Management of Companies

Management of Companies

Director: Is a person who directs, conduct, supervise and control the functioning of the company.

Board of Directors

A Board of directors is a team of people elected by shareholders to represent the shareholders interest and ensure that the company’s management acts on their behalf. The head of the board of directors is the Chairman or Chairperson of the Board.

 Asper Section 149 (1) Every company shall have a Board of Directors consisting of individuals as director. The following are the provisions:

ü Every company shall have a minimum number of three directors in the case of public company, Two directors in the case of private company, and one director in the case of one-person company. A company can appoint maximum 15 directors.

Ø Provided that a company may appoint more than 15 directors after passing a special resolution.

ü At least one-woman director must be appointed by the company

ü All listed companies must have at least one third proportion of their board of directors as independent directors

Legal position of director (Role of directors)

As agents

The relationship between company and director is like principle and agent. Thus the company will be liable for the all acts done by the agent on behave of the principle. 

As trustee

Directors are considered as the trustee for the money which comes in their hands

As managing partner

They are elected members of the shareholders

As employees

A director may be considered as the employee, if he is serving the company such as secretary, manager or otherwise

Appointment of directors

Appointment of first directors

• By the articles of the company
• By the subscribers of the MoA

Appointment of subsequent directors

• By the company in general meeting
• By the Board of Directors
• By the third party
• By the principal of proportionate representative
• By the tribunal

Removal of Directors

• By the shareholders
• By the Tribunal
• By the central government

Powers of Directors

According to Companies Act 2013, the Board of Directors of a Company has the following powers in the Company.

(a) To make calls on shares in respect of money unpaid

(b) To authorize buy back of securities under section 68

(c) To issue securities, including debentures, whether in or out side India

(d) To borrow money

(e) To invest in funds of the company

(f) To grant loans or give guarantee or provide security in respect of loan

(g) To approve financial statements and the Board’s report

(h) To diversify the business of the company

(i) To approve amalgamation merger or reconstruction

(j) To take over a company or acquire a controlling or substantial stake in another company

(k) Any other matter which may be prescribed.

Liabilities of Directors

Liability to the Company-
The liability of the Director to the company may arise from:
(a) Breach of fiduciary duty.
(b) Ultra Vires acts
(c) Negligence, and
(d) Mala fide Acts

(a) Breach of Fiduciary duty

 Whenever a director works dishonestly to the interest of company, he will be held liable for breach of fiduciary duty. Most of the powers of Directors are ‘powers in trust’ as explained above and therefore, should be exercised in the benefit of company and not for their own benefit or for the benefit of other members.
(b) Ultra vires acts:

Everybody in the company are supposed to work within the prescribed limits or the provisions of Companies Act, Memorandum and Articles of association since these lay down the limits to the activities of the company and consequently to the power of board of Directors. If the Directors do anything which is beyond these prescribed limits it would be considered as ultra vires and so he shall be made personally liable for this.
(c) Negligence:

Whenever the directors fail to exercise reasonable care, skill and diligence, they shall be deemed to have acted negligently in discharge of their duties and consequently shall be liable for any loss or damage resulting therefrom..
(d) Mala fide Acts:

Directors are the trustees of the assets of the company including money, property and also exercise power over them. And If they exercise such power dishonestly or perform their duties in a malafide manner, they will be held liable for the breach of trust and would be asked to reimburse the company of whatever the loss company has suffered of such malafide act

2. Liability to third parties:
In addition to the statutory duties, directors also owe common law duties. As a result of this, they may often find themselves liable to third parties. If, for example, you assumed personal responsibility for a misstatement to a customer, you could find yourself sued by that customer alongside the company.

3. Criminal Liability

If the prospectus contain an untrue statement

If the application money does not deposited in the scheduled bank

If the return on allotment not filed with registrar

If annual general meeting is not called with the specified time
If the allotment made without getting minimum subscription

Independent Director

An Independent Director means a director other than a managing director or a whole time director or a nominee director who does not have any material or pecuniary relationship with the company.

Qualifications of Independent Director

• Integrity, expertise and experience
• Who is or was not a promoter of the company, or its holding, subsidiary or associate company
• Who is not related to promoters or directors in the company
• Who has or had no pecuniary relationship with the company
• None of whose relatives has or had pecuniary relationship with company
• Who possess such other qualifications as may be prescribed

Tenure of ID

An independent Director can be appointed for a term of up to five consecutive years on the board. Special resolution is to passed for reappointment of further five years Sec.149 (10).

