Description
Law Shares & Stocks BSE NSE
Contents
1. Shares and Stocks -
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Share Capital Joint Stock Company Shares Kinds of shares Share stock Share certificates and share warrant.
2. Market • Financial markets • Stock exchange • Broker • SEBI • Capital formation-Role of a Co. Secretary • Procedure for issue of shares • Essential elements for shares • How is trading done: online & through brokers • Stock exchanges-NSE & BSE 3. Laws: • Need for Law-Frauds • Rules for brokers • Rules for issuing • Rules for listing 4. Conclusion
INTRODUCTION
A newly floated company as well as an existing one can collect funds through external sources by issuing shares and debentures, by accepting public deposits, by taking long-term loans, and bank credit etc. The important external sources are briefly discussed as under: (a) ISSUE OF SHARES: The company can collect long-term funds by issuing shares to the public (share capital). (b) ISSUE OF DEBENTURES: The company can collect medium term funds by the issue of debentures to the public (borrowed capital).
SHARE CAPITAL:
Share capital means the capital raised by a company by the issue of shares. The share capital of a company is divided into several classes as stated below: 1] AUTHORISED CAPITAL: This is the nominal value of the shares which a company is authorized to issue by its Memorandum of Association. It is also known as ‘Registered Capital’. This is the maximum capital which the company will have during its lifetime until it is increased. 2] ISSUED AND SUBSCRIBED CAPITAL: Issued capital is the nominal value of the shares which are offered to the public for subscription. A company does not normally issue all its capital at once. The issued capital can never exceed the authorised capital.
3] CALLED-UP CAPITAL: This is that part of the issued capital which has been called up on the shares. 4] PAID-UP CAPITAL: This is that part of the issued capital which has been paid up by the shareholders or which is credited as paid-up on the shares. 5] UNCALLED CAPITAL: This is the remainder of the issued capital which has not been called. The company may call this amount any time but this is subject to the terms of issue of shares and the provisions of the Articles 6] RESERVE CAPITAL: This is that part of the uncalled capital of a company which can be called only in the event of its winding up. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company. Joint Stock Company :It is large scale commercial organization, having its capital divided into shares, the ownership of which is the pre-condition for membership. Features • Large capital • Greater managerial skills • High degree of specialization • Limited liability • Large number of shareholders • Separation of ownership and management Articles of Association define the rules and regulations for the internal management of the company. Registration of the Articles is the second step in the process of incorporation of a company. All companies must have their own articles. However a public company, limited by shares, can adopt all or any of the regulations contained in ‘Table A’, attached to the first schedule of the companies act, 1956.’Table A’ contains a model set of articles.
Articles of Association, is a subsidiary to the Memorandum of Association, therefore it has to be within the limits of the latter. This document lays down the powers and duties of directors. It defines the relationship between the company and its shareholders.
SHARE: The Oxford dictionary defines a share as ‘each of the equal parts
into which a company’s capital is divided, entitling its owner to a proportion of profits’. Similarly, a stock is defined as ‘capital of a business’ A joint stock company collects its owned capital by issuing shares. The share capital of the company is divided into a no. of equal parts. Each part is called a share. Thus a share is one part of the total share capital of the company. SECTION 2(46) OF INDIAN COMPANIES ACT, 1956 DEFINES SHARE AS “ A SHARE IS THE SHARE CAPITAL OF A COMPANY, AND INCLUDES STOCK EXCEPT WHEN A DISTINCTION BETWEEN STOCK AND SHARES IS EXPRESSED AND IMPLIED.” KINDS OF SHARES: The company can issue different kinds of shares, which enjoy varying rights and privileges. Under the Indian Companies’ Act, 1956, a public limited company can issue 2 kinds of shares: Equity shares and preference shares. Equity shares (or ordinary shares) is supposed to be issued by every company. The equity shareholders enjoy dividends (rewards) as well as bear the risk of the company. . The equity shareholder receive dividend only if the company makes profits for a particular year. In case of winding up of the company, the claim of the equity shareholders regarding repayment of the capital comes last, only after repayment of capital to preference share holders. Advantages: 1. It represents permanent capital. There is no liability for repayment during the lifetime of the company only in the winding up of the company. Equity share holders are paid and that too after payment to creditors and preference shareholders 2. It does not involve any fixed obligations for payment of dividend. 3. It enhances creditworthiness of the company.
