PROVISIONS OF LAW RELATING TO ISSUE OF CAPITAL

Group No 2

Members:

Manik Madan (2626)

Varun Kaushik (2642)

Mayank Methi (2650)

Anmol Toppo (2662)

Ajay Singh (2623)

Gurpreet Singh Bhatti (2628)

MEMORANDUM OF ASSOCIATION

As per Section 2(28) of the Companies Act, 1956” Memorandum means Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act.”

It defines as well as confines the power of the company. If anything is done beyond these powers, that will be “Ultra Vires”(beyond powers of) the company, and therefore void.

CAPITAL CLAUSE

As per Section 13(4)(a), this clause states the amount of share capital with which the company is registered, along with the number of shares into which the capital is divided, and the amount/denomination of each share.

ALTERATION OF CAPITAL CLAUSE

Alteration of share capital(Section 94,95,97)

Reduction of the share capital(Section 100 to 105)

Variations of the rights of shareholders (Section 106 to 107)

Rearrangement of share capital(Section 391)

ALTERATION OF SHARE CAPITAL

Increase in the share capital by issuing new shares.

Consolidate or sub divide all or any of its share capital into shares of larger or smaller denominations than its existing shares.

Convert all or any of its fully paid up shares into stock or vice versa.

Cancel shares which has not been subscribed.

ALTERATION OF SHARE CAPITAL(CONTD.)

Procedure: Any of the above forms of altering the share capital requires simply the passing of an ORDINARY RESOLUTION, provided the articles permit to do so. If the articles do not permit, then the articles can be altered by passing the special resolution.

REDUCTION OF SHARE CAPITAL

Section 100(1)(a): The company may extinguish or reduces the liability on any of its shares in respect of share capital not paid up, or uncalled capital.

Section100(1)(b): It may either with or without extinguishing liability on any of its shares, cancel any paid up share capital, which is lost or unrepresented by available assets.

Section 100(1)(c): It may either with or without extinguishing or reducing liability on any of its shares, pay off any paid up share capital which is in excess of the wants of the company.

REDUCTION OF SHARE CAPITAL(CONTD.)

Procedure:

Sanction of the articles and passing of Special Resolution

Application to the Tribunal by way of petition to confirm the reduction

Registration of the Tribunal’s order

Members liability after reduction

REDUCTION OF SHARE CAPITAL(CONTD.)

Reduction without Sanction of Tribunal

Forfeiture of shares for non payment of calls.

Surrender of shares which is accepted only under circumstances where forfeiture is justified.

Diminution of capital where a company cancels shares which have not been subscribed or agreed to subscribed.

Redemption of redeemable preference shares.

Purchase of its own shares by a company.

VARIATION IN THE RIGHTS OF SHAREHOLDERS

Section 106: Permission of the Memorandum and Articles of Association is necessary to amend the rights attached to one or more classes of shares. If memorandum and articles authorise then no Special Resolution is required, otherwise it is required.

Section 106(b): If the terms of the issue of particular class of shares prohibits variation then no variation can be made.

VARIATION IN THE RIGHTS OF SHAREHOLDERS(CONTD.)

Section 107: Rights of Dissenting Shareholders

If the rights attached to any class of shares are to be varied then dissenting shareholders constituting not less than 10% of holders of the issued shares of that class, can appeal to Tribunal to have the variation cancelled within 21 days of passing the resolution. The Tribunal after hearing the applicants may disallow the variation, if it is satisfied that the variation would unfairly prejudice the shareholder.

PROSPECTUS

OFFICIAL DEFINITION

A prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate. (Section 2 (36))

WHAT IT EXACTLY MEANS ?

In essence, it means that a prospectus is an invitation issued to the public to take shares or debentures of the company or to deposit money with the company.

“OFFER FOR SALE” - PROSPECTUS

When the complete share capital of a company is allotted to an intermediary or an Issue House, which then issues then shares to the public by means of an advertisement of its own, a document by which such an offer for sale to the public is made shall be deemed to be a prospectus by implication, given that:

The public offer is made within 6 months of the agreement between the issue house and the primary company.

At the date of offer to the public, the whole consideration in respect of the shares has not been received by the company.

Section 64

OFFER TO THE PUBLIC

A document is considered to be a prospectus or not is defined by “Offer to the Public”.

What is Public ?

Friends and relatives of the directors?

Offer is made to only 2 people?

According to the amendment in the Section 67 in the year 2000, public can be defined as:

Offer made to 50 or more persons, even though specific 50 persons, they are considered to be public.

