Finance - Issue of shares
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Transcript of Finance - Issue of shares
ISSUE OF SHARES
Presented by,
K. Nagaveni
2nd year MHA
J.N. Medical college
Belgaum
4/4/2015 1K.Nagaveni
INTRODUCTION
As we are aware finance is the life blood of business. It
is of vital significance for modern business which
requires huge capital. Funds required for a business may
be classified as long term and short term. we have learnt
about short term finance. Finance is required for a long
period also. It is required for purchasing fixed assets like
land and building, machinery etc..
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Even a portion of working capital, which is required to
meet day to day expenses, is of a permanent nature. To
finance it we require long term capital. The amount of
long term capital depends upon the scale of business and
nature of business.
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Sources of long term finance
The main sources of long term finance are as follows:
1. Shares
2. Debentures
3. Public Deposits
4. Retained earnings
5. Term loans from banks
6. Loan from financial institutions
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SHARES
Definition: shares can be defined as one of the units into which
the share capital of a company has been divided.
According to section 2 (46) of the companies Act, “a share is the
share in the capital of a company and includes stock except where
a distinction between stock and share is expressed or implied.”
The person holding the share is known as shareholder . He
receives dividend from the company as a consideration for
investing his money into the company.
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Sealing and Signing of Certificate.-
Every share certificate shall be issued under the seal of the
company, which shall be affixed in the presence of
(i) two directors or persons acting on behalf of the directors
under a duly registered power-of-attorney ; and
(ii) the secretary or some other person appointed by the
Board for the purpose. The two directors or their attorneys
and the secretary or other person shall sign the share
certificate.
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Common Seal
The company Act 1960 (revised) requires affixation of the common
seal on certain documents, share certificates and share warrants issued
by the company.
The common seal should be adopted by a resolution of the Board.
The impression of the common seal should be made part of the minutes
of the meeting in which it is adopted.
The common seal should be made of metal and capable of being
manually operated.
The common seal should have the name of the company and state in
which the registered office is situated engraved in legible characters.
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Terms of issues
Shares can be issued at par or at a premium or
at a discount.
Shares are said to be issued at par when a
shareholder is required to pay the face value of
the shares of the company.
For ex: when shares of Rs .10 are issued at Rs
.10 ,these are said to be issued at a face value.
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Shares are said to be issued at a premium when shareholder
is required to pay more than the face value to the company.
For ex: if shares of Rs.10 are issued at Rs.12, then
shares are said to be issued at a premium.
Shares are said to be at discount when the shareholder is
required to pay less amount than the face value of the shares
to the company.
For ex: when the shares of RS.10 are issued at Rs.9,
the shares are said to be issued at a discount.
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The issue of share amount can be received in one
instalment or it can be spread over different
instalment. The amount when received in different
instalments may be paid on application, allotments or
in different calls.
The amount which received on application called the
application money and the amount which becomes
due on allotment is called allotment money.
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Issue of shares
Issue of shares is the main source of long term finance.
Shares are issued by joint stock companies to the public.
A company divides its capital into units of a definite face
value, say of Rs. 10 each or Rs. 100 each. Each unit is
called a share. A person holding shares is called a
shareholder.
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Shares can be issued at par, premium or discount. There are
no restrictions regarding issue of shares at par. However , for
issue of shares t premium or discount , a company has to
follow the restrictions imposed by the Companies Act ,1956 .
These restrictions are as follows:
Issue of shares at premium: a company can always issue a
shares at a premium i.e. for a value higher than the face
value of shares whether for cash or for consideration other
than cash . However , according section 78 of the companies
act , the amount of such premium shall have to be transferred
by the company to the securities premium account.
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Securities of the premium can be used by the company only
for the following purposes:
a)For the issue fully paid bonus shares to the members of the
company,
b)For writing off preliminary expenses of the company,
c)For writing off the expenses of, or the commission paid or
discount allowed, on any issue of shares or debentures of the
company.
d) For providing premium payable on the redemption of any
redeemable preference shares or debentures of the company.
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Issue of shares at discount: A company can issue shares at a discount , subject
to the following conditions laid down by section 79 of the companies act .
A)Shares to be issued at a discount must be of a class already issued.
B) Issue of shares at a discount must be authorised by an ordinary resolution of
the company;
c)Issue must be sanctioned by the company Law board;
d)Resolution must specify the maximum rate of discount.
e)One year must have passed since the date on which the company was allowed to
commence business.
f)Every prospectus relating to the issue of shares shall disclose particulars of the
discount allowed on the issue of shares or that amount which has not been
written at the date of the issue of prospectus.
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Characteristics of shares
1. It is a unit of capital of the company
2.Each share is of a definite face value.
3. A share certificate is issued to a shareholder indicating
the number of shares and the amount.
4. Each share has a distinct number.
5. The face value of a share indicates the interest of a
person in the company and the extent of his liability.
6. Shares are transferable units
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Investors are of different habits and temperaments.
