Definition of Company:
Company is an artificial person created by Law and having separated legal entity with a perpetual succession, common seal and liability is limited.
Company is having the following Characteristics:
Separate Legal Entity
A company is in law regarded as an entity separate from its members. It has an independent corporate existence.
Any of its members can enter into contracts with it in the same manner as any other individual can and he cannot be held liable for the acts of the company even if he holds virtually the entire share capital.
The company’s money and property belongs to it and not to the shareholders (although the shareholders own the company)
A company may be a company limited by shares or a company limited by guarantee. In a company limited by shares, the liability of members is limited to the unpaid value of the shares.
Being an artificial person a company never dies, nor does its life depend on the life of its members. Members may come and go but the company can go on forever. It continues to exist even if all its members are dead. The existence of company can be terminated only by law.
It means that a company’s existence persists irrespective of the change in the composition of its membership.
Since a company has no physical existence, it must act through its agents and all such contracts entered into by its agents must be under a seal of the company. The common seal acts as the official signature of the company.
Transferability Of Shares
The capital of a company is divided into parts called shares. These shares are, subject to certain conditions, freely transferable, so that no shareholder is permanently wedded to the company. When the join stock companies were established the great object was that the shares should be capable of being easily transferred.
As a company is a legal person distinct from its members, it is capable of owning, enjoying and disposing of property in its own name. Although its capital and assets are contributed by its shareholders, they are not the private and joint owners of its property. The company is the real person in which all its property is vested and by which it is controlled, managed and disposed of.
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Differences between Pvt. Limited Company and Public Limited Company as below:
|Basis for Comparison||Public Limited Company||
Private Limited Company
|Meaning||A public company is a company which is owned and traded publicly.||A private company is a company which is owned and traded privately.|
|Minimum paid up capital||Rs. 5 Lakh||Rs. 1 Lakh|
|Start of business||After receiving certificate of incorporation and certificate of commencement of business.||After receiving certificate of incorporation.|
|Issue of prospectus / Statement in lieu of prospectus||Obligatory||Not required|
|Public subscription||Allowed||Not allowed|
|Quorum at AGM||5 members must present in person.||2 members must present in person.|
|Transfer of shares||Free||Restricted|
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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.
The basic principle behind bonus shares is that the total number of shares increases with a constant ratio of number of shares held to the number of shares outstanding.
Explanation of Bonus Share: if Investor A holds 200 shares of a company and a company declares 4:1 bonus, that is for every one share, he gets 4 shares for free. That is total 800 shares for free and his total holding will increase to 1000 shares.
Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes difficult for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share. But the overall capital remains the same even if bonus shares are declared.
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Sources: Economic Times
Do you know about Rights Issue of Shares ?
A rights issue is one of the ways by which a company can raise equity share capital among the various types of equity share capital sources available. These are slightly different from the standard issue of shares. Right shares mean the shares where the existing shareholders have the first right to subscribe the shares.
In layman terms, rights issue gives a right to the existing shareholders to purchase additional new shares in the company. Rights Issue of shares are usually issued at a discount as compared to the prevailing traded price in the market. The existing shareholders are allowed a prescribed time limit/date within which need to exercise the right or the right will thereafter be forgone.
Let us have a look at the features of the rights issue, reasons why rights shares are issued, accounting treatment of rights issue and how market price reacts post rights issue. This will help us understand the concept better.
Having looked at the features, let us look at an example of a rights issue.
Let us say an investor owns 1000 shares of ABC Ltd. and the shares are trading at a price of Rs100 ABC Ltd. announces a rights issue in the ratio of 2 : 5, i.e. each investor holding 5 shares will be eligible for 2 shares from the new issuance. The company announces a discounted price of say Rs 60 per share. This means that for every 5 shares of value Rs 100 held by an existing shareholder, ABC Ltd will offer 2 shares at a discounted price of Rs 60.
Portfolio Value before Rights Issue = 1000 shares X Rs 100 = Rs 1,00,000
No. of Right Shares to Be Received = (1000 X 2/5) = 400 Shares
Cost of Purchasing New Shares Using the Rights = 400 shares X Rs 60 = Rs 24,000
New quantity of shares = 1000 Shares + 400 Shares = 1400 Shares
New portfolio value post right issue = Rs 1,00.000 + Rs 24,000 = Rs 1,24,000
Price per share post rights issue = Rs 1,24,000 / 1400 = Rs 88.6
The theoretical price per share post rights issue equals to Rs 88.6 as against initial price of Rs 100. However, market reaction to rights issue can be slightly different and it is dependent on many other factors.
Let us look at the market price action by a company post rights issue.
The price action post rights issue depends on various factors that include the reason for the issue of rights share by the company, the future prospects for the growth of the company, the industry outlook, the general market trend etc. among many other things. It, therefore, does not mean that, as the rights issue is given at discount, it may be always beneficial to the existing shareholder.
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When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Existing shares split, but the underlying value remains the same. As the number of shares increases, price per share goes down.
