Shares

Week-7
Shares

• Traditionally, ‘share’ was understood to be an equitable interest in the assets of

the firm
• Shareholders are no longer regarded as having an equitable interest in the
company’s assets. Consequently, shareholders are not, in the eyes of the law,
part owners of an undertaking. At the most, ‘share’ represents certain rights
regarding dividends, return of capital on winding up, voting, and the like.
• confer some sort of proprietary interest in the company, though not in its
property
Shares- Basics

• S. 44 – shares & debentures are Movable Property transferable in the manner

provided by the AoA
• Sec 2(7) of the Sale of Goods Act defines ‘goods’ as every kind of movable
property other than actionable claims and money; and includes stocks and
shares, etc.
• Since ‘shares’ are goods, the property in the shares passes when it is intended
to pass. Ownership in goods passes when an appropriate contract is executed-
Transfer Deed
• Issue of shares is NOT the same as transfer of property. Creation v. transfer of
shares
• ‘Share capital’ is that portion of a company’s capital that has been obtained by
the issue of shares in the company to its shareholders, usually for cash.
Shares

• S.46- Share Certificate

• Name of Company, CIN &
Registered office address
• Nominal and paid up value
• Name of holder and no. of shares
held
• Folio no., certificate no. and
distinctive no(s).
 How does a company raise capital

ISSUE OF
SHARES

ASSET SALE
LOANS/DEBT

ANGEL
INVESTORS/
VENTURE
CAPITALISTS
 TYPES OF CAPITAL

• Section 2(8) : Authorized - The amount of capital with which a company is

registered - It is the maximum amount of capital which a company can raise
through shares
• Section 2(86): Subscribed - The amount of capital (out of authorized capital)
for which company has received applications from the general public who are
interested in buying shares.
• Section 2(50) Issued - The amount of capital (out of subscribed capital) which
the company has issued to the subscribers
• Captain America registers his company – Avengers Enterprises Ltd. in India (Mumbai) with the registrar
with a capital of Rs. 2,00,00,000/- (two crore) where each share is of Rs. 10/-.

• In response to the advertisements made by the company to buy shares in the company applications have
been received for 10,00,000 (ten lakh) shares but company actually issued 7,00,000 shares where
company has called for Rs. 8/- per share.

• All the calls have been met in full except, three shareholders who still owe for their 6000 shares in total.

• * Authorized capital = Rs. 2,00,00,000 (2 crore)

• * Subscribed capital = 1,000,000 (ten lakh) x Rs. 10 = Rs. 1,00,00,000 (one crore)

• * Issued capital = 700,000 (seven lakh) x Rs.10 = Rs. 70,00,000 (seventy lakh)

• * Called-up capital = 7,00,000 (seven lakh) x Rs. 8 = Rs. 5,600,000 (fifty six lakh)

• * Paid-up capital = 5,600,000 – (6000 x Rs. 8 ) = Rs. 5,552,000 (fifty five Lakh and fifty two thousand)
• Newshine Company Ltd., New Delhi, has registered its capital as Rs. 40,00,000/- divided into
4,00,000 shares of Rs. 10/- each. The company offered to the public for subscription of 2,00,000
shares of Rs. 10/- each, as Rs. 2/- on application, Rs. 3/- on allotment, Rs. 3/- on first call and the
balance on final call.

• The company received applications for 2,50,000 shares.

• The company finalized the allotment on 2,00,000 shares and rejected applications for 50,000
shares.

• The company did not make the final call.

• The company received all the amount except on 2,000 shares where call money has not been
received. This is call in Arrears and the Articles will state if an interest is to be charged.

• A shareholder can pay the whole or part of the amount remaining unpaid on his shares even
before the call is made. This is only a voluntary payment and is known as calls in advance – Only
if the AoA permit the company to do so.
 TYPES OF SHARE CAPITAL
• S. 43 - The share capital of a company limited by shares shall be of two kinds, namely—

(a) equity share capital—(also called ordinary shares)

(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

(b) preference share capital

Explanation—For the purposes of this section—

(i)‘‘equity share capital’’, with reference to any company limited by shares, means all share capital which is not preference
share capital;
(ii)’‘preference share capital’’, with reference to any company limited by shares, means that part of the issued share capital
of the company which carries or would carry a preferential right with respect to—

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of
or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or
deemed to have been paid-up.
 Classification Of Shares

• Shares
• Kinds
• Equity
• Preference
• Classes
• Differential voting rights
• Dividend
• Voting
• Differential Dividend rates
 Equity Shares

• Rank behind the preference shares for:

• repayment of capital on winding-up
• payment of dividends
• Voting powers (allow them to control the
resolutions)- S.47(a)+Proviso
• Dividends are not fixed and may rise
considerably with the company's
profitability.
Preference Shares • Preference to payments NOT
allotment
• With respect to

PREFERENCE SHAREHOLDERS TO • (A) Payment of dividends &

EQUITY SHAREHOLDERS: • (B) Repayment upon winding
up- S.43(b)+Explanation
• Voting rights: (A) Matters of
interest/ rights & (B) Winding up-
Section 47(2)+ Proviso
• Types:
• Convertible & Non-Convertible
• Redeemable & Irredeemable
• Cumulative & Non-Cumulative
• Participatory & Non- Participatory
Basis Equity Shares Preference Shares

These are the shares that promise the holder some preference over the company’s equity
Define It is the foundation capital of the company.
shares.

Dividend They do not have a mandatory right to receive a dividend. Based on their type of non-cumulative or cumulative, these shares are entitled to dividends.

