Procedure of Issue of Shares,Forfeiture of Shares

Procedure of issue of shares:

When company has been registered, the following procedure is adopted by the company to collect money from the public by issuing of shares:

Step-1

Issue of prospectus:

When a Public company intends to raise capital by issuing its shares to the public, it invites the public to make an offer to buy its shares through a document called ‘Prospectus’. According to Section 60 (1), a copy of prospectus is required to be delivered to the Registrar for registration on or before the date of publication thereof. 

It contains the brief information about the company, its past record and of the project for which company is issuing share. It also includes the opening date and the closing date of the issue, amount payable with application, at the time of allotment and on calls, name of the bank in which the application money will be deposited, minimum number of shares for which application will be accepted, etc.

Step-2

To receive application:

After reading the prospectus if the public is satisfied then they can apply to the company for purchase of its shares on a printed prescribed form. Each application form along with application money must be deposited by the public in a schedule bank and get a receipt for the same.

The company cannot withdraw this money from the bank till the procedure of allotment has been completed (in case of first allotment, this amount cannot be withdrawn until the certificate to commence business is obtained and the amount of minimum subscription has been received). The amount payable on application for share shall not be less than 5% of the nominal amount of share.

Step-3

Allotments of shares:

Allotments of shares means acceptance by the company of the offer made by the applicants to take up the shares applied for. The information of allotment is given to the shareholders by a letter known as ‘Allotment Letter’, informing the amount to be called at the time of allotment and the date fixed for payment of such money. It is on allotment that share come into existence. 

Thus, the application money on the share after allotment becomes a part of share capital. Decision to allot the share is taken by the Board of Directors in consultation with the stock exchange. After the closure of the subscription list, the bank sends all applications to the company. On receipt of applications, each application is carefully scrutinised to ascertain that the application form is properly filled up and signed and the money is deposited with the bank.

Step-4

To make calls on shares:

The remaining amount left after application and allotment money due from shareholders may be demanded in one or more parts which are termed as ‘First Call’ and ‘Second Call’ and so on. A word ‘Final’ word is added to the last call. The amount of call must not exceed 25% of the nominal value of the shares and at least 1 month have elapsed since the date which was fixed for the payment of the last preceding call, for which at least 14 days notice specifying the time and place must be given.

Modes of issue of shares:

A company can issue shares in two ways:

1. For cash.

2. For consideration other than cash.

Issue of shares for cash: When the shares are issued by the company in consideration for cash such issue of shares is known as issue of share for cash. In such a case shares can be issued at par or at a premium or at a discount. Such issue price may be payable either in lump sum along with application or in instalments at different stages (e.g. partly on application, partly on allotment, partly on call).

Issue of shares at par:

Shares are said to be issued at par when they are issued at a price equal to the face value. For example, if a share of Rs. 10 is issued at Rs. 10, it is said that the share has been issued at par. Issue of shares at premium: When shares are issued at an amount more than the face value of share, they are said to be issued at premium. For example, if a share of Rs. 10 is issued at Rs. 15; such a condition of issue is known as issue of shares at premium. 

The difference between the issue price and the face value [i.e. Rs. 5 (Rs.15 – Rs.10)] of the shares is called premium. It is a capital profit for the company and will show credit balance; hence it will be shown in the liability side of the Balance Sheet under the heading ‘Reserves and Surplus’ in a separate account called ‘Security Premium Account’. Shares of those companies can be issued at premium which offer attractive rate of dividend on their existing shares, having a good profit track for last few years and whose shares are in demand. The amount of premium depends upon the profitability and demand of shares of such company.

Note: 

The Company may collect the amount of security premium in lump sum or in instalments. Premium on shares may be collected by the company either with application money or with the allotment money or even with one of the calls. In absence of any information, the amount of the premium is to be recorded with allotment.

Issue of shares at discount:

Shares are said to be issued at a discount when they are issued at a price lower than the face value. For example if a share of Rs. 10 is issued at Rs. 9, it is said that the share has been issued at discount. The excess of the face value over the issue price [i.e. Re.1 (Rs. 10 – Rs. 9)] is called as the amount of discount. Share discount account showing a debit balance denotes a loss to the company which is in the nature of capital loss. Therefore, it is desirable, but not compulsory, to write it off against any Capital Profit available or Profit and Loss Account as soon as possible, and the unwritten off part of it is shown in the asset side of the Balance Sheet under the heading of ‘Miscellaneous Expenditure’ in a separate account called ‘Discount on issue of Shares Account’.