It is a general offer to persons other than those receiving the offer, it is deemed to have been made to the public.

Offer made to the public to exchange securities for securities is not a valid public offer.

EXCEPTIONS

The NBFC or Public Financial Institutions defined under Section 4A are free to offer securities through “Private Placement”

ISSUE OF PROSPECTUS

Guidelines of SEBI should be compiled along with the proposed issue of shares to the public.

A copy of prospectus signed by all directors should be registered with the Registrar. (expert’s consent, material contract, statement of adjustment by the auditors, legal advisor’s content)

Issue prospectus within 90 days of registering with the Registrar.

CONTENTS OF A PROSPECTUS

In order to protect the investors and enable them to take informed decisions, the governing body has specified the format of the prospectus. It should contain:

1. Company’s name and address;

2. Names and addresses of the promoters of the firm;

3. Main objects of the firm, its past and present business;

4. Details of the Directors and Managers;

5. Details of the legal advisors, other experts;

6. Size of present value;

7. Consent of directors, bankers to the company etc. ;

8. Names of Regional and other stock exchanges where application has been made for listing the issue;

9. Nature of the Product and industry details with future prospects;

10. Details of outstanding litigation and criminal charges, if any;

11. Credit Ratings obtained or not, risk involved;

MISLEADING PROSPECTUS AND ITS CONSEQUENCES

A prospectus containing false, misleading, ambiguous or fraudulent statements of material facts, or suppressing material facts is termed as a “Misleading Prospectus”.

There has to be a misinterpretation of facts and not law. Example: Section 79 states that shares can not be issued at a discount exceeding 10% but the company states that its shares will be issued at half the nominal Value

REMEDIES FOR MISSTATEMENTS IN A PROSPECTUS

Remedies against the company:

a) Rescission of Contract

b) Claiming the charges

Remedies against the Directors, Promoters and Experts:

The subscriber can make any or all of the above mentioned persons liable to pay compensation.

If the Directors/Expert proves that he had removed their letter of consent before the publishing of the prospectus, he may escape legal actions.

Fraudulently inducing persons to invest money:

If anyone promises or forecasts, what is false, knowingly or recklessly and forces someone to buy the shares is bound to get five years imprisonment with a fine.

DEFENSE AVAILABLE TO THE DIRECTORS AND EXPERTS

SHELF PROSPECTUS

When a financial institution wants financing from the Central Government in India, it must provide a shelf prospectus to the Registrar of Companies. A shelf prospectus contains one or more issues of the securities listed in the prospectus. It is a notification to the public of the transaction the institution plans to do, and it is the company's way into the primary market.

INFORMATION MEMORANDUM

An Information Memorandum is a document provided by a company to prospective investors after the investors have reviewed a brief Investment Summary, or “teaser”, and signed a Confidentiality Agreement.

Some business owners and financial advisors look at an Information Memorandum as a marketing document which provides a selective overview of the attractive features of a company.

AIM OF THE PRESENTATION

This presentation is a serious attempt to make you all familiarise with the following details :

1. When is a public company entitled to proceed to initial allotment of its shares ?

2. What are the statutory restrictions as to allotment of shares?

3. What is meant by ‘irregular allotment’ of shares?

4. What are the provisions of the Companies Act regarding valid allotment of shares ?

5. What is minimum subscription?

6. What is meant by Return of allotment ?

ALLOTMENT OF SHARES

A prospectus issued by a company is not an “offer” in the contractual sense, but merely an Invitation to Offer.

It is up to the Board of Directors to accept the offer or to reject it. If the offer is accepted by the company by making the allotment of shares, it results in a valid and binding contract between the applicant and the company, and the applicant becomes a shareholder of the company.

The provisions governing allotment of shares may be studied under the following two heads :

General provisions Special provisions (Indian Contract Act) (Companies Act) 1) General Provisions

A valid allotment must be in conformity with the general provisions

of the Indian Contract Act relating to Acceptance of an Offer. Thus : 1) Allotment must be made by proper authority. 2) Within reasonable time. 3) Must be communicated. 4) Absolute and unconditional.

Effect of non-compliance of ‘general provisions’ :

If they are not complied with, the allotment is null and void.

2) Special Provisions

At the very outset it may be mentioned that the Companies Act doesn’t prescribe any restrictions as to the allotment of shares in the case of private companies. The Act, however, lays down certain restrictions regarding the allotment of shares by Public companies. For a clear understanding we shall be discussing these restrictions under the following two heads :

1) When no public offer is made.

2) When an offer to public is made.