Rate of Dividend The rate of the dividend fluctuates. The rate of a dividend is fixed.

Voting They have voting rights in general meetings. They do not have any voting rights.

Compulsory
Equity shares are never mandatorily to be repaid to the investors. A preference share is compulsorily repayable to their investors.
Repayment

They do not have any type; therefore, they are considered ordinary They have various types like the convertible, non-convertible, cumulative, non-cumulative,
Types
stock. participatory, non-participatory, etc.

At the time of liquidation, equity shareholders have a residual right over

Preference shareholders have the first right after repayment of all employee payments,
Liquidation the company’s assets even after repayment to preference shares of the
statutory payments, and all kinds of secured and unsecured creditors.
company.

Participation in
Primarily responsible for the management of the company. Do not have participation rights in the control of the company.
management

Conversion They cannot get converted into preference shares. They can get converted into equity shares.

Compulsory to
Equity share capital is mandatory to be issued by every company. The preference share capital is not mandatory for all the companies to issue.
issue
The dividend on equity shares is paid only after the preference dividend Dividend on the preference shares is paid in preference to the equity shares.
Order of payment has been paid.

Bonus Shares They are entitled to the bonus issue against their existing holdings. They are not entitled to the bonus issue against their existing holdings.

They are generally of smaller denomination; hence even small investors They are generally of high denomination; hence medium and large investors can afford to
Denomination
can invest in them. invest in the preference share capital.
 Voting
• Section 2(93): ‘voting right’ which means ‘the right of a member of a company
to vote in any meeting of the company or by means of postal ballot’
• the right of shareholders to vote in a general meeting of the company is
attached to the number of shares held by the shareholders of the company.
• A person holding shares with voting right will be entitled to exercise that voting
right only if his name appear in the company’s register of members.
• a company cannot restrict any member from exercising its voting rights, unless
as prescribed by law
• Can't take away the right, but you can vary the right (by creating different
classes of equity shares where one class votes and the other doesn’t)
 Voting
• S.47

• Equity shareholders (Section 47(1)(a) & (b))

• On a poll - (show of hands etc); one vote for one share unless DVR

• On every resolution placed before the company (AGM and EGM)

• Re-payment or reduction of equity shares – when part of share capital might get cancelled (Section 47(2))

• In proportion to their share in the paid-up equity share capital of the company (S. 106 - A shareholder
cannot exercise the right to vote if any amount which is called for on the share is unpaid – partly paid
shares are allowed to vote to the extent of the amount paid. )

• Preference shareholders (Section 47(2))

• Preference shareholders are restricted to vote only on those resolutions which directly affect their rights;

• Winding up

• Repayment or reduction of preference share capital

• If dividends have not been paid for 2 years

 Differential Voting Rights- S.48

• Section 47 is subject to Section 43; notwithstanding the implicit ‘one-share-one-vote’ requirement

• provide the shareholder with differential rights related to voting

• There are two types of DVRs

• Shares with superior voting rights (SR’s)- carry lesser dividend rates
• Shares with inferior/fractional voting rights (FR’s)- carry higher dividends

Company PhoneCo. is a tech startup that has recently gone public. It has issued two classes of shares:
Class A and Class B.

Class A Shares: Class A shares are ordinary shares with one vote per share.

Class B Shares: Each Class B share has ten votes per share.

You are an investor interested in purchasing shares of the Company. You have two options:

Option 1: You can buy Class A shares with one vote per share.

Option 2: You can buy Class B shares with ten votes per share.
 Differential Voting Rights

• Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 prescribed
under the Companies Act, 2013
• No company shall issue equity with differential rights as to dividend or voting
unless it complies with the following conditions:
• 1) It is authorized by its Articles of Association.
• 2) The issue is authorized by an ordinary resolution.
• 3) Shares with differential rights shall not exceed seventy four percent of
total voting power including voting power in respect of equity shares with
differential rights issued at any point of time.
 S.48- Variations of shareholders‘ rights

• shareholders' rights can be subject to variation or alteration by following the legal

procedures and obtaining the necessary approvals
• There must be "variation" (of rights) of an existing class of shares
• What is class of shares? - Class of shares [such meaning that will prevent the section
from being so worked as to result in injustice, and must be confined to such person
whose rights are not dissimilar as to make it impossible for them to consult together with
a view to their common interest- Sovereign Life Assurance v. Dodd (1892) 2 QB
• These variations may include changes in voting rights, dividend rights, or other
rights associated with shares
• Approvals (48(1)):
• Such a provision is mentioned in MoA and terms of issue
• 75% approval of holders of that class
• Incase of (10%) dissenting s/h- apply to NCLT
 S.48- Variations of shareholders‘ rights

• Why variation
• Conversation of shares
• M&A, restructuring
• Buyback, consolidations, redemption of shares
 Issue of Shares

• Authorized capital of ASD Ltd. is Rs. 10,000 divided into 1000 equity shares of Rs.
10/- each.
• When the share is issued at Rs. 10/-, it is called share is issued at par.
• If the share is issued at Rs. 12/- then the share is issued at a premium of Rs. 2/-.
(Section 52)
• If the share is issued for Rs. 9, then the share is issued at discount of Rs. 1/-.
(Section 53)
 Shares Issued At Premium- S.52
• Premiums received are NOT to be utilized as profits
• Premium received on those shares shall be transferred to a “securities premium account”

• The company may apply the securities premium account—

(a) towards the issue of unissued shares of the company to the members of the company as fully
paid bonus shares;

