Different Kinds of Shares and Listing Procedure Under Companies Act 2013 By Kausha Mehta


Dear Professional Colleagues,

A share is a small part of the capital and a person, who owns shares, is known as a shareholder. We may also define shares as one of the units in the company to which the total capital of the company is divided. Justice Farewell defines share as “A share is the interest of the shareholder in the company. It is measured by the sum of money for the purpose of liability in the first place and of interest in the second place.” Shareholders are also known as Members of the company.

  • The share of a company shall be a moveable property. It is transferable in the manner provided by the Articles of Association of the company.
  • The share capital is non-refundable except in the case of winding up and reduction of capital.
  • Each share in a company shall have a distinctive number. 
DIFFERENT KINDS OF SHARES:

Basically, there are 3 types of shares into which the whole capital of the company is divided.

  1. Equity Shares
  2. Preference Shares
  3. Deferred Shares 
EQUITY SHARES

Equity shares are also known as Ordinary shares. The equity shareholders are the real owners of a company. The ordinary shareholders have voting rights in the meetings of the company. They are entitled to receive the dividend as declared by the Board of Directors. The equity share capital cannot be redeemed during the lifetime of the company.
 
BENEFITS OF EQUITY SHARES:

Various benefits available to Equity Shareholders are as under:
 
  • Venture Capital: Equity Shares are the most important and popular type of shares. It is, therefore, called a venture capital of the company.
  • No burden on a company’s resources: Since the dividend is to be paid out of the profit of the company, therefore they do not impose a load on the resources of a company.
  • Provision of long-term finance: The equity shares provide long-term finance to the company.
  • No charge on the assets: The equity shares do not create any charge on the assets of a company. The company can raise further funds. If it desires, through mortgage of property or other assets.
  • Payment of Profit: Equity shareholders are paid profit after all the other claims are met by the company.
  • The rate of dividend: The rate of dividend on ordinary shares depends upon the profit of the company.
PREFERENCE SHARES

Preference shares have certain preferences as compared to other types of shares. The main preferences of these shareholders over others are as follows:
 
  1. The first preference is for compensation of dividend. Whenever the company distributes profit, the dividend is first paid to preference shareholders.
  2. In case of winding up the company, the preference shareholders have a prior right in regard to repayment of capital.
 
Classes of Preference Shares:

The main type of preference shares are as under:
  • Cumulative Preference Shares: In this type of preference share, dividends are paid also for those years in which no profit is earned. Whenever the company declares the profit, the cumulative preference shares are paid the dividend for all the previous years in which dividend could not be declared.
  • Non-Cumulative Preference Shares: In this type of preference shares, the holders do not have any claim regarding amount outstanding of the dividend. They are paid if a company earns a profit.
  • Convertible preference shares: The convertible preference shares are those which the holders can convert into equity shares at a specified period of time. The right of conversion is to be authorized by the Articles of Association of the Company.
DEFERRED SHARES

Deferred Shares are also called founder shares. They were used to be issued to the promoters of the company. The dividend on deferred shares was paid after the claim of all the other shareholders has been met including equity shareholders. The deferred shareholder has one vote. These shares enabled the promoters to control the working of the company with a very small investment.
 
WHAT IS LISTING?

Listing means an admission of securities of a company to trade on a stock exchange. Listing is not compulsory under the Companies Act. It becomes necessary when a Public Limited Company wants to issue shares or debentures to the public. When securities are listed on a stock exchange, the company has to comply with the requirements of the exchange. Listing is beneficial for the company, to the investor, and to the public at large.

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.
Applicant company, desirous of getting listed should comply with the required eligibility criteria as prescribed by the Stock Exchange.

Minimum Listing Requirement for New Company:

The following eligibility criteria have been prescribed effective from August 1, 2006, for the listing of companies on BSE, through Initial Public Offerings & Follow-Up Public Offerings:

Companies have been classified as large-cap companies and small-cap companies. A large-cap company is a company with a minimum issue size of Rs. 10 crores and a market capitalization of not less than Rs. 25 crores. A small cap company is a company other than a large-cap company.

In respect of Large Cap Companies:
  • The minimum post-issue paid-up capital of the applicant company shall be Rs. 3 crore;
  • The minimum issue size shall be Rs. 10 crores;
  • The minimum market capitalization of the Company shall be Rs. 25 crore.
In respect of Small-Cap Companies:
  • The minimum post-issue paid-up capital of the company shall be Rs. 3 crore;
  • The minimum issue size shall be Rs. 3 crore;
  • The minimum market capitalization of the Company shall be Rs. 5 crore;
  • The minimum income/turnover of the Company shall be Rs. 3 crore in each of the preceding 12 months period;
  • The minimum number of public shareholders after the issue shall be 1000.
A due diligence study may be conducted by an independent team of Chartered Accountants or Merchant Bankers appointed by BSE, the cost of which will be borne by the company. The requirement of a due diligence study may be waived if a financial institution or a scheduled commercial bank has appraised the project in the preceding 12 months.
 
