1.

Types of Shares under COMPANY ACT-------1956

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 .The capital of the company can be divided into different units with definite value called shares. Holders of these shares are called shareholders or members of the company. There are two types of shares which a company may issue..
(1) Equity Shares (2) Preference Shares

(1) Equity Shares

Equity shares is the equally divided capital of a company. Total capital contribution for a company comprises of investments through equity share holdings by small and big investors. The investors who have a stake in a company are referred to as shareholders. The equity shares are therefore documents issued by a company and floated in the open market for purchase by shareholders which entitles them to be one of the owners of the company. The profits of equity shareholders depend on the profit making capability of the company that they have invested in. In a situation where the company has made huge profits the benefits are passed over to the equity share holders by way of dividends. The equity shareholders also en oy voting rights in the company. !quity shares will get dividend and repayment of capital after meeting the claims of preference shareholders. There will be no fi"ed rate of dividend to be paid to the equity shareholders and this rate may vary form year to year. This rate of dividend is determined by directors and in case of larger profits, it may even be more than the rate attached to preference shares. Such shareholders may go without any dividend if no profit is made.

(2) Preference Shares

Preference Shares means shares which fulfill the following # conditions. Therefore, a share which is does not fulfill both these conditions is an equity share. a$ %ayment of dividend at predetermined fi"ed rate. b$ &epayment of 'apital

Types of Preference Shares

( .Cumulative or Non-cumulative )
* non+cumulative or simple preference shares gives right to fi"ed percentage dividend of profit of each year. In case no dividend thereon is declared in any year because of absence of profit. 'umulative 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 .

# .Re eema!le an Non- Re eema!le )

&edeemable %reference 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 %reference shares means preference shares need not repaid by the company e"cept on winding up of the company. However, under the Indian 'ompanies *ct, a company cannot issue irredeemable preference shares. In fact, a company limited by shares cannot issue preference shares which are redeemable after more than (, years from the date of issue .

-. Participatin" Preference Share or non-participatin" preference shares )

%articipating %reference shares are entitled to a preferential dividend at a fi"ed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. * 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.

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$%& $'C( )* S+'RES

,hat o you mean $%& $'C( )* S+'RES un er SE$Re"ulation 1.../

$uy !ac0 of its own shares by a company is nothing but reduction of share capital. *fter the recent amendments in the 'ompanies *ct, (./0 buy back of its own shares by a company is allowed without sanction of the 'ourt. It is nothing but a process which enables a company to go back to the holders of its shares and offer to purchase from them the shares that they hold. The !uy-!ac0 may !e 1a. from the e"isting security holders on a proportionate basis1 b. from the open market or c. from odd lots, that is to say, where the lot of securities of a listed public company whose shares are listed on a recogni2ed stock e"change is smaller than such marketable lot as may be specified by the stock e"change1 d. by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity. 3here a company has passed a special resolution to buy+back its own shares or other securities under this section, it shall, before making such buy+back, file with the &egistrar and the Securities and !"change 4oard of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the 4oard has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the 4oard, and signed by at least two directors of the company, one of whom shall be the managing director, if any) Such a declaration of solvency need not be filed with the Securities and !"change 4oard of India by a company whose shares are not listed on any recogni2ed stock e"change. 3here a company buys back its own securities, it shall e"tinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy+back.

SE$- ($%& $'C( )* SEC%R-T-ES) RE2%3'T-)NS4 1../ 5 Section 66' of The Companies 'ct4 1.78

5 *uthori2ed by its *rticles 5 4uy+back of equity shares in any financial year shall not e"ceed twenty+ five per cent of its total paid+up equity capital in that financial year1 5 &atio of the debt owed by the company is not more than twice the capital and its free reserves after such buy+back ) 5 the promoter shall not deal in the securities of the company in the stock e"change during the period the buy+back offer is open 5 The company shall nominate a compliance officer and investors service centre for compliance with the buy+back regulations and to redress the grievances of the investors. 5 !very buy+back shall be completed within twelve months from the date of passing the special resolution passed in general meeting authori2ing the buyback 5 'ompany shall maintain a register of the securities so bought, the consideration paid for the securities bought+back, the date of cancellation of securities, the date of e"tinguishing and physically destroying of securities and such other particulars as may be prescribed. 5 6ile with the &egistrar and the S!4I, a return containing such particulars relating to the buy+back within thirty days of such completion 5 The company shall within two days of the completion of buy+back issue an public advertisement in a national daily, inter alia,

There are three main reasons hy a !ompany ou"d opt for #uy #a!$ %(. To improve shareholder value, since with fewer shares earning per share of the remaining shares will increase. #. *s a defense mechanism against hostile take+overs since there are fewer shares available for the hostile acquirer to acquire.

-. %ublic Signaling of the 7anagement8s %olicy.