(b) in writing off the preliminary expenses of the company;

(c) in writing off the expenses of, or the commission paid, or discount allowed on, any issue of shares or
debentures of the company;

(d) in providing for the premium payable on the redemption of any redeemable preference shares or of any
debentures of the company; or
(e) for the purchase of its own shares or other securities under S. 68. [Buy Back]
 Sweat Equity Shares- S.54 & Companies (Share Capital and Debentures) Rules,
2014

• Shares issued by a company to its employees or directors

• form of compensation for their contribution to the company's growth and
development
• Instead of monetary investment
• Issued at a discounted price or for no consideration (for free)
• way for employees or directors to acquire ownership of the company over
time.
• Can be issued basis of certain conditions- Special Resolution, Registered
valuer,
• https://ca2013.com/rule-8-companies-share-capital-and-debentures-rules-20
14/
 Employee Stock Option Plan (ESOP)- 62(1)(b) and (Rule 12
Companies Share Capital and Debenture), Rules 2014)

• reward employees who are recognized performers for the growth of an enterprise, by incentivizing
them with an equity stake
• S.62(1)(b)- company having a share capital proposes to increase its subscribed capital by the issue of
further shares, such shares shall be offered - to employees under a scheme of employees‘ stock option,
subject to special resolution passed by company and subject to such conditions as may be prescribed
• S. 2(37)- the option given to the directors, officers or employees of a company or of its holding
company or subsidiary company or companies, if any, which gives such directors, officers or
employees, the benefit or right to purchase, or to subscribe for, the shares of the company at a future
date at a pre-determined price;”
• option (and not an obligation) to buy the stocks sometime in future at a predefined price
• vesting period- period from the date of issue of the ESOPs, after which employees with ESOPs gain
access to the rights offered by their stock options
• Cliff duration - employees work for a minimum time period before they are eligible for the first
ESOPs to be vested
 ESOPs

• ABC has been allotted 5000 shares as part of SOPs agreement.

• Number of Shares : 5,000
• Price per Share : 100
• ESOPs Valuation : 5,00,000
• At end of vesting period price per share- 200
• At end of vesting period price per share- 80
Basis​ Sweat Equity​ Employees Stock Option (ESOP)​

Governing Law​ Governed by S. 54 of the Act with Rule 8 of Governed by S. 62(1)(b) with Rule 12 of Companies (Share Capital and
Companies (Share Capital and Debenture) Rules 2014.​ Debenture) Rules 2014.​

Issue Norms​ Company can issue only after remaining in business for 1 No such norm, Company can grant at any point of time after
year.​ incorporation.​

Eligibility​ Can be issued to Directors, Employees, or any Officers Can be issued to Employees, Officers, and Directors not holding 10% or
of the Company.​ more equity shares of the Company.​
Cannot be issued to: i) Promoters or person belonging to promoter
group, ii) Independent Director & iii) Directors holding 10% or more
equity shares in the Company.​

Consideration​ Can be paid partly in cash and partly through Consideration has to be paid through cash only.​
services rendered or fully non-cash consideration.​

Lock-in Period​ Compulsory lock-in period of 3 years.​ No lock-in period.​

Restrictions on Issue​ Cannot be issued for more than 15% of the paid-up equity There are no such restrictions in issuance or grant of ESOP. Generally
share capital in a year or shares of the value of 5 crores; 10% to 15% of the equity is reserved for ESOPs.​
whichever is higher.​

Pricing Guidelines​ Shall be valued by a registered valuer as the fair There is no pricing guideline defined for issuance or grant of ESOP.​
price giving justification for such valuation. The valuation
of IPR, or Know-how, or value additions for which shares are
to be issued shall also be carried out by a
registered valuer with proper justification. Both the
valuation reports should be sent to the shareholders along
with notice calling the General Meeting.​

Register​ Register of Sweat Equity Shares in Form SH-3.​ Register of ESOP in Form SH-6.​
 Increasing Capital

• Methods
• Issue Bonus Shares/ Rights Issue
• Issue Sweat Equity Shares
• Issue shares through Private Placement (not defined in the 1956 Act, only in the 2013
Act)
• Why Companies Increase Share Capital
Reduce Debt-Equity Ratio = increase equity compared to the debt
Debt-equity ratio is 2:1 (equity : debt)
Fund Acquisition for development projects
Reduce the price of shares in the market - If you increase the capital, the value of the
share reduces. This makes the share capital ore liquid (easier to convert into money - easy
to sell/market the shares)
Public & Private Companies Issuing Securities/
Capital
• Angel Investor

• Venture Capital

• IPO

• Private Equity

• Crowdfunding

• Private Companies can issue securities by way of rights issue, bonus shares issue or through private
placement

• Public Companies can use all 4 methods of raising capital

• Public Offer Includes - IPO and FPO

• Public offer of securities are highly regulated (by SEBI regulations, BSE Rules etc.)

• Private placement - because CA makes less stringent rules, makes it easier to issue your shares. 16
• S.23 - Public offer and private placement

(1) A public company may issue securities—

• (a) to public through prospectus (herein referred to as "public offer") by complying with the provisions of
this Part; or

• (b) through private placement by complying with the provisions of Part II of this Chapter; or

• (c) through a rights issue or a bonus issue in accordance with the provisions of this Act and in case of a
listed company or a company which intends to get its securities listed also with the provisions of SEBI Act,
1992 and the rules and regulations made thereunder.