Role and Responsibilities of Independent Directors

• ID acts as a coach, guide and mentor to the company
• Improving corporate credibility and governance standards by working as a watch dog
• Fulfills a useful role in succession planning
• Risk managemet and strategy
• Scrutinizing, monitoring and reporting management performance regarding goals and objectives agreed in the board meeting
• Safeguard the interest of all stakeholders, particularly the minority share holders
• Balance the conflicting interest of shareholders.

 Key Managerial Personnel Under Companies

 According to Standard 18 (AS18) the Key Managerial personal are people who have authority and responsibility for planning, directing and controlling the activities of the reporting enterprise. The following are the Key Managerial Personal under companies Act:

These are a group of people who are in charge of managing the operations of a Company; they are responsible for the planning, directing and controlling the functioning of a Company. They are the first point of contract between the company and its Stakeholders.

• CEO/MD
• Company Secretary
• Whole Time Director
• Chief Finance Officer

CEO/MD:

CEO is the highest ranking executive in a company. They are responsible for the running of the whole company. Whose major responsibilities include making major corporate decisions, managing the overall operations and resources of a company. He is also responsible for innovating and growing the company to a large scale.

Company Secretary

According to Section 2(1)(c) of the Company Secretaries Act, 1980, company secretaries are the people who are the member of the Institute of Company Secretaries of India. Hence, he is a member of ICSI and performs various ministerial and administrative functions of the organization.

Whole Time Director:

A director who is devoting the whole of working hours to the company is called whole time director. He has the substantial stake in the company and is a part of day to day operation.

Chief Finance Officer:

He is a senior level executive responsible for handling the financial status of the company. He needs to formulate financial planning, contingency plans etc.

Audit Committee

An audit committee is a committee of an organisation’s board of directors which is responsible for oversight of the financial reporting process, selection of the independent auditor, and receipt of audit results both internal and external.

• All public companies with a paid up capital of R.s. 10 crore or more
• All public company having turnover of 100 crores or more
• All Public companies having aggregate, outstanding loans or borrowing or debentures of deposits exceeding R.s. 50 Crores or more.

Audit Committee – The Function

• Recommendation for appointment, remuneration and terms of appointment of auditor of the company
• Review and monitors auditor’s independence
• Examination of the financial statements and auditors report
• Scrutiny of intercorporate loans and deposits
• Valuation of undertakings or assets of the company
• Evaluation of the internal financial controls

SEBI (Security Exchange Board of India)

• Securities and Exchange Board of India (SEBI) is a statutory regulatory body entrusted with the responsibility to regulate the Indian capital markets. It monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations.
• SEBI was founded on April 12, 1992, under the SEBI Act, 1992. Headquartered in Mumbai, India, SEBI has regional offices in New Delhi, Chennai, Kolkata and Ahmedabad along with other local regional offices across prominent cities in India

Structure of SEBI

SEBI has a corporate framework comprising various departments each managed by a department head. There are about 20+ departments under SEBI. The chairman of SEBI is nominated by the Union Government of India.

• Two officers from the Union Finance Ministry will be a part of this structure.
• One member will be appointed from the Reserve Bank of India.
• Five other members will be nominated by the Union Government of India.

Objectives of SEBI:

SEBI has following objectives-

• Protection to the investors

The primary objective of SEBI is to protect the interest of people in the stock market and provide a healthy environment for them.

• Prevention of malpractices

This was the reason why SEBI was formed. Among the main objectives, preventing malpractices is one of them.

• Fair and proper functioning

SEBI is responsible for the orderly functioning of the capital markets and keeps a close check over the activities of the financial intermediaries such as brokers, sub-brokers, etc.

