All About Shares & How To Issue and Buy Back Them

Sec.
2(46) :
Share means share in the capital of a company
5 DECEMBER 09 www.afterschool.tk 1
Types of shares :
Equity
preference (preference in dividend, wind up
etc. )
sweet equity (for employees)
share warrant (right to buy shares in future)
right shares (right of existing shareholders to
buy share)
bonus share (freely given to existing
shareholders)
Types of capital
Authorised / nominal/ registered (mentioned in
MOA)
issued
subscribed
called up
paid up
reserve
Can a company issue
irredeemable preference shares ?
No
only redeemable preference shares can be
issued (sec. 80 of company act) – these must
be redeemed in max. 20 years
Rules regarding redemption of
preference shares :
Redemption only out of profit / fresh issue

only fully paid shares can be redeemed
it must create redemption reserve fund
if premium is paid at redemption, it must be
from profit / security premium account
Shares with differential voting
rights ....
Here the shareholders get different voting

rights / different dividend
articles must authorise it
approval of shareholders is necessary
max. 25% of total equity
(as per 2000 amendment – which deleted sec.
88, which didnt allow such shares)
BUY BACK OF SHARES
1999 amendment brought Sec.

77A,77AA,77B, which allowed buy back and
deleted 77(1), 77(2) which didnt allow buy
back
WHY BUY
` BACK?
To increaase EPS
where there is surplus profit
When company has excess funds / liquidity
to defend company from possible takeover bids
to provide exit route to shareholders
to increase market value of shares
How to have buy back?
Out of free reserves

or out of security premium account
or out of proceeds of fresh equity issues
How much can a company buy
back?
10 % of paid up capital + reserves = if
authorised by AOA + board resolution
by special resolution : Max. 25% of paid up
capital + reserves
buy back must be completed in 12 months
all the shares must be fully paid up
SEBI (buy back) regulations 1998 must be
followed
Rules of buy back :
In 6 months company cant issue bonus / fresh
issue / convert warrants into equity / sweat
equity
fill up form 4a & 4b must be filled with ROC
ratio of debt equity ratio 2:1
read :
www.sebi.gov.in/faq/buybackfaq.htm
www.legalserviceindia.com/articles/shares.htm
Penalty
50000
or 2 years imprisonment for default
Prohibition of buy back (sec. 77B)
When a company has defaulted in payment of

deposits / repayment of interest / deposit /
dividend, it cant buy back its shares
when it has defaulted in submitted annual
accounts as per sec. 159, 211, 207 it cant buy
back shares
Case: Sterlite
Buy back under sec 77A cannot be overriding

to powers of the court under Sec. 100,101, 391
and therefore buy back cant be unilateral.
Read :
http://www.financialexpress.com/news/hc-admits-dc
SWEAT EQUITY SHARES
SEC. 79A AS PER 1999 AMENDMENT

shares of existing class only
at least 1 year must have passed
Special resolution
as per SEBI guidelines
www.sebi.gov.in/acts/sweatregu2002.html
Issues regarding sweat equity
How to value / price sweat equity shares ?
VERMA COMMITTEE
RECOMMENDATIONS
http://www.hinduonnet.com/2002/10/04/stories/200
www.financialexpress.com/printer/news/55236
/ - Angola
ISSUE OF SHARES AT
PREMIUM / DISCOUNT
DISCOUNT : MAX. : 10% (MORE – BY CLB

PERMISSION)
FIRST ISSUE CANT BE ON DISCOUNT
PREMIUM IS TRANSFERRED TO
SECURITY PREMIUM A/C AND CANT BE
TREATED AS PROFIT
HOW TO USE SHARE
PREMIUM
AS PER 78(2) :
FOR BUY BACK OF SHARES
FOR ISSUE OF BONUS SHARES
WRITING OFF PRELIMINARY EXP /
COMMISSION / DISCOUNT
FOR PREMIUM ON REDEMPTION OF
SHARES
BONUS ISSUES
It is for FULLY PAID UP shares

http://dpe.nic.in/newgl/glch0312.htm
authorised by AOA
sanctioned by ordinary resolution
out of free reserves (not from revaluation of
fixed assets) .
Share allotment
Allotment must be unconditional
within reasonable time
sec : 73(1A),69,72,73 and 70 must be followed
– issue of prospectus, minimum subscription,
min. Application money etc. Must be followed
apply to stock exchanges and take permission
otherwise allotment will be void (if Stock
exchange refuse, apply to SAT) .
How to transfer share in private
company ?
Generally answer is No – private company doesnt allow share
transfer
(i) Transferor should give a notice in writing for his intention to
transfer his share to the company.
(ii) The company in turn should notify to other members as regards
the availability of shares and the price at which such share would be
available to them.
(iii) Such price is generally determined by the directors or the
auditors of the company.(iv) The company should also intimate to
the members, the time limit within which they should communicate
their option to purchase shares on transfer.
Minimum subscription
90% - in 120 days from prospectus
otherwise return in 130 days othersie interest
6%
as per SEBI guidelines, these rates have
changed – so read latest SEBI guidlines
www.sebi.gov.in/commreport/rep245.html
www.sebi.gov.in/acts/ipguidelines.pdf
Calls
Make a call - at least 5% on application,

