Answer in brief.
1. What is Book Building Method ?
Ans: Under this method, the issuer company determines the number of shares and the issue price at which its shares will be sold by the bidding process.
The company issues a Red Herring Prospectus which contains a price range or price band and asks the investors to bid on it. Here, the minimum price of bid is called ‘Floor Price’ or ‘Ask Price and the maximum price of bid is called ‘Cap Price or ‘Bid Price’. The final price at which shares are offered to the investors is called as ‘Cut-Off price. The bids along with the application money is to be submitted to the Lead Merchant Bankers called as ‘Book Runners’ who enter the bids in a book. After bidding is over, the company fixes ‘cut off-price’ based on the highest or best price at which all shares on offer can be sold.
2. State the provisions for Rights Issue.
Ans : The Company issue shares to its existing equity shareholders in the proportion of shares held by them. Such shares issued is called as Rights Issue’ of shares.
The provisions related to the Rights Issue are as follows:
Rights shares are sold to the existing shareholders at a price which is lesser than its market price.
A company has to send a Letter of an offer to the existing shareholders at the time of issuing Rights shares.
The letter of offer shall mention:
– The number of shares offered.
– The period of offer i.e. offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of the offer.
– The right to renounce i.e. the shareholders have a right to give up their shares in favour of any other person.
The letter of offer can be sent by registered post, speed post, courier, or through electronic mode. If the shareholder does not respond to the Rights Issue offer within a stipulated time, it is implied that he is not interested in the offer and the company can offer the unsold shares to new investors. The company has to obtain a minimum subscription i.e. 90% of the issue.
3. State the provisions related to Bonus Shares.
Ans: Bonus issues refer to the fully paid-up shares given to its existing equity shareholders without any cost, based upon the number of shares they have. Provisions related to Bonus Shares are as follows:
A company can issue Bonus Shares only out of:
• Free reserves or
• Securities Premium Account or
• Capital Redemption Reserve Account
A company cannot issue Bonus Shares only out of reserves created by the Revaluation of Assets. The company also cannot issue bonus shares instead of paying a dividend. Once the announcement for Bonus Shares is made by the Board of Directors then it cannot be withdrawn. Bonus shares are fully paid up shares. Shareholders cannot give away their bonus shares to another person. There is no minimum subscription to be collected.
4. State the general principles / rules for allotment of shares.
Ans: Allotment of Shares means Company allots (to give) shares to the general public. Allotment means the distribution of shares among the applicants.
The general principles/rules for allotment of shares are as follows:
Communication: The decision regarding allotment must be communicated to the applicants. It means the company should inform the investors in writing and then share the applicant and the company enters into a contract. Absolute and unconditional: The allotment must be absolute and unconditional, i.e. it must be made on the same terms as stated in the application.
– No change in the terms of allotment or new conditions can be added at the time of allotment.
Proper authority: The allotment should be made by proper authority, i.e. Board of Directors of the company or authorized committee on behalf of the Board of Directors. An allotment made without proper authority will be invalid.
Allotment should not be in contravention (violation) of any other laws:
– A Company cannot allot shares by violating or contradicting any other existing laws. For instance, Shares cannot be allotted to a minor.
– But in the event of any such contravention, the company and every officer of the company who is in default shall be punishable with a fine which may extend to Rs. 5,000.
Allotment against applications only: A company can allot shares only if it has received a written application for shares from the applicant. Thus, no valid allotment can be made on oral requests. It must be against written application only.
Reasonable time: The allotment must be made within a reasonable time. Otherwise, the applicant is not bound to accept it, i.e. applicant can reject it. As per the Act, allotment shall be done within 60 days of receipt of application money. The allotment can be made from the fifth day from date of the issue of prospectus.
5. State the contents of Shares Certificate.
Ans : Share certificate should be in Form SH-1 as prescribed under Companies (Share Capital and Debenture) Rules, 2014. Following are the contents of a share certificate:
Name of the Company, CIN, Registered office address, Folio Number, Share Certificate Number, Name of Member, Nature of share, number of shares and a distinctive number of the shares, Amount paid on shares, Common Seal, if any, and signature of two Directors and Company Secretary.
6. What are the effects of forfeiture of shares ?
Ans: Forfeiture of Shares: Forfeiture of Shares is a process where the company forfeits the shares of a member or shareholder who fails to pay the call on shares or installments of the issue price of his shares within a certain period of time after they fall due. In other words, when the shareholder fails to pay the full amount of share which he agreed to pay in installments the company can cancel his shares.
The effects of forfeiture of Shares are as follows:
Cessation of membership:
– A person whose shares have been forfeited ceases to be a member in respect of forfeited shares.
