Saturday, 3 September 2011

Terms using in Stock Market Investment

Part 1

Capital of a Company

Capital refers to the amount invested in the company so that it can carry on its activities. In a company capital refers to "share capital". The capital clause in Memorandum of Association must state the amount of capital with which company is registered giving details of number of shares and the type of shares of the company. A company cannot issue share capital in excess of the limit specified in the Capital clause without altering the capital clause of the MA.

The following different terms are used to denote different aspects of share capital: -

1. Nominal authorized or registered capital

Nominal authorized or registered capital means the sum mentioned in the capital clause of Memorandum of Association. It is the maximum amount, which the company raises by issuing the shares and on which the registration fee is paid. This limit is cannot be exceeded unless the Memorandum of Association is altered.

2. Issued capital

Issued capital means that part of the authorized capital, which has been offered for subscription to members and includes shares allotted to members for consideration in kind also.

3. Subscribed capital

Subscribed capital means that part of the issued capital at nominal or face value which has been subscribed or taken up by purchaser of shares in the company and which has been allotted.

4. Called-up capital

Called-up capital means the total amount of called up capital on the shares issued and subscribed by the shareholders on capital account. i.e. if the face value of a share is Rs.10/- but the company requires only Rs.2/- at present, it may call only Rs.2/- now and the balance Rs.8/- at a later date. Rs.2/- is the called up share capital and Rs.8/- is the uncalled share capital.

5. Paid-up capital

Paid-up capital means the total amount of called up share capital, which is actually paid to the company by the members.

In India, there is the concept of par value of shares. Par value of shares means the face value of the shares. A share under the Companies act, can either of Rs.10/- or Rs.100/- or any other value which may be the fixed by the Memorandum of Association of the company. When the shares are issued at the price which is higher than the par value say, for example Par value is Rs.10/- and it is issued at Rs.15/- then Rs.5/- is the premium amount i.e., Rs.10/- is the par value of the shares and Rs.5/- is the premium. Similarly when a share is issued at an amount lower than the par value, say Rs.8/-, in that case Rs.2/- is discount on shares and Rs.10/- will be par value.

Types of shares:

Shares in the company may be similar i.e. they may carry the same rights and liabilities and confer on their holders the same rights, liabilities and duties. There are two types of shares under Indian Company Law: -

1.Equity shares means that part of the share capital of the company which are not preference shares.

2.Preference Shares means shares which fulfill the following 2 conditions. Therefore, a share which is does not fulfill both these conditions is an equity share.

a) It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend payable is payable on fixed figure or percent and this dividend must paid before the holders of the equity shares can be paid dividend.

b) It also carries preferential right in regard to payment of capital on winding up or otherwise. It means the amount paid on preference share must be paid back to preference shareholders before anything in paid to the equity shareholders. In other words, preference share capital has priority both in repayment of dividend as well as capital.

Types of Preference Shares

Cumulative or Non-cumulative

A non-cumulative or simple preference shares gives right to fixed percentage dividend of profit of each year. In case no dividend thereon is declared in any year because of absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares however give the right to the preference shareholders to demand the unpaid dividend in any year during the subsequent year or years when the profits are available for distribution. In this case dividends which are not paid in any year are accumulated and are paid out when the profits are available.

Redeemable and Non Redeemable

Redeemable Preference shares are preference shares, which have to be repaid by the company after the term of which for which the preference shares have been issued. Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. However, under the Indian Companies Act, a company cannot issue irredeemable preference shares. In fact, a company limited by shares cannot issue preference shares, which are redeemable after more than 10 years from the date of issue. In other words the maximum tenure of preference shares is 10 years. If a company is unable to redeem any preference shares within the specified period, it may, with consent of the Company Law Board, issue further redeemable preference shares equal to redeem the old preference shares including dividend thereon. A company can issue the preference shares which from the very beginning are redeemable on a fixed date or after certain period of time not exceeding 10 years provided it comprises of following conditions: -

It must be authorized by the articles of association to make such an issue.



The shares will be only redeemable if they are fully paid up.



The shares may be redeemed out of profits of the company which otherwise would be available for dividends or out of proceeds of new issue of shares made for the purpose of redeem shares.



If there is premium payable on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed.



When shares are redeemed out of profits a sum equal to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve account. This amount should then be utilized for the purpose of redemption of redeemable preference shares. This reserve can be used to issue of fully paid bonus shares to the members of the company.

Participating Preference Share or non-participating preference shares

Participating Preference shares are entitled to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. A non-participating share is one which does not such right to participate in the profits of the company after the dividend and capital have been paid to the preference shareholders.

Alternation of capital

A company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorized by the articles of association of the company: -

1) Increase in share capital by such amount, as it thinks expedient by issuing new shares.

2) Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. e.g., if the company has 100 shares of Rs.10/- each (aggregating to Rs. 1000/-) it may consolidate those shares into 10 shares of Rs. 100/- each.

3) Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination.

4) Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived.

5) Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the court.

