regulations, it is mandatory for the companies to register with a depository. The Depository: National Securities Depository Ltd (NSDL) and Central Depository Securities Limited (CDSL) are the two depositories operating in India. For the purpose of uniquely identifying each share and security, the depositories give businesses a 12-digit International Securities Identification Number. Registrars and Transfer Agents typically act as an intermediary between the company and the repository. The Owner or the Beneficiary: Both new and experienced share investors are required to open a "Demat Account" under the current rules and regulations. The registered account keeps track of the investor's transactions, including purchases and sales of exchange-traded funds (ETFs), stocks, bonds, and mutual funds. Investors are unable to open an account on their own. On behalf of their client, depository participants or brokerage firms open a demat account. The Depository Participant (DP): DP is the Depositories' registered agent. After processing their registration form and supporting documentation, they open demat accounts for their clients. Rematerialisation Any investor who has already converted the securities and debenture certificates to electronic formats has the option of changing them to physical form once again. People opt for rematerialisation to avoid paying for the maintenance charge of a Demat account that has only 1 or 2 shares. It is the process of converting all securities in the electronic form to physical certificates. You will need to fill out a Remat Request Form (RRF) and approach the Depository Participant (DP) with it. Process - Rematerialisation Investors must complete a Remat Request Form (RRF) with their respective DP, just as the share dematerialisation process. Investors cannot trade their shares while the process of rematerialisation is taking place. Rematerialisation takes place in the steps described below: 1. Investor gets in touch with their respective DP. 2.Investors receive a Remat Request Form (RRF) from depository participants. 3.Following receipt of the completed RRF, the depository participant submits the request to the share issuer and depository, blocking the investor's account temporarily. 4.The share issuer prints actual certificates after successfully processing the request, and after verifying with the depository, sends the certificates. 5.The account gets debited for the blocked balance. Differences Basis Dematerialisation Rematerialisation Definition Physical shares are converted into Electronic shares are converted to the electronic format the physical form Cost of Maintenance Annual maintenance costs and Physical certificates do not require other transaction fees are maintenance charges applicable as specified by the broker Disadvantages No threats to shares held in the High chance of theft, electronic form misplacement, fraud and forgery Identification attributes Shares held in the dematerialised Physical shares hold distinct form do not have a distinct number numbers issued by the RTA (Registrar and Transfer Agent). Differences (contd) Basis Dematerialisation Rematerialisation Transaction approach All transactions take place Post rematerialisation, transactions electronically take place physically Maintained by NSDL or CDSL — depository The company maintains the participants — maintain the account account Challenges Dematerialisation is a simple and Rematerialisation a complex easy process; mandatory when procedure and takes an extended trading in shares. period of time. The process is typically a long drawn and requires expert assistance. Sequence It is the principal and primary It is a secondary and supporting function of the depository, and is function of the depository and a an initial process. reversal procedure. Meaning of Member The Companies Act divides the members into three classes. According to Sec. 41 of the Companies Act, the three classes of members are: 1. The persons who have subscribed to the Memorandum of a company 2. Every other person who has agreed in writing to become a member of the company and whose name has been entered in the Register of Members 3. Every person holding equity share capital of a company and whose names are recorded as beneficial owner in the depository records are considered as members of the concerned company Member vs Shareholder A member can be distinguished from a shareholder in the following circumstances: 1. A registered member of a company having no share capital is not a shareholder since the company itself has no share capital 2. A person who holds a share warrant is a shareholder but he is not a member of the company 3. The legal representative of a deceased member is only a shareholder but not a member. To acquire membership, the legal representative of the deceased member should apply to the company and get his name registered in the register Who can become a Member? The company law does not prescribe any disqualification, which would depart a person from becoming a member of a company. It appears that any person who is competent to enter into valid contract can become a member of a company. The Memorandum or Articles may impose certain restrictions or restrain certain persons from acquiring membership in a company. In the absence of any express provision regarding the capacity of a person, the provisions of the Contract Act shall apply.  Rights of the Members 1. Statutory Rights: These are the rights conferred upon the members by the Companies Act. These rights cannot be taken away by the Articles of Association or Memorandum of Association. Some of the important statutory rights are given below 1. Right to receive notice of meetings, attend, to take part in the discussion and vote at the meetings. 2. Right to transfer the shares [in case of public companies]. 3. Right to receive copies of the Annual Accounts of the company. 4. Right to inspect the documents of the company such as register of members, annual returns, etc. 5. Right to participate in appointments of directors and auditors in the Annual General Meetings. 6. Rights to apply to the Government for ordering an investigation into the affairs of the company. 7. Right to apply to the Court for winding up of the company. 2. Documentary Rights: In addition to the statutory rights, there are certain rights that can be conferred upon the shareholders by the documents like the Memorandum and the Articles of Association. 3. Legal Rights: These are the rights, which are given to the members by the General Law. Termination of the Membership 1. Voluntary termination (by act of the parties) 2. Compulsory termination (by operation of law) 1. Voluntary/by act of the parties termination: A person 2. Compulsory/By operation of law ceases to be a member of a company by doing the following termination: A person ceases to be a member act: by operation of law in the following cases: By transfer of shares By termination of shares By forfeiture of shares By insolvency of the person By surrender of shares By exercising lien by the company. By the order of court on acquiring shares By issue of share warrants On winding up of a company By redemption of shares By the buy back of shares by the company On the death of the person By irregularity in allotment By repudiating the contract on the ground of false or misleading statement in the prospectus of the company.