Functions of SEBI:

SEBI primarily has three functions-

• Protective Function
• Regulatory Function
• Development Function

Protective Functions

As the name suggests, these functions are performed by SEBI to protect the interest of investors and other financial participants. It includes-

• Checking price rigging
• Prevent insider trading
• Promote fair practices
• Create awareness among investors
• Prohibit fraudulent and unfair trade practices

Regulatory Functions

These functions are basically performed to keep a check on the functioning of the business in the financial markets.These functions include-

• Designing guidelines and code of conduct for the proper functioning of financial intermediaries and corporate.
• Regulation of takeover of companies
• Conducting inquiries and audit of exchanges
• Registration of brokers, sub-brokers, merchant bankers etc.
• Levying of fees
• Performing and exercising powers
• Register and regulate credit rating agency

Development Functions

• SEBI performs certain development functions also that include but they are not limited to-
• Imparting training to intermediaries
• Promotion of fair trading and reduction of malpractices
• Carry out research work
• Encouraging self-regulating organizations
• Buy-sell mutual funds directly from AMC through a broker

Corporate governance

• Corporate governance is the system by which companies are directed and controlled.
• Corporate governance is an internal system that encompasses policies, processes, people and which makes sure the needs of share holders and other stake holders are met in full.

Pillars of Corporate Governance

ü Accountability: Safeguard the interest of stake holders.

ü Fairness: Fairness means “treating all stakeholders s including minorities, reasonably, equitably and provide effective redress for violations.

ü Transparency: Transparency “means having nothing to hide” that allows its processes and transactions observable to outsiders. It means accurate, adequate and timely disclosure of relevant information to the stake holders.

ü Independence: Strong board of directors with independency

ü Integrity: Highest standard of integrity.

ü Stakeholder engagement: Those charged with governance should identify the key stakeholders and how they interact with the business and how they are engaged with to ensure the best outcome for the organization.

Why Corporate Governance is Important

1. Large number of stake holders: There are several stake holders in a company like shareholders, employees, creditors government, community etc. These stake holders have different rights and interest in the operation of the company. Corporate governance is necessary to protect the interest of these stake holders

2. Changing structure f ownership: Now a day’s promoters or shareholders includes the foreigners also. So a transparent administration system is essential to attract global capital to the Indian industries’.

3. Greater Social Responsibility: In order to ensure the transparent and better dealings with regard to the environment, conservation of resources, basic infrastructure, a good system is essential.

4. Corporate scams and frauds: Several corporate scams and frauds have been reported in the corporate world in recent years. The board of directors may misuse their powers, commits frauds, manipulation and misappropriation, insider trading etc. to prevent this better system is essential

5. Shareholders activism: Shareholders associations and strong shareholders’ movement have led to demand for good governance of corporation.

6. Need to implement a strong regulatory system for better administration

7. Merger and acquisition of companies demanded the corporate governance to ensure the rights and interest of various shareholders.

Corporate Social Responsibility (CSR)

Corporate Social Responsibility/ corporate sustainability/sustainable business/ corporate conscience/ corporate citizenship/ conscious capitalism or responsible business

It implies the responsibility of a business towards its various stake holders, namely shareholders, suppliers, customers, public, government and society.

CSR – The Importance

a) Improved public image – Undertaking CSR enhances reputation of the company.

b) Increased brand awareness and recognition – If you are following ethical practice, the news will be spreading quickly.

c) Cost saving – Sustainability leads to cost reduction

d) An advantage over competitors

e) Increased customer engagement

f) Greater employee engagement

g) More benefit to employees – positive and productive

 Arguments for Social Responsibility

The following are the arguments in favour of SR:

1. Business is a part of society:

Business is a part of society. Society is a system and business is one of its sub systems. Every sub system of a system formulates for the betterment of the whole system and not for its own betterment only.

• Long term self-interest of the Business:

The existence of a business depends on the existence of various social organs like employees, customers, society as a whole. So the business should provide satisfaction to all these organs on continuous basis for its continued existence.

• Avoidance of Government Regulations:

Government aims at maintaining equilibrium in the society on long term basis. For this purpose, it tries to ensure that every organs of society meets social requirements. If any organization fails to do so, the government has the power to take action.

• Moral Justification:

Social responsibility has moral justification. Business takes various inputs from the society, namely money, material, people information etc. So business has to undertake social responsibility.

• Public Image:

Any business which involves in fulfilling the inspirations of the society creates better image in the public.

• Maintenance of Society:

The business has to be socially responsible in order to avoid anti social entities so that society is maintained on continuous basis.

• Availability of Resources with the business:

Business enterprise has huge financial resources and very efficient managers. So they can solve a social problem easily.

.

Arguments against Social Responsibility

1. Conflict with profit motive:

The main aim of business is to maximize the profit, but the discharge of social responsibility adds to cost of business. So there is a chance for violation of profit maximization. It is Contrary to basic functions of business.