Reduction of the share capital can be effected only in the manners specified in Section 100-104 of the Act or by way of buy back under Section 77A and 77B of the Act. Notice of alteration to share capital is required to be filed with the registrar of the company in Form no 5 within 30 days of the alteration of the capital clause of the MA. The Registrar shall record the notice and make necessary alteration in Memorandum and Articles of Association of the company. Any default in giving notice to the registrar renders company and its officers in default liable to punishment with fine which may extend to the Rs. 50/- for each day of default.

Conversion of shares into stocks: Conversion of fully paid shares into stock may likewise be affected by the ordinary resolution of the company in the general meeting. Notice of the conversion must be given to the Registrar within 30 days of the conversion, the stock may be converted into fully paid shares following the same procedure and notice given to the Registrar in Form no 5. In this connection, the following provisions are important: -

1) Only fully paid shares can be converted into stocks

2) Direct issue of stock to members is not lawful and cannot be done.

3) The difference between shares and stock is that shares are transferable only in complete units so that transfer of half or any portion of share is not possible whereas stock is expressed in terms of any amount money and is transferable in any money fractions.

4) Articles may give the Board of Directors authority to fix minimum amount of stock transferable.
 --------------------------------

PART II

5) Since stock is not divided into different units it is not required to be numbered. Shares on the other hand must be numbered.

Reduction of share capital with sanction of the Court

A company limited by the shares or a company limited by guarantee and having share capital can if authorized by its articles, by special resolution and subject to confirmation by the court on petition reduce its share capital. It may effect reduction of its share capital in any of following circumstances:

1.Where the company is overcapitalized: -

a) It may extinguish or reduce the liability of member in respect of uncalled or unpaid capital. For example, where shares are of Rs.100/- each with Rs.60/- paid up, the company may reduce them to Rs.60/- fully paid and thus release the shareholder from the liability on uncalled capital of Rs.40/-.

b) Pay off or return part of the unpaid capital not wanted for the purpose of the company. For example, where the shares are fully paid of Rs. 100/- they may be reduced Rs.40/- each and Rs.60/- may be paid back to the shareholders.

c) Pay off part of the paid up share capital on the footing that it may be called up again. If shares are of Rs.100/- each the company may pay off Rs.25/- per share on condition that when desired the company may call it again without extinguishing the liability of shareholders to pay the uncalled share capital.

d) Reduce by a combination of the aforesaid methods

2.Where the company has suffered loss of capital, in such situation the company can write off or cancel the share capital which has been lost or is unrepresented by available assets.

Where the company has passed the resolution for reducing the share capital, it must, by petition, apply to the court in the prescribed form to the court for an order confirming the reduction. Where the proposed reduction of share capital involves the either diminution of liabilities in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital or in any other case if the court so directs the following provisions shall have effect: -

1.Every creditor of the company who on the date fixed by the court is entitled to debt from or any claim against the company shall be entitled to object to the reduction.

2.The Court shall settle a list of creditors so entitled to object and for that purpose shall ascertain as far as possible without requiring an application from any of the creditors, the names of creditors and the nature and amount of debt or claims and publish notices fixing the day or days within which creditors not entered in the list are to be entered if they so desire.

3.Where a creditor entered on the list whose debt or claim is not discharged or has not been determined does not consent to the reduction, the court may, if it thinks fit, dispense with the consent of the creditors if the company secures payment of this debt or claim by appropriating the following amounts as the court may direct: -

a) The company admits the full amount claim or debt or though not admitting it is willing to provide for it, then the full amount of debt or claim

b) If the company does not admit and is not willing to provide for the full amount of debt or claim or if the amount is contingent or not ascertained, then amount fixed by the court after due enquiry.

4.Where the proposed reduction of share capital involves either diminution of any liability in respect of the unpaid share capital or payment of any shareholder of any paid share capital, the Court may, having regard to any special circumstances of the case as it thinks proper so to do, direct that the above provisions shall not apply to any class or classes of creditors.

5 If the court is satisfied with respect to every creditor of the company entitled to object to reduction that either his consent to the reduction has been obtained or his that debt or claim has been discharged or has been determined or has been secured, make an order confirming the reduction on such terms and conditions as it thinks fit.

6.Where the court makes such an order, it may, if for any special reasons thinks fit and proper to do so, make an order directing that the company shall during such period commencing on and any time after the date of the order as is specified in the order add to its name as the last words the words "& Reduced" and make an order requiring the company to publish the same along with the reasons for the reduction or such other information in regard thereto as the court may think expedient with view to giving proper information to the public and if the court thinks fit the causes which led to reduction.

7.Where the company is ordered to add to its name the words "& Reduced" those words shall until the expiry of period specified in the order shall be deemed to be part of the name of the company.

8.The registrar, on the production to him, of an order of the court confirming the reduction of the share capital of the company and on delivering to him the certified copy of the order and of minutes approved by the court showing with respect to the share capital of the company as altered by the order register the reduction of share capital. On registration of order and minutes, the reduction of share capital shall take effect.

9.Notice of the registration shall be published in such manner as the court may direct.

