CAPITAL RAISING

Every company must state the amount of its share capital, the number of shares and
the nominal value of the shares. This is the company’s authorised, or nominal, share
capital. It is left to the Company to decide what rights will attach to its shares. The
actual number of shares issued is usually referred to as the issued share capital.
Definition
A share is defined in Section 2 of the Act as:
‘a share in the share capital of accompany and includes stock, except where a
distinction between stock and shares is expressed or implied
The share capital of a company is variously referred to as the authorised share capital,
nominal share capital, issued share capital or paid-up share capital.
Authorised capital
The authorised or nominal share capital refers to the maximum number of shares
available for issue and the nominal value of each share. Once a company has begun
trading, although the actual value of the shares will vary according to the company’s
performance and demand for the shares, the nominal value does not change.
Authorised share capital can be increased only with the approval of the existing
shareholders by special resolution.
ALTERATION OF CAPITAL
This might be an increase in authorised share capital, either by creating new shares
of an existing class, by creating a new class of another shares or a share buy-back.
The authorised capital may be increased using the following procedure:

- At a board meeting the directors resolve to recommend the increase of capital.

- Prepare a circular to members, giving reasons for the recommendation and
including the notice of the meeting together with a form of proxy.
- In the case of listed companies this will require a circular which has been
formally approved by the Zimbabwe Stock Exchange.
- When the final documents are posted, copies of the notice and any related
circular and the proxy form should be sent to the Zimbabwe Stock Exchange
and members.
- Copies of the special resolution suitable for submission to the Registrar
should be prepared for signatures.
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 - General meeting held and resolutions approved
- A form CR 8 and CR 10 with the necessary duty should be submitted.
- The notice for the general meeting should, by ordinary resolution authorise
the directors to issue shares that are authorised but unissued.
- The special resolution has to be registered by the Registrar before it
becomes effective.

- At the same time as increasing the company’s share capital, it is important to

give the directors authority to allot the shares and consider whether pre -
emption rights should be waived. It is therefore common practice for a
resolution authorising the directors to issue the newly created shares to be
proposed at the same meeting.
Pre-emptive rights are contractual clauses or rights of shareholders to buy
additional shares in any future issue before the shares are offered to the general
public. These can be dis- allowed. Section 138
Issued capital
Issued capital is the part of the company’s total authorised or nominal capital which
has been issued and taken up the members and is expressed in terms of its nominal
rather than actual value. For example, a company with an authorised capital of 1,000
shares of $1 each ($1,000) which issues 250 shares, has an issued share capital of
$250 (i.e. 250 shares of $1 each).
Share premium
A share premium is the difference between the issue price of a share and its nominal
value. For example, if the nominal value of a share is $1 and it issued for $1.50, the
premium is 50 cents. When a company states its share capital, only the nominal
amount of the shares is included. The amount of any share premium is credited to a
share premium account.
Share premium - the difference between the issue price of a share and its nominal
value
Classes of shares
Ordinary shares
- owners or equity holders, basically run the company through voting

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 - rank after preference shares for the purposes of dividends and return of
capital,
- but carry voting rights not given to holders of preference shares.
- the company’s risk capital and the directors must decide whether or not to
declare a dividend to be paid out of the distributable profits.
- Ordinary shareholders stand to gain or lose the most on a winding -up,
depending on the surplus assets available.

Preference shares
- typically these shares carry a preferential right to a fixed dividend and usually
rank higher in priority than other classes of shares in a winding -up.
- The fixed rate of dividend is often expressed as a percentage and is deemed
to be cumulative, unless stated otherwise.
- should a company fail to pay the dividend due, it will accrue to the shareholder
and become payable, together with the next dividend due, at the next payment
date.
- If cumulative preference shares are issued and the dividend, of say 5%, cannot
be paid in year one, because the company has not operated at a profit, the
entitlement is rolled forward to year 2, with owners being entitled to a 10%
dividend.
- usually cumulative unless the Articles states otherwise