Conditions for issue of shares at discount: For issue of shares a discount the company has to satisfy the following conditions given in section 79 of the Companies Act 1956:

(i) At least one year must have elapsed since the company became entitled to commence business. It means that a new company cannot issue shares at a discount at the very beginning.

(ii) The company has already issued such types of shares.

(iii) An ordinary resolution to issue the shares at a discount has been passed by the company in the General Meeting of shareholders and sanction of the Company Law Tribunal has been obtained.

(iv) The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10% of the face value of the shares. For more than this limit, sanction of the Company Law Tribunal is necessary.

(v) The issue must be made within two months from the date of receiving the sanction of the Company Law Tribunal or within such extended time as the Company Law Tribunal may allow.

Forfeiture of shares:

When any company allots share to the applicants, it is done on the basis of a legal contract between the company and the applicant, which makes it binding upon the shareholders to pay the amount of allotment and calls whenever they are due. Now if any shareholder fails to pay the allotment and or call money due to him, the shareholder violates the contract and the company is entitled to take its share back, which is known as forfeiture of shares. The company can forfeit such shares if authorised by the Articles of Association. Forfeiture of share can be done according to the rules laid sown in the Articles and if no rules are given in Articles, the provisions of Table A, regarding forfeiture will apply. Forfeiture of shares means cancellation of allotment to defaulting shareholders and to treat the amount already received on such shares is not returnable to him – it is forfeited.

Procedure for forfeited shares:

The usual procedure is that the defaulting shareholder must be given a minimum 14 days notice requiring him to pay the amount due on his shares along with interest on it stating that if he fails to pay the amount and the interest on it, the shares will be forfeited. Inspite of this notice, the shareholder does not pay the unpaid amount. The directors after passing a resolution will forfeit the shares and information will be given to the defaulting shareholder about the forfeiture his shares.

Effect of forfeiture of shares:

1.                  Termination of membership: The membership of the defaulting will be terminated and they lose all the rights and interest on those shares i.e. ceases to be the member / shareholder / owner of the company and his name will be removed from the Register of Members

2.                  Seizure of money paid: The amount already paid on the forfeited shares by the defaulting shareholders will be seized by the company and in no case will be refunded back to the shareholder.

3.                  Non payment of dividend: When shares are forfeited the shareholder remains no longer the member of the company therefore he looses the right to receive future dividend.

4.                  Reduction of share capital: Forfeiture of shares result in the reduction of share capital to the extent of amount called up on such shares.

Surrender of shares:

When a shareholder feels that he cannot pay further calls; he may himself surrender the shares to the company. These shares are then cancelled. Surrender of shares is a voluntary return of shares for the purposes of cancellation. The directors can accept the surrender of shares only when the Articles of Association authorise them to do so. Surrender is lawful only in two cases viz.

(a) where it is done as a short cut to forfeiture to avoid the formalities for a valid forfeiture and

(b) where shares are surrendered in exchange for new shares of the same nominal value. A surrender will be void if it amounts to purchase of the shares by the company or if it is accepted for the purpose of relieving a member from his liabilities. Entries are passed just like forfeiture of shares.

Thus, surrender of shares is at the instance of shareholder whereas forfeiture of shares at the instance of company.

Re-issue of Forfeited of shares:

Shares forfeited becomes the property of the company and the directors of a company have an authority to re-issue the shares once forfeited by them in accordance with the provisions contained in Articles of Association. Table ‘A’ provides that “A forfeited shares may be sold or otherwise disposed off on such terms and in such manner as the Board thinks fit”. They can re-issue the forfeited shares at par, at premium or at discount. However, if the shares are re-issued at discount, the amount of the discount does not exceed the amount paid on such shares by the original shareholder but in case of shares originally issued at a discount, the maximum permissible discount will be amount paid on such shares by the original shareholder plus the amount of original discount.

Over subscription of issue:

When the application received from the public are more than the shares issued by the company, this situation is called as over subscription of issue. The Board of Directors cannot allot shares more than that offered to the public, in such a condition the Directors of the company make the allotment of shares on the basis of reasonable criteria. Any allotment to be made by the company in case of over subscription should be according to the scheme, which is finalized with the consultation of Security and Exchange Board of India (S.E.B.I.) The journal entry for application money will be passed for all the shares applied for, but while transferring the application money to share capital account, only the application money on shares issued will be considered.