• (2) A private company may issue securities—

• (a) by way of rights issue or bonus issue in accordance with the provisions of this Act; or

• (b) through private placement by complying with the provisions of Part II of this Chapter.

• Explanation.—For the purposes of this Chapter, "public offer" includes initial public offer or further public offer of
securities to the public by a company, or an offer for sale of securities to the public by an existing shareholder,
 Bonus Shares- S.63
• Rule 14 The Companies (Share Capital and Debentures) Rules,2014

• Ways of rewarding the shareholders

• Bonus shares are additional shares given to the current shareholders without any additional cost,
based upon the number of shares that a shareholder owns.

• These are the company’s accumulated earnings that are not given out as dividends but are
converted into free shares/ Value of shares goes down because your number of shares goes up

• Sources of Issue- S.63(1)

• A company may issue fully paid-up bonus shares to its members out of

a. free reserves,

b. securities premium account or

c. the capital redemption reserve account.

 Bonus Shares- S.63
• Conditions to use reserves (Section 63(2))

• Needs to be authorized by its articles

• Recommendation of the board

• Company should not have defaulted in payment of interest or principal in respect of FD or debt securities
issued by it.
• Bonus Shares cannot be issue in Lieu of Dividend (Section 63(3))

• you purchased 1000 shares in ABC Ltd. at Rs. 10/- per share. Before Bonus Issue you own: 1000 shares at a
total cost of Rs 10,000. Now you receive 1 new Bonus share for every 4 shares held. If you own 1000
shares, (1000/4 = 250) then you will receive 250 new bonus shares. You now own a total 1,250 shares with
total combined cost of Rs. 10,000. The base cost per share is therefore reduced: New base cost per share =
Rs. 8/-.

• Wipro has given bonus shares to its shareholders 5 times since 2000. The recent offering was in the year
2019 when the firm dispersed the bonus stock in a ratio of 1:3 to its shareholders. This means that for
every one existing share held by a shareholder, they will receive three additional shares as a bonus.
 Rights Issue- S.62
• Rights issue means the company is issuing shares to buy additional rights for the existing
shareholders. In a public company, issuing rights is a way to raise additional capital.
• In such cases shareholders have the privilege to buy specified number of shares at
specified price during specified time. The price offered are usually discounted from the
trading price, that's the benefit to existing shareholders. The Offeree can renounce the
right in favour of another person
• A company declares rights issue of 3: 5 at Rs. 100/- per share. Current share price is at
Rs. 150 per share, means the company is issuing three rights shares for every five shares
held by the shareholders of the company at Rs. 100 per share.

• Bharti Airtel decided to raise ₹ 21,000 crore at ₹ 535 by offering its existing shareholders
one additional share for every 14 held on the record date. This means that a shareholder
with 1,400 shares will have the right to get an additional 100 shares of the company at ₹
535 each (market price was much higher at that point, nearly around ₹ 680).
Basis Rights Issue Bonus Issue

Meaning Right shares are issued on Bonus shares are issued free
discounted price to the of cost to the shareholders in
existing shareholders and a certain ratio, other than a
they have option to agree or dividend.
deny the offer.

Price Less than the current market Free of cost

price

Purpose For quick and additional Alternate to cash dividend

funds

Effect on share prices May or maynot decrease the Reduces the market price
share price unless holder
sells the shares

Creation and renunciation Additional shares; can be Created from company's

renounced profits, reserves and surplus
and renounciation is not
possible
 Modes of Increasing Capital

• The 2013 Act primarily prescribes four modes of increasing share capital:

• Public issue – IPO and FPO - With an IPO, an unlisted public company can make either a fresh issue of
securities or offer its existing securities for sale for the first time to the public while an FPO allows an already
listed company to make a fresh issue of securities to the public. Both IPO and FPO are governed by SEBI, and
the corresponding laws and regulations.

• Private placement – S. 42 - is an offer by a company, to a select group of persons to subscribe its securities.

• Rights issue – S. 62(1) - issue fresh securities to existing shareholders in a particular ratio depending on the
number of securities held prior to the issue. This route is best suited for companies who intend to raise capital
without diluting stake of their existing shareholders

• Bonus issue – S. 63 – the total number of issued shares increases i.e. to say that the shareholder base of the
company increases but, the ratio of number of shares held by each shareholder remains the same.
Needle Industries
 Private Placement- S.42 & Rule 14 of Companies (Prospectus
and Allotment of Securities) Rules, 2014
• Section 71 in case of private placement of debentures
• Section 62 in case of private placement of convertible debentures
• Section 180(1) in case of private placement of NCD
• S.42 (2)(ii)- Means any offer or invitation to subscribe or issue securities to a
select group of persons by a company (other than by way of public offer)
through Private Placement Offer-cum-Application Letter (PPOAL)
• Deemed Public Offer: If an offer or allotment is made to 200 people in a FY it
shall be deemed to be a public offer
• Realty firm Godrej Properties said it has raised Rs 1,160 crore through issue
of non-convertible debentures on private placement basis.- Sept 2023
 Private Placement
S. 62(1) – A company may offer shares to –
• Existing shareholders [rights and bonus issue]
• Employees [ESOP or Sweat Equity]
• 3rd parties (requires a special resolution) – (clause c)

• S. 62(1)(c) - to any persons, if it is authorized by a special resolution.

• Shareholders Resolution - This resolution must set forth the price justification, including premium, if any

• SR-Will be valid for 12 month- If not completed PP in 12 Month, will have to pass another SR

• Approve Draft Offer Letter (PAS-4) by SR.