1. When no public offer is made :

There is only one restriction as to the allotment of shares in the case of a public co. which doesn’t offer them to the public for subscription (i.e., which manages to obtain its capital privately). As provided by Section 70, such a co. can’t proceed to make a valid allotment of any shares unless at least three days before the first allotment it has filed with the Registrar a ‘Statement in lieu of Prospectus’.

Effect of non-compliance :

If the above requirement is not complied with, the allotment shall be ‘Irregular Allotment’ voidable at the option of the allottee , and the co. and every director of the company who wilfully authorises or permits the contravention, shall be punishable with fine which may extend to Rs. 10,000 {Sec. 70(4)}.

2) When an offer to public is made : In the case of a public co. which offers shares to the public for

subscription, all the provisions applicable to the first allotment of shares aren’t applicable to subsequent allotment of shares. Hence, we shall be studying these provisions under appropriate heads :

First allotment of shares Before a public co. which offered shares to the public for subscription

proceeds to initial allotment of shares, the following statutory restrictions must be complied with :

1) A copy of the prospectus must be duly filed with the Registrar for

registration [Sec. 60] 2) The Co. must receive at least 5% cash, of the nominal value of

shares, as applicable money [Sec. 69(3)]. 3) The minimum subscription amount as disclosed in the prospectus

must be received within 120 days of the issue of prospectus.

4) Application money must be deposited in a scheduled bank and it cannot be withdrawn till the company secures the “certificate to commence business,” i.e., the ‘trading certificate’ or where such certificate has already been obtained (by filing a statment in lieu of prospectus) until the entire amount payable on applications for shares in respect of minimum subscription has been received by the company [Sec. 69(4)]. The object of this provision is to ensure safety of Subscribers’ money.

5) The co. shall not proceed to allot shares until the beginning of the fifth day from the date of the issue of prospectus or such a later date as may be specified in the prospectus.

6) Shares and debentures to be dealt in on Stock Exchange : Sec. 73 makes it compulsory for every co. intending to offer shares or debentures to the public for subscription by the issue of a prospectus, before such issue, to make an application to one or more recognised Stock exchanges for permission for the shares or debentures intending to be so offered to be dealt with in the Stock exchange or each such Stock exchange.

7) Initial offer of securities to be in the demat form in certain cases : The Companies (Amendment) Act, 2000 has inserted Sec. 68B which provides that every listed public co. , making intial public offer of any security for a sum of rupees ten crore or more, shall issue the same only in dematerialised form by complying with the requisite provisions of the Depositories Act, 1996 and regulations made thereunder.

Subsequent allotment of shares :

All the “Special Provisions” regarding the ‘First Allotment of Shares’ (discussed above), except No. 3(min. Subs. Must be recd.) and No. 4 (application money must be deposited in a scheduled bank) apply equally to any subsequent allotment of shares offered to the public for subscription by a public co. [Sec. 69(7)].

SEBI GUIDELINES REGARDING MINIMUM SUBSCRIPTION

It is important to note that in all cases of public/rights issues of shares, the “guidelines for disclosure and investor protection” issued by SEBI must also be complied with. These guidelines, inter alia, provide that the requirement of 90% min. Subs. is mandatory in all cases of public issues of capital.

Thus, a co. making any public/rights issue of securities wouldn’t be allowed to make the allotment of the shares, whether initial or subsequent, unless it has recd. a min of 90% subscription against the proposed issue.

Effect of Non-compliance of Special Provisions

Now the question arises : What will be the result if an allotment is made by a co. making an offer to the public for subscription in the contravention of the above statutory restrictions ??

The answer to this may be stated as follows :

1) If restriction no. 1 (reg. of prospectus) and no. 5 (opening of subscription lists) are not complied with, the validity of allotment is not affected and only fine is imposed on the co. and every defaulting officer as per Sec. 60(5) and 72(3) respectively. The amt. of fine may extend up to Rs. 50,000 .

2) If restriction no. 6 (shares to be dealt in on a stock exchange) is not complied with the allotment is void.

3) If restriction no. 7 (initial offer of Rs. 10 crore or more to be in demat form only) is not complied with, the validity of allotment is not affected and only fine is imposed on every dafulting officer. The amt. of fine may extend up to five thousand rupees as per Sec. 629A.

4) If restriction no. 2 (at least 5% of the face value of shares to be received as application money in cash), no. 3 (minimum subscription amount must be received) and no. 4 (application money to be deposited in a scheduled bank) are not complied with, the contract of allotment shall be voidable at the option of the allottee and the allotment is termed as ‘Irregular allotment’ (Sec. 71)

Irregular Allotment & its effect (Sec. 71)

As already observed, an allotment of shares is irregular:

1) When it has been made a public co. which invites public to subscribe its shares , (a) without receiving at least 5% cash of the nominal value of shares, as application money; or (b) without receiving the minimum subscription amount within 120 days of the issue of prospectus; or (c) without depositing the application money in a scheduled bank. It may be noted that for making a subsequent allotment irregular, conditions (b) & (c) are irrelevant.

2) When it has been made by a public co. which doesn’t invite public to subscribe its shares, without filing with the Registrar the ‘statement in lieu of prospectus’ at least 3 days before the first allotment of shares.

The effects of an irregular allotment are as follows :

1) Voidable at the option of the allottee.

2) Directors’ liability.

3) Fine.

ALLOTMENT PROCEDURE

After the Directors are fully satisfied that the statutory conditions for valid allotment have been duly conformed to, they proceed with the work of allotment. A meeting of the Board Of Directors is called and the completed ‘ Application And Allotment Lists’ are placed before them. If the issue is under-subscribed or just fully subscribed, the Board can allot to each applicant the actual no. of shares applied for. It is worth noting here that inspite of under-subscription, the Board is under no obligation to allot shares to each each applicant. For, subject to the Articles of Association, the directors have an unfettered discretion to accept or reject any application in whole or in part without assigning any reason provided they do not act in bad faith or capriciously.

If there is over-subscription, i.e., applications for larger no. of shares than offered for subscription have been received, there arises the problem of deciding the allotment policy. The BOD generally appoints a sub-committee of directors to consider and report on the basis of allotment to be adopted in such a case. In the case of unlisted shares some of the more common basis of allotment are:

(i) The allotment may be settled by lottery; or

(ii) The allotment may be made on prorata basis; i.e., by alloting shares to each applicant in proportion to the no. of shares applied for; or

(iii) Small applications may be given preferential treatment.

The Return as to Allotments (Sec. 75)

This is the only section relating to allotment which applies to private companies as well. Within 30 days of allotment of shares every company, public and private, having a share capital, is required to send to the Registrar a document known as the “Return of Allotments”. It must contain the following particulars & must be accompanied by the documents specified below :

1) The no. & nominal amount of the shares allotted for cash, the names, addresses and occupations of the allottees and the amount paid on each share. It is important to note that the co. shall not show in such ‘return’ any shares as having been allotted for cash if cash has not actually been received in respect of such allotment.

2) Where shares are allotted fully or partly paid up otherwise than in cash, actual contracts in writing constituting the title of the allottee to the shares together with the relevant contracts of sale or services must be produced for examination of the Registrar and verified copies in the prescribed manner of all such contracts must be filed with him. The company shall also file with the Registrar a return stating the no. & nominal amount of the shares so allotted, the extent to which they are paid-up, and the consideration for which they have been allotted.

3) Where bonus shares have been issued, the return must state the no. and nominal amount of such shares, the names, addresses and occupations of the allottees and must be accompanied by a copy of the resolution authorising the issue of such shares.

4) Where the shares have been issued “at a discount”, the return must be accompanied by a copy of the ordinary resolution authorising such issue, and a copy of the Company Law Board’s order sanctioning the issue.

The return of allotment must be duly dated and signed by a director or the secretary. If default is made in complying with this section, there is a fine on every officer in default which may extend to Rs. 5,000 for every day during which the default continues, but the validity of the allotments is not affected.

It should be remembered that no return as to allotment shall be filed when forfeited shares are reissued or allotted to a new buyer because reissue of forfeited shares is not an allotment of shares in the strict legal sense but only a sale.

(Sri Gopal Jalan & Co. Vs Calcutta Stock Exchange Association Ltd)

SHARES AND SHARE CAPITAL

SHARES

The companies act defines a share as “share in the share capital of the company, and includes stock except where a distinction between stock and share is expressed”.

STOCKS

Share clubbed together is known as STOCK.

When company issue share certificate, then it is STOCKS

DISTINCTION BETWEEN SHARE AND STOCK

Stocks are fully paid up whereas shares may be fully paid up or partly paid up.

Shares may be issued when a company is incorporated but stock cannot be issued under such circumstances. Only fully paid shares can be converted into stock.

Stocks is convenient method of transferring because it can be issued or transferred in fractional parts whereas shares cannot be divided below the face value of each share.

Stocks are not numbered whereas shares are serially numbered.a

Shares are always registered and not transferable by mere delivery but stock man may be registered or unregistered or unregistered stock can be transferred by mere delivery.