4. The equity share capital does not create any charge on the assets of the company. 5. Equity shareholders enjoy control over the management of the company 6. The dividend can be very high in the case of highly profitable companies. 7. The existing share holders are eligible for bonus shares and rights of the shares. Features: 1. Permanent capital: equity share capital represents permanent capital of the company. There is no obligation on the part of the company to repay the capital during the life time of the company, except at the winding up of a company. 2. Risk to capital: There is no guarantee of return of capital. Equity share holder has a residual claim on the winding up of the company. 3. Fluctuating dividends: There is no guarantee of minimum dividend. The rate if dividend depends upon the earnings of the company. Thus if a company accumulates losses, shareholders get no dividends. 4. Voting rights: The equity share holder enjoy normally voting rights. They can actually vote on all resolutions passed at the shareholders meeting. They can exercise their rights either by person or by proxy the preference. 5. Capital appreciation: Equity shareholders are subject to capital appreciation or depreciation. Appreciation takes place when the market value of shares increases on the stock exchange due to excellent performance of the company, while depreciation takes place when the market value of the share decline on the stock exchange. 6. Bonus shares: When the company ‘s performance is exceptionally good, the company may issue bonus shares by distributing the profits by way of dividend bonus. 7. Benefit of rights issue: When an existing company raises further capital by way of shares, first preference is given to existing shareholders. 8. Transferability of shares: The shares of a public company are freely transferable. If the share holder wants to sell or transfer the shares, he can easily do so. In case of certain preferential allotment, such as preferential allotment to employees, there is a lock-in period. Shareholders can transfer shares after expiry of lock-in period. Preference shares:
PREFERENCE SHARES ARE THOSE SHARES WHICH ENJOY PREFERENCE OVER EQUITY SHARE CAPITAL. THE TWO MAIN PREFERENCES ARE: • FIXED ANNUAL DIVIDENDS. • RETURN OF CAPITAL IN THE EVENT OF WINDING UP OF THE COMPANY. Although the preference shareholders enjoy the above preferences, they do not enjoy normail voting rights. They are entitled to vote only on those matters that affect their interests. The maximum rate of interest permissible is 14%. Features: 1. Reference for dividend The preference shareholder get a preference for dividend 2. Payment of capital: The preference shareholders get preference in repayment of capital at the time of winding up of a company. 3. Redeemabiltiy of shares: As per the Companies’ amendment Act, 1988, a company cannot issue irredeemable preference shares. Thus, preference shares have to be redeemed after a certain period of time . 4. Dividend rate: The preference shareholders gets a regular dividend, which is fixed. 5. Risk factor: As preference share holders have preference for dividend and return of capital, there is lower risks as compared to equity shares. 6. Bonus Shares: Preference Shareholders are not entitled for the issue of bonus shares. They are also not entitled for ‘right issue of shares’. 7. Voting rights: They do not enjoy normal voting rights at company meetings. They have voting rights in respect of only those matters which affects their interests. 8. Nature of shareholders: Normally, catious investors who do not like to take large risks prefer to go for preference shares. Types of preference shares: 1. Participating and non-participating shares: The participating preference shareholders (along with the equity shareholders) have the right to participate in the surplus profits of the company, whereas, non-participating do not have such right. The nonparticipating share holders are entitled to a fixed rate of dividend. 2. Cumulative and non cumulative shares: The cumulative preference shares accumulate unpaid dividend on shares. This