Types of Preferences shares

Redeemable Preference Shares - Sections 126 and 127

- these can be repaid or redeemed by the company at their nominal or

par value at some stated date in the future.
- they offer a certain amount of protection for the investor and
companies welcome them because the investor will not stay with the
company forever.
- can be redeemed out profits or from a fresh issue of shares

Convertible Preference Shares

- These preference shares provide the company with the right, at a future
date, of converting the preference shares into ordinary shares

Participating preference share

in addition to getting their fixed interest, this type also get dividend
from the surplusafter paying the ordinary share holders

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 non- cumulative
- if a company does not pay a scheduled dividend, it does not have the
obligation to pay at a later date

Methods of raising funds

(a) Equity

(i) Public issue of shares

Sections 103 to 114 of the Act permit public companies to offer shares
to the public by means of a prospectus. The company issues out a
prospectus inviting the public to subscribe for the share. The offer opens
for a specific period after which it closes and the company start s to allot
the shares

Allotment procedure on a public offer

- On receipt of the completed application , remittance, must be

deposited in a bank account opened solely for the purpose of the public
offer
- The board of directors, if duly authorised, should pass a resolution to
allot the shares and to authorise the issue of the shares.
- Once the allotment has been made the necessary entries should be
made in the register of members.
- Share certificate prepared and posted
- A return of allotments [on form CR 11]should be submitted to the
Registrar.

Shares allotted for non-cash consideration

Sometimes share are allotted for non –cash consideration . The

company should ensure proper valuation has been done . A copy of
the contract should be sent to the Registrar of Companies when the
return of allotments form CR 11is registered.
The directors are clearly bound to ensure the adequacy of the
consideration, which should be reported to members.
In the case of listed companies the Zimbabwe Stock Exchange will
review a valuer’s report and ensure that reference is made to the
valuer’s report in circulars sent to
shareholders.
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 A formal contract is drawn up for the transfer of the non-cash
consideration to the company and for the allotment of the shares in
consideration of the assets. This contract should be approved by the
board of directors. The contract should be sent to the Registrar of
Companies, with the return of allotments [CR 11].

If there is no written contract, particulars of the agreement must be set

out on form CR 11, and sent to the Registrar of Companies with the
return of allotments.

Private limited companies do not need to have non-cash consideration

independently valued. Directors can apply their own valuation,
provided of course this is acceptable to the allottee.

Minimum Subscription

Section 115 of the Act provides that no allotment may be made unless
the minimum subscription is received. If the minimum number of
shares, stated at the time of the issue of the shares/securities, is not
received within 60 days after the issue of the prospectus, t he funds
received shall be returned to the offeror without interest.

The issue price:

One of the major considerations is the issue price of new securities and the manner
in which the price is to be fixed and paid. While companies and their advisers will
have a reasonable idea of what issue price they can expect to achieve, it cannot be
fixed until just before the issue because it has to reflect prevailing market conditions.
If the price set is too low, the issue will be oversubscribed; if the price is too high,
there will be insufficient applications and a number of shares will be left in the hands
of the underwriters. To err on the side of too low a price is preferable, so long as it
is only a modest margin, as a low take-up could cause problems for the underwriter
and also adversely affect the public’s appetite for the company’s securities in the
future.
In a public offer, the issue price is fixed. All successful applicants pay the same price.
If the issue or offer is oversubscribed, some or all allotments may be reduced so that
some or all applicants will be allotted fewer shares than paid for, and some
applications may be rejected altogether. Application monies in excess of the amount
required are returned to the applicants.

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The main underwriter must agree in writing to purchase any securities that are not
subscribed for and to pay the fixed issue price for those shares. There will be an
underwriting fee and the underwriter may also offset his risk by sub-underwriting
with a number of banks and pension funds. Underwriting provides insurance for the
issuer that the issue of shares will be fully subscribed; this is important especially
where the issuer has to raise a specific amount of capital for a particular purpose.
In the event of the offer not being fully subscribed, if there is no underwriter to take
up the shortfall, all funds received shall be returned. This would result in the issue
costs being wasted. Underwriting is accordingly essential to all public offers.
Underwriting:
An agreement usually made between the company and merchant banks or brokers
for the bank or broker to take up shares in an issue if they are not fully taken up by
the public. Underwriting removes the risk that the company will not receive its full
subscription monies and have to return the funds to all applicants.
Refer to section 113 SI134 /2019 conditions to be met by an underwriter

(ii) Private placement

This is sale of share not through a public offering but to a few selected
number of investors. The company negotiate with an investor(s) who
agree to take share at an agreed price.