Reduction of capital without the sanction of the court

Reduction of capital can take place without the sanction of the court in the following cases

1) Buy back of shares in accordance to the provisions of Section 77A and 77B

2) Forfeiture of shares - A company may if authorized by its articles forfeit shares for non-payment of calls by the shareholders. Such proceedings amount to reduction of capital but the act does not require court sanction for this purpose.

3) Valid surrender of the shares - A company may accept the surrender of shares

4) Cancellation of capital - A company may cancel the shares, which has not been taken up or agreed to be taken by the person and diminish the amount of its share capital.

5) Purchase of shares of member by the company under Section 402B. The Company Law Board may, on application made under Section 397 or Section 398, order the purchase of shares or interest of any member of the company by the company. These provisions come in force when a prescribed number of members make a complaint to the CLB for mis-management or oppression of the minority shareholders in the company.

6) Redemption of redeemable preference shares. Where redeemable preference shares are redeemed, it actually amounts to reduction of the capital. However, this does not require the sanction of the court.

Variation of shareholders rights

The rights, duties and liabilities of all shareholders are clearly defined at the time of issue of the shares. Once the rights of shareholders are fixed, they cannot be altered unless the provisions of the Companies Act for this purpose are complied with. The rights attached to the shares of any class can be varied only with the consent in writing of shareholders holding not less than 75 % of the issued shares of that class or with the sanction of special resolution passed at a separate meeting of the holders of issued shares of that class. However, the following conditions also must be complied with: -

1.The variation of rights are allowed by the Memorandum or Articles of Association of the Company.

2.In absence of such provision in the Memorandum or Articles of company, such variation must not be prohibited by the terms of issue of shares of that class.

Rights of Dissenting Shareholders:

The rights of the shareholders who did not consent to or vote for variation of their rights are protected by the Companies Act. If the rights of any class of the shareholders are varied, the holders of not less than 10 per cent of the shares of that class, being persons who did not consent to or vote in favor of resolution for variation of their rights can apply to the court to have the variation cancelled. Where such application is made to the court, such variation will not be given effect unless and until it is confirmed by the court.

Voting Rights of the Members

Every member of a public company limited by shares holding equity shares will have votes in proportion to his share in paid up equity capital of the company.

Generally, preference shareholders do not have any voting rights. However, they can vote on matters directly relating to the rights attached to the preference share capital. Any resolution for winding up of the company or for the reduction or repayment of the share capital shall be deemed to affect directly the rights attached to preference shares. Where the preference shares are cumulative (in respect of dividend) and the dividend thereon has remained unpaid for an aggregate period of two years before date of any meeting of the company, the preference shareholders will have right to vote on any resolution. In case of non-cumulative preference shares, preference shareholders have right to vote on every resolution if dividend due on their capital remains unpaid, either in respect of period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of aggregate period of not less than three years comprised in six years ending with the expiry of concerned financial year.

Every equity shareholder has a right to vote at a general meeting. No company can prohibit any member from exercising his voting right any ground including the ground that he has not held his shares for a minimum period before he becomes eligible to vote. However, a member’s voting rights can be revoked if that member does not make payment of calls or other sums due against him or where the company has exercised the right of lien on his shares.
-----------------------------

PART III

-Preference Shares


--------------------------------------------------------------------------------

Traditionally, Preference Shares have been seen as one of the principal methods of financing companies. However, their use in recent years has become soemwhat limited.

Preference Shares are shares that have several features, namely:

1.    they carry a fixed percentage dividend
2.    they are normally "cumulative", i.e. if the dividend can not be paid in one   year, it carries forward to the following year, where it becomes a priority item
3.   they do not carry voting rights or any other rights to participation in the running or policy of the company
4.   they do not participate, in any way, in any growth in the company or improvement in the company's profitability or value
5.   in terms of priority of payment of dividend and, in the event of corporate failure, repayment of capital, they rank ahead of ordinary shares, but behind loan notes and debentures.
Preference Shares now have very little use in the financing of companies, although there remain a few, very specialist, uses for them. They are, at best, seen as being a "halfway house" between ordinary shares (at one end of the financing spectrum) and long-term loans (at the other end of the spectrum) and they are seen to enjoy the advantages and privileges of neither ordinary shares or long-term loans.

The general view is that, if you want a fixed interest rate, priority on payment of interest and repayment of capital (in the event of corporate failure), no participation in the growing profits and value of the company and no participation in the company's organisation and policy and would like the security to be repaid by the company (i.e. a safe investment with very limited growth potential), buy a loan note / debenture.

If, on the other hand, you want a variable dividend, which (hopefully) rises with the growing profits and value of the company, with participation in the organisation and policy making, accept that the security will never be repaid by the company and you are prepared to take some degree of risk (i.e. you are prepared to be a limited risk taker, but one who seeks some return for the acceptance of that risk) then buy the company's ordinary shares.

In neither case should you consider Preference Shares, as they offer the advantages of neither ordinary shares nor long-term loans.

Preference Shares are valued on the Stock Market as less secure fixed-interest long-term loans.

No comments: