SHARE AND SHARE CAPITAL

Meaning of Share
- Indivisible units into which share capital of a company is divided.
- S. 2(84) – share is a share in the share capital of company & includes stock (it is
goods as per S. 2(7) SOGA).
- A share is not a sum of money, it represents interest of the shareholder in the
company.
- The rights and liabilities of the shareholder will be corresponding to the amount of
money invested in purchasing “n” number of shares (Borland Trustees v. Steel Bros.
& Co. Ltd. 1901)
- Share certificate is not share but evidence of title (S. 46 of the Companies Act, 2013).

Difference between Share and Stock

Share Stock
1. Can be originally issued. Cannot be originally issued.
2. May either be fully paid-up or partly It is always fully paid-up.
paid-up.
3. Can only be transferred as a whole. Can be transferred in any denomination.
4. Has a distinctive number to Bears no such number.
differentiate from other shares.

Examples:
(i) If A has 10 shares of a company worth 10 Rs. (face value each) and these shares
are fully paid up the it can be said that A has a stock worth Rs. 100 (on
conversion).
(ii) If A has 10 shares of a company worth 10 Rs. (face value each) and out of these 5
shares are fully paid up then it can be said that A has a stock worth Rs. 50 and 5
shares of Rs. 10 each (on conversion of 5 fully paid up shares only).

Kinds of Shares
1. Equity Shares (Section 43)
These are shares which carry voting rights.
So, can equity shares never be issued without voting rights? False.
S. 43 allows issue of shares without voting rights. What is the benefit of these shares?
Higher dividend, if not paid get voting rights to vote on all resolutions of the
company.

2. Preference Shares (Section 43)

Those shares which carry the below mentioned special rights and no voting rights.
a. A preferential right in respect of a fixed dividend which may consist of a fixed
amount or a fixed rate;
b. A preferential right as to repayment of capital in the case of winding up of the
company I priority to other classes of shares.
So, can preference shares never be with voting rights? False. Preference shareholders
can vote on: (Section 47)
a. Resolutions that directly affect the rights attached to those preference shares
b. Resolutions for the winding up of a company or for the repayment or reduction of
its equity or preference share capital
c. Where the dividend in respect of a class of preference shares has not been paid for
a period of two years or more, such class of preference shareholders shall have a
right to vote on all the resolutions placed before the company.

Kinds of Preference Shares

a. Participating preference shares
 Besides a fixed rate of dividend, the holders of these shares are also entitled to
participate with the equity shareholders in the surplus profits which remain
after paying dividend to equity shareholders up to a certain limit or even in
the event of winding up if after paying back ESHs and PSHs any surplus is
left then they are entitled to get that also along with ESHs.
 They may also be entitled to get a share in the surplus assets of the company
on its winding up.
 Unless expressly provided in the articles, preference shares shall be presumed
to be non-participating.

b. Non-participating preference shares

 The holders of these shares are entitled only to a fixed rate of dividend and do
not share in the surplus profits. The whole of the surplus profits will this go to
the equity shareholders.

c. Convertible preference shares

 The holders of the shares have a right to get converted their preference shares
into equity shares within a certain period.

d. Non-convertible preference shares

 These preference shares do not carry the right of conversion into equity share.

e. Redeemable preference share

 Shares which can be redeemed after a fixed period or after giving a certain
notice at any time at the will of the company out of the profits of the company
or sale proceeds of the new shares are called redeemable shares.
 As per S. 55 of the Companies Act, 2013:
No company limited by share can issue any preference shares which are
irredeemable.
A company limited by shares may, if so authorised by its articles, issue
preference shares which are liable to be redeemed within a period not
 exceeding 20 years from the date of their issue. Exception: 30 years for
infrastructure projects. However, there has to be a min. of 10% of redemption
every year beginning from 21st year, on proportionate basis at the option of
shareholders).