)!9ectives of $uy $ac01

Shares may be bought back by the company on account of one or more of the following reasons i# To increase promoters holding ii# Increase earning per share iii# &ationalise the capital structure by writing off capital not represented by available assets. iv# Support share value v# To thwart takeover bid vi# To pay surplus cash not required by business Infact the best strategy to maintain the share price in a bear run is to buy back the shares from the open market at a premium over the prevailing market price.

C'SE ST%:& )* $%& $'C( S+'RES

* buyback is defined as a company buying back its own shares that it had issued in the market earlier. * buyback of shares can be done in two ways.
#)pen )ffer Purchase 9

In an open offer, a company can buy its shares directly from the stock market through brokers. :pen+market purchases are resorted to when the number of shares to be bought back is relatively small. The company has to fi" a ma"imum price for an open market offer, stipulate the number of shares it intends to purchase, and announced the closing date of the offer.
; Ten er )ffer 9

* tender offer is made when the number of shares to be bought back is large. Such an offer is a fi"ed price offer, i.e., the company fi"es a particular price for the ma"imum number of shares it is willing to purchase. It also fi"es an outer time limit for accepting the offer. The offer price is usually fi"ed at a premium in order to encourage shareholders to surrender their shares. The company accepts the shares on a proportionate basis if the offer is over subscribed. 4ut if offer is under+ subscribed, the company may either accept whatever is tendered or e"tend the time limit.

The fundamental difference between both depends on the price at which the shares are repurchased. In a ten er offer, a company is forced to pay the price that it had fi"ed for the repurchase, whereas in an open offer, the company only fi"es a ma"imum price, but the repurchase is made at the prevailing market price. *part from the above two buyback methods, companies can use the targeted buyback methods to repurchase shares from a select group of shareholders.

C'SE ST%:&
The best e"ample of such a buyback in the Indian conte"t was the buyback of shares undertaken by the 2reat Eastern Shippin" Company (2ESC)) to protect itself from a hostile takeover bid led by the * H ;almia group. In :ctober #,,,, the ' + :almia "roup of :elhi made a hostile bid for a </ per cent stake in the 2reat Eastern Shippin" Company (2ESC)) at Rs# 26 a share. The price offered was less than half the book value of the company. The offer and counter offers made by the * H ;almia group and the promoters of =!S': pushed up the bidding cost. The * H ;almia group ultimately sol its 1<#7= sta0e >around - million shares$ at Rs 7> per share for a consideration of Rs# 18? million before the year end. The * H ;almia group had acquired the 1<#7= sta0e in 2esco at an average cost of Rs# 2> per share for a consideration of Rs# 62 million. Hence, the * H ;almia group was able to make a profit of Rs# .1 million through greenmail transaction in less than 0 months. Companies can also use the book building process to !uy !ac0 shares. The book building process is a mechanism of price discovery which helps determine market price of securities. If the book building option is used, a draft prospectus has to be filed with S!4I. The prospectus should contain all the details of the offer, e"cept the price at which the securities will be offered >a price band is specified$. The copy of the draft prospectus is filed with S!4I and is circulated among institutional buyers by a leading merchant banker acting as the book runner. Institutional investors specify the price as well as the volume of shares they intend to buy. The book runner, on receiving the above information, determines the price at which the offer is to be made to the public.

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C'P-T'3 -SS%ES (C)NTR)3) 'CT------1.>6

'apital issues >control$ *ct, 'I'* is only a historical interest now as it was repealed by the 'apital issues >control$ *ct, (..#. 4ut we should know about it because it played an important part in the functioning of the Indian capital market for as many as </ years since (.<?,and its provisions have now become the powers and functions of the S!4I. It was administered by the controller of 'apital Issues >''I$ in the 7inistry of 6inance.

)$@ECT-AE
(. to protect the investing public, #. to ensure that investment by the corporate sector were in accordance with the plans @ that they were not wasteful @ in non+essential channels, -. to ensure that the capital structure of companies was sound @ in the public interest, <. to ensure that there was no undue congestion of public issues in any part of the year , and /. to regulate the volume, terms @ conditions for foreign investment. &aising of capital from the securities market before (..# was regulated. Ander the capital issues >control$*ct, (.<?,firms were required to obtain approval from the 'ontroller :f 'apital Issues>''I$for raising resources in the market. Bew companies were allowed to issue shares only at par. :nly the e"isting companies with substantial reserves could issue shares at a premium, which was based on some prescribed formula. In (..#, capital issues >control$ *ct, (.<? was repealed @ with this ended all controls relating to raising resources from the market. Since then the issuers of securities could raise the capital from the market without requiring any consent from any authority either for making the issue or for pricing it. &estrictions on rights @ bonus issues

have also been removed. Bew as a well as established companies are now able to price their issues according to their assessment of market conditions.