TYPES OF SHARES

Before passing companies act, 1956, shares use to be of three types:

Ordinary shares

Preference shares

Deferred share

After companies act, companies issued only two types of shares:

Preference shares

Equity shares

SHARE CAPITAL

Share capital means the capital raised by a company by the issue of shares.

KINDS OF SHARE CAPITAL

Preference share capital: in case of a company limited by shares, that part of the capital of the company, which carries a preferential right as to payment of divident during the lifetime of the company and repayment of capital on wilding up of the company.

Equity share capital: all the capital which is not preference capital, i.e. which doesn't carry any preferential rights.

KINDS OF PREFERENCE SHARES

Cumulative preference shares

Non-cumulative preference shares

Participating preference shares

Non-participating preference shares

Convertible preference shares

Non convertible preference shares

Redeemable preference shares

KINDS OF EQUITY SHARES

Equity shares with voting rights

Equity shares with differential rights

TYPES OF SHARE CAPITAL

Authorised capital

Issued capital

Subscribed capital

Called up capital

Un-called up capital

Paid-up capital

Reserve capital

FURTHER ISSUE OF CAPITAL

By allotment of new shares[sec. 81(1) to (3)]: a public company limited by shares may at any time, increase its subscribed shares capital within the limit of authorized capital by issuing new shares.

By conversion of debentures or loans into shares[sec 81(4)to(7)]: where a company has taken loan from the central government by issuing any debentures or otherwise, the govt. may, in the public interest, convert such debentures or loans into shares in the company.

REDUCTION OF CAPITAL

Under sec.100 a company limited by shares having a share capital may reduce its share capital, subject to the coonformation by the court, in any of the following three ways:

It may extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; or

It may either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up capital whhich is loss, or is unrepresented by available assets; or

It may, either with or without extinguishing or reducing liability on any of its shares, pay-off any paid-up share capital which is in excess of the wants of the company.

ISSUE OF BONUS SHARES

Sufficient undistributed profits must be there. Article of association must contain a provision for

capitalisation of reserves. Suitable resolution by the board of directors must be

passed. Formal approval of the shareholders in AGM must be

secured. The guidelines regarding the issue of bonus shares

prescribed by the SEBI must be compiled with.

SHAREHOLDERS OR MEMBER

The ‘members’ or ‘shareholders’ of a company are the persons who collectively constitute the company as a corporate entity.

DIFFERENCE B/W SHAREHOLDER & MEMBER

(1) A registered shareholder is a member but a registered member may not be a shareholder because the company may not have the share capital.

(2) A person who owns a bearer share warrant is a shareholder but he is not a member as his name is struck off the register of members.

(3) A legal representative of a deceased member is not a member until he applies for registration. He is, however, a shareholder even though his name does not appear in the register of members.

(4) A person who has transferred his shares ceases to be a holder of those shares as from sale of the transfer but he continues to be a member till such time the transfer is registered in the name of the transferee in the books of company.

METHODS OF BECOMING A MEMBER

By allotment

By subscribing to the memorandum

By agreeing to purchase qualification shares

By transfer

By transmission or succession

By principle of estoppel

WHO MAY BECOME A MEMBER?

All persons who are competent to contract may, in general, become members of a company. There are, however, some special considerations to which reference must be made.

(1) Company

(2) Hindu undivided family

(3) Partnership firm

CONTD..

(4) Joint-holders

i. Re issue of share certificate

ii. Re liability for calls

iii. Re transmission of shares

iv. Re voting power

v. Re payment and receipt of dividends, etc

(5) Foreigners

(6) Trustee

(7) Registered society

(8) Insolvent

(9) minor

TERMINATION OF MEMBERSHIP

By transfer of shares.

By forfeiture of shares.

By surrender of shares.

By insolvency.

By death; name of deceased member continues till shares are registered in the name of his legal representative.

By rescission of the contract to take shares on the ground of misrepresentation in the prospectus.

By sale of shares by company after it exercises its right of lien on the shares or in other legal way.

RIGHTS OF MEMBERS

To receive notices of all general meetings.

To attend & vote at general meetings, appoint directors & auditors.

To receive copies of accounts of company.

Entitled to a copy of report of a statutory meeting.

To inspect the minutes of proceedings of any general meeting.

To inspect the register, index of members, debenture holders.

To transfer his shares.

CONTD.. Priority to have shares offered if there is increase of capital by

the company.

To receive share certificate.

To receive dividends in case of preference shares.

To make an application to the Central Government for ordering investigation into the affairs of the company.