• Distortion of resource Allocation:

Social responsibility leads to distortion of resource allocation.

• Imposition of social values:

Discharging of Social responsibility involves lots of influence of the business on the society. Therefore by undertaking SR, a business is likely to impose its own value on the society.

• Personal Resistance:

People tend to dislike interference from business in their problems.

CSR Committee

Following companies to constitute CSR committee

• Net worth of Rs. 500 crore or more, or
• Turnover of Rs. 1000 crore or more, or
• Net Profit of Rs. 5 crore of more

Committee to consist of atleast 3 directors out of which atleast 1 to be independent director.

Functions of CSR Committee

• Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII
• Recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
• Monitor the Corporate Social Responsibility Policy of the company from time to time.
• Prepare a transparent monitoring mechanism for ensuring implementation of the projects / programmes / activities proposed to be undertaken by the company.

Winding Up of the Company

Winding Up of the Company

It is the process of putting an end to the life of the business. Company is created by law, thus it should be come to an end by an operation of law. Winding up is the process of realizing company’s assets and discharging the liabilities and distributing the surplus if any to the equity holders.

Modes of Winding  up

1. By tribunal (Compulsory winding up)
2. Voluntary Winding Up
   1. By Members
   1. By Creditors

Reasons for winding up

• When the object of company has fulfilled
• When the object of the company has unattainable
• When the company is not in a position to clear its debts
• When the company is in the scheme of amalgamation/reconstruction

By tribunal (Compulsory winding up)

Life of an end of the company is comes to an end by an order of court.

Circumstances for compulsory winding up

• Inability to pay debts
• BY passing special resolution
• Acts against sovereignty and integrity of India
• When company is sick and cannot revive
• On application made by the registrar
• Default in filing annual returns
• Main objective of company is failed
• The business has become illegal
• The company has become insolvent

Voluntary Winding Up

Life of company comes to an end by the initiative of members or creditors. In this mode of winding up the company and creditors left free to settle their affairs without going to the court.

Steps for Voluntary winding up

1. Declaration of solvency to the registrar
2. Meeting of creditors
3. Pass resolution
4. Commencement of voluntary winding up
5. Appointment of liquidators
6. Notice of appointment to the registrar
7. Appointment of committees by liquidators
8. Submit the report of progress of winding up
9. Report of liquidators to the court for examination
10. Final meet and dissolution

Depository System

Depository

A depository is an institution that holds the securities of investors in the electronic form in the Demat accounts. The primary function of a depository is to transfer the ownership of securities from one account to another after a trade has been made.

Depository Participant 

Depository Participant (‘DP’) is the agent or the registered stockbroker of a depository. It acts as a link between the companies which issue shares and its shareholders.
A person cannot contact the depository directly. Through the DP, a person can open and maintain a Demat account. They are the link between the depository and the investors. Currently, there are two depositories registered with SEBI and are licensed to operate in India:

• NSDL (National Securities Depository Ltd.)
• CDSL (Central Depository Services (India) Ltd.)

National Securities Depository Limited (NSDL)

The National Securities Depository Limited (NSDL) is promoted by the National Stock Exchange, Unit Trust of India and Industrial Development Bank of India among others.

Central Depository Services (India) Limited (CDSL)

The Central Depository Services Limited (CDSL) is promoted by the Bombay Stock Exchange, Bank of India and State Bank of India among others. The DP’s registered under the CDSL help the investors to avail the services provided by the CDSL

Dematerialization

Dematerialisation of Shares Dematerialisation is a process through which physical securities such as share certificates and other documents are converted into electronic format and held in a Demat Account. An investor intending to dematerialise its securities needs to open a Demat Account with a Depository Participant (DP). A depository is responsible for holding the securities of a shareholder in electronic form, these securities could be in the form of Share Certificates, bonds, government securities, and mutual fund units, which are held by a registered Depository Participant (DP).