Stock split is done to infuse liquidity and to make shares affordable for various investors who could not buy the shares of that company before due to high prices.
People often confuse bonus shares with stock split. Distribution of bonus shares only changes its issued share capital whereas stock split splits the company’s authorized share capital.
ABC Ltd is having 1 crore shares ,
Face value of the share is Rs 10
Market value of the share is Rs 300
Share capital of the company is : Rs 10* 1 crore shares = Rs 10 crores
Capitalisation of the company is : Rs 300 * 1 crore shares = Rs 300 crores
Like this conditions company given splitting benefit 10:1 proportionate, that means here the company face value splitted Rs 10 to Rs 1 ,then the company shares increased to 1 crore to 10 crore shares. After splitting, the company data I given below:-
ABC Ltd is having 10 crore shares,
Face value of the share is Rs 1
Market value of the share is generally godown to Rs 30
Share capital of the company is : Rs 1* 10 crore shares = Rs 10 crores
Capitalisation of the company is: Rs 30 * 10 crore shares = Rs 300 crores
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Definition of Bulk Deal:
A bulk deal is said to have happened if under a single client code and in a single or multiple transactions more than 0.5 per cent of a company’s equity shares are traded. A bulk deal can be implemented within the trading hours at any point of time.
Bulk deal order consists of the following attributes:
- The order should comprise of buying/selling of at least 0.5% of the total number of equity shares of a company, listed in a particular ‘scrip‘ or exchange.
- The broker who manages and implements the trade transaction is solely responsible for notifying about the bulk deals on a daily basis to the particular exchange. The broker is supposed to supply the exchange with the following details and attributes of the order:Name of the scrip, name of the client, quantity of shares bought/sold and the traded price.
- If the Bulk Deal comprises of a single trade transaction: The broker has to notify exchange immediately.
- If the bulk deal comprises of multiple transactions: The broker should notify the exchange within one hour from the closure of the trading.
- The trade executed must result in delivery and shall not be squared off or reversed.
- According to SEBI, optimal trading and settlement activities, surveillance and risk regulation measures which are applicable to common trading activities are applicable and exhibited in the trading windows also.
- The exchange has to ‘disseminate‘ or share the entire information about the bulk deal in the public market after the closing of trading hours on the same day of the implementation of the bulk deal.
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Block deal is a trade, with a minimum quantity of 5 lakh shares or minimum value of Rs. 5 crore, executed through a single transaction, on the special “Block Deal window”. The window is opened for only 35 minutes in the morning trading hours.
Market regulator SEBI (Securities and Exchange Broad of India) has also made it mandatory for the stock brokers to disclose on a daily basis the block deals made through Data Upload Software (DUS).
Usually block deal happens when two parties agree to buy or sell securities at an agreed price between themselves and inform the stock exchange. The orders in a block deal are not shown to the people who trade from normal trade window.
Stock exchanges should disclose the information on block deals to the public on the same day after market hours. This should contain information bits like name of the scrip, name of the client, quantity of shares, traded price and so on.
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At the time of applying for equity Shares, through Public Issue in Primary Market, SEBI has advised the Precautions to Investors, in the form of Know your client (KYC). These are as given below,
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Source : National Stock Exchange of India Ltd
Do you want to invest and trade in Stock Market you have to open Demat Account and trading account is compulsory.Documents required to opening Trading and Demat Account along with application form.
To open an account Trading and Demat Account, you need 4 types of documents
Proof of Identity (POI)
Aadhaar Card / Passport / Voter ID card / Driving license. and
PAN Card. (Mandatory)
Proof of Address (POA)
Passport or Voters Identity Card or Ration Card. (or)
Latest 3 months Electricity Bill or Gas Bill. (or)
Latest 3 months Bank Account Statement.
Proof of Income (Only required in case of trading in derivatives segments).
Latest 6 months Bank account statement. (or)
DEMAT account holding statement with a depository participant (or)
Proof of Salary Income by submission of Salary Slip /Form 16.
Valid proof for a corresponding Bank account i.e. Proof of Bank Account
A Cancelled Cheque (with your name printed).
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Share capital is the sum of money received by a company by selling its shares to the investors. When a company issues fresh share to the investors and raises fund, it directly increases the value of share capital.
The amount of total share capital cannot be more than the amount of authorized share capital of a company. Increase in market price of shares does not affect the value of share capital because share capital is calculated based on the par value of shares and not on the basis of market price.
Share capital is shown on the balance sheet of a company.
Types of Share capital can be categorised in authorized share capital, issued share capital, subscribed share capital, called up share capital and paid up share capital.
Authorized share capital refers to the total capital that a company is authorized to accept from investors by issuing shares. In simple terms, a company cannot raise capital more than its authorized capital.
It represents the capital with which a company is registered that’s why it is also known as ‘registered capital’.
Issued Share Capital represents that part of total authorized share capital which has been issued by a company for subscription by investors. Usually, companies do not issue all of their shares for control purpose. Thus, the part which is issued represents the issued share capital.