To apply to CG to convene the AGM when Board of Directors fail to convene the same.

To present a petition to the Court for winding up of company.

Right to share in the assets of the company on its winding up, after distribution to the creditors etc.

SHARE CERTIFICATE

A share certificate is a registered ‘evidence of title’ to the shares, issued by the company under its common seal, duly stamped and signed by one or more directors and countersigned by the secretary of the company, as per Articles.

A shareholder is entitled to have one share certificate in respect of shares registered in his name from the company free of charge, certifying that he is the holder of the specified no. of shares in the company.

A share certificate is not a ‘document of title’, for, the rights under it are not transferable by a mere endorsement and/or delivery of the certificate. In order to transfer shares evidenced by a share certificate an ‘instrument of transfer’ duly completed must be lodged with the company for approval by the Board of Directors.

ISSUE OF CERTIFICATES

As per sec. 113, a share certificate must be issued or despatched to the allottee within three months after the date of allotment or within two months after the application for the registration of the transfer.

However, the Company Law Board has been empowered to extend the aforesaid periods in appropriate cases for a further period not exceeding nine months. Under the Securities Contracts (Regulation) Rules, 1957, a listed company is required to issue certificates within one month after the application for the registration of the transfer is received by the company.

With the introduction of the ‘Depository System’ there is no need to issue share certificates for the shares registered in the name of the ‘depository’. Instead, the co. should intimate the details of allotment of shares to the depository immediately on allotment of such shares.[New sub-section (4) of Sec. 113 inserted by the Depositories Act, 1996]

LEGAL EFFECTS OF SHARE CERTIFICATE The legal effects of the issue of a share certificate are mainly two : 1. Estoppel as to title to the shares : A share

certificate is a prima facie evidence of title; i.e., it estoppes the company from denying the title of the person, to the shares, whose name is mentioned therein, provided he acquires the shares in good faith, for value and under genuine transfer.

2. Estoppel as to payment : Secondly, if the share certificate states that the full amount on the shares has been received, the company is estopped, as against a bona fide purchaser of shares for value, from alleging that the shares aren’t fully paid-up.

ISSUE OF DUPLICATE SHARE CERTIFICATE

The directors are empowered to issue new duplicate share certificate in place of original certficate if such certificate :

(a) Is having to have been lost or destroyed, or

(b) Having been defaced or multilated or torn is surrendered to the company [Sec. 84(2)].

Penalty for fraudulent renewal :

If a company with intent to defraud renews a certificate or issues a duplicate thereof, the company shall be punishable with fine which may extend to Rs. 10,000 and every defaulting officer shall be punishable with imprisonment up to six months or fine up to one lakh rupees or with both

[Sec. 84(3)].

Penalty for personation of shareholder :

(Sec. 116) If any person falsely and deceitfully personates a shareholder or the owner of a share warrant, and thereby obtains or attempts to obtain any such share certificate or any such share warrant or receives or attempts to receive any money due to any such owner, he shall be punishable with imprisonment for a term up to 3 years and shall also be liable to fine.

SHARE WARRANT

A Share Warrant is a document in which it is stated that the bearer of the warrant is entitled to the shares specified therein. A definition may, thus, be given as follows :

“ A share warrant is a bearer ‘document of title’ to the shares, issued by the company under its common seal, duly stamped and signed by one or more directors of the company, as per Articles”.

A share warrant is just like a negotiable instrument. The shares specified therein may be transferred by delivery of the warrant only, [Sec. 114(3)] and any bona fide holder for value will obtain a perfect title to the shares.

In other words, a share warrant represents a bearer share and a bearer share is just like a bearer cheque. Share warrants are not popular in practice because the risk of loss is great. Once it is lost, there are very few chances of recovering the ownership of shares.

CONDITIONS OF ISSUE

Sec. 114 lays down the following provisions for the issue of share warrant :

1. Only a public company limited by shares can issue share

warrants.

2. Share warrants cannot be issued originally. Only share certificates for fully paid shares can be converted into warrants.

3. The Articles of Association must authorise the issue of share warrants.

4. Approval of Central Government must be obtained for issuing warrants.

EFFECTS OF ISSUE OF SHARE WARRANTS

The various effects of the issue of share warrants may be enumerated as follows :

1. The company shall strike out of its Register of Members the name of the member then entered therein as holding the shares specified in the warrant, just as if he had ceased to be member, & shall enter in that register the following particulars :

(a) The fact of the issue of the warrant;

(b) A statement of the shares specified in the warrant, distinguishing each share by its no.; and

(c) The date of the issue of the warrant[Sec. 115(1)].