Process of Dematerialization

1. Dematerialization starts with opening a Demat account. For Demat account opening,you need to shortlist aDepository Participant (DP) that offers Demat services
2. To convert the physical shares into electronic/Demat form, A Dematerialization Request Form (DRF), which is available with the Depository Participant (DP), has to be filled in and deposited along with share certificates. On each share certificate, ‘Surrendered for Dematerialization’ needs to be mentioned
3. The DP needs to process this request along with the share certificates to the company and simultaneously to registrars and transfer agents through the depository
4. Once the request is approved, the share certificates in the physical form will be destroyed and a confirmation of dematerialization will be sent to the depository
5. The depository will then confirm the dematerialization of shares to the DP. Once this is done, a credit in the holding of shares will reflect in the investor’s account electronically
6. This cycle takes about 15 to 30 days from the submission of dematerialization request
7. Dematerialization is possible only with a Demat account,therefore it is essential to learn how to open a Demat account to understand dematerialization

Rematerialisation of Shares:

Rematerialisation is the process of conversion of electronic holdings of securities into physical certificate form. For rematerialisation of scrips, the investors have to fill up a Remat Request Form (RRF) and submit it to the depository participant.

Buyback of shares

Buyback of shares

Stock buybacks refer to the repurchasing of shares of stock by the company that issued them. A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake.

Provision related to buyback of shares

• Buy back in a financial year shall not exceed 25 percent of the free reserves and equity of a company
• Buy back would be used only for restructuring of capital and not for treasury operations.
• Buy back of shares can be done out of the company’s free-reserves, share premium account or proceeds of any earlier issue specially made for buy back purpose.
• The post-buy debt-equity ratio will be at 2: 1.
• There will be a 24-month gap between two buy backs of the same type of security. However, there would be no bar on the issuance of other types of securities including debt, debentures and preference equity
• Companies desiring to buy-back shares will have to seek following approval from the Board of Directors.
• The buy-back process will have to be completed within 12 months from the date of passing the special resolution, authorized by the Article of Association of company.
• Companies, which have defaulted in repayment of deposits, redemption of debentures/preference shares and repayment to Financial Institutions will not be allowed the buyback option.
• A company seeking buyback will be permitted to do so after making full disclosure, of all facts, the need for the buyback.

Share certificate

A share Certificate refers to a document which is issued by a company evidencing that a person named in such certificate is the owner of the shares of Company as stated in the share certificate.

Details to be provided in a share certificate

Every share certificate issued in India should contain the below mentioned:

Name of issuing Company

CIN no. (Corporate Identification Number) of such Company

Address of the company’s registered office

Name of owners of such shares

Folio number of member

Number of shares which is represented by such share certificate

An amount which is paid on such shares

Distinct number of the shares

Share warrant

A Share Warrant is a document issued by the company under its common seal, stating that its bearer is entitled to the shares or stock specified therein. Share warrants are negotiable instruments. They are transferable by mere delivery without registration of transfer.

Conditions for the issue of share warrants:–  

The shares must be fully paid up.

·  The Articles of the company must authorize to do so.

·  The company must obtain the permission of the central Government.

·  The share Warrants must be issued under the common seal of the company.

·  Only public companies limited by shares can issue share warrants and a private limited company cannot issue share warrants.

Transfer of shares 

Transfer of shares means the transfer of ownership of the shares from one person to another. Transfer of shares is affected by removing the name of the existing shareholder from the register of members and by inserting the name of the transferee in place of the transferor in the register of members. Shares of a public company are freely transferable whereas there are certain restrictions on the transfer of shares of a private company.

Procedure for Transfer of Shares

• The instrument of transfer should be duly filled and signed by both the transferor and the transferee.
• The instrument of transfer must be in the form prescribed by the Government.
• Every instrument of transfer must bear the stamps of the requisite value as per the Indian Stamps Act,
• The instrument of transfer must be delivered to the company for registration within 60 days from the date of execution along with the share certificate or the letter of allotment, as the case may be.
• If partly paid -up shares are to be transferred, then the company must give notice to the transferee and if the transferee does not make any objection within two weeks from the date of receipt of the notice, the company can register the transfer.
• Board of Directors approval for the registration of transfer is obtained. After the approval of the Board, the company registers the transfer by striking off the transferor’s name from the Register of Members and entering the name of the transferee in its place.

Transmission of shares

Transmission of shares means transfer of shares on account of operation of law. Transmission of shares takes place in case of death, insanity or insolvency of a member or, where the member is a company, on its liquidation. The effect of the transmission is that the legal representative, administrator or the official assignee or receiver, as the case may be, shall be entitled to the shares.