• Initial contact – invitation to offer – Letter accompanied by an application form and addressed specifically to the
person, either in writing or in electronic mode.

• Due diligence

• Negotiation

• Share subscription agreement/Private placement letter/Placement agreement/Investment agreement

• Satisfaction of conditions precedent

• Closing
BASIS Private Placement Preferential Allotment
Provision S. 23 (public offer and private S. 62 (further issue of share capital) (sub-
placement) andS. 42 (offer or invitation clause (1)(c))
for subscription of securities on private
placement)
Definition under the offer or invitation sent to a select group It is an issuance of securities to a select
Act of people inviting them to subscribe to group of people on preferential basis. These
the company's securities. pre-identified people may be company’s
set of people can be existing existing members, employees or any other
shareholders, employees, or any new set persons.
of people. Explanation clause clarifies that this kind of
Offer is made by issuing a private- issuance is not a public offer, rights issue,
placement-cum-application letter. employee stock option scheme, employee
Explanation clause states that private stock purchase scheme, sweat equity or
placement is an offer that is not a public bonus shares or depository receipts issued
offer. (RULE 14 of in a country outside India or foreign
Companies( Prospectus and Allotment of securities. (Rule 13 of Companies (Issue of
Securities ) Rules, 2014 Share Capital and Debentures) Rules, 2014.
private placement is the ‘mode’ whereby Preferential allotment is a ‘situation’
securities are issued to a pre-identified whereby the ‘mode’ of private placement is
set of people. used for issuing securities.

Purpose both public and private companies- primarily used by publicly-traded companies
capital and investment

Pricing Negotiable Basis the regulatory pricing

Sahara India Real Estate Corporation Limited & Ors v. SEBI, 2011

• Sahara India Real Estate Corporation Limited (SIRECL) and Sahara Housing
Investment Corporation Limited (SHICL) (both unlisted companies) are
controlled by the Sahara Group. The two appellant companies raised from
investors by issuance of Optionally Fully Convertible Debentures (OFCDs) and
collected over Rs. 17,656 crores, from about three crore investors.

• This was done pursuant to special resolutions passed approving the issue of
OFCDs. The Red Herring prospectus filed by Sahara companies provided that
the Sahara companies did not intend to list these securities on any recognized
stock exchange.
Sahara India Real Estate Corporation Limited & Ors v. SEBI, 2011

• .Sahara’s contentions were as under:

o The raising of funds through issue of OFCDs was in compliance with all regulations and was legal.
o The raising of funds through issue of OFCDs was by way of private placement to persons who were
associated with Sahara Group and those issues were not public issues. SEBI did not have
jurisdiction to administer those securities, it was the Central Govt.
o Since the OFCDs were not intended to be listed, it was the opinion of the Sahara companies that
the prospectus would only be required to be filed before the Registrar of Companies and not the
SEBI.

• SEBIs contentions:
o Sahara Group did not comply with the rules/regulations and guidelines.
o The issue of OFCDs was a public issue as it was made to more than 50 investors and therefore,
securities were liable to be listed on a recognized stock exchange. SEBI also stated that the
parliament had conferred powers on it to administer issue of securities to public.
Sahara India Real Estate Corporation Limited & Ors v. SEBI, 2011

HELD:

Issue of OFCDs is not a private placement. SEBI does have power to investigate and adjudicate in this matter

When the securities are offered to more than 50 persons it is to be considered as a public issue accordingly SEBI has jurisdiction as
per S. 55A (1956 Act) in the matter of unlisted public companies. The appellants companies knowingly issued securities by way of
private placement in order to diminish various laws and regulation.

The court then considered the persons to whom the OFCD’s were offered. It observed that people who were not affiliated to the
Sahara group were permitted to subscribe to the shares provided they were introduced by people affiliated with the Sahara Group.

SEBI stated that Sahara Group did not comply with the rules/regulations and guidelines. The SEBI Act is a special legislation
bestowing SEBI with special powers to investigate and adjudicate to protect the interests of the investors. It has special powers and
its powers are not derogatory to any other provisions existing in any other law and are analogous to such other law and should be
read harmoniously with such other provisions and there is no conflict of jurisdiction between the MCA and the SEBI in the matters
where interests of the investors are at stake. The Court observed that as per provisions enumerated under Section 55A of the
Companies Act, so far matters relate to issue and transfer of securities and non-payment of dividend, SEBI has the power to
administer in the case of listed public companies and in the case of those public companies which intend to get their securities listed
on a recognized stock exchange in India. SC concluded that the actions and intentions on the part of the two companies clearly show
that they wanted to issue securities to the public in the garb of a private placement to bypass the various laws and regulations in
relation to that - attracting civil and criminal liability
 Public Offer
Covered in Chapter III Part I of the CA 2013 – specifically Ss. 23 to 41

• Multiple legislations apply – CA, ICDR, Listing Agreement

• Enabling provision is S. 23

• SEBI specifically has rights to administer issue and transfer of securities, non-payment of dividends of
listed companies (S. 24)

• IPO- introduction to public trading

• OFFER FOR SALE AND FOLLOW ON PUBLIC OFFER

• An OFS is used to offload Promoters’ shares while an FPO is used to fund new projects.

• Dilution of shares is allowed in an FPO leading to change in Shareholding structure while OFS does not
affect the number of authorized shares.

