Share Capital and Financial Structure

Financial Structure
Definition: The mix of debt and equity a company uses to finance operations.
Goal: To optimize the mix of debt and equity.
Components:
Debt Capital: Funds from credit investors, repaid with interest.
Equity Capital: Funds raised from shareholders, giving them ownership and potential
returns.

Share
Definition (Section 2(84) of the Companies Act, 1956): A share in the share capital of a
company, including stock.
Represents: A fractional part of the company's capital, determining shareholder interests and
liabilities.
Function: A financial instrument representing ownership in a company. Shareholders are
owners, and each share denotes a part of that ownership.

Share Capital
Definition: The amount of capital raised or to be raised by a company through the issue of
shares.
Timing: Raised at incorporation or later for expansion.
Permanent Liability: Repaid only at winding up.
Memorandum of Association: Specifies the amount of share capital.

Types of Capital
Authorized, Registered, or Nominal Capital:
Maximum amount a company is authorized to raise.
Stated in the capital clause of the Memorandum of Association.
Issued and Unissued Capital:
Issued Capital: Part of authorized capital offered to the public for subscription.
Unissued Capital: Part of authorized capital not offered to the public.
Subscribed and Unsubscribed Capital:
Subscribed Capital: Face value of shares subscribed by the public.
Unsubscribed Capital: Balance of issued capital not subscribed by the public.
Called-up Capital:
Portion of subscribed capital that directors require shareholders to pay.
Collected in installments (application money, allotment money, call money).
Paid-up Capital:
Part of called-up capital actually paid by shareholders.
Paid-up Capital = Called-up Capital - Calls-in-Arrears.
 Uncalled Capital:
Part of subscribed capital not yet called up.
Reserve Capital:
Part of uncalled capital reserved for winding up, by special resolution.

Features of Shares
Instruments used to raise capital.
Measure ownership in a company.
Have nominal or face values.
Shareholders have rights and liabilities as per the Articles.
Shareholders receive dividends.
Title evidenced by physical certificate or electronic credit (Demat Account).

Classes of Shares
Equity Shares
Preference Shares
Sweat Equity Shares

Equity Shares
Definition: Shares that are not preference shares.
Dividend: Not fixed or mandatory, depends on profit and Board discretion.
Repayment: Repaid at winding up after liabilities and preference shareholders.
Risk Capital: Considered the risk capital of the business.
Permanent.
Voting Rights: Right to vote on every resolution.
Equity shareholders share the prospects of the company in the form of higher rate of
dividend, bonus and capital appreciation in the share price in the stock exchange.

Preference Shares
Preferences:
Fixed rate of dividend before equity shares.
Repayment of capital before equity capital at winding up.
Voting Rights: Limited, only on matters directly affecting their rights.
Favourable to cautious investors.
Dividend is not mandatory.
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 shares shall have a right to vote on all
resolutions placed before the company.
Types:
Redeemable and Irredeemable (Irredeemable is prohibited under the Companies Act,
2013).
Cumulative and Non-Cumulative.
Convertible and Non-Convertible.
 Participating and Non-Participating.

Sweat Equity Shares

Definition (Section 54): Equity shares issued to employees or directors at a discount, for non-
cash consideration (technical know-how, intellectual property rights).
Conditions for Issuance:
Authorized by special resolution.
Resolution includes number of shares, market value, valuation of consideration, and class
of employees/directors.
Company must have been entitled to commence business for at least one year.
Listed companies must follow SEBI regulations.

Issue of Shares and Modes of Issue

Private Placement (Section 42):
Offer to a select group of investors.
Limited number of persons (excluding QIBs and employees under ESOP).
Payment via cheque, demand draft, or banking channels (not cash).
Allotment within 60 days of application money receipt.
Public Issue:
Shares offered to the public through a prospectus.
Regulated by SEBI.
Methods: Fixed pricing or book building.
Initial Public Offer (IPO): First public issue.
Follow-on Public Offer (FPO): Subsequent issue by a listed company.

Book Building
Definition: Pricing shares based on demand with the assistance of merchant banks.
Process:

1. Appoint an underwriter to assist with the process, determine issue size and pricing range.
2. Invite investors to bid.
3. Analyze bids and determine the final "cut-off" price using a weighted average technique.
4. Publicize the information.
5. Final allocation.

Allotment of Shares
Definition: Appropriation of previously unappropriated shares to allottees.
Legal Effect: Acceptance of investor's offer, creating a binding contract.
Provisions:
General provisions (Proper authorization, valid application, within reasonable time,
unconditional, communication of allotment).
Statutory provisions (Registration of prospectus, minimum subscription, application for
 listing, return of allotment).
Minimum subscription of capital should not be less than 90% of the issued amount according
to the Securities and Exchange Board of India (SEBI).

Irregular Allotment
Definition: Allotment not complying with statutory provisions.
Examples: Failure to issue a prospectus, failure to receive minimum subscription, failure to
deposit application money in a scheduled bank, etc.
Effect: Voidable at the option of the allottees within two months of the statutory meeting or
the date of allotment.

Certificate of Shares (Section 46)

Definition: A document issued under the common seal of the company specifying the shares
held by any person.
Contents:
Name and address of registered office.
Serial number of the certificate.
Name and address of the shareholder.
Number of shares held.
Class of shares, nominal value and paid-up value.
Distinctive number of shares.
Folio Number of the shareholder.
Signature of the authorised signatory.
Common seal of the company.

Listing of Shares (Section 40)

Definition: Inclusion of shares in the official list of a Stock Exchange for trading.
Compulsory for public issues made through prospectus.
Benefits: Liquidity, better corporate image, acceptance as collateral, better governance.

