Answer the following question
1. Explain the classification of share capital.
Ans: Meaning of Share Capital: The term capital, in general, means the amount of money invested in a business. It includes not only the money invested at the time of inception of the business firms but also all the money invested subsequently.
The capital raised by the company by issuing Equity Shares and Preference Shares is called share capital. Usually, in share capital, the proportion of Equity Shares is more than Preference Shares. The Companies Act uses the term capital in several senses.
The classification of Share Capital
1. Paid-up Capital and Calls in Arrears
2. Issued Capital and Unissued Capital
3. Called up Capital, Uncalled Capital, and Reserve Capital
4. Subscribed Capital or Unsubscribed Capital
5. Authorized Capital
(1) Paid-up Capital and Calls in Arrears: – The Called-up capital may not be fully paid. Some shareholders may pay only part of the amount required to be paid or may not pay at all. Paid-up Capital is the part of called-up capital which is actually paid by the shareholders.
The remaining part indicates the default in payment of calls by some shareholders, known as Calls in Arrears. In other words, the amount not paid by shareholders is called as Calls in Arrears or Unpaid Calls.
(2) Issued Capital and Unissued Capital: – Issued Capital is that part of nominal capital which is issued to the public. Companies generally do not issue all its capital at once.
They issue their capital in installments and so the issued capital is generally less than the nominal capital. It never exceeds the authorized capital.
Whereas, Unissued Capital is the balance of nominal capital remaining to be issued to the public. The company can issue shares from the unissued capital, in the future.
(3) Called up Capital, Uncalled Capital, and Reserve Capital: – The Called up Capital is the part of subscribed capital which the company has actually called upon the shareholders to pay.
Called – up Capital includes the amount paid by the shareholder from time to time on the application, allotment, various calls, etc.
The remaining part of subscribing capital not yet called up is known as Uncalled Capital. The Uncalled Capital may be converted into Reserve Capital by passing a special resolution.
Reserve Capital is a capital that a company keeps aside a part of uncalled capital. It can be called up only in case of winding up of the company, to meet the liabilities arising then. It is kept reserved for the Creditors in case of the winding-up of the company.
(4) Subscribed Capital or Unsubscribed Capital: – Subscribed Capital is that part of the issued capital which is taken up by the public. Sometimes, the public may not take up all the shares that are offered to the public, for a subscription.
In such a case, the subscribed capital shall be less than the issued capital. If the public subscribe all the shares, it shall be equal to the issued capital
Unsubscribed Capital is that part of the issued capital which is not allotted to the public.
The unsubscribed capital is also known as Treasury shares, which are shares held by the corporation itself and have no exercisable rights.
(5) Authorised Capital: – This is the amount of capital stated in the capital clause of the Memorandum of Association. It is also known as “Nominal Capital” or “Registered Capital”.
The company is entitled to raise finance by the issue of shares only up to the amount of authorised capital. However, the company can increase the amount of authorized capital by altering the Memorandum suitably. The promoters generally fix the amount of nominal capital after considering both the long-term and short-term requirements of the proposed company.
2. Explain the two methods a company can use to make its public offer of shares.
Ans: Public Issue or offer means offering the shares to the public. This is the most common method used by companies. The company invites the public to subscribe for its shares by issuing a prospectus.
The two methods a company can use to make its public offer of shares are as follows:
(1) Initial Public Offer (IPO): An Initial Public Offer (IPO) is a process of offering shares to the general public for the first time. A public company makes an appeal to the general public to purchase its shares by issuing the prospectus. The prospectus contains detailed information about the company, its project, and shares. It also includes an application form free of cost.
(2) Follow on Public Offer (FPO): Follow-on Public Offering or Follow on Public Offer is the process of offering shares to the public, after the process of IPO. In FPO, the company goes for a further issue of shares to the general public with a view to diversifying its equity base. The shares are offered for sale by the company through the prospectus.
3. Explain briefly the different types of shares offered by a company to its existing Equity shareholders.
Ans: The different types of shares offered by a company to its existing Equity shareholders are as follows:
(1) Rights issue: The Company issue shares to its existing equity shareholders in the proportion of shares holding by them. Such shares issued are called as ‘Rights Issue’ of shares. Under the rights issue, such shareholders are given pre-emptive rights to apply for new shares. However, if the shareholder does not opt to subscribe to such shares, then the company has the option to sell it to the general public. A company can make a Rights Issue when it is making a private placement. The main aim of issuing the right shares is to raise additional funds by offering shares to the existing equity shareholders. The provisions related to Rights Issue are as follows:
Rights shares are sold to the existing shareholders at a price which is lesser than its market price.