Advantages
It aids the company in raising capital when market liquidity conditions are
not good. It is a flexible method which allows the company to choose
investors of their choice . This increases the chances of having investors
with similar objectives to and also provides flexibility in the amount and
type of funding . Fundraising by this placement helps the company to
diversify company’s funding sources and its capital structure.
Ease of Execution - using private placements, you can raise a significant
amount of finance, and often quite quickly.
Cost Savings -a company can often issue a private placement for a much
lower all-in cost than it could in a public offering as it doesn't need to
involve brokers or underwriters .

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 Lesser Regulatory Requirements – This placement requires limited public
disclosures and is prone to less regulatory requirements than that would be
needed in a public offering.
Some of the disadvantages include :
A Private placements presents a limited number of potential investors than
in a public issue and the company may be left with no option but to go with
those few . The process may not present a wider choice of investors from
which choose from . Further, the investor may have a limited amount of
funds to invest and may set certain targets to be achieved whereby he would
invest the funds.. The investors may require more return because of the risk
they are taking by investing privately..
It results in results in dilution and therefore requires shareholder approval
and other regulatory approvals. .

(iii) Rights issue

A rights issue is an issue of shares to the existing shareholders pro rata to
their existing holdings. Companies use rights offers to obtain additional
funding from the company’s shareholders, rather than obtain working
capital by borrowing from banks or other financial institutions.

Checklist for Rights Issue

- Check the Articles of Association and share register to ensure that

the company has sufficient unissued authorised share capital.
- Check that the directors have been authorised to allot additional
shares. If this is not the case then separate authority must be sought
through an ordinary resolution of the members.
- The company must increase its authorised share capital if it is
insufficient (special resolution at general meeting).
- If it is necessary to increase the authorised share capital no further
action may be taken until the Registrar of Companies has registered
the special resolution, which shall be submitted on a form CR 8
together with a form CR 10 in respect of the increase of capital.
- The directors must resolve to increase the company’s issued share
capital by a rights issue and to issue the provisional allotment letters
to the shareholders.
- Letters of renunciation must also be sent if it is the intention that
existing shareholders can renounce their entitlement in favour of

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 third parties. if renunciations rights are not offered, the shareholder
would still have the ability to refuse to take up the rights issue.
- Once the closing date for acceptance is reached, the directors
resolve to allot those shares taken up.
- Update the register of members.
- Prepare appropriate share certificates and issue to shareholders.
- File formCR 11 with the Registrar of Companies, to reflect the shares
allotted.

Letters of renunciation /Letters of Allocation

In the case of rights offers the existing shareholders are often permitted to
renounce the right to acquire shares offered to them in favour of another
person by completing a letter of renunciation, which is usually attached to the
letter of offer. This allows a shareholder who is unable to follow his/her rights
to allow another person to take up the share.

(b)Borrowing

Debentures and loans from financial institutions

Debentures are effectively loans to the company by investors who receive
interest, usually at a fixed rate. These are not strictly a class of share but are
frequently referred to when looking at a company’s financial structure.
Debentures are secured loans on the assets of the company, and rank ahead of
the payment of dividends on either preference shares or ordinary shares
Debentures are secured through giving either a fixed or floating charge over
the assets of the company. A fixed charge is a mortgage of freehold, or
leasehold land or fixed plant and machinery although a fixed charge may be
granted over other assets . It prevents the company selling the assets charged
without the consent of the debenture holder Interest on debentures must be
paid, even if the company does not have sufficient distributable reserves, and
failure to pay may lead to an event of default. Debentures also rank ahead of
shares in repayment of capital in a liquidation. Debentures do not carry voting
rights.
Loans on the collateral that secures the loan and the ability of the company to
repay.
Consolidation and subdivision of shares