Lien of shares:

A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a company lien on a share means that the member would not be permitted to transfer his shares unless he pays his debt to the company. 

Listing of securities

Listing of securities

Listing means the admission of securities of a company to trading on a stock exchange. It becomes necessary when a public limited company desires to issue shares or debentures to the public. When securities are listed in a stock exchange, the company has to comply with the requirements of the exchange.

Objectives of Listing

• To provide liquidity to securities
• To provide a mechanism for effective control and supervision of trading
• To mobilize savings for economic development
• To provide free negotiability to stocks.
• Ability to raise further capital

Benefits of listing

1. Credibility of the issuer
2. Raise capital
3. Provide capital
4. Provide marketability
5. Effective controlling and supervision of trading
6. Mobilize savings for economic development
7. Helps the company to extent their market
8. Ensure large volume of trading actively, it reduces the cost of trading
9. Likely to covered in the analytical reports of the media
10. Timely disclosure and protect the interest of the interest of shareholders
11. Fixation of price of the securities

Sweat Equity

Is the equity shares issued by the company to its directors and/or employees at  discount of for consideration other than cash  for providing know-how or making available rights in the nature of intellectual property rights or value additions.

Right issue of shares

A rights issue is a primary market offer to the existing shareholders to buy additional shares of the company on a pro-rata basis within a specified date at a discounted price than the current market price.

Benefits of Issuing of  Right Shares
1. More control on existing shareholders
Because right shares are issued to existing shareholder, so there is no risk of losing of control of existing shareholders. Existing shareholders’ share will increase in company and they can take decision without any compromise with the principles of company. It is very helpful to achieve the missions of company.
2. No loss to existing shareholder

By issuing shares to existing shareholders, value of share will increase due to stability in controlling power of company. So, there will not be any loss to existing shareholders with right shares.
3. No cost for issuing shares to public
Company has not to give any invitation to public, so advertising cost and other new issue cost will decrease with right shares.
4. Helpful to increase the goodwill of company
It is also way to increase the goodwill and reputation of company in industry.

5. Capital formation
Company can get capital at any time without any delay because company can easily issue of shares to existing shareholders just sending right shares offer notice.

6. More scientific
Distribution technique of right shares issue is more scientific. Not all shares will get by single shareholders but it will be in the proportion of existing shares which is in the hand of old shareholders at this time.

Bonus Share

Definition: 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 company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Bonus shares are issued out of

• Its free reserves
• The security premium account
• Out of capital redemption reserves

Issue of bonus shares must satisfy the following conditions

• it is authorized by the articles
• It has the recommendation of the BoD
• It don’t have any default payment of interest or principal in respect of fixed deposits or debt securities issued by it
• It does not have any default payment of statutory dues of the employees such as contribution to PF, gratuity
• Partly paid up shares must make into fully paid up shares

Allotment of shares

Allotment of shares

Allotment is the acceptance of the offer by the company. Allotment is a binding contract between the company and the prospective shareholders.

Procedure for Allotment of shares

1. General Principles
2. Statutory Restrictions

General Principles: It includes

• Allotted by the proper authority: It should made by the proper authority that is BoD or any committee authorized by the company
• Allotment against application only
• Reasonable time
• Allotment should be communicated to the applicants
• It should be absolute and unconditional

Statutory Restrictions

• Registration of Prospectus
• Minimum subscription
• It should follow guidelines
• Opening and closing of the issue
• Return of allotment

Irregular allotment

When the allotment of shares is made in contravention of the provision of the act then the allotment is termed as irregular

1. An allotment shall be irregular when, it is made by the company without receiving the minimum subscription or the application money subject to a minimum of 5% of the nominal value of the share.
2. Minimum subscription has not received
3. Copy of prospectus has not filed with registrar
4. Application money has not been kept in the scheduled bank
5. Condition as to the listing of shares on the stock exchange is not observed
6. Company does not issued the prospectus

Underwriting

Is an act of guarantees by an organization for the sale of certain minimum amount of shares and debentures issued by a public limited company.

Book Building: Meaning, Process

Book Building may be defined as a process used by companies raising capital through Public Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional investors as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

Book Building vs. Fixed Price Method:

The main difference between the book building method and the fixed price method is that in the former, the issue price to not decided initially. The investors have to bid for the shares within the price range given. The issue price is fixed on the basis of demand and supply of the shares.