f. Irredeemable preference shares

 They are of the nature of a permanent and perpetual liability which cannot be
redeemed during the lifetime of the company.
g. Cumulative preference shares
 A cumulative preference share has a right to claim the fixed dividend of the
current year out of the future profits. The dividend, in these shares,
accumulates unless paid. The accumulated arrears of dividend are to be paid
before anything is paid out of the profits to the holders of any other class of
shares.
 Preference shares are always cumulative unless otherwise expressly states in
the AOA.

h. Non-cumulative preference shares

 Dividend on non-cumulative preference shares can be paid only out of the
profits of that very year, and is not allowed to accumulate to be paid out of the
profits of the future years. The right to claim dividend will lapse is there are
no profit in a particular year.

Some important points regarding shares

- A company cannot issue preference shares without issuing equity shares. This is
because for shares to be preference giving preferential rights, there must be equity
shares.
- A company can declare dividend for preference shares and not equity shares. The
usual practice is that once dividend is paid to PS that year they cannot claim any
further dividend even if there’s more profit but ESHs can ask for declaration any
number of times in a fiscal year.
- A company cannot distribute dividend on shares without declaration. It has to have
profit – that too distributable profit – then there has to be declaration. Even if any
clause for distribution is already there in AOA still atleast declaration by BODs would
be required if not in GM.

Kinds of Share Capital

a. Nominal, Authorised or Registered Capital: As per section 2(8), “authorised capital”
or “nominal capital” means such capital as is authorised by the memorandum of a
company to be the maximum amount of share capital of the company.
b. Issued Capital: As per section 2(50), “issued capital” means such capital as the
company issues from time to time for subscription. It is that part of the authorised or
nominal capital which the company issues for the time being for public subscription
and allotment. This is computed at the face or nominal value.
 c. Subscribed Capital: As per section 2(86), “subscribed capital” means such part of the
capital which is for the time being subscribed by the members of a company. It is that
portion of the issued capital at face value which has been subscribed for or taken up
by the subscribers of shares in the company. It is clear that the entire issued capital
may or may not be subscribed.
d. Called up Capital” As per section 2(15). “called-up capital” means such part of the
capital, which has been called up for payment. It is that portion of the subscribed
capital which has been called up or demanded on the shares by the company.
e. Paid-up Share Capital: As per section 2(64), “paid-up share capital” or “share capital
paid-up” means such aggregate amount of money credited as paid-up as is equivalent
to the amount received as paid-up in respect of shares issued and also includes any
amount credited as paid-up in respect of shares of the company, but does not include
any other amount received in respect of such shares, by whatever name called.

Example:
Authorised Share Capital: Share capital with which the company is registered. (100)
Issued Share Capital: Share capital which is issued to the public for subscription. (70)
Subscribed Share Capital: Actual amount of capital for which subscription applications are
received by the company. (50)
Unsubscribed Share: Capital – Actual amount of capital for which the subscription is not
received by the company. (20)
Called Up Capital: The company may not need the entire amount at once so it may call some
not all amount on the share. (35)
Uncalled capital: The company may not need the entire amount at once so it may call some
not all amount on the share. (15)
Paid up capital: This is the amount that is actually paid on the called up capital. (20)
Unpaid capital: This is the amount that is not yet paid by the shareholders and can be called
for when the company is in need or during winding up. (15)
The company usually does not issue its entire share capital (which is also the maximum it can
issue, 100 in this case). It usually issues only a certain amount of it based on its own
circumstances, Rs 70 in this case.

Bookbuilding process
Used for efficient price discovery.
Example: Suppose “X” is a smartphone company and wants to offer 3000 shares to the public
at a price band of Rs. 20-24.
Bid quantity – bid price
500 – 24 (cap price)
1000 – 23
1500 – 22 (cut off price)
3000 – 21 (floor price)
The price range within which the shares are offered is called the price band, Rs. 20-24 in this
case. Spread is the difference between cap and floor price.
The cap of the price band should not be higher by more than 20% of the floor of the band.
For example, if floor price is 100 INR then cap of the price band shall be less than or equal to
120 INR. The price band can be revised but variation not to exceed 20%.
Why is 22 the cut off price? Because in the current case, the target of the company is 3000
shares which is achieved at 22 (500+1000+1500=3000). If the company’s target was 6000
shares then we’d go down to Rs. 21.