Controller of Capital Issues (CCI)

The officer in the ;epartment of !conomic *ffairs, 7inistry of 6inance, =overnment of India, who formerly administered control over capital issues in accordance with the 'apital Issues >'ontrol$ *ct, (.<?, and its related order and rules made from time to time. This act aimed to modulate and channelise investments in desired directions, and helped maintain the health of the capital market. To do so, the 'ontroller of 'apital Issues was empowered as the sanctioning authority for any reorgani2ation of the capital structure of public limited companies through the issue of shares 9 whether fresh of additional, including at a premium, rights or bonus 9 and debentures, etc. In other words, companies wanting to make any change in their capital structures had to obtain prior approval of their proposals from the 'ontroller of 'apital Issues. 3hile e"amining such proposals, the 'ontroller of 'apital Issues acted as a Clast checkpost8 to make sure that the company had obtained al government and mandatory clearances, such and industrial licenses, approval from financial institutions, etc. The office is now defunct.

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-N-T-'3 P%$3-C )**ER-N2S ( -P) )

I%:s generally involve one or more investment banks as Dunderwriters.D The company offering its shares, called the Dissuer,D enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

Apon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold >called the gross spread$. Asually, the lead underwriters, i.e. the underwriters selling the largest proportions of the I%:, take the highest commissionsEup to FG in some cases.

Asually, the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of e"isting shares. However, certain regulatory restrictions and restrictions imposed by the lead underwriter are often placed on the sale of e"isting shares.

%ublic offerings are primarily sold to institutional investors, but some shares are also allocated to the underwritersH retail investors. * broker selling shares of a public offering to his clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering1 the purchase price simply includes the built+in sales credit.

STEPS T) $E *)33),E: *)R 'N -P)

(. *pplication to IS! and '74 #. %ublicity *ctivities -. 'ompany !"aminations by IS! and '74 !"perts <. &egistration of Stocks by the 4oard /. %ublic offering of stocks 0. Botification of Sale &esults ?. Iisting to the !"change and Trading 1# 'pplication to -SE an CB$ *fter necessary documents are prepared, the company applies to '74 for registration and to IS! for being traded on the respective market. To shorten the public offering process, it would be useful if IS! and '74 applications are lodged concurrently. The application may be presented by the company itself, or the authori2ed underwriter. 2# Pu!licity 'ctivities In order to attract ma"imum number of investors, publicity activities should be attached the necessary degree of attention. %ublicity activities may include statements by the company e"ecutives that the stock will be offered to public as well as information that appear on the press and the media about the companyHs operations. :n the other hand, publicity activities may be conducted not only nationally but also to attract international financial institutions and investors. ?# Company ECaminations !y -SE an CB$ ECperts *fter the deficient documents and information discovered in the public offering and listing application are completed, the companyHs head office and production facilities are visited by the e"perts of IS! and '74 for on+site e"amination purposes. *lthough e"aminations

may vary according to the type of the company that lodges a listing application >industrial company, service company, insurance company, bank, etc.$

># Re"istration of Stoc0s !y CB$ The '74 e"amines the application to see whether the prospectus and the circular contain the information stipulated by the legislation or not in accordance with public disclosure requirements, and registers those stocks that are deemed eligible. 7# Pu!lic offerin" of stoc0s 8# Notification of Sale Results *fter the sale transaction is completed, the underwriter communicates the public offering sales results to IS! and '74.

6# 3istin" to the ECchan"e an Tra in" The stocks of the company that applies for IS! listing are traded on one of the IS! Stock 7arkets with a decision to be made by the !"ecutive 'ouncil of the !"change after the e"aminations conducted by IS! e"perts. 6ollowing the decision of the !"ecutive 'ouncil of IS!, public offering results, the prospectus and other information deemed necessary by the !"change are announced on the ;aily 4ulletin. !ffective from the second business day that succeeds the announcement, the stocks start to be traded on the respective market.

,hat is an -P) an hoD to "o a!out investin" in itE

*n initial public offering >I%:$ occurs when a company first sells common shares to investors in the public. =enerally, the company offers primary shares this way, although sometimes secondary shares are also sold as I%:s. 6or a company to offer I%:s, they need to hire a corporate lawyer as well as an investment banker to underwrite the offer. The actual sale of the shares is generally offered by stock e"change or by regulators. 3hen the company starts to offer I%:s, they are usually required to reveal financial information about the company so that investors know whether the companies a good investment or not.

,hy :o Companies )ffer -P)sE

In general, companies offer I%:s in order to raise money that they need for business e"pansion and new business opportunities. 4y offering shares to investors, a company stands to bring in a lot of money. They can then use this money to grow their business. The more their business grows, in turn, the higher the share prices grow and the more money is generated by investors purchasing shares. Anlike business loans, which need to be repaid with interest, I%:s do not have this disadvantage. It is investors who take the risk ++ although also a potential gain ++ buying shares. If the company loses money and they will not have to repay their investors, although investors in general demand high accountability from a company they are buying stocks from.