On the other hand, in the fixed price method, the price is decided right at the start. Investors cannot choose the price. They have to buy the shares at the price decided by the company. In the book building method, the demand is known every day during the offer period, but in fixed price method, the demand is known only after the issue closes.

Book Building in India:

The introduction of book-building in India was done in 1995 following the recommendations of an expert committee appointed by SEBI under Y.H. Malegam. The committee recommended and SEBI accepted in November 1995 that the book-building route should be open to issuer companies, subject to certain terms and conditions. In January 2000, SEBI came out with a compendium of guidelines, circulars and instructions to merchant bankers relating to issue of capital, including those on the book-building mechanism.

Book Building Process:

The principal intermediaries involved in a book building process are the companies, Book Running Lead Manager (BRLM) and syndicate members are the intermediaries registered with SEBI and eligible to act as underwriters. Syndicate members are appointed by the BRLM. The book building process is undertaken basically to determine investor appetite for a share at a particular price. It is undertaken before making a public offer and it helps determine the issue price and the number of shares to be issued

The following are the important points in book building process:

1. The Issuer who is planning an offer nominates lead merchant banker(s) as ‘book runners’.

2. The Issuer specifies the number of securities to be issued and the price band for the bids

3. The Issuer also appoints syndicate members with whom orders are to be placed by the investors.

4. The syndicate members put the orders into an ‘electronic book’. This process is called ‘bidding’ and is similar to open auction.

5. The book normally remains open for a period of 5 days.

6. Bids have to be entered within the specified price band

7. Bids can be revised by the bidders before the book closes.

8. The book runners and the Issuer decide the final price at which the securities shall be issued.

9. Generally, the number of shares is fixed; the issue size gets frozen based on the final price per share.

10. Allocation of securities is made to the successful bidders. The rest bidders get refund orders

Types of Issue of Shares

Types of Issue of Shares

Issue of Shares is the process in which companies allot new shares to shareholders. Shareholders can be either individuals or corporates. The company follows the rules prescribed by Companies Act 2013 while issuing the shares

1.      Public Issue 

Under this method, the company issues a prospectus to the public inviting offers for subscription. The investors who are interested in the securities apply for the securities they are willing to buy. Advertisements are also issued in the leading newspapers. Under the Company Act it is obligatory for a public limited company to issue a prospectus or file a statement in lieu of prospectus with the Registrar of Companies.

• Initial Public Offer: When a company is going for a process of getting listed on the stock exchange and publicly traded, IPO is the first public offering, it is the main source of the company in acquiring money from the general public to finance its projects and the company allots shares to the investors in return.
• Follow-On Public Offer: The process of FPO starts after an IPO. FPO is a public issue of shares to investors at large by a publicly listed company. In FPO, the company goes for a further issue of shares to the general public with a view to diversifying its equity base. A prospectus is offered by the company.
• Private placement  

This method involves an issue of new shares to financial institutions and large private clients rather than making an invitation to the general public to subscribe to shares.

• Preferential issue: A private placement of securities by a listed company. <br><br> Securities are issued to an identified set of investors which may include promoters, strategic investors, employees and such group
• Qualified Institutional Placement (QIP): A private placement of securities by a listed company to a set of institutional investors termed as qualified institutional buyers is a QIP
• Institutional placement programme: Means a further public offer of eligible securities by an eligible seller, in which the offer, allocation and allotment of such securities is made only to qualified institutional buyers in terms of this Chapter.

3.      Offer for Sale

Under this method, the issuing company allots or agrees to allot the security to an issue house at an agreed price. The issue house or financial institution publishes a document called an ‘offer for sale’. It offers to the public shares or debentures for sale at higher price.

4.      Right Issue

The right issue is a way to use which companies raise additional capital. In the right issue, a company gives its existing shareholders a right to buy new shares of the company at a discount from its current market price.

• Bonus issues

A listed company may capitalize part of its reserves by making a bonus issue to the existing shareholders, and no cash will be paid to such issues. For instance, if a corporation declares a 1 for 5 bonus issue, that means for every 5 shares held, an existing shareholder will receive 1 share for free.

• Composite issue

When the issue of shares or convertible securities by a listed issuer on public cum-rights basis, wherein the allotment in both public issue and rights issue is proposed to be made simultaneously, it is called composite issue.