ICDR, 2018 (Technical aspect of how a share is issued)

1) Investor
There are different classes of investors which we need to understand:
a) Anchor Investors: Are those investors who invest for a value of atleast 10cr. If it is
a case of small and medium enterprises, then minimum is 2cr. They are qualified
institutional buyers, They are not individuals. Returns matter to them but they are
also willing to take a higher amount of risk for the returns.
What is the point of this?
If the anchor investors who take too much of due diligence are coming and
investing, it creates trust in the public that the shares are investable. It basically is
an indicator of the “value” of shares.
b) Retail individual investors: Are those individual investors who invest into a value
of not more than 2 lakh rupees. If you see the ICDR regulations, there is a sfety
net to protect such small investors.
c) Institutional investors: A qualified institutional buyer (QIB), family trust or
intermediaries (like MF, MBs, underwriters) registered with SEBI board and
having a net worth (assets-liabilities) of atleast 500cr.
d) Non institutional investors: Different class of investors who are not (b) and (c)
e) QIBs:
(i) Public financial institutions
(ii) scheduled commercial banks,
(iii) multilateral and bilateral development financial institution
(iv) a state industrial development corporation
f) High net worth individuals: They are not defined anywhere but in the newspaper
or so many articles you will see this word mentioned. How are we going to
ascertain it? USD 10 million in liquid cash apart from their permanent residence.
India is gearing up to have the highest number of ultra high net worth individuals
(more than USD 30 million). UK tops the list for highest inflow of high net worth
individuals and ultra high net worth individuals.