means, if the dividend is not paid in one or more years due to poor performance of the company then such unpaid dividend gets accumulated. The accumulated dividend is to be paid before making any payments of equity shareholders. Non-cumulative preference shares do not accumulate the unpaid dividend. If the dividend is not paid in one year due to poor performance, the non-cumulative shareholders forfeit the right to get such unpaid dividend in the subsequent years. 3. Redeemable and irredeemable shares: The redeemable preference shares are repaid after a certain period of time, but the irredeemable preference shares are payable only on the winding up of the capital. The irredeemable shares carry more risk because there are chances they may not get their capital back on winding up of the company. As per the amendment made on 15th June,1988, In the Indian Companies Act, the issue of irredeemable preference shares has been abolished. If any irredeemable preference shares are issued prior to this amendment, then such shares are to be redeemed. Deferred Shares: This type of shares are also known as “FOUNDER SHARES” or “MANAGEMENT SHARES”. In India, The Indian Companies Act,1956 does not permit the issue of deferred shares in the case of Public Limited Companies. As per Sec.85 And Sec.86 Of Companies Act, 1956, the shares capital of a company limited by shares, shall be of two kinds only, namely: (a) Equity Share Capital, And (b) Preference Share Capital. The above section do not apply to a private company unless it is a subsidiary of a public company. That means such a private company may issue share capital of such other kinds as it may fit. So a pure private company can issue deferred shares. Bonus Shares: Profitable companies issue bonus shares to equity shareholders. Issue of bonus shares is called as “Capitalisation of Reserves”(undistributed profits). The bonus shares enjoys all rights and privilege of equity shareholder. The bonus shares are equity shares. The only difference is that they are issued to equity shareholders free of cost or as a gift by the company.
When the company earns huge profits, the entire profit is not distributed by way of dividend. It transfers a part of the profits to reserves. Out of such reserves, the bonus shares can be issued. Conditions for issue of Bonus Shares: 1. No Bonus Shares can be issued within 12 Months of any public/rights issue. 2. The Bonus issue is to be made out of free reserves built out of genuine profits or share premium collected in cash only. Reserves created by revaluation of fixed assets are not to be taken into consideration, while calculating free reserves. 3. There should be a provision in articles of association to this effect. If there is no such provision, the company should pass a resolution at its general body meeting making provisions in the articles for capitalization of reserves. 4. The bonus issue is not made unless the party-paid shares, if any existing, are made fully paid-up. 5. A Company which announces its bonus issue after the approval of the board of directors must implement the approval within a period of six months from the date of such approval and shall not have the option of changing the decision. 6. Consequent to the issue of bonus shares, if the subscribed and paid-up capital exceed the authorized capital, a resolution should be passed by the company at its general body meeting for increasing the authorized capital. 7. No bonus issue can be made by the company which will dilute the value or rights of the holders of convertible debentures, fully or partly. 8. The residual reserves after the proposed capitalization (issue of bonus shares) should be atleast 40% of the increased paidup capital. 9. There can be issue of bonus shares only twice in a period of 5 years. SHARE STOCK THE INDIAN COMPANIES ACT, 1956, DEFINES A STOCK AS “A BUNDLE OF FULLY PAID SHARES PUT TOGETHER FOR CONVENIENCE, SO THAT IT MAY BE DIVIDED INTO ANY AMOUNT AND TRANSFERRED INTO ANY FRACTIONS AND SUBDIVISIONS WITHOUT REGARD TO THE ORIGINAL FACE VALU OF THE SHARES”.
The stock represents a portion of share capital of the company. It is used for the convenience of the shareholders of fully paid shares. Thus, a shareholder may have a no. of shares certificates. He may request the company to issue him only one certificate by surrendering all the share certificates. Conditions for issue of stock: 1. Only a public limited company can issue a stock. A private company is prohibited to convert its shares into a stocks. 2. Only fully paid shares can be converted into a stock 3. Articles of association must permit issue of stock. if article do not permit such issue, then they must be amended by passing a suitable resolution, before issue of stocks. 4. The registrar of companies must be given intimation of such conversion within 30 days after doing so. 5. An ordinary resolution must be passed by the shareholders in the general meeting in respect of conversion.
OTHER KINDS OF SHARES?STOCKS in MARKET
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Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held. Cumulative Preference Shares. A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.