• Only the companies with a Market Capitalisation of Rs 1000 crores and above can use the OFS route to
raise funds while all the listed companies can use the FPO option.
 IPO
• Entry Norms I: SEBI

1. Net Tangible assets of at least Rs. 3 crores for 3 full years.

2. Distributable profits in at least 3 years.

3. Net worth of at least 1 crore in 3 years

4. If there was a change in name, at least 50% of the revenue in the preceding year should be from the new
activity.

5. The issue size should not exceed 5 times the pre-issue net worth of the company.

• When is a company barred from an IPO:

• If promoter/director/issuer-company/selling shareholder has been barred from accessing the stock market
by Sebi;

• If promoter/director of the issuer-company is promoter/director of another company which is barred from

accessing the stock market;

• If promoter/director/issuer-company is a willful defaulter;

 IPO

• Selection of Underwriters:
• Underwriters is/are a financial institution or investment bank that plays a crucial
role in the process of taking a company public. The primary function of an
underwriter in an IPO is to facilitate the issuance of new shares of stock to the
public and ensure that the shares are successfully sold to investors
• Risk Assumption, Due Diligence, Pricing Structure, Marketing and Advertising,
Allocation
• Registration with SEBI - To begin an IPO process, the company involved must
submit a registration statement to SEBI
• RHP - S.32- While awaiting SEBI’s approval, the company with assistance from the
underwriters, creates a 'Red Herring' prospectus.
• SEBI Approvals – Amendments (if any)- Date of IPO- Selecting the stock exchange
 IPO

• Deciding On Price Band & Share Number - After the SEBI approval, the company,
with assistance from the underwriters decide on the final price band of the
shares and also decide the number of shares to be sold.
There are two types of issues: Fixed Price and Book Building.

• Fixed Price – the company decides the price of the share issue and the number of
shares being sold. APJ Ltd public issue of 10 lakh shares of face value Rs. 10/- each
at a premium of Rs. 70/- each is available to the public thereby generating Rs. 7
Crores.

• Book Building – A Book building issue helps the company discover the price of the
issue. The company decides a price band and it gives the investor an option to
choose the price at which he/she wishes to bid for the company shares.
 IPO

Available to Public for Purchase - On the dates mentioned in the prospectus, the
shares are available to public. Investors can fill out the IPO form and submit the
application. This open period usually lasts for 5 working days which is a SEBI
requirement.

Share Allotment - Once the subscription period is over the issuing company allots
the shares to the prospective investors. In case of oversubscribed issues, shares
are not allotted to all applicants.

Listing & Refund - The last step is the listing on the stock exchange. Investors to
whom shares were allotted would get the shares credited to their DEMAT accounts
and for the remaining the money would be refunded.
 Prospectus
• Section 2(70) of the Act – ‘prospectus’ means any document described or issued as a
prospectus and includes a red herring prospectus referred to in Section 32 or shelf prospectus
referred to in Section 31 or any notice, circular, advertisement or other document inviting offers
from the public for the subscription or purchase of any securities of a body corporate;
• A document shall be called a prospectus if it satisfies two things –
• (a) It invites subscription to, or purchase of, shares or debentures or any other security of a
body corporate; and
• (b) The invitation is made to the public.

S. 25 – Document containing offer of securities for sale to be deemed prospectus

• Where a company allots or agrees to allot any securities of the company with a view to all or
any of those securities being offered for sale to the public, any document by which the offer for
sale to the public is made shall, for all purposes, be deemed to be a prospectus issued by the
company; and all enactments and rules of law as to the contents of prospectus and as to
liability in respect of mis-statements, in and omissions from, prospectus, or otherwise relating to
prospectus, shall apply.
 Prospectus
• S. 26 – Matters to be mentioned in Prospectus - Every prospectus issued by or on behalf
of a public company shall be dated and signed and shall state basic information with
regard to - names and addresses of the registered office of the company, company
secretary, CFO, auditors, legal advisers, bankers, trustees, and such other persons as
may be prescribed- dates of the opening and closing of the issue, and declaration about
the issue of allotment letters and refunds within the prescribed time; - a statement by the
BoD about the separate bank account where all monies received out of the issue are to
be transferred and disclosure of details of all monies – main object of public offer – capital
structure of the company etc.
• Companies (Prospectus and Allotment of Securities) Rules, 2014 – Rule 3. Information to
be stated in the prospectus— (1) The Prospectus to be issued shall contain—
• the names, addresses and contact details of the corporate office of the issuer company,
compliance officer of the issuer company, merchant bankers and co-managers to the
issue, registrar to the issue, bankers to the issue, stock brokers to the issue, names and
addresses of such other persons as may be specified by SEBI
 Prospectus

S. 35- Civil liability for misstatements in prospectus

S.34- Criminal liability for misstatements in prospectus

SHELF PROSPECTUS: Under Section 31 of the Companies Act, 2013, Shelf Prospectus is a type of
prospectus issued by the companies which may be valid up to one year from the date of when
securities are issued for the first time.
Information Memorandum: may be filed highlighting any change therein.