2. By virtue of Sec. 115(5) the bearer of share warrant may or may not be granted all the rights of membership. As such, if the articles so provide, he may be deemed to be a member to the extent and for the purposes defined in the Articles. His rights of membership are usually curtailed, e.g., he cannot present a petition for the winding up of the company. He may not be granted the right to attend general meetings, the right to vote, etc.

3. The share warrant will not constitute the qualification shares for the directors, where one is imposed by the Articles[Sec. 270(4)]. In other words, a holder of share warrant cannot qualify himself for the appointment of a director.

4. The Annual Return must give particulars of share warrants.

DIVIDENDS ON SHARE WARRANTS

Sec. 114(1) expressly authorises the company to provide for the payment of dividends on the share warrants by attaching coupons for dividends with the warrants. Dividend is paid to the person who presents that appropriate coupon.

ISSUE OF DUPLICATE WARRANTS

In case the original share warrant is defaced, multilated or torn, a duplicate share warrant may be obtained, on surrendering the original one for cancellation to the company, just like in the case of a share certificate. But where the original warrant is lost, stolen or destroyed the duplicate is rarely issued and that too upon satisfactory evidence and indemnity.

SURRENDER OF SHARE WARRANTS

Sec. 115(2) provides that subject to the Articles, the bearer of a share warrant may surrender his warrant to the company for cancellation and have his name entered in the Register of Members. The share warrant must be surrendered and cancelled before the name of the holder of the share warrant is entered in the Registrar of Members; otherwise, the company shall be responsible for any loss incurred by any person[Sec. 115(3)].

Difference between share certificate and

share warrants?

Answer:

1. Share Certificate[SC] is a registered evidence of title.

Share warrant[SW] is a bearer document of title.

2. SC is not a negotiable instrument.

SW is a negotiable instrument.

3. Both Private & Public Company can issue Share Certificate.

Only Public company can issue Share Warrant.

4. Issue of SC doesn't require approval of Central Government.

Issue of SW requires approval of Central Government.

5. Holder of SC has full rights(voting, participation in management, etc.) in

a company.

Holder of SW doesn't have has full rights in a company.

6. SC is issued in respect of partly paid or fully paid shares.

SW is issued in respect of only fully paid shares.

7. Dividend is paid through dividend warrants posted by the company at the

registered address of the member in the case of SC whereas; in the case SW

the dividend is paid through bearer dividend coupons.

TRANSFER AND TRANSMISSION OF SHARES

CONTENTS 1. Introduction of transferability of shares

2. Requirement for transfer of shares

3. Difference for Private and Public company

4. Common grounds for refusal

5. Nomination of shares

6. Transmission of shares

7. Difference between Transfer and Transmission

CALLS AND FORFEITURE OF SHARES

BASIC REQUIREMENT FOR VALID CALLS

For each call at least 14 days notice period must be given to the members

stock exchange shall be advised of the proposal at least 2 days before the board meeting. The sock exchange normally stipulates that no call shall be made payable within one month after the call was made but no later than one year from the date of issue

An interval of thirty days is required between two successive calls and not more than twenty five per cent of the nominal value of shares can be called at one time.

The board of directors has the power to revoke or postpone a call after it is made

Provision for payment of call in installments can be made only by a resolution of boards

Joint share holders are jointly and severally liable for payment of calls

If a member fails to pay money he is liable to pay interest not exceeding the rate specified in the article or terms of issue.

If any member desires to pay the call money in advance the directors may at their discretion accept and pay interest not exceeding the rate specified in the articles.

A defaulting member will not have ant voting right till call money is paid by him.

FORFEITURE OF SHARES Meaning: Forfeiture means termination of membership as a

sort of penalty for the non-payment of calls on the due date. To forfeit means to take away or to withdraw the rights of a person. Forfeiture of share refers to the cancellation or termination of membership of a share holder by taking away the shares and rights of membership.

Procedures regarding forfeiture of shares: (1) Provision in the Articles of Association: The secretary has to check if there is a provision in the Articles of Association regarding forfeiture of shares. If there is a provision in the Articles, the company can go ahead regarding forfeiture of shares. If there is no provision in the Articles, the company cannot go ahead regarding forfeiture of shares. (2) Preparing the list of defaulters: As soon as the due date of payment of call money is over, the secretary prepares a list of defaulting members. He, then calls a meeting of the Board of Directors and places the list of defaulters for consideration and suitable decision and action by the Board.