Under subscription of issue:

Shares are said to be under-subscribed when the number of shares applied for is less than the number of shares offered, but at least minimum subscription (According to the guidelines issued by S.E.B.I. minimum subscription means ‘If the company does not receive a minimum subscription of 90% of the issued amount within 60 days from the date of closure of the issue, the company shall forthwith refund the entire subscription amount’) is received. For example, in case has offered 5,000 shares to public but the public applied for 4,500 shares only, it is called a case of under-subscription. Journal entries are passed on the basis of shares applied for.

Private placement of shares:

According to Section 81 (1A) of the Companies Act, 1956 private placement of shares implies issue and allotment of shares to a selected group of persons such U.T.I., L.I.C. etc. in other words; an issue which is not a public issue but offered to a select group of persons is called Private Placement of shares.

Preferential allotment:

A preferential allotment is one that is made at a pre-determined price to the preidentified people who wish to take a strategic stake in the company such as promoters, venture capitalists, financial institutions, buyers of companies products ore its suppliers. In other such a case, the allottees will not sell their securities in the open market for a minimum period of three years from the date of allotment. This period is known as the lock-in-period. The preferential allotment can take place only if three-fourths of the shareholders agree to the issue on preferential basis. S.E.B.I. has prescribed that the minimum price of such an issue has to be an average of highs and lows of the 26 week preceding the date on which the board resolves to make the preferential allotment.

Employee stock option plan:

In order to retain high caliber employees or to give them a sense of belonging, companies may offer their equity shares to be purchased at their will. Such scheme is called Employee stock option plan (ESOP). Following are the characteristics of this scheme:

1) ESOP implies the right, but not an obligation.

2) The employee has a right to exercise the option of purchase of shares within the vesting period, i.e., the time period during which the scheme remains in operation.

3) Any share issued under the scheme of ESOP shall be locked-in for a minimum period of one year from the date of allotment.

Buy-back of shares:

The term buy-back of share implies the act of purchasing its own shares by a company either from free reserves, securities premium or proceeds of any shares or securities. According to Section 77A of the Companies Act 1956, a company can buy its own shares either from the:

a) Existing equity shareholders on a proportionate basis.

b) Open market

c) Odd lot shareholders

d) Employees of the company pursuant to a scheme of stock option or sweat equity.

Right shares:

Under Section 81 of the Companies Act, the existing shareholders have a right to subscribe, in their existing proportion, to the fresh issue of capital or to reject the offer, or sell their rights. The existing shareholders can authorize the company by passing a special resolution to offer such shares to the public.

Source : lexvidhi.com

Reverse Merger

Reverse Merger :

An act where a private company purchases a publicly traded company and shifts its management into the latter. It also normally involves renaming the publicly traded company. This allows private companies to become publicly traded while avoiding the regulatory and financial requirements associated with an IPO.

In order for a reverse merger to happen smoothly, the publicly traded company is usually a shell corporation, that is, one with only an organizational structure and little or no activity. The two businesses can then merge the private company's product(s) with the public company's structure. It also makes initial trading less dependent on market conditions, a key risk in IPOs. However, it is important to note that a reverse merger only provides the private company with more liquidity if there is a real market interest in it.

A reverse merger is a strategy where a private company purchases control of a public shell company and then they do a merger with the private company. With a reverse merger the private company shareholders receive most of the shares in the public company and control of the board. A reverse merger is a very fast way to go public with the time table only being a couple of weeks. The reason a reverse merger is so quick is the public shell company already went through all the paper work and reviews in order to become public.

Reverse Merger Analysis :

Reverse merger allows your private company to go public.  

Reverse merger financial transactions are becoming increasingly popular and accepted. It is an alternative means for private companies to go public. The public shell is a vital aspect of a reverse merger transaction. A public shell is a publicly listed company with no assets or liabilities. It gets the name "shell" because the only thing remaining from the current company is its corporate shell structure. When a private company merges into this entity it becomes a shell.

Advantages :

There are several benefits to a reverse merger when compared to an Initial Public Offering (IPO). You will often receive a higher value for your company and the company won't have to have an underwriter. Another few benefits are that it is much cheaper and less time consuming to go public this way. Also with a reverse merger the ownership control will not be as diluted as with a regular public offering.

More businesses qualify for a reverse merger because a long and stable history of income is not required to qualify. The lack of an earning history will not keep a privately-held company from going public this route.

The benefits to reverse mergers is that you can demand a higher stock offering for the company stock, going public at a lesser cost and less dilution then an initial public offering. With the reverse merger you are less susceptible to the market. When going public the benefits are great when trying to raise capital. With the company now being public the stock is liquid and able to be uses for financing. Your company will now have the ability to acquire other companies using stock. Being public allows the company to offer stock incentive plans to keep employees.

Public Company Vs. Private Company

Distinction between a public company and a private company :
The distinction between a public company and a private company are explained in the following manner:

1. Minimum Paid-up Capital :

A company to be Incorporated as a Private Company must have a minimum paid-up capital of Rs. 1,00,000, whereas a Public Company must have a minimum paid-up capital of Rs. 5,00,000

2. Minimum number of members:

The minimum number of person required to form a public company is seven, whereas in a private company their number is only two.

3. Maximum number of members:

There is no limit on the maximum number of member of a public company, but a private company cannot have more than fifty members excluding past and present employees.

4. Commencement of Business:

A private company can commence its business as soon as it is incorporated. But a public company shall not commence its business immediately unless it has been granted the certificate of commencement of business.

5. Invitation to public:

A public company by issuing a prospectus may invite public to subscribe to its shares whereas a private company cannot extend such invitation to the public.

6. Transferability of shares:

There is no restriction on the transfer of share In the case of public company whereas a private company by its articles must restrict the right of members to transfer the share.

7. Number of Directors:

A public company must have at least three directors whereas a private company may have two directors.

8. Statutory Meeting :

A public company must hold a statutory meeting and file with the register a statutory report. But in a private company there are no such obligations.

9. Restrictions on the appointment of Directors:

A director of a public company shall file with the register a consent to act as such. He shall sign the memorandum and enter into a contact for qualification shares. He cannot vote or take part in the discussion on a contract in which he is interested. Two-thirds of the directors of a public company must retire by rotation. These restrictions do not apply to a private company.

10. Managerial Remuneration :

Total managerial remuneration in the case of public company cannot exceed 11% of net profits, but in the case of inadequacy of profit a minimum of Rs. 50, 000 can be paid. These restrictions do not apply to a private company.

11. Further Issue of Capital:

A public company proposing further issue of shares must offer them to the existing members. A private company is free to allot new issue to outsiders.

12. Name :

A private company has to use words ‘private limited’ at the end of its name. But a public company has to use only the word ‘Limited’ at the end of its name.

Meger,Amalgamation,Acquisition/Takeover,Jointventure,Strategic Alliance Strategies

Merger Strategy :

A merger takes place two or more companies join together to form a single company.

Types of Mergers:

Horizontal Mergers:

The combining companies are of the same business.

Vertical Mergers: The joining companies are at different stages of the production process of the same product.

Concentric Mergers:

The Joining companies are from similar businesses. They however, have no buyer seller relationship.

Conglomerate Mergers:

In Conglomerate Mergers the combining companies are from unrelated or completely different businesses.

Reverse Merger:

When profit making company merges with the financially weaker company.

Merger Vs. Amalgamation :

"Very often, the two expressions "merger" and "amalgamation" are taken as synonymous. But there is, in fact, a difference.

>>Merger is restricted to a case where the assets and liabilities of the companies get vested in another company, the company which is merged losing its identity and its shareholders becoming shareholders of the other company.

>>On the other hand, amalgamation is an arrangement, whereby the assets and liabilities of two or more companies become vested in another company (which may or may not be one of the original companies) and which would have as its shareholders substantially, all the shareholders of the amalgamating companies."

Takeover Strategy :

Takeovers or Acquisitions happen when one company acquires ownership or the controlling stake in the other company.

Companies looking for rapid growth opportunities often adopt the takeover strategy.

>>Takeovers may be of two kinds, hostile and friendly.

>>Hostile takeovers, as the name suggests, are against the wishes acquired company. Friendly takeovers involve negotiation and mutual consent.