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Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows – Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond. Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured/charged against the asset of the company in favor of debenture holder Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in form of a promissory note redeemable at par to the holder on maturity and therefore doesn’t require any guarantee. Commercial paper is a money market instrument issued for the tenure of 90 days. Coupons: Tokens for payment of interest attached to bearer securities. Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.
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SHARE CERTIFICATE A share certificate is a document of title to shares. It is issued to the shareholders of the company, as an evidence to their shareholding in the company. A SHARE CERTIFICATE IS DEFINED AS A DOCUMENT OF TITLE TO SHARES ISSUED BY A COMPANY UNDER ITS COMMON SEAL. Contents of a share certificate: 1. Name and address of the registered office of the company. 2. Name(s) of the shareholder(s) 3. Registered folio no. and certificate number. 4. Number of share(s) held. 5. The type of share 6. Date of issue of certificate. 7. Signature of two directors and one authorised signatory. 8. Lock in period if any. 9. Seal of the company against the affixed revenue stamp. 10.The face value of shares. 11.Whether the face value is fully paid or paid partly. Statutory provisions regarding issue of share certificate. The Indian companies Act, 1956, lays down the following provisions regarding the issue of share certificate: 1. Time limit for issue: Share certificates must be issued within three months of the date of allotment and within two months of date of request for registration of transfer. 2. Resolution: Issue of share certificates must be sanctioned by a resolution passed at a board meeting. 3. Penalty for fraudulent renewal: If a company fraudulently renews certificates, then the company is liable to pay a fine of Rs. 10000/and every officer of the company in default is liable to punishment for a term upto six months or a fine of Rs..10,000/- or both. 4. Details: Every share certificate should specify the name of the holder, the no. and the type of share held by him and the amount paid on each share. 5. Register of members: On the issue of a share certificate, the prescribed particulars of member concerned, should be entered in the register of members. 6. Duplicate certificate: The duplicate certificate issued must contain the fact that it is a duplicate certificate.
7. Other relevant provision: such as entries in the register of members must be initialed and authenticated by an authorised person. Procedure involved in the issue of share certificate: The company secretary has to look after the procedure of issuing share certificates to the members. Following are the duties which the company secretary with respect to procedure involved in the issue of share certificate: 1. Printing of share certificate: The secretary has to get the shares printed with the necessary details required. 2. Board meeting for allotment: The secretary calls for a board meeting soon after the collection of share application forms. The board appoints a committee to finalise the allotment and submits a report to the board. 3. Dispatch of allotment letters: The secretary may dispatch allotment/regret letter to the share applicant. 4. Preparation of register of members: The names and other details of those who are allotted shares are entered in the register of members. 5. Board meeting to sign certificates: The board meeting is called to sign on the share certificates. This work may be done earlier in the previous meeting too.. 6. Preparation of share certificate: share certificates are prepared by entering the necessary details. 7. Intimation to shareholders: The shareholders will be informed regarding the dispatch of share certificate in exchange of allotment letter and the bankers’ receipt for a payment of allotted money. 8. Dispatch of share certificate: The secretary will send the duly completed certificates to members, It could also be sent along with notice of allotment. Issue of duplicate share certificate: A company can issue a duplicate share certificate to its members when the member requests for the same. If the original share certificate is damaged or worn out, the member has to surrender the original certificate to company to obtain a duplicate certificate. Member has to give a statutory certificate stating that the original share certificate is lost. A letter of indemnity in favour of the company is required by the member to protect the company. The cost of public notice issued by the company with respect to the loss has to be borne by the member and a bank guarantee may be asked by the company. 1. The secretary has to verify the details of application for duplicate certificate. The board has to approve the issue of a duplicate
certificate while a public notice must be put in a newspaper regarding the loss of original share certificate. Finally a duplicate certificate is prepared and is sent to the applicant by registered post. SHARE WARRANT A SHARE WARRANT IS DEFINED AS “A DOCUMENT ISSUED BY A COMPANY UNDER ITS COMMON SEAL STATING THAT THE BEARER OF THE WARRANT IS ENTITLED TO THE NUMBER OF SHARES MENTIONED THEREIN”. A Share certificate can be converted into a share warrant in respect of fully paid-up. It can be issued only by public limited companies. A share warrant is a bearer document. It is transferable by mere delivery. It’s a negotiable document. The holder of the share warrant is entitled to the no. of shares mentioned therein. A share warrant may have coupons attached to it, for the purpose of future dividend on the shares included in the warrant. Normally, there are three parts to a share warrant: (a) The counterfoil (b) The share warrant paper and (c) The dividend coupons Conditions for the issue of a share warrant: 1. Only a public limited company by shares can issue share warrants. 2. A company can issue share warrants only in case of fully paid shares. 3. Articles of Association must permit the issue of such warrants. 4. Prior permission is needed from Central govt. for the issue of such warrants. 5. Share warrants are issued only at the request of the members. SHAREHOLDERS Shareholders are the owners of the company who provide capital for the company. They elect Board of Directors to run the business on their behalf. RIGHTS OF SHAREHOLDERS Under the Companies Act, the following are some of the basic rights of members. 1. To receive notices and circulars of general meetings, statutory report, annual report of directors, annual accounts, auditor’s report, dividend warrant etc.