Some want to take lesser risk and are interested in a
regular income. There are others who may take greater
risk in anticipation of huge profits in future. In order to
tap the savings of different types of people, a company
may issue different types of shares. These are:
1. Preference shares, and
2. Equity Shares.
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Preference Shares
Preference Shares are the shares which carry preferential
rights over the equity shares. These rights are
Receiving dividends at a fixed rate,
Getting back the capital in case the company is wound-
up.
Investment in these shares are safe, and a preference
shareholder also gets dividend regularly.
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Types of preference shares
1. Cumulative preference shares: if the company does not earn
adequate profit in any year, dividends on preference shares
may not be paid for that year . But if the preference shares are
cumulative such unpaid dividends are treated as arrears and
can b carried and forward to subsequent years.
2. Non – cumulative preference shares: The holders of these
shares no doubt will get a preferential right in getting a fixed
capital dividend before it is distributed to equity share holders
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3.Redeemable preference shares: capital raised through
the issue of redeemable preference shares is to be paid
back by the company to such shareholders after the
expiry of a stipulated period, whether the company is
wound up or not.
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4.Particiapting or non participating preference shares: the
preference shares which are entitled to share in the surplus
profit of the company in addition to the fixed rate of
preference dividend are known as participating preference
shares.
The participating preference shareholders obtain return on their
capital in two forms: 1)fixed dividend
2)share in excess of profits.
Those preference shares which don’t carry the rights of share
in excess profits are known as non participating preference
shares.
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Equity Shares
Equity shares are shares which do not enjoy any
preferential right in the matter of payment of dividend or
repayment of capital. The equity shareholder gets
dividend only after the payment of dividends to the
preference shares. There is no fixed rate of dividend for
equity shareholders. The rate of dividend depends upon
the surplus profits.
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In case of winding up of a company, the equity share
capital is refunded only after refunding the preference
share capital. Equity shareholders have the right to take
part in the management of the company. However,
equity shares also carry more risk.
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Merits of equity shares
(A) To the shareholders
1. In case there are good profits, the company pays
dividend to the equity shareholders at a higher rate.
2. The value of equity shares goes up in the stock market
with the increase in profits of the concern.
3. Equity shares can be easily sold in the stock market.
4. Equity shareholders have greater say in the management
of a company as they are conferred voting rights by the
Articles of Association.
4/4/2015 24K.Nagaveni
To the Management:
1. A company can raise fixed capital by issuing equity shares
without creating any charge on its fixed assets.
2. The capital raised by issuing equity shares is not required to
be paid back during the life time of the company. It will be
paid back only if the company is wound up.
3. There is no liability on the company regarding payment of
dividend on equity shares. The company may declare
dividend only if there are enough profits.
4. If a company raises more capital by issuing equity shares, it
leads to greater confidence among the investors and creditors.
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Demerits
A)To the shareholders
1)Uncertainly about payment of dividend:
Equity share-holders get dividend only when the
company is earning sufficient profits and the Board of
Directors declare dividend.
If there are preference shareholders, equity shareholders
get dividend only after payment of dividend to the
preference shareholders.
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2)Speculative:
Often there is speculation on the prices of equity shares.
This is particularly so in times of boom when dividend
paid by the companies is high.
3)Danger of over– capitalization:
In case the management miscalculates the long term
financial requirements, it may raise more funds than
required by issuing shares. This may amount to over-
capitalization which in turn leads to low value of shares
in the stock market.
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4)Ownership in name only :
Holding of equity shares in a company makes the holder
one of the owners of the company. Such shareholders
enjoy voting rights. They manage and control the
company. But then it is all in theory. In practice, a
handful of persons control the votes and manage the
company. Moreover, the decision to declare dividend
rests with the Board of Directors.
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5)Higher Risk :
Equity shareholders bear a very high degree of risk. In
case of losses they do not get dividend. In case of
winding up of a company, they are the very last to get
refund of the money invested. Equity shares actually
swim and sink with the company.
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B)To the Management:
1)No trading on equity :
Trading on equity means ability of a company to raise funds
through preference shares, debentures and bank loans etc. On such
funds the company has to pay at a fixed rate. This enables equity
shareholders to enjoy a higher rate of return when profits are large.
The major part of the profit earned is paid to the equity
shareholders because borrowed funds carry only a fixed rate of
interest. But if a company has only equity shares and does not
have either preference shares, debentures or loans, it cannot have
the advantage of trading on equity.
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2)Conflict of interests :
As the equity shareholders carry voting rights, groups
are formed to corner the votes and grab the control of
the company. There develops conflict of interests
which is harmful for the smooth functioning of a
company.
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Difference between preference shares and equity
shares
Basis of difference Preference Shares Equity shares
1.Choice It is not compulsory to
issue these shares
It is compulsory to issue
these shares
2.Payment of dividend: Dividend is paid on these
shares in preference to
the equity shares
Dividend is paid on these
shares only after paying
dividend on preference
shares.
3.Return of capital In case of winding up of
a company the capital is
refunded in preference
over equity shares.
Capital on these shares is
refunded in case of
winding up of a company
after refund of preference
shares capital.
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References:
Sources of Long-term Finance –pdf
Financial management - Dr.S.N Maheshwari
Advanced accountancy – S.P.jain , K.L.Narang
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