Joint Venture Strategy:

In Joint Ventures or JVs two or more companies come together and form a new entity to pursue some business activity.

It may be uneconomical for a company to pursue a business activity all alone. This is why it may go in for a JV.

In a JV, the two companies can combine their capabilities and strengths and share the business risks. This way they can overcome all difficulties and hurdles effectively.

>> JV Strategy is a Profit Motive Strategy

Strategic Alliance Strategy:

Strategic Alliance: The companies collaborate with each other to pursue a business activity. In a Strategic Alliance new company is not formed.

>>The companies remain independent after the formation of the alliance.

>>Strategic Alliances can help companies in many ways such as to get access to foreign technology and to enter new markets.

>> Strategic Alliance  Strategy is a Non Profit Motive Strategy

Dividend Analysis

Dividend Analysis:

Dividend:

1. A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

Also referred to as "Dividend Per Share (DPS)."

2. Mandatory distributions of income and realized capital gains made to mutual fund investors.

Explanation:

1. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.

High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain higher-than-average growth.

2. Mutual funds pay out interest and dividend income received from their portfolio holdings as dividends to fund shareholders. In addition, realized capital gains from the portfolio's trading activities are generally paid out (capital gains distribution) as a year-end dividend.

Interim Dividend:

A dividend payment made before a company's AGM and final financial statements. This declared dividend usually accompanies the company's interim financial statements.

>>This is used more frequently in the United Kingdom, where it is usual for dividend payments to occur semi-annually. The interim dividend is generally the smaller of the 2 payments made to shareholders.

Cum Dividend:

When a buyer of a security is entitled to receive a dividend that has been declared, but not paid.

>>Cum dividend means "with dividend." A stock trades cum-dividend up until the ex-dividend date. On or after this point, the stock trades without its dividend rights.

Declaration Date:

1. The date on which the next dividend payment is announced by the directors of a company. This statement includes the dividend's size, ex-dividend date and payment date. It is also referred to as the "announcement date".

2. The last day on which the holder of an option must indicate whether he or she will exercise the option.

Explanation :

1. Once it is authorized, the dividend is known as a declared dividend and it becomes the company's legal liability to pay it.

2. The declaration date of all listed stock options in the U.S. is on the third Friday of the listed month. If there is a holiday on the Friday, the declaration date falls on the third Thursday.

Board Of Directors - B Of D:

A group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues. Such issues include the hiring/firing of executives, dividend policies, options policies and executive compensation. Every public company must have a board of directors.

Explanation :

Board Of Directors - B Of D'In general, the board makes decisions on shareholders' behalf. Most importantly, the board of directors should be a fair representation of both management and shareholders' interests; too many insiders serving as directors will mean that the board will tend to make decisions more beneficial to management. On the other hand, possessing too many independent directors may mean management will be left out of the decision-making process and may cause good managers to leave in frustration.

Vertical Integration Vs. Horizontal Integration

Vertical Integration:

When a company expands its business into areas that are at different points of the same production path.

>>A car company that expands into tire manufacturing would be an example of vertical integration. A company such as this is often referred to as vertically integrated.

Backward Integration:

A form of vertical integration that involves the purchase of suppliers in order to reduce dependency.

>>A good example would be if a bakery business bought a wheat farm in order to reduce the risk associated with the dependency on flour.

Forward Integration:

A business strategy that involves a form of vertical integration whereby activities are expanded to include control of the direct distribution of its products.

>> A good example of forward integration is when a farmer sells his/her crops at the local market rather than to a distribution center.

Horizontal Integration :

The acquisition of additional business activities that are at the same level of the value chain in similar or different industries. This can be achieved by internal or external expansion. Because the different firms are involved in the same stage of production, horizontal integration allows them to share resources at that level. 

If the products offered by the companies are the same or similar, it is a merger of competitors. If all of the producers of a particular good or service in a given market were to merge, it would result in the creation of a monopoly. Also called lateral integration.

>>Examples of horizontal integration include an oil company's acquisition of additional oil refineries, or an automobile manufacturer's acquisition of a light truck manufacturer.

Horizontal integration offers several advantages, including favorable economies of scale, economies or scope, increased market power and reduction in the costs associated with international trade by operating in foreign markets. Horizontal integration is in contrast to vertical integration, where firms expand into different activities, known as upstream or downstream activities.