2. To exercise the right to elect directors, auditors and to approve the annual accounts of the company. 3. To decide remuneration for directors and auditors. 4. To remove directors and auditors, if required. 5. To exercise borrowing powers. 6. To approve the dividend declared. 7. To receive dividend. 8. To appoint proxy and to exercise voting rights through proxy. 9. To demand a poll in a general meeting. 10.To inspect the statutory books. 11.To receive share certificate. 12.T transfer shares as per Articles. 13.To call an extra-ordinary general meeting under special circumstances. 14.To receive pro-rata offer of newly issued shares. 15.To receive bonus shares. 16.To alter Memorandum and Articles of Association of the company. 17.To receive a share in the assets and properties of company on dissolution. DUTIES TO SHAREHOLDERS OF COMPANY SECRETRIAL • Arranging for issue of capital. • Sending allotment letters. • Issuing call notices. • Issuing dividend warrants. • Certifying valid transfers. SOCIAL RESPONSIBILITY TOWARDS SHAREHOLDERS Business organizations have the following social responsibilities towards shareholders, who are the owners and risk bearers of business. 1. Fair return: Since shareholders have invested their funds and borne the business risk, they expect a fair and adequate return on their investment. What constitutes fair return depends on the level of risk but it should definitely be higher than the interest paid by banks on similar investment. 2. Capital Market: To provide the country with a strong, sound and well-organized capital market, undue fluctuations in share prices in stock market brought about by manipulations made by directors, should be avoided because it adversely affects the shareholder’s confidence in the organization. 3. Shareholders participation: To encourage the participation of shareholders in the administration of organization and to pass on the
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benefits of capital appreciation to shareholders. Eg. Bonus shares can be issued to shareholders from time to time. Effective Use of Shareholders Funds: Shareholders’ funds should be employed in the best possible manner by the organization, so as to maximize both short and long run returns to shareholders. Expansion Programmes: The management should undertake expansion and diversification programmes, research and development activities, to maximize the profitability and also to pave the way for long-term survival and growth of business. Accurate information: The management should keep the shareholders updated regarding business affairs. Meetings of shareholders should be held regularly and the relevant reports and circulars should be made available to all shareholders. Good Reputation: The management should take care that the company maintains its goodwill and reputation in the market to boost the morale of shareholders. Audited Annual Accounts: A copy of the audited Profit and Loss Account and Balance Sheet should be sent to each and every shareholder annually.