Section 31(2) : Shelf prospectus + Information Memorandum = Deemed prospectus and the provisions
of prospectus will be applied to it.
 Peek v. Gurney 6 H.L. 377 (1873)

• Promoters of a company issued a prospectus in July 1865 to the general public inviting them to
subscribe for shares in the company, especially for the original allottees.. In reliance on the
statements, the plaintiff bought shares from an original allottee. Peek sought an indemnity from the
company's directors on the ground that their misrepresentations in the prospectus had caused him to
buy the shares.
• HELD
• There must be something to connect the directors making the representation with the party
complaining that he has been deceived and injured by it. the `parties in one way or other are brought
into direct communication; and in an action the misrepresentation would be properly alleged to have
been made by the directors to the initial allotees. but the purchaser of shares in the market upon the
faith of a prospectus which he has not received from those who are answerable for it, cannot by
action upon it so connect himself with them as to render them liable to him for the
misrepresentations contained in it, as if it had been addressed personally to himself. I therefore think
that the Appellant cannot make the Respondents responsible to him for the loss he has sustained by
trusting to the prospectus issued by them inviting the public to apply for allotments of shares.
 Derry vs. Peek

• A company by the name of “The Plymouth, the Devonport and District Tramways” company
released its brochure, highlighting that the tramways company will now have the right to
use the mechanically powered or steam powered trams, thereby, replacing the old horse-
powered trams. On reading the advertisement and the claims issued by the company, Sir
Henry Peek (plaintiff) bought the shares of the company believing that the company now
has the right to use mechanical power.
• The permission to use the steam-powered trams was denied by the “Board of Trade”.
Company believing that they would easily get the approval to operate the steam-powered
trams as it was just a simple formality, the company published the advertisement in their
prospectus to invite people to purchase the shares of the company.
• When the board of trades turned down the company’s permission, the shareholders of the
company led by the plaintiff, who had purchased the shares of the company relying on the
statements and claims made by the company bought a suit of fraudulent misrepresentation
and deceit against the company
 Derry vs. Peek
• HELD:

• To support an action of deceit it always was necessary at common law to prove fraud, i.e. that the thing was done
fraudulently. Fraud never has been and never will be exhaustively defined, the forms which deceit may take being so
many and various. There is a negative characteristic: it must be something which an honest man would not do; not
merely what a logical or clearheaded man would not do.

• Once establish that a man honestly intended to do his duty, the consequences cannot turn his words or acts into a fraud.
There may be an obligation to see that no untrue statement is made, but the failure to meet that obligation is not fraud , if
there is no dishonest intention. The statement may be inaccurate, yet if the defendants honestly-though mistakenly-
believed that it substantially represented the truth, there is no fraud, and an action of deceit will.
• If he known that a certain statement is false, yet he choses to publish the statement
• Deliberately invites the people to enter into contract by means of dishonesty
• If he does not believe in the true statement and relies and persuades people to enter into the contract on his own
assumptions.

• a mere carelessness on the part of the directors by publishing statements on the prospectus which was not duly accepted
by the “Board of Trades” does not make them liable for fraud and deceit.

• shareholders were unable to prove that the directors of the company were dishonest. Thus, there was the lack of element
of fraud on the part of the defendant. The court cited that the company made the statement carelessly and believing that
they would easily get the permission. Thus, the directors of the company could not be held liable for the deceit because
 Sundaram Finance Service & Ltd. v. Grandtrust Finance Ltd.
(2003 Madras HC)
• The Petitioner was the Sponsor for a company, Vishnu Forge Industries. Sponsorship Agreement stated that
Sundaram shall be the Sponsor and shall arrange to offer the Equity Shares for sale to the public and to get
them listed at the Over the Counter Exchange of India (OTCEI).

• To expand their business operations, Forge required finance and for this, it along with Sundaram
approached and induced Grandtrust to subscribe for shares. Accordingly, the GT believing their
representation to be true subscribed for 50,000 equity shares of face value Rs. 10 each with a premium of
Rs. 6/- for each share.

• It was also represented to the complainant that the shares could be sold for a price not less than Rs.25/- per
share, as Vishnu Forge was going public.

• Cheque of Rs. 8,00,000/- was issued. It is based on this representation that the GT purchased the shares.
Sundaram + Forge entered into an agreement with the complainant and other Co-investors.

• Clause 15 of this Agreement stated: The sponsor shall arrange to offer the Equity Shares for sale to the
public not later than April 30, 1996, to get them listed at the OTCEI, on such terms and conditions as may
be decided by the Sponsor in its absolute discretion.

• Sundram Finance failed to arrange an offer the shares to the public by 30 th April and no efforts were taken
on his behalf.
 Sundaram Finance Service & Ltd. v. Grandtrust Finance Ltd. (2003 Madras HC)

• Both these Agreements – Sponsorship and agreement with the investors were amended – the difference being that the
contents of the amendment to the Sponsorship Agreement was not disclosed to the investors. Pursuant to the criminal
conspiracy between them, Sundaram and Forge had entered into a Supplementary Agreement to Sponsorship
Agreement among themselves without the knowledge of the investors, including the complainant on 27.4.96 to the
effect that ‘The sponsor shall arrange to offer the shares for sale to the public and to get them listed at the OTCEI, or
any other stock exchange on such terms, conditions and at such time as may be decided by the sponsor in its
discretion’. Therefore, the complainant is said to have been misled, or a false promise has been given to the
complainant by the Sponsor even at the time of representing that the shares would be offered for sale on 30.4.96, but
did not do so.

• ISSUES:

• The counsel for the petitioner argued that the entire transaction would be a civil consequence and that it is only a
breach of agreement, for which the remedy is only in the civil court, and the parties cannot seek their vengeance
through the Criminal Courts.

• Argued that there was no element of cheating.

 Sundaram Finance Service & Ltd. v. Grandtrust Finance Ltd.
(2003 Madras HC)
• The court must be satisfied to hold that there was deception at the time of representation. But that cannot
be judged only on the basis of the earliest representation alone. The court reiterated that a person would
never at the first instance itself come forward with any misstatements, as that will deter the person from
falling into the trap.