It refers to that part of issued share capital, which has been subscribed by investors. It means when a company issues shares to raise capital, it may or may not receive subscriptions for all of its shares. The part of issued share capital for which subscription has been received is known as subscribed share capital. So subscribed share capital can be equal to subscribed share capital but not more than that.
A company collects the full amount of share price in more than one lot. The part of subscribed share capital which has been asked for payment represents called up share capital.
It represents that part of called up share capital which has been paid by investors.
Paid up share capital = Called up share capital – Call in arrears.
Suppose ABC Ltd. is registered with a capital of Rs 1 crore divided into shares of Rs 10 each. It issues 8 lakh shares to raise a fund of Rs 80 lakh but investors subscribe for 6 lakh shares. The company calls for Rs 4 per share out of Rs 10 (Nominal value of shares) and it receives payment for only 5 lakh and 50 thousands shares.
Authorized share capital (10 lakh shares of Rs.10 each) = 1 crore
Issued share capital (8 lakh shares of Rs.10 each) = 80 lakh
Subscribedshare capital (6 lakh shares of Rs.10 each) = 60 lakh
Called up share capital (6 lakh × Rs.4) = 24 lakh
Paid up share capital (5 lakh and 50 thousand × Rs.4) = 22 lakh
Call in arrears (50 thousand × Rs.4) = 2 lakh
Most companies only ever have one type of shares (or class of share). The shares are commonly called ordinary shares and will be the ones the company was incorporated with.
However, in general, if a company has more than one type of share the main differences between them will be found in one or more of the following areas:
Entitlement to dividends: Shares may have the right to normal dividends, preferential dividends (that is, the right to be paid a dividend before other share classes), a dividend only in certain circumstances or no dividends at all.
Entitlement to capital on winding up: If the company is dissolved any assets left after the company’s debts are paid can be distributed to shareholders. However, different share classes may have different rights to capital distribution – with some shares ranking first and others only paid if sufficient assets remain after others have received their full distribution of capital.
Voting rights: Usually, this is as simple as shares either carrying voting rights or not. However, weighted or tiered voting rights are also possible – so, for example, shares may carry extra voting rights in certain circumstances or on certain important matters affecting the company.
Types of Shares as below:
1. Ordinary shares
These carry no special rights or restrictions. They rank after preference shares as regards dividends and return of capital but carry voting rights (usually one vote per share) not normally given to holders of preference shares (unless their preferential dividend is in arrears).
Some companies create more than one class of ordinary shares – e.g. “A Ordinary Shares”, “B Ordinary shares” etc. This gives flexibility for different dividends to be paid to different shareholders or, for example, for pre-emption rights to apply to some shares but not others.
2. Deferred ordinary shares
A company can issue shares which will not pay a dividend until all other classes of shares have received a minimum dividend. Thereafter they will usually be fully participating. On a winding up they will only receive something once every other entitlement has been met.
3. Non-voting ordinary shares
Voting rights on ordinary shares may be restricted in some way – e.g. they only carry voting rights if certain conditions are met. Alternatively, they may carry no voting rights at all. They may also preclude the shareholder even attending a General Meeting. In all other respects they will have the same rights as ordinary shares.
4. Redeemable shares
The terms of redeemable shares give the company the option to buy them back in the future; occasionally, the shareholder may (also) have the option to sell them back to the company, although that’s much less common.
The option may arise at or after a specific date, between two dates or be effective at any time the shares are in issue. The redemption price is usually the same as the issue price, but can be set differently. A company can only redeem shares out of profits or the proceeds of a new share issue, which may restrict its ability to redeem shares even if the directors would like to exercise the option.
If a company chooses to have redeemable shares, it must also have non-redeemable shares in issue. At no point can all of its share capital be made up of redeemable shares.
5. Preference shares
These shares are called preference or preferred since they have a right to receive a fixed amount of dividend every year. This is received ahead of ordinary shareholders. The amount of the dividend is usually expressed as a percentage of the nominal value. So, aRs.10, 5% preference share will pay an annual dividend of Rs.0.50. The full entitlement will be paid every year unless the distributable reserves are insufficient to pay all or even some of it. On a winding up, the holders of preference shares are usually entitled to any arrears of dividends and their capital ahead of ordinary shareholders. Preference shares are usually non-voting (or only have a vote only when their dividend is in arrears).
6. Cumulative preference shares
If the dividend is missed or not paid in full then the shortfall will be made good when the company next has sufficient distributable reserves. It follows that ordinary shareholders will not receive any dividends until all the arrears on cumulative preference shares have been paid.
By default, preference shares are cumulative but many companies also issue non-cumulative preference shares.
7. Redeemable preference shares
Redeemable preference shares combine the features of preference shares and redeemable shares. The shareholder, therefore, benefits from the preferential right to dividends (which may be cumulative or non-cumulative) while the company retains the ability to redeem the shares on pre-agreed terms in the future.
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