Share Warrant
Definition: A document certifying that the holder is entitled to the number of shares specified.
Issued under common seal for fully paid-up shares.
Transferable by delivery.
Issued only if authorized by the Articles of Association and with Central Government
approval.
Dividend coupons attached.

SEBI Guidelines for Public Issue

Entry Norms for Unlisted Companies (Profitability Route, QIB Route, Appraisal Route).
 Entry Norms for Listed Companies.
IPO Grading.
Pricing of an Issue.
Freedom of companies to determine the denomination of shares for public or rights issues
and to change the standard denomination.

Bonus Shares (Section 63)

Definition: Shares issued to existing shareholders out of accumulated profits, free of cost.
Legal Provisions:
Articles must allow bonus shares.
Recommended by Board, approved by shareholders.
Issued out of free reserves, share premium, or capital redemption reserve.
Fully paid-up only.
No bonus shares in lieu of dividend.

Right Shares
Definition: Shares offered to existing shareholders when a company makes an additional
issue (Section 62).
Offered in proportion to paid-up value of shares held.
Provisions:
Offer made by notice.
Specifies proportion and number of shares.
Time limit for acceptance (15-30 days).
Shareholders can renounce rights in favor of a third party.

Shares with Differential Voting Rights (Section 48)

Definition: Shares with varying voting rights as per the terms of issue.
Requires consent of holders of not less than three-fourths of the issued capital of that class.

Employees Stock Option Scheme (ESOS)

Definition (Section 2(37)): Option to directors, officers, or employees to purchase shares at a
pre-determined price.
Purpose: Employee satisfaction, participation in management, reduced labour turnover.
Special resolution required at a general meeting to implement an ESOS.

Issue of Shares for Cash

Issue at Par: Consideration equals nominal value.
Issue at a Premium: Issue price greater than par value. Premium credited to 'Securities
Premium Account' and used for specific purposes.
Issue at a Discount (Section 53): Prohibited except for sweat equity shares.
Stock
Definition: Bundle of fully paid shares merged into a common value.
No uniform nominal values.
Can be reconverted into shares.
Stock holders are members.

Voting Rights
Equity shareholders: Right to vote on every resolution. Voting right is proportional to share in
the paid-up equity share capital of the company.
Preference shareholders: Right to vote only on resolutions directly affecting their rights.
Voting right is proportional to share in the paid-up preference share capital of the company.
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.

Calls on Shares
Definition: Demand made by the company for payment of the remaining amount on shares.
Conditions:
Directors to make a valid call - the Board of Directors shall pass a resolution to that effect
giving the amount of call and the time and mode of payment.
Call made for the benefit of the company.
Call amount to be uniform.
Notice of call.
Interval between two calls.
Calls-in-Arrear: Amount unpaid on calls.
Calls-in-Advance: Amount paid before the call is made.

Forfeiture of Shares
Definition: Cancellation of shares for non-payment of allotment and/or call money.
Conditions:
Authorised by the Articles.
Notice to Shareholders.
Resolution for Forfeiture.
Bonafide Act.
Effect: Removal from Register of Members, forfeited shares become property of the
company.
Reissue of Forfeited Shares: Reissued at par, premium, or discount.

Surrender of Shares
Definition: Shareholder voluntarily returns shares to the company.
 Allowed only if the Articles of Association of the company contains a provision allowing
surrender of shares or authorising the Directors to decide on the matter.
Shares may be reissued by the Directors later.

Buyback of Shares
Definition: Company buying its own shares to reduce paid-up capital.
Conditions:
Articles must authorize buyback.
Special resolution required.
Buyback cannot exceed 25% of total paid-up capital and free reserves.
Debt cannot exceed two times paid-up capital and free reserves after buyback.
Shares must be fully paid up.

Transfer and Transmission of Shares (Section 56)

Transfer of Shares: Voluntary act.
Requires instrument of transfer (Transfer Deed).
Transmission of Shares: By operation of law (death or insolvency).
No instrument of transfer required.

Dematerialization of Shares
Definition: Converting physical share certificates into electronic form.
Benefits: Elimination of risks, no stamp duty on transfer, immediate transfer, reduced
paperwork and transaction costs, increased liquidity.
Depository: Organization holding securities in electronic form (NSDL, CDSL).
Depository Participant (DP): Agent of the Depository interfacing with investors.
Rematerialisation: The process by which electronic holdings are converted back into physical
certificates

Transfer of Shares under Depository System

Market Transactions: Transfer through stock exchanges, seller gives Delivery Instruction slip.
Off Market Transactions: Transfer from one Demat Account to another, transferor signs
Delivery Instruction Slip.

Global Depository Receipt

Definition: A financial instrument issued to Non-Resident Investors against the issue of
ordinary shares or Foreign Currency Convertible Bonds [FCCB] of the issuing company, in the
form of a certificate or depository receipt created by an Overseas Depository Bank appointed
by the issuing company.
Debentures
Definition (Section 2(30) of the Companies Act, 2013): Includes debenture stock, bonds, or
any instrument evidencing debt.
Issued to raise debt capital.
Debenture holders are creditors.
Carry a fixed rate of interest.
Kinds of Debentures:
Bearer and Registered.
Secured and Unsecured.
Redeemable and Irredeemable.
Convertible and Non-Convertible.
Zero Interest Debentures (ZID).
Interest fully convertible debentures.
Creation of Charges:
Fixed Charge: On specific assets.
Floating Charge: On a class of property that is constantly changing.