Specimen of a share certificate:
SELL WELL INDIA LIMITED (INCORPORATED UNDER THE COMPANIES ACT, 1956) REGD. OFFICE: 116, S.V. ROAD, MUMBAI – 400 056 SHARE CERTIFICATE THIS IS TO CERTIFY THAT THE PERSON(S) NAMED IN THIS CERTIFICATE IS/ARE THE REGISTERED HOLDER(S) OF THE WITHIN MENTIONED SHARE(S) BEARING THE DISTINCTIVE NUMBER(S) HEREIN SPECIFIED IN THE ABOVE COMPANY SUBJECT TO THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY AND THAT THE AMOUNT ENDORSED HEREON HAS BEEN PAID UP ON EACH SUCH SHARE EQUITY SHARES EACH OF Rs.10-00 AMOUNT PAID UP PER SHARE Rs.10-00 REG. FOLIO NO. 1/10 CERTIFICATE NO. 420 NAME(S) OF HOLDER(S): BABU RAO NO. OF SHARE(S) HELD: 100 DISTINCTIVE NO.(S): 58450 TO 58549 GIVEN UNDER THE COMMON SEAL OF THE COMPANY THIS 12TH DAY OF OCTOBER 2003. CHAIRMAN SEAL NOTE: NO TRANSFER OF ANY OF THE SHARE COMPRISED IN THIS CERTIFICATE WILL BE REGISTERED UNLESS ACCOMPANIED BY THIS CERTIFICATE. MANAGING DIRECTOR AUTHORISED SIGNATORY
Specimen of a share warrant.
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SELL WELL INDIA LIMITED (INCORPORATED UNDER THE COMPANIES ACT,1956) REGD. OFFICE: 116,S.V. ROAD, MUMBAI – 400 056.
SELL WELL INDIA LTD FOR 1000 EQUITY SHARES NUMBERED :6100 – 7900 NO. OF CERTIFICATE : S 840 ISSUED TO: BABU RAO DATE: 8TH FEBRUARY, 2003 FOLIO NO, IN REGISTER OF MEMBERS: J49 SHARE WARRANT SHARE WARRANT NO. SW 210 THIS IS TO CERTIFY THAT THE BEARERR OF THIS WARRANT IS ENTITLED TO 1000 FULLY PAID SHARES OF Rs.10 EACH NUMBERED 6100 TI 7900 (BOTH INCLUSIVE) IN, SELL WELL INDIA LIMITED, SUBJECT TO THE ARTICLES OF ASSOCIATION OF THE COMPANY AND THE CONDITIONS ENDORSED THEREON. GIVEN UNDER THE COMMON SEAL OF THE COMPANY THIS 8TH OF FEBRUARY 2003. CHAIRMAN SIGNATORY SEAL MANAGING DIRECTOR AUTHORISED
MARKETS FINANCIAL MARKETS: The financial markets can broadly be divided into money and capital market. Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre- issued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-theCounter (OTC) is a part of the dealer market. STOCK EXCHANGE: A stock exchange is a market place, like any other centralised market where buyers and sellers can transact business in shares and securities at a given point of time in a convenient and competitive manner at the fairest possible price. Now-a-days, the business is done using a screen based method through duly authorised members or brokers of the exchange. The
stock exchange is open to any one, big or small with money to invest or securities to sell. A stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Investment in shares offers a wide range of choice. There is something for every type of investors. There are three types of investors depending on their income, needs and expectations: 1.investors who are risk averse 2. Cautious investors who would like to take some risks. 3.Speculative investors. The stock exchange allows tan individual to invest in any securities he likes. His capital is free to move from one security to another which enables him to make profits if the venture succeeds or to incur losses if it fails. The screen based system of stock exchange is continuous auction market but it is not like the conventional auction where buyers compete and there is only one seller. In the stock exchange, there is two way auction. The bidders compete with each other to purchase at the lowest price the shares they want to buy. Similarly, those who want to sell compete with each other to get the highest price for the shares they are offering. When the buyer bidding the highest price and the seller offering the lowest price match, a transaction is executed by the exchange. Both quotations and orders of sale are entered now-a-days using a computer. New York Stock Exchange or the NYSE, was the first known stock exchange in the world. It is in continuous operation since 1792. There are 24 recognised stock markets in India with 9879 Cos. listed on these markets having 50 million investors. Prominent among them are Mumbai Stock Exchange and the National Stock Exchange. BROKER: An investor has to utilise the services of a registered broker for buying or selling shares in the stock market. It may be noted that brokers act as agents for their clients. At times, clients may deal with a sub-broker who in turn will transact business through a registered broker. At present, sub-brokers are required to register themselves with the SEBI for doing business. The broker charges commission or brokerage for his services which is regulated and which has to be shown separately in the contract which must be issued to the client. After a broker executes an order of a client, he is statutorily required to issue a contract notice to the client. This note is in a prescribed form and confirms that certain no. of securities have been bought or sold at the