A company has to send a ‘Letter of offer’ to the existing shareholders at the time of issuing Rights shares.
The letter of offer shall mention:
• The number of shares offered.
• The period of offer i.e. offer is valid for a period not less than fifteen days and not exceeding thirty days from the date of the offer.
• The right to renounce i.e. the shareholders have a right to give up their shares in favour of any other person.
The letter of offer can be sent by registered post, speed post, courier, or through electronic mode. If The shareholder does not respond to the Rights Issue offer within a stipulated time*, it is implied* that he is not interested in the offer and the company can offer the unsold shares to new investors. The company has to obtain a minimum subscription i.e. 90% of the issue.
(2) Bonus issues: Bonus issues refer to the fully paid-up shares given to its existing equity shareholders without any cost, based upon the number of shares they have. Such shares are given by the company as a gift to its existing equity shareholder out of its profits or reserves.
For this purpose, a certain proportion is decided. For instance, if a person holds 100 shares and the company declares 1:2 bonus issues, then for every 2 shares held, he gets 1 share free of cost. The process of issuing the bonus shares out of the company’s profits or reserves is known as ‘Capitalisation of Profits’.
Provisions related to Bonus Issues are as follows:
A company can issue Bonus Shares only out of:
• Free reserves or
• Securities Premium Account* or
• Capital Redemption Reserve Account*
A company cannot issue Bonus Shares only out of reserves created by Revaluation of Assets
The company also cannot issue bonus shares instead of paying dividend. Once the announcement for Bonus Shares is made by the Board of Directors then it cannot be withdrawn. Bonus shares are fully paid up shares. Shareholders cannot give away their bonus shares to another person. There is no minimum subscription to be collected.
4. Explain the statutory provisions for allotment of shares.
Allotment of Shares:
(1) Allotment of shares means the company allots (to give) shares to the general public. Allotment means the distribution of shares among the applicants.
(2) When a public company wants to issue the shares to the general public, it has to issue prospectus to invite the general public to subscribe to its shares.
Statutory provisions of allotment of shares
1.Registration of Prospectus
3. Application money
4. Depositing the application money
5. Minimum subscription
6. Appointment of Managers to the issue and various other agencies
7. Permission to deal on Stock Exchange
8. Closing of the subscription list
9. Beginning of allotment work
The statutory provisions for allotment of shares are as follows:
1) Registration of Prospectus: – The Company has to file a copy of the prospectus with the Registrar of Companies (ROC) while raising its capital by issuing the shares to the general public. When the company raises the capital privately, it has to prepare ‘Statement in lieu of Prospectus’.
2) Over Subscription: – In the case of oversubscription, the company has to refund the excess application money to the applicants. If it is failed to do so in the prescribed time then every officer of the company would be punishable. SEBI does not allow any allotment in excess of securities offered through offer document or prospectus. However, it may permit to allot not more than 10% of the net offer.
3) Application Money: The part of the face values of shares which are collected by the company along with share application, is known as ‘Application Money. Application money should not be less than 5% of the face value of the share. SEBI has specified (for public companies) the application money should not be less than 25% of the nominal amount of shares.
4) Depositing the Application Money: As per this condition, the company has to deposit the money into separate account known as Share Application Money Account’ opened in a scheduled bank by the company. The company is not allowed to withdraw this amount.
5) Minimum Subscription: Minimum subscription is the minimum amount raised by the company for obtaining a trading certificate and to start the work of allotment of shares. This amount is mentioned in the prospectus. It must be collected within thirty (30) days from the issue of prospectus. The minimum subscription amount should be 90% of the issued capital. SEBI has stated minimum subscription should be 90% of the issue: – Usually, when a company does not collect minimum subscriptions, it means its issue has been undersubscribed i.e. the number of shares applied for is less than the shares offered by the company. If a minimum subscription is not collected within the specified time, the entire amount received as application money should be returned to the subscribers within fifteen days of closure of the issue. To avoid such a situation, the company may enter into an underwriting agreement* with the underwriters.