(3) Board Meeting and Resolution by Directors: The secretary arranges the meeting of the Board Directors and in this meeting a resolution will be passed whereby the secretary will be authorized to send reminders to the defaulters. Such call reminders contain a request to pay the call amount due, within a specified period with interest. This letter also intimates the defaulters that his shares are liable for forfeiture in case the default in payment of the amount continues. (4) Issue of Warning Letter: Even after reminders have been sent to the defaulters, no heed has been taken to pay the call money, the secretary has to issue a warning notice under the authority of the Board's resolution and the Articles. The warning notice is for asking the defaulting members to pay the dues within 14 days from the date of notice. Warning is also given that failure to pay within the stipulated time will make the shares liable for forfeiture.

(5) Board Meeting for resolution on forfeiture: If the default continues even after 14 days warning notice, the secretary has to arrange a meeting of the Board of Directors. In this meeting a resolution will be passed by the Board of Directors to forfeit the shares of the defaulting members. (6) Notice of the forfeiture: The secretary has to send a formal notice to the defaulting members informing them about the forfeiture and asking them to surrender the forfeited shares. Such notice of forfeiture or letter of forfeiture is required to be sent by registered post to the individual share holders concerned. Usually, the fact of forfeiture is also notified in the press and the public is cautioned against dealing in the said shares. The amount of forfeited shares is transferred to a Forfeited Shares Account in the financial books of the company.

(7) Removal of names from the register of members: Finally, the secretary has to remove the name of defaulters, from the register of members and enter the same with other particulars in the register of forfeiture of shares. These were the procedures by which the company forfeits the shares of a defaulting share holder.

SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000 CHAPTER: IV - PROMOTERS CONTRIBUTION AND LOCK-IN REQUIREMENTS

Promoters Contribution in a Public Issue by Unlisted Companies

In a public issue by an unlisted company, the promoters shall contribute not less than 20% of the post issue capital. The promoters shareholding after offer for sale shall not be less than 20% of the post issue capital.

In case of public issues by listed companies, the promoters shall participate either to the extent of 20% of the proposed issue or ensure post-issue share holding to the extent of 20% of the post-issue capital

In case of composite issues of a listed company, the promoters contribution shall at the option of the promoter(s) be either 20% of the proposed public issue or 20% of the post-issue capital. Rights issue component of the composite issue shall be excluded while calculating the post-issue capital.

Promoters Participation in Excess of the Required Minimum Contribution to be Treated as Preferential Allotment

In case of a listed company, participation by promoters in the proposed public issue in excess of the required minimum percentage shall attract the pricing provisions of Guidelines on preferential allotment, if the issue price is lower than the price as determined on the basis of said preferential allotment guidelines.

Exemption from Requirement of Promoters Contribution

The requirement of promoters contribution shall not be applicable -

in case of public issue of securities by a company which has been listed on a stock exchange for at least 3 years and has a track record of dividend payment for at least 3 immediately preceding years. Provided that if the promoters participate in the proposed issue to the extent greater than higher of the two options referred earlier, the subscription in excess of such percentage shall attract pricing guidelines on preferential issue, if the issue price is lower than the price as determined on the basis of said guidelines on preferential issue.

in case of companies where no identifiable promoter or promoter group exists.

in case of rights issues.

Provided, in case of (a) and (c) above, the promoters shall disclose their existing shareholding and the extent to which they are participating in the proposed issue, in the offer document.

LOCK-IN REQUIREMENTS

In case of any issue of capital to the public the minimum promoters contribution shall be locked in for a period of 3 years. The lock-in shall start from the date of allotment in the proposed public issue and the last date of the lock-in shall be reckoned as three years from the date of commencement of commercial production or the date of allotment in the public issue whichever is later.

In case of a public issue by unlisted company, if the promoters contribution in the proposed issue exceeds the required minimum contribution, such excess contribution shall also be locked in for a period of(one year). In case of a public issue by a listed company, participation by promoters in the proposed public issue in excess of the required minimum percentage shall also be locked-in for a period of (one year) as per the lock-in provisions as specified in Guidelines on Preferential issue.

Provided that excess promoters contribution shall not be subject to lock-in in case of public issue of securities by a company which has been listed on a stock exchange for at least 3 years and has a track record of dividend payment for at least 3 immediately preceding years.

In case shortfall in the firm allotment category is met by the promoter such subscription shall be locked in for a period of (one year).

Securities Issued Last to be Locked-in First

The securities forming part of promoters contribution and issued last to the promoters shall be locked in first for the specified period. Provided that the securities issued to the financial institutions appearing as promoters, if issued last, shall not be locked-in before the shares allotted to the other promoters.