stated price by your order and to your account, and the brokerage amount has to be shown separately in the contract note. The brokerage cannot exceed Rs. 0.25 per share or 2.5 per cent of the contract price, whichever is higher subject to a minimum charge of Rs.25per contract. The contract is an important evidence of a real transaction. Once it is delivered and accepted, it blinds the broker and the client; neither can then repudiate the contract. A good broker ensures that the contract note is sent to the client by hand delivery or by post on he same day or on the following day of the transaction. Some of the brokers or their authorised assistants act as jobbers. Jobbers are important players in the market who buy and sell shares on their account by giving two way quotations. An order is executed when it matches either a jobber’s quote or another broker’s order. Jobbers specialise in trading on their own account in one or more listed securities. By trading in and out of the market, they are helping in maintaining a liquid and continuous market in the stock in which they specialise. For active shares, there may be several jobbers trading in them. For inactive shares or for thinly traded shares, only one jobber may be doing trading in many of them. Jobbers specialise in particular shares. There may be more than one jobber and the price quoted by them may differ. But all jobbers try to square of their deals at the end of the day. It means whatever they buy or sell, or whatever they have earlier bought or sold are recorded in the books. They normally do not keep any outstanding business to be carried forward for the next day. A jobber gives two way quotations. A higher price represents the figure at which the jobber is willing to sell. The lower price represents the price at which he is willing to buy. The difference is the jobber’s spread. It is generally a fraction of 1% of the price for actively traded but if the share is not traded frequently, the spread becomes wider. Bull is an operator who expects the share prices to rise. He buys shares without any intention of taking delivery. When the prices rise, he sells the shares and squares up the transaction at a profit. This is called Long purchase. The counterpart of a bull is a bear. A bear expects share prices to decline and sells shares which he may not own. His intention is to buy those shares at a later date when the prices decline and then square up the transaction with a profit. This activity is referred to as selling short. A Stag is a person who subscribes to the new issue with the primary objective to selling at profit no sooner than he gets the allotment.
SEBI With increased liberalization, abolition of the Office of Controller of Capital Issues and free competition, it was felt that without adequate safeguards, free competition may degenerate into a free-for-all where the prospect for short-term profits may attract market participants whose credentials may be doubtful. The issuers and intermediaries in the primary market and the intermediaries in the secondary market may be insensitive to the rights of the investors. There was therefore a need for an authority to lay down the entry norms for market intermediaries, prescribe code of conduct, rules and regulations for all players in the market and then ensure that the game is played according to rules . In order to ensure that the rules, regulations and operations of stock exchanges are fair and an effective balance is struck between the needs of investor protection and competitive provision of financial services the need for a formal organization like the Securities Exchange Board of India (SEBI) with statutory powers was felt. This concept was formalized in April 1992 with the passing of SEBI Act, 1992. Similarly, in the US, Securities Exchange Commission 1934,Securities and Investment Board 1982 are other renowned bodies like the SEBI. SEBI’s main functions are: 1. Regulating the businesses in stock exchanges 2. Registering and regulating stock securities market and collective investment schemes like mutual funds 3. Promoting and regulating other self regulatory authorities 4. Prohibiting fraudulent and unfair trade practices in the stock market 5. Inspection and enquiries of intermediaries and self regulatory organizations in the stock market. 6. Performing other such functions as mentioned in the Securities Contracts Regulation Act, 1956. Due to the involvement of SEBI in stock exchanges, trading hours have increased, settlement cycle has been shortened to a week, rolling settlements and bad delivery cells have been introduced, computerization of stock exchanges has taken place and better guidelines have been issued for trading.