• When the case is where the chain of events have to be taken into consideration, the court cannot take into
consideration the earliest document alone and come to a conclusion that there was an element of cheating
at the time of representation. The subsequent documents which has been entered into especially the two
documents in the form of agreements. This obviously, is to drag on the process of bringing the shares for
sale and admittedly, it transpires that the shares have not yet been brought for sale.

• The court also citied Hridaya Ranjan Prasad Verma Vs. State of Bihar (2000 (4) SCC 168), wherein their
Lordships have held that the intention of the accused depends upon the inducement, which may be njudged
by his subsequent conduct also. The facts of this case reveals that there are chain of events taking place
from the year 1995 to April 1996 and consequently, the court finds that there is sufficient ground for the
Magistrate to take cognizance of the offence as against the accused.
 Shiromani Sugar Mills Ltd v. Debi Prasad, AIR 1950 All 508

• A public limited Company formed with a large number of objects: "to manufacture in India or abroad all kinds of sugar by
up-to-date and latest scientific method and machinery, and for this purpose to erect and construct a factory or factories at
one or several places in or outside India."

• Incorporated on 7th November 1933. The prospectus was published: “The issue was with regard to allotment and call
money - Out of Rs. 100, the price of a preference share, Rs. 20 were payable on application for the share, Rs. 30 were
payable on the share being allotted and the balance of Rs. 60 was payable in such call or calls as might be decided by the
Directors from time to time.

• Under Article 32 of the AoA a share became liable to forfeiture if the share-holder did not pay the call or instalment or
allotment money within the fixed time”.

• Shareholders of the Company – of which some did not pay even the allotment money and others did not pay the first and
second call moneys. Consequently, their shares were forfeited through resolutions passed by the Directors in three
meetings. An order for the winding up of the company was passed. The official liquidator then instituted the suits to
recover the balance of the allotment and first and second-call money.

• These suits were contested by the shareholders on the grounds (1) that the original contract for the purchase of the
shares was procured by the promoters of the Company by fraudulent misrepresentation, (2) that the promises held out to
the shareholders at the time of the purchase were not carried out by the Company and consequently the opposite parties
were justified in not making further payment
 Shiromani Sugar Mills Ltd v. Debi Prasad, AIR 1950 All 508
• “the Managing Agents with their friends, promoters and directors have already promised to subscribe share
worth Rs. 6,00,000" printed in red on the cover of the prospectus: The misrepresentation must be of a
material fact, the share-holder must have been induced by it and he must plead and prove so. It is difficult
to say that this statement could be assailed as a misrepresentation of fact. The only fact asserted was of
the existence of promise. Unless it were false, there was no misrepresentation of fact. Nobody should have
been misled by this statement and nobody should have understood it to mean that shares worth Rs.
6,00,000/- had already been-subscribed to. “promised” If the opposite parties misunderstood this statement
to mean that the shares had already been subscribed to and applied for shares under that
misapprehension, they are to blame themselves and not the promoters of the company . Even if it amounted
to misrepresentation, there is no proof that it induced the opposite parties to buy the shares.

• A share-holder's contract to purchase shares is only voidable, and not void on account of misrepresentation
in the prospectus. This means that the contract is valid till rescinded. But a shareholder has not unlimited
time within which to rescind the contract; he must rescind it promptly, that is within reasonable time of his
becoming aware of the fraud giving him the right to rescind. In the present case, the shares were allotted to
the opposite parties in 1934 and they have allowed their names to remain in the register of shareholders.
They have taken absolutely no active steps to avoid the contract. They gave no indication of their intention
to avoid the contract at any time; the earliest intention that they gave is through their written statements
in the suit. It has been found by the learned Civil Judge that the assets of the company were in a very bad
 DLF Limited v. SEBI (SAT Order Appeal No. 331 of 2014)

• DLF had filed a draft RHP (“DRHP”) with SEBI in January 2007 for raising Rs. 9187.5 crore through an
IPO. Thereafter, DLF issued the RHP on May 25, 2007and the Prospectus was filed with the Registrar
of Companies (“ROC”) on June 18, 2007.
• Mr. Kimsuk Sinha (“Mr. Sinha”) had filed complaints with SEBI on June 4, 2007 alleging the Sudipti
Estates Private Limited (“Sudipti“) and certain other persons had defrauded him of 34 crore in
relation to a transaction between them for purchase of land (“Complaint”) and also registered a first
information report (“FIR”) dated April 26, 2007 alleging that two of DLF’s wholly owned subsidiaries
(“WOS”) were the only shareholders of the Sudipti and requesting to disallow the listing of DLF
pursuant to the IPO and for immediate action. Subsequently the allegations in Complaint were
denied by DLF.
• Charges by SEBI —
• a) Non disclosure of material information in relation to alleged subsidiaries by DLF in RHP/Prospectus
• b) Non-disclosure of related party transactions (alleged subsidiaries) by DLF in RHP/Prospectus
• c) Non-disclosure of outstanding litigation relating to Alleged Subsidiaries by DLF in RHP/Prospectus
• d) Deliberate and active suppression of material information amounting to Fraud in terms of PFUTP
 DLF Limited v. SEBI (SAT Order Appeal No. 331 of 2014)

• SEBI concluded that non-disclosure/omission of material information in RHP/Prospectus makes

the Issuer, its directors and CFO liable for violation of DIP guidelines/ICDR regulations.
• Active and deliberate suppression of material information in RHP/Prospectus amounts to fraud
in terms (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities
Market) Regulations and consequently restraining access and prohibiting dealing by Issuer, its
directors and CFO in securities market.