(minimum 25%)
board resolution must be passed
14 day notice for calls
interval of 1 month between two calls
sec. 92 : advance call may be taken up
Forfeiture
At least 14 day notice

AOA must authorise
Board resolution is necessary
a person is responsible for unpaid money even
after forfeiture of his shares
Underwriting commission
2.5% on debentures
5% on shares
must be mentioned in prospectus
agreement with underwriter must be submitted
to ROC
Sebi guidelines
http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=4
What is minimum subscription
It must be mentioned in prospectus – as per

SEBI guidelines : 90% is minimum
subscription
Issue norms
Issue norms must be given in prospectus. Issue

must be made in 30 days of public issue
closure (otherwise penal interest @15%)
refund orders (if any must be despatched in 78
days).
Allotment must be made by board of directors /
proper authority
Transfer of shares
Now it is through Demat (NSDL or CDSL) –

so it is a request to these Demat companies to
transfer the shares –, but earlier you had to sign
a transfer deed – sec 108, to 111A gave details
of transfer of shares - which was applicable in
the case of physical shares.
Nomination
Every shareholder can nominate a person as

per sec. 109A. Thus if a person dies, his
nominee will get the shares. Nominee can be
minor also.
Difference between transfer &
transmission ?
Transfer is a voluntary act, you intentionally

transfer your shares – but transmission takes
place by law – suppose X dies, his shares
transmitted to his nominee. Cases when
tranmission takes place : 1. death 2. insovency
3. lunancy 4. any other situation prescribed by
law
Transfer deed (physical shares)
When you want to transfer shares, get a
transfer deed, get it endorsed by registrar of
companies and then it should be signed by both
tranferor and transferee. It must contain
particulars of shares, address of transferee.
Then it should be lodged to company, which
will enter name of transferee in register of
shareholders. If the company wants to refuse
transfer it has to inform in 2 months with
reasons (like signature mismatch etc.)
GOLDEN RULE
Kindersely : in Brunswick etc. v/s Muggeridge

(1860) : the person issueing prospectus must
give every information stricktly and
scrupulously and must not omit any material
information
Important rules
Experts opinion only after obtaining written

consent by experts
Director names only after obtaining written
consent by director to become the director
the experts mentioned must not be connected
to formation of the company
(indemnify if there is false information)
When can registrar refuse to
register a prospectus
It is not dated
it is not signed
it is not accompanied with documents
it is not as per company law & SEBI guidelines
STATEMENT IN LIEU OF
PROSPECTUS
1. when a private company becomes a public
company (within 30 days)
2. when public company is not issueing shares
to public, they have to issue this.
3. when a public company doesnt allot shares
to public
it must have contents similar to prospectus,
penalty if untrue statement : 10000
http://www.vakilno1.com/bareacts/companiesact/s44
BE A PROMOTOR
A Promotor is a person who sets up a

company.
As a promotor, you have to think about the
idea and convert this idea into a company. As a
promotor, you have to set up initial contracts
so that company becomes operational.
Steps ......
Prepare Memorandum of association (as per format) in at

least 3 copes
Prepare Articles of association (as per format) in at least 3
copes (or apply Table A of schedule I)
Prepare agreements with directors
Submit declaration to Registrar of company that all
formalities have been fulfilled (by company secretary)
prepare prospectus
go ahead for raising money for your dream ideas
LEGAL FORMS
Form NO. 1 : declaration of all the formalities

of company (to be filed with registrar of
comapnies ). for other forms and their
structure, click on the following link :
http://www.mca.gov.in/MCA21/dca/downloadeform
http://www.vakilno1.com/froms_html/co_form.htm
THANKS....
GIVE YOUR SUGGESTIONS AND JOIN
AFTERSCHOOOL NETWORK / START
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ENTREPRENEURSHIP NETWORK IN
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All About Shares & How To Issue and Buy Back Them

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Sec.

Share means share in the capital of a company

Redemption only out of profit / fresh issue

Here the shareholders get different voting

1999 amendment brought Sec.

Out of free reserves

When a company has defaulted in payment of

Buy back under sec 77A cannot be overriding

SEC. 79A AS PER 1999 AMENDMENT

DISCOUNT : MAX. : 10% (MORE – BY CLB

It is for FULLY PAID UP shares

Make a call - at least 5% on application,

At least 14 day notice

It must be mentioned in prospectus – as per

Issue norms must be given in prospectus. Issue

Now it is through Demat (NSDL or CDSL) –

Every shareholder can nominate a person as

Transfer is a voluntary act, you intentionally

Kindersely : in Brunswick etc. v/s Muggeridge

Experts opinion only after obtaining written

A Promotor is a person who sets up a

Prepare Memorandum of association (as per format) in at

Form NO. 1 : declaration of all the formalities

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