Issue of Shares
Everywhere in ICDR, the words “specified securities” which means equity shares and
convertible securities.
 1) Public Issue
a) IPO/FPO: The only difference between IPO (Initial public offering) and FPO
(Further public offering) is that the first time securities are ever issued is IPO but
any subsequent issue of securities is “further” public offering.
Minimum public contribution in any company which is public company should be
25%. (Securities Contract Regulation Rules)
b) Offer for sale: IPO is a very technical procedure and to cut down on compliances
the concept of offer for sale was introduced in 2013.
7th October, 2019
2) Rights Issue (S. 62 of the Companies Act): The shareholders existing in the company
have a pre-emptive right which works in their favour.
Rights issue is an issuance of shares to shareholders existing in the company. Only
when they refuse can shares be offered to the general public.
3) Private Placement
a) Private placement (Unlisted companies): This is for private companies and listed
companies.
b) Preferential issue (for Listed companies): It is not necessary for a company to go
through the arduous route of public issue of shares. Therefore, they can go for
preferential issue of shares.
c) QIP (For QIBs-Listed Companies): Qualified Institutional Placement is when a
listed company goes for placement of shares only for QIBs.
The difference between a public company and a listed company is that a listed company has
to be listed in a recognised stock exchange.
Regulation 2(w): IPO definition
“initial public offer” means an offer of specified securities by an unlisted issuer to the public
for subscription and includes an offer for sale of specified securities to the public by any
existing holders of such specified securities in an unlisted issuer;
- An IPO happens in a primary market (or New Issues Maret) where securities are sold
by the issuer company for the first time;
- It is considered a risky investment – because there is no historical data available for
the analysts and investors to analyse and anticipate the performance of the
shares/securities.
In any IPO, 20% of the shares have to be subscribed to by the promoters of the company.
This is for the promoters to have a stake in the company and this credibility to the IPO. This
helps in public faith.
Example: If there’s an issue of 100Rs of shares, 20rs will by default have to be subscribed to
by the promoters. The same wont be available for the general public to subscribe to.
If for any reason, the promoters can’t pay the subscription for the 20%, then QIBs can
subscribe to the same without being labelled as promoters.
Regulation 6 in ICDR, 2018 instead of Regulation 26 in ICDR, 2009
Regulation 6: Eligibility requirements for an IPO
1) An issuer shall be eligible to make an initial public offer only if:
 a) It has net tangible assets of atleast three crore rupees, calculated on a restated and
consolidated basis, in each of the preceding three full years (of twelve months
each), of which not more than fifty per cent, are held in monetary assets:
Provided that if more than fifty per cent of the net tangible assets are held in monetary
assets, the issuer has utilised or made firm commitments to utilise such excess
monetary assets in its business or project;
Provided further that the limit of fifty percent on monetary assets shall not be
applicable in case the initial public offer is made entirely through an offer for sale.
b) It has an average operating profit of at least fifteen crore rupees, calculated on a
restated and consolidated basis , during the preceding three years (of twelve
months each), with operating profit in each of these preceding three years;
c) It has a net worth of atleast one crore rupees in each of the preceding three full
years (of twelve months each), calculated on a restated and consolidated basis;
d) It it has changed its name within the last one year, at least fifty percent of the
revenue, calculated on a restated and consolidated basis, for the preceding one full
year has been earned by it from the activity indicated by its new name.
2) An issuer not satisfying the condition stipulated in sub regulation (1) shall be eligible
to make an initial public offer only if the issue is made through the book-building
process and the issuer undertakes to allot at least seventy five percent of the net offer
to qualified institutional buyers and to refund the full subscription money if it fails to
do so.
Net Tangible Assets = Total Assets – (Intangible Assets + Liabilities)
Case 1: Company does not have any intangible assets (goodwill, IPR, etc)
NTA = Total assets – Liabilities
Case 2: Company has IPR and goodwill of Rs. 20 (Intangible Assets)
NTA = Total assets – (Intangible assets + Liabilities)
Restated basis means when you redraft, the minor errors have to corrected and
restated. Consolidated basis means not just your standalone thing, but the financial
statements of subsidiaries and any other asset valuation will also be taken into
account.
Monetary assets means that 50% should not be in cash. Credibility is the reason for
this. The firm commitment made in the proviso is through notices and disclosures
from time to time.
Financial term for operating profit: Earning before interest and taxes
Net worth = Assets – liabilities
Net offer = Full offer – 20% of promoter share.
Difference between bookbuilding process through 6(1) and 6(2):
If BB through Regulation 6(1) the If BB through Regulation 6(2) the
allocation in the net offer allocation in the net offer
1) Not less than 35% to retail Not more than 10%
individual investors
2) Not less than 15% to non- Not more than 15%
institutional investors
3) Not more than 50% to qualified Not less than 75% to QIBs, 5% of which
institutional buyers, 5% of which shall be allocated to mutual funds – (c)
shall be allocated to mutual funds
– (c)
In addition to 5% allocation available in In addition to 5% allocation available in
terms of clause (c), mutual funds shall be terms of clause (c), mutual funds shall be
eligible for allocation under the balance eligible for allocation under the balance
available for QIBs. available for QIBs.
9th October, 2019
Regulation 32 of ICDR as well as schedule 13 th says that not more than 60% of the portion of
QIBs should go to the anchor investors.
S. No. Particulars
1. Total shares 200 crore
2. QIBs (Regulation Not more than 100
6(1)) crore (50% of total)
3. Anchor Investors Not more than 60
crore (60% of QIB)

IPO Grading
The issuer may obtain grading for its initial public offer from one or more credit rating
agencies registered with the Board. (Regulation 39).
How grading is done? A credit rating agency grades a company as follows:
Company Rating type Grade Outlook
ICICI Overall AA Very stable
Shares BB Stable
Debentures BBB Partially stable

This assessment is based on the documents supplied by the company itself and therefore it is
not an absolute metric of the condition of the company. The agencies give a disclaimer on the
website that their assessment is only representative and they take no liability for anyone who
acts based on their assessment. Investors should perform their own diligence.