– The member’s name removed from the Register of Members,
– This is provided under regulation 32(1) of Table F of Schedule 1 of Companies Act, 2013.
Liability of Members:
– The liability of a person whose shares have been forfeited comes to an end when the company receives the payment in full of all such money in respect of shares forfeited.
– A member is liable for unpaid calls even after the forfeiture of shares.
– This is provided in Regulation 32(2) of Table F.
Liquidation of the company:
– In the case of, liquidation of the company takes place within one year of the forfeiture, then the liability of a former shareholder remains as a liability of a past member to pay calls.
– In other words, if the company goes for liquidation, a member whose shares have been forfeited is liable to pay the calls as a past member.
Forfeited shares become the company’s property:
– The forfeited shares become the property of the company on forfeiture.
– Accordingly, these may be re-issued or otherwise disposed of on such terms and in such manner which the board of directors thinks fit.
This provided under Regulation 31(1) of Table F.
7. When can the Board of Directors refuse transfer of shares ?
Ans: Refusal to Transfer of Shares:
If a company refuses to register the transfer of shares, it shall send a notice of refusal to the transferor and the transferee or to the person giving intimation of such transfer within thirty days from the date on which the instrument of transfer was delivered to the company.
The notice should contain a valid reason for such refusal. The Board of Directors has the authority to refuse registration of transfer of shares. A member may appeal to the NCLT against the refusal by the Board within a period of thirty days from the date of receipt of the refusal notice.
If no notice is received, the member can appeal within 60 days in case of a Private Company and within 90 days in case of a Public Company.
It is important to note that the Board may refuse the transfer in the following cases:
– Where the member transfers the shares to his/her representative(s).
– When the provisions for transfer of shares as given in the Articles of Association is not fulfilled by the member.
– When the instrument of transfer is not as per the rules prescribed under the Companies Act.
– When the Instrument is not accompanied by the Share Certificate.
– When the company has a lien on the shares to be transferred.
8. Explain Employee stock option scheme.
Ans: Employee Stock Option Scheme (ESOS): This is a scheme through which a company encourages employee participation in the business of a company. Under this scheme, the company offers certain shares, from the new issue to the whole time directors, officers, or employees of the company. The company offers the shares at a predetermined price which is usually less than the price offered to the general public. The Employee Stock Option Scheme (ESOS) must be approved by passing a special resolution in the general meeting.
Provisions related to ESOS are as follows: A company may offer the shares directly to the employees or through an Employee Welfare Trust. The shares are offered at price less than the market price. There is a minimum vesting period of one year. Usually, the company will specify the lock-in period i.e. period during which the employee cannot sell his shares. The Lock-in period is a minimum of 1 year between the grant of option and vesting. Shares issued under this scheme do not enjoy any dividend or voting rights till the employees buy the shares. The company has to get the approval of shareholders through a special resolution to issue ESOS. The employee cannot transfer his option to any other person nor can he pledge or mortgage* the shares issued under ESOS. The company has to set up a compensation committee to administer ESOS. The company has to fulfill the provisions of SEBI (Share Based Employee Benefits) Regulations, 2014.
9. What is calls on shares ?
Ans: “Calls on shares” means the demand made by the company on its shareholders holding partly paid shares to pay part or full unpaid amount on the shares. The board of directors of the company makes such a call on shares in accordance with terms and conditions of the issue of shares and as per articles of association of the company. A call may be defined as “A demand made by the company on its shareholders to pay whole or part of the balance remaining unpaid on each share at any time during the lifetime of a company”.
For instance, the price of a share is Rs.100/. At the time of applying for shares, the investor has to pay Rs. 5/- of the nominal value of a share, so Rs. 95/- is balanced on each share. As and when the company needs money it asks its shareholders to pay, it is known as calls on shares.
The company has to send a call letter/notice to the shareholders asking them to pay the call money and give them a minimum 14 days’ notice to pay the call money to the Company’s Banker, No call can be made for more than 25% of the nominal value of shares. The gap between two calls should not be less than one month from the date fixed for the payment of the last preceding call.
10. What is transfer of shares ?
Ans: Transfer of share means the transfer of ownership of shares from one person to another. In other words, a shareholder can transfer the share to another shareholder. Transfer of shares takes place when the shareholder wants to sell his shares or give as a gift to another person. Shares can only be transferred by following the procedure laid down in the Articles of Association. A shareholder can sell either a part of a share or entire shares held by him. In the case of public companies, shares are freely transferable subject to the provisions of the Articles of Association. Whereas, in the case of Private Company, there are restrictions on the free transfer of shares. Once, the shares are transferred, the liability of the transferor ends. It takes place when both the transferor and transferee are living.