6) Appointment of Managers to the issue and various other agencies: – The company has to appoint one or more Merchant Bankers to act as managers to the public issue.
It also has to appoint:
• Registrar to the issue,
• Collecting Bankers,
• Underwriters to the issue and Brokers to the issue.
• Self-certified syndicate banks,
• Advertising agents etc.
7) Permission to deal on Stock Exchange: – Every company, before making a public offer shall apply to one or more recognized Stock Exchanges to seek permission for listing* its shares with them. For this, the prospectus shall mention the name of the Stock Exchange. In addition, an application for permission to list in that stock exchange has to be made by the company. If permission is not given by the stock exchange, the allotment made shall be considered void.
8) Closing of the Subscription List: – There is no provision in the Companies Act regarding the closing of the subscription list. But as per SEBI guidelines, the subscription list must be issued for a minimum of 3 and a maximum of 10 working days. In the case of the Rights issue, the subscription list is open for not more than 60 (sixty) days.
9) Beginning of allotment work: – The company can start the work of allotment after 5 days of opening the issue (in case of filing of prospectus) and within 3 days (in case of filing statement in lieu of prospectus). This enables the member of the public to go through the prospectus thoroughly and decide.
5. Explain briefly the procedure for allotment of shares.
(1) Allotment of shares means the company allots (to give) shares to the general public. Allotment means the distribution of shares among the applicants.
(2) When a public company wants to issue the shares to the general public, it has to issue a prospectus to invite the general public to subscribe to its shares.
Procedure for allotment of shares are as follows:
Appointment of Allotment Committee: – When the subscription list is closed the secretary informs the Board of Directors to make preparations for allotment of shares. If the issue is par subscribed or under subscribed, the Board can do the allotment of shares. But if the issue is oversubscribed, the Board has to appoint an Allotment Committee to undertake the work of allotment. Allotment committee which consists of Directors and Secretary. This committee decides the basis of allotment and submits a report to the Board. It prepares the formula for allotment of shares.
Hold Board Meeting to Decide the Basis of Allotment: – The secretary makes the necessary arrangement for the Board Meeting, to deal with the allotment of shares.
– Board Meeting is held to approve the allotment formula suggested by the Allotment Committee.
– Once the allotment formula is approved, the application and allotment lists are made.
– This list contains the names of the allottees i.e. the applicants who will be allotted shares. The list has to be signed by the Chairman and Secretary.
Pass Board Resolution for Allotment: – The decision regarding the allotment of shares is taken at the Board. Hence, at the board meeting, a resolution is passed to allot shares. The resolution also authorises the Secretary to issue letters of allotment and letters of regret.
Collection of Allotment Money: – The secretary must need to make the necessary arrangements with the company’s bank for the collection of allotment money. The letter of allotment states the money to be paid by the applicant on the allotment of shares. The money has to be paid in the Bank specified by the company within the stipulated time. For all public issues and Rights Issues (from Jan. 2016) ASBA is mandatory.
Arrangement Relating to Letters of Renunciation: An applicant who has been allotted shares can renounce the shares in favour of another person.
– The applicant has to fill up a form for renunciation and submit it with the original copy of the letter of allotment to the company.
– After approval from the Board, Secretary enters the name of the new allottees in the application and allotment list.
Arrangement Relating to Splitting of Allotment Letters: – Splitting means putting the shares in one or more names. Sometimes, the applicant who has been allotted shares can request for the splitting of allotment letters.
– After getting the approval of the Board for the splitting, Secretary enters the details of the split in the list of split allotments. Secretary has to also issue split letters.
File Return of Allotment: – A statement containing details of allotment is called ‘Return of Allotment’. Secretary has to file a ‘Return of Allotment with the Registrar of companies within 30 days of allotment of shares.
– The return of allotment contains details of allotment of shares including the names and addresses of allottees, the value of shares allotted, the amount paid or payable on each share, etc.
Prepare Register of Members and Issue Share Certificate: – The secretary prepares the Register of members on the basis of share application allotment lists. Secretary has to enter the names of all those applicants who have paid the allotment money in the Register of Members.
– Secretary also has to prepare the Share Certificates and distribute it to all the members within two months of allotment of shares.
– A share certificate is issued in exchange for a letter of allotment and receipt of allotment money.