Definition of FPO (Regulation 2(q))

Further Public Offer means an offer of specified securities by a listed issuer to the public for
subscription and includes an offer for sale of specified securities to the public by any existing
holders of such specified securities in a listed issuer.

Chapter – IV of ICDR – FPO

Entities not eligible to make a further public offer (Regulation 102)
An issuer shall not be eligible to make a further public offer:
a) If the issuer, any of its promoters…

Offer for Sale (OFS)

Minimum offer size of OFS will be 25 crores. Only available on BSE/NSE.
Benefit for promoters: Helps them dilute their shareholdings in a listed company in
transparent manner – stock exchange based bidding platform.
Investor’s benefit: get discount (not allowed in IPO) on shares purchased during OFS than
buying from secondary market.
Seller: Promoters
Buyer: Corporates, QIBs, HUFs, FIIs.
OFS is backed by 100% margin meaning that you will have to pay the entire application
money for the issue at the time of buying- this shall be directly paid through your trading
account;
If “T” is the date of opening of issue – then investors receive shares directly in their demat
account – on T+2 days basis (T day means trading day)
Issue of shares can be done in three ways:
1) At par
2) At discount
3) At premium
The shares issued at discount create a deficit. Where does the 1 rs on a 10 rs share issued at
9rs come from. It comes from the companies free reserves that are without liability.
The company makes money from a share in 4 stages:
1) Application stage (Minimum 25% of the share value is called)
2) Allotment money (Another 25%)
3) First call (another 25%, say)
4) Final call (another 25%)
In IPO or FPO you have to pay minimum 25% of the share, but in an offer for sale you have
to pay 100%.
10th October, 2019
Minimum promoter contribution (Reg. 14) and Lock In (Reg. 16)
Reg. 14 – Minimum promoters’ contribution
1) The promoters of the issuer shall hold at least twenty percent of the post issue capital;
Provided that in case
Reg. 16 –
Minimum lock in period for promoters normally is 3 years but they would be allowed to sell
the securities after one year if it is in excess of min. promoter contribution which is 20%.
For other investors minimum lock In period is one year.
Transfer can take place during lock in period (promoter to new or other promoters and other
investors to other persons but subject to takeover cod only – and will still remain locked in) –
Reg. 22.

Example: Suppose 11 months are over of the lock in period. Pursuant to the takeover scheme,
some new promoter or new investor will take the shares of the previous promoters and
investors, but the securities will still remain locked till the lock in period expires.

Regulation 141 – Minimum subscription

1) The min subscription to be received in the issue shall be atleast ninety percent of the
offer through the offer document, except in case of an offer for sale of specified
securities.
2) In the event of non receipt of min subscription referred to in sub-regulation (1), all
application monies received shall be refunded to the applicants forthwith, but not later
than fifteen days of the date of issue.
RIGHTS ISSUE
Rights Issue Bonus Issue
Though issued to existing shareholders at Given to existing shareholders free of cost
discount still price has to be paid
Right to renounce No such right
Maybe partly paid Always fully paid
Min. 90% subscription – else refund the No such requirement
entire money received

Rights Issue
For example: For every one share in the company that you have, the company has decided to
offer you two more shares. Ration of 2:1 here. Rights issue/existing shares.
When rights issue happens, the shareholders are given between 15-30 days to subscribe to the
shares. After 30 days, the offer is deemed to be declined.
Right to renounce: The shareholder can give a specific name who he/she wants to have his
shares or can renounce the shares in favour of any person the company may chose to give the
shares.