CAPITAL FORMATION-ROLE OF A COMPANY SECRETARY A Company Secretary is a person who is incharge of the legal aspects of a company. The company secretary plays an important role in the capital formation of the company. To collect long term funds by way of shares, the company secretary has to perform a number of duties as follows: 1. Consent of SEBI: When the public issue of shares exceeds Rs. 1 crore, the company has to take prior consent of the SEBI. only after getting the approval o f the SEBI, the company can proceed to raise funds from the market. 2. Vetting of prospectus: The company should properly draft the prospectus giving all the necessary details. The draft prospectus containing the disclosures has to be vetted by SEBI before a public issue is made. Once SEBI examines it, the draft prospectus and application form together with articles and memorandum of association must be forwarded to the stock exchange for approval. 3. Appointment of underwriters: The company then proceeds to get the issue underwritten. The underwriters guarantee the subscription for a consideration of commission. The issue can be guaranteed by a consortium consisting of IDBI, IFCI, and others. Each underwriter is responsible for the amount of shares underwritten by him. 4. Appointment of bankers: The bankers to the issue must be appointed to collect application money on behalf of the company. Normally, the company appoints its own bankers to handle the issue. Many-a-times, the underwriting bank also acts as a banker to the issue. 5. Appointment of registrars: The company also need to appoint registrars to handle various tasks in connection with the issue of capital. The registrars normally performs the following tasks: collection of application forms from the banks. 6. Appointment of brokers: The brokers facilitate the marketing of securities. There are certain restrictions regarding the appointment of brokers. Only registered brokers of the concerned stock exchange can be appointed as brokers. Brokers who serve as underwriters need to be appointed as brokers as well. The appointment of the broker has to be approved by the concerned stock exchange. There is also restriction on the number of brokers. 7. Filing of the prospectus with the registrar of companies: Once the prospectus is approved is approved by the concerned stock exchange and necessary appointments are made in respect of bankers, registrars, underwriters and brokers, the company then proceeds to file the prospectus with the registrar of companies,
along with the requisite documents as required under the Companies Act, 1956. 8. Printing and despatch of prospectus and application forms: The company then orders the printing of prospectus and application forms. The printed copies are sent to the brokers, underwriters and bankers to the issue. They must be sent to the brokers at least 21 days before the first announcement in the newspaper regarding the issue. The brokers normally receive printed copies from the registrars or the company. The brokers then distribute the prospectus and the application forms among investors. 9. Filing of initial listing application: Within 10 days of filing the prospectus, the initial listing of application must be made with the concerned stock exchange, along with the requisite fees. 10. Promotion of the issue: The company normally undertakes to promote the issue with the help of a publicity and advertising campaign. Some companies may get good reports in the newspaper columns with support of editors. 11. Statutory announcement: The statutory announcement of the issue must be made after seeking the approval of the lead stock exchange. The announcement must be published at least 10 days prior to the opening of the subscription list. 12. Collection of application money: The bankers to the issue collects the application of shares from the members of public along with the application money. 13. Processing of applications: The registrars to the issue collects the application forms from the banked and scrutinise them. Necessary information is tabulated and coded for the purpose of allotment of shares. 14. Establishing the liability of underwriters: If the issue is undersubscribed, the liability of the underwriters has to be established. Each underwriter has to subscribe the unsubscribed amount of shares in the agreed proportion at the time of underwriting agreement. 15. Allotment of shares: The registrars make arrangement to allot the shares. If the capital is just or undersubscribed, then they allot the shares after taking formal approval of the concerned stock exchange(s).if the capital is oversubscribed, then they have to decide the basis of allotment in consultation with stock exchanges and SEBI. 16. Listing of the issue: The detailed listing application should be submitted to the concerned stock exchange(s) along with the listing
agreement and the listing fee. The listing formalities after subscription list is closed. 17. Calls on shares: The company makes a call on its share holders to pay the unpaid amount of shares, if any. ISSUE OF SHARES Issue of shares is one of the most important stages in capital raising of a joint stock company. Issue of share involves the following aspects: 1. Application of shares. 2. Allotment of shares