Fund Raising, Reduction, Deposits and Charges

Here, we will delve into how a corporate and startups raise funds by issuing shares in open market, from venture capital investors, from financial institutions and from friends and family. How the promoter’s shareholding can be increased by offering buyback or capital reduction to the existing shareholders, enabling them exiting the company. Let’s demystify why members and shareholders are used interchangeably.

I.            Who is a member and how to become a member or shareholder?

A.    Who can become a member?

Any individual, LLP or company can become a member in a company. If a company becomes a member in another company, Section 186 (intercorporate loans and investments – discussed later) and Section 19 (subsidiary cannot be a member of holding company) restrictions to be complied with. A foreign person can become a member subject to compliance of Foreign Exchange Management Act, 1999 (FEMA).

B.    How to become a member?

1)      While incorporating the company, the subscriber to MOA becomes a member;

2)      One who has submitted share application form or share transfer form can become a member, when approved and added in the ¹Register of Members;

3)      One who holds a demat account will be the beneficial owner of shares with depository being the registered owner, who’s name will be added to the Register of Members.

4)      One can become a member by way of gift, court order, merger, ²transmission or nomination.

Note: Traditionally, a shareholder who’s name is added in the Register of Member is a member. Now, most of the shares being in electronic or demat form, register of members will contain only the depository names and hence can be called either ways.

C.   Leading Prompts:

Find the name of depositories in India. Zerodha, AngelOne, HDFC Securities can be called depository participants? Check whether a Partnership Firm can be a member of Section 8 company.

Find the name of depositories in India

II.            What is a share and what are the types of shares and its features?

Share is a MOVABLE goods, transferable as per the AOA of the company. A share is the interest of shareholder in the company. A share is a % share in the capital of the company. A private limited company can issue any type of share, by altering the MOA and AOA detailing its features.

Primarily, there are 3 types of shares:

A)    Equity shares or Ordinary shares:

Equity shares are held by promoters of the company, who has control over the affairs of the company. Equity shareholders will have voting right (in proportion to the paid-up equity capital) and dividend right.

B)    Preference shares:

Preference shares have PREFERENTIAL RIGHT as to:

·       Dividend before payment to Equity shareholders;

·       Repayment of capital on winding up, before payment to Equity shareholders.

Preference shares are generally cumulative (dividends get accumulated and paid as arrears), non-participating (no further share in surplus profits) and non-convertible (into equity shares, thus remain like a loan with fixed dividend).

Venture capital investors in startups prefers investing either through Compulsorily Convertible Preference Shares (CCPS), which partake the character of an equity share.

Preference shareholders shall have voting right on the following:

Ø  When rights attached to his preference shares are affected;

Ø  resolution for the winding up or reduction of capital;

Ø  on all resolutions, when their dividend is not paid for 2 years or more.

C)   Equity shares with Differential Voting Rights (DVR)

Voting right of an equity share in 1:1, i.e, 1 share will have 1 vote in the proportion of paid-up equity share capital of the company. So is the dividend right. So is the right to get bonus shares, rights shares, etc…If any of the above rights (voting or dividend or otherwise) attached to the equity share is altered by the AOA (say as 1 share will have 0.5 vote or 2 votes), it will be called as a new class of a share “Equity shares with DVR”. This can be issued on satisfying the following conditions:

1)      Articles should authorise such issue and shareholders to approve by ordinary resolution;

2)      Voting power of DVR should be UPTO 74% of total voting power;

3)      3 year Compliances: The company should have filed e-form AOC-4 (annual financial statements) and MGT-7 or 7A (annual return); no penalisation for offences by Courts or Tribunals under RBI, SEBI, SCRA, FEMA or any other special Act.

4)      No existing default: in dividend, deposits, redemption of preference shares or debentures;

5)      5 years completed, since the following defaults are made good: regarding dividend on preference shares, bank loan repayment, statutory payments to employees, default in crediting amount in IEPF (Investor Education and Protection Fund).

6)      Disclosures in the Explanatory Statements and the Board’s Report: The shareholders should be given complete details of the issue such as: total number of shares with DVR, the exact differential voting or dividend or otherwise along with justification, price of DVR, pre and post issue shareholding pattern after issue of DVR, diluted EPS, etc…

7)      No conversion of existing shares or DVR: Only fresh issue of DVR shares to be made.

III.            What is valuation and issue of shares at par and premium? Explain sweat equity shares and employees stock options.

1)      AT PAR: If any share is issued at its face value, it is called issue AT PAR;

2)      AT PREMIUM or Higher Valuation: When shares are valued by a Registered Valuer (a professional as per the Companies (Registered Valuers and Valuation) Rules, 2017 and registered with Registered Value Organisation) and issued ABOVE the face value, it is called issue AT PREMIUM. In Swiggy IPO, Re. 1/- share is offered at a premium of Rs. 389/-.

3)      AT DISCOUNT: If face value is Rs. 10/- and if any share is issued at discount to face value (say at Rs. 6) is VOID.

4)      Sweat Equity Shares: Sweat Equity Shares are issued at a discount to employees or directors (of the company or its holding or subsidiary, in India or abroad) by passing a Special Resolution detailing the number of sweat equity shares issued, the current market price, discount price or for consideration other than cash, etc…FOR the know-how or intellectual property rights (IPR) or value additions (economic benefits), as valued by the registered valuer. The conditions for issue include:

a.      Limits: UPTO 15% paid-up equity capital or issue value of Rs. 5 crores, whichever is higher in a financial year or UPTO 25% of paid-up equity capital, at any time.

b.      Startup: UPTO 50% paid-up equity capital by DPIIT registered Startups UPTO 10 years from the date of its incorporation.

c.      Disclosures in the Explanatory Statements and the Board’s Report: The shareholders should be given complete details of the issue such as: the board meeting date, reasons for issuance, class and number of shares, recipients (directors or employees), terms, pricing, consideration, percentage of capital, benefits accrued, and diluted EPS.

d.       

5)      Employees Stock Option (ESOP):

IV.            What are the types of issue of shares?

V.            Part A – Listed companies and fund raising from public through Prospectus

VI.            Part B – Unlisted companies and fund raising from select investors through Private Placement

VII.            Fund raising from existing investors, conversion of loans into shares and convertible notes

VIII.            All about debentures and fund raising

IX.            Allotment, issue and stamping of share certificates vs. demat form

X.            What are the provisions for transfer, transmission and nomination of shares?

XI.            What is buyback and does it amount to reduction of capital?

XII.            What is a Deposit and what are not deposits?

XIII.            Public Deposits and fund raising by Eligible Unlisted Public Limited Companies

XIV.            Deposits and fund raising by other Unlisted Companies

XV.            What is a charge requiring registration?

XVI.            What is the procedure for creation, modification and satisfaction of charges and debentures?