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-SS%ES )* SEC%R-T-ES

The euro area securities issues statistics cover issues of securities other than shares >i.e. debt securities$ and issues of quoted shares by euro area residents. The statistics cover outstanding amounts >stocks$, transactions >gross issuance, redemptions and net issuance$ and growth rates. The statistics are estimated to cover appro"imately ./G of total issues by euro area residents. Information about securities issues is an important element in monetary and financial analysis. 6or borrowers, securities issues are an alternative to Cbank financeJ. Holders of financial assets may view securities issue by Cnon+banksJ as partial substitutes for bank deposits and negotiable instruments issued by banks. :ver time, shifts between direct finance >through securities markets$ and indirect finance >through the banking system$ may affect the transmission mechanism of monetary policy, as such shifts may change the euro areaHs financial structure * process by which a public company can, by an issue of securities >shares or debentures$, raise capital from the public. It may involve a prospectus issue, in which the company itself issues a prospectus inviting the public to acquire securities1 an offer for sale, in which the company sells the securities on offer to an issuing house, which then issues a prospectus inviting the public to purchase the securities from it1 or a placing, whereby an issuing house arranges for the securities to be taken up by its own or anotherHs clients in the e"pectation that they will ultimately become available to the public on the open market.

Prospectus (finance)
* prospectus is a detailed disclosure document that normally must be prepared whenever a company or mutual fund plans to issue securities to the public. It must, by law, provide full, true and plain disclosure of all material facts relating to the securities being issued. It must also be accepted for filing by the securities regulators and delivered to every person who buys the securities. Some urisdictions allow a summary prospectus, which is an abbreviated version. This is supplied to investors, although the detailed prospectus is available on request. ' typical prospectus inclu es amon" other thin"s1

the history of the issuer and a description of its operations1 audited financial statements for the previous three years1 a description of the issuerHs business and investment plans1 a description of the intended use of proceeds from the securities offering1 a summary of the ma or risk factors affecting the issuer1 information about the issuerHs management and its principal shareholders >those who own more than (,G$1 a description of the legal rights of investors to withdraw from a purchase, or to sue for rescission >the return of their investment$ or damages if the prospectus contains a misrepresentation.

The Prospectus Process ,or0

3hen an issuer decides to offer securities to the public, it first prepares a preliminary prospectus and files that document with the securities regulators for review. :nce the preliminary prospectus has been properly filed, the issuer can begin to solicit e"pressions of interest from potential investors, provided that it gives each potential investor a copy of the preliminary prospectus and complies with other legal requirements. 3hen regulatory review of the document is complete and any comments have been addressed, the issuer prepares and files a final version of the prospectus and the regulators issue a receipt for it. :nce the prospectus receipt has been issued, the issuer can begin to distribute the securities. * copy of the final prospectus must be sent to every purchaser. Securities distributed under a prospectus can be freely traded among investors, typically through a stock e"change or another secondary market. Securities that are issued without a prospectus >under certain statutory e"emptions from the prospectus requirement$ can not generally be sold to the public and in most cases are sub ect to resale restrictions.

After the Prospectus - the Responsibilities of Reporting Issuers

*n issuer that has obtained a receipt for a prospectus becomes a reportin" issuer in that urisdiction. This requires it to publish periodic financial statements and give prompt notice to the public of any material changes in its affairs. These financial statements and material change reports are available to the public at most of the securities regulators, at any stock e"changes on which the securities are listed. Insiders of reporting issuers must also file regular reports of disclosing their trading activity in the issuerHs securities. Insider reports are available for public viewing at the offices of the securities regulators.

' statement in lieu of prospectus

' statement in lieu of prospectus. *ccording to the companiesH ordinance if a public company is not issuing a prospectus on its formation, it then must file a statement in lieu of prospectus with the registrar of the companies. * statement n lieu of prospectus is defined as) D* public document prepared in the second schedule of companyHs ordinance by every such public company which doesnHt issue a prospectus on its formation with the registrar before allotment or shares of debentures, and signed y every person who is named therein.D * statement in lieu of prospectus gives practically the same information as a prospectus and is signed by all the directors or proposed directors. In case, the company has not filed a statement in lieu of prospectus with the registrar, it is then not allowed to allot any of its shares or debentures. * statement in lieu of the prospectus contains the information as described below)++++ 1- Bame of the company 2- Statement of capital ?- ;escription of the business >+ Bames, addresses, and occupation of directors 7- !stimated initial e"penses 8+ Bames of vendors and details of property 6+ 7aterial contracts /+ ;irectorHs interest .- 7inimum subscription