For all Companies:

In respect of the requirement of paid-up capital and market capitalization, the issuers shall be required to include in the disclaimer clause forming a part of the offer document that in the event of the market capitalization requirement of BSE not being met, the securities of the issuer would not be listed on BSE.

The applicant, promoters and group companies, shall not be in default in compliance of the listing agreement.

The above eligibility criteria would be in addition to the conditions prescribed under the SEBI (Disclosure and Investor Protection) Guidelines, 2000.
 
Companies already listed on Stock Exchanges:

The listing norms for companies already listed on other stock exchanges and seeking listing at BSE made effective from August 6, 2002, are as under:

  • The company shall have a minimum issued and paid up equity capital of Rs. 3 crore;
  • The company shall have a profit making track record for the preceding last three years. The revenues/profits arising out of extraordinary items or income from any source of non-recurring nature shall be excluded while calculating the profit making track record;
  • Minimum net worth shall be Rs. 20 crore;
  • Minimum market capitalization of the listed capital shall be at least two times of the paid-up capital;
  • The company shall have a dividend paying track record for at least the last 3 consecutive years and the dividend should be at least 10% in each year;
  • Minimum 25% of the company’s issued capital shall be with Non-Promoter shareholders as per Clause 35 of the Listing Agreement. Out of above Non-Promoter holding, no single shareholder shall hold more than 0.5% of the paid-up capital of the company individually or jointly with others except in case of Banks/Financial Institutions/Overseas Corporate Bodies and Non-Resident Indians;
  • The company shall have at least two years listing record with any of the Regional Stock Exchanges;
  • The company shall sign an agreement with CDSL and NSDL for demat trading.
Permission to use the name of BSE in an Issuer Company’s Prospectus:

Companies desiring to list their securities offered through a public issue are required to obtain prior permission of BSE to use the name of BSE in their prospectus or offer for sale documents before filing the same with the concerned office of the Registrar of Companies.
BSE has a Listing Committee, comprising of market experts, which decides upon the matter of granting permission to companies to use the name of BSE in their prospectus/offer documents. This Committee evaluates the promoters, company, project, financials, risk factors and several other aspects before taking a decision in this regard.

The decision with regard to some types/sizes of companies has been delegated to the Internal Committee of BSE.
 
Submission of Letter of Application:

As per the Companies Act, a company seeking listing of its securities on BSE is required to submit a Letter of Application to all the stock exchanges where it proposes to have its securities listed before filing the prospectus with the Registrar of Companies.
 
Allotment of Securities:

As per the Listing Agreement, a company is required to complete the allotment of securities offered to the public within 30 days of the date of closure of the subscription list and approach the Designated Stock Exchange for approval of the basis of allotment.
In case of Book Building issues, allotment shall be made not later than 15 days from the closure of the issue, failing which interest at the rate of 15% shall be paid to the investors.
 
Trading Permission:

As per SEBI Guidelines, an issuer company should complete the formalities for trading at all the stock exchanges where the securities are to be listed within 7 working days of finalization of the basis of allotment.

A company should scrupulously adhere to the time limit specified in SEBI (Disclosure and Investor Protection) Guidelines 2000 for allotment of all securities and dispatch of allotment letters/share certificates/credit in depository accounts and refund orders and for obtaining the listing permissions of all the exchanges whose names are stated in its prospectus or offer document. In the event of listing permission to a company being denied by any stock exchange where it had applied for listing of its securities, the company cannot proceed with the allotment of shares. However, the company may file an appeal before SEBI under Section 22 of the Securities Contracts (Regulation) Act, 1956.
 
The requirement of 1% Security:

Companies making public/rights issues are required to deposit 1% of the issue amount with the Designated Stock Exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding the delay in sending refund orders/share certificates, non-payment of the commission to underwriters, brokers, etc.
 
Payment of Listing Fees:

All companies listed on BSE are required to pay to BSE the Annual Listing Fees by 30th April of every financial year as per the Schedule of Listing Fees prescribed from time to time.
 
Compliance with the Listing Agreement:

Companies desirous of getting their securities listed at BSE are required to enter into an agreement with BSE called the Listing Agreement, under which they are required to make certain disclosures and perform certain acts, failing which the company may face some disciplinary action, including suspension/delisting of securities. As such, the Listing Agreement is of great importance and is executed under the common seal of a company.

Under the Listing Agreement, a company undertakes, amongst other things, to provide facilities for prompt transfer, registration, sub-division and consolidation of securities; to give proper notice of closure of transfer books and record dates, to forward 6 copies of unabridged Annual Reports, Balance Sheets and Profit and Loss Accounts to BSE, to file shareholding patterns and financial results on a quarterly basis; to intimate promptly to the Exchange the happenings which are likely to materially affect the financial performance of the Company and its stock prices, to comply with the conditions of Corporate Governance, etc.

The Listing Department of BSE monitors the compliance by the companies with the provisions of the Listing Agreement, especially with regard to timely payment of annual listing fees, submission of results, shareholding patterns and corporate governance reports on a quarterly basis. The penal action is taken against the defaulting companies.

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