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Consolidation
Consolidation means that the shares of a low nominal value are aggregated into a
smaller number of shares of an increased nominal value. For example, five shares of
10 cents each would be consolidated into one share of 50cents. It can be convenient
to consolidate if a company has issued a large number of ordinary shares which have
a low nominal value or as part of a complex re-organisation of the company’s share
capital.
There is no change in the actual share capital but only the individual shares value
changes. The register of members should be rewritten to show the holdings of each
member in the new denomination. Existing share certificates should be cancelled
and new ones issued with a notice stating that the consolidation has taken place.
Some holdings may not consolidate into an exact number of new shares, causing
those members to ‘lose’ that fraction of their holding. If the company is listed, the
fractional shares should be aggregated, sold on the market, and the proceeds
distributed to the appropriate members, subject to a minimum amount. In unlisted
companies, arrangements would have to be made for the fractions to be sold to
some person, at an agreed price.
Subdivision of shares /share split
Subdivision of shares is where shares of a high nominal value are divided into a larger
number of shares of lower nominal value. For example, one share of $1 would be
divided into four shares of 25 cents each. Subdivision is therefore the opposite of
consolidation and is usually effected to make the shares more easily marketable. This
is also known as splitting shares.
The procedure is the same as that for consolidation, except that fractions of shares
do not arise. Following receipt of the form CR 9 marked as duly registered by the
Registrar, the register of members needs to be rewritten to show the shares held in
the new denominations, and existing share certificates should be cancelled and
replaced.
Share buy-backs
Sections 128 to129 of the Act permit a company to purchase its own shares.
Authority for the buy-back needs to be included in the Articles of Association, or a
special resolution may be necessary. In addition, the general meeting should
authorise a specified buy-back or a general power to buy-back. The resolution should
state the maximum number of shares to be bought and the price range. Such
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resolution effective from one AGM to the end of another AGM. They can be
bought from the market, or by approaching specific shareholders i.e off market
purchases.
On-market repurchases
In the case of on market repurchases, the company buys shares in the market at the
prevailing market price. Also, on market purchases can be spread out over a period
of time and at different price levels unlike general offers, as described below, and
are much more widely used for smaller repurchases. In addition, an open market
repurchase gives the company more flexibility in deciding when to and the quantity
of shares to be repurchased each time .
The general practice is that the company obtains a general mandate from the
shareholders at a general meeting to repurchase the company’s shares from the open
market between the date of approval and the following annual general [Link]
present Listing Rules have set a cap of 10% of the issued share capital at the time of
the general mandate and that the repurchase price must not be 5% or more than the
average closing price of the five preceding trading days.
General offer repurchases
In a repurchase general offer, the company makes the offer to all shareholders and
specifies the price per share, the number of shares to be repurchased, and the period
of time for which it will keep the offer open. The general offer is open for acceptance
by shareholders to offer their shares for [Link] many cases, the company
retains the flexibility to withdraw the offer if an insufficient number of shares are
submitted or to extend the offer beyond the originally specified time period .This
approach is used primarily for large equity repurchases from a number of
unidentified shareholders to consolidate control.
Off-market repurchase (privately negotiated repurchase)
In privately negotiated repurchases, the company buys back shares from a large
shareholder at a negotiated price per share .This method is not as common as the
first two and is sometimes used to consolidate control and eliminating an
undesirable shareholder. Therefore, most off-market repurchases are made with an
identified party.

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Once a buy-back is completed, the voting powers of the shares are lost and the
shares could be held by a subsidiary or by the holding company.
A special resolution must be passed at a general meeting. Shares bought back can
either be cancelled or held as treasury shares to be used in acquisitions or share
options.
Treasury Shares :
Shares bought back are normally held as treasury shares. They are not entitled to any
dividend and have no voting rights. They can be used for share options, transaction
involving mergers or acquisition etc.

(i) Discuss the pros and cons of share buy back from both company and
investor point of view.
(ii) Why would a company do a consolidation or share split ?
(iii) Discuss the advantages and disadvantages of each of the methods of capital
raising .

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