Bonus Shares (S. 63)

Suppose the company has 100 rs in the Reserves and Surplus account (no liability). It is not a
good practice to give it entirely in dividends nor should it entirely be given in bonus shares.
If you give it entirely in dividends and the company makes less profits later, the shareholders
will get greedy and criticize the company when they don’t get excessive dividends.
If you give it entirely in bonus shares, the shareholders will never boast about the company
since they are not getting any money out of it.
Sources from which bonus shares can be paid:
(i) Free reserves
(ii) Securities premium account
(iii) Capital redemption reserve account

If the rights issue is of more than ten crores, the ICDR regulations become applicable on it.
Reg. 68 – Chapter III ICDR – Part III: Record date
1) The issuer shall announce a record date for the purpose of determining the
shareholders eligible to apply for specified securities in the proposed rights issue for
such period as may be specified in the Securities and Exchange Board of India
(Listing Obligations and Disclosure Requirements) Regulations, 2015.
2) The issuer shall not withdraw its rights issue after announcement of the record date.
Reg. 2(z)(tt): Definition
“qualified institutions placement” – means issue of eligible securities by a listed issuer to
QIBs on a private placement basis and includes an offer for sale of specified securities by the
promoters…
14th October, 2019
Buy Back (General Overview)
Why companies buy-back/repurchase their own shares?
To show the market that they have confidence in themselves, to prevnt hostile takeover, to
increase shareholder value (less no of shares-less dividend will have to be distributed-so less
shareholders ean-more dividend), improves financial ratios for example ROA, ROE and EPS.

When to do buy-backs?
The managements feel the market has discounted its share price too steeply. A stock price can
be pummelled by the market for many reasons such as weaker-than-expected earnings results,
an accounting scandal, or just a poor overall economic climate. Thus, when a company
spends millions of dollars buying up its own shares, it can be a sign that management
believes that the market has gone too far in discounting the shares- a positive sign.

Why go for buy-back than distributing dividend – if one has to be chosen over the other
and market conditions – compel?
Dividend distribution shows positive attitude of the company – buy backs instils confidence
in the company more helpful in the long run.

White Knight and Black Knight

If I am company A and company B wants to takeover company A. After employing lot of
methods to prevent takeover and not being successful and I know I can’t stop the takeover,
what will I do?
Instead of company B taking over my company, I will invite company C (a friend) to take
over my company on much more beneficial terms than company B would have. This would
be a friendly takeover and Company C here is a white knight. However, if company B take
over it would be hostile takeover and company B here is a black knight.

It makes sense for a company to buy back its shares when the market is not responding well
but what could be the reason for the same when the market is doing well?
Yes, the same is done to prevent hostile takeovers. When the company’s shares are ding well,
the company will either buy-back the shares to prevent a hostile takeover. But this will be an
expensive affair, so the company will try to alter the value of its shares for the worse and then
buy back.
Therefore, its not good if the shares are doing too badly in the market and not good even if
they are doing too well.

How buy-back affects – Financial Ratios?

It increases the return of shares for remaining shareholders.

S. 68 Power of Company to Purchase its own securities

SEBI buyback resolution, 2018 also to be followed for listed companies.
Regulation 2(d): ‘Buyback period’
Regulation 2(j): ‘Odd lots’

15th October, 2019

‘Small Shareholders’
‘Tender Offer’
A company cannot buy more than 15% of the shares of a company from the open market.

Reduction of Share Capital (S. 66)

Requires a special resolution. Will have to apply to the tribunal and require its approval.
When people subscribe to the shares of a company, it induces credibility in the minds of
creditors and whosoever else is doing business with the company. It shows that people have
faith in the securities of the company.

How do you actually reduce your share capital?

There are various methods:
1) Suppose people have paid up rs 5 on a 10 rs share. The company can then go on to tell
the shareholder that it has become a fully paid 5rs share and they don’t have to pay
anything else.
2) In case the 10rs share is fully paid up, the company can return some money on it.

What is the significance of reducing share capital?

It increases the distributable reserves of dividend of a company.
Suppose there is a certain level of income of the company and by reduction in share capital
the number of shareholders are not being reduced. But given a certain level of income a
company will have, say it give x dividend on 10rs share. Now the share has become a 5rs
share and therefore the dividend to be paid will be less than x. This will increase the reserves
of the company over the years.

Reduction helps in shareholder wealth maximisation because dividend per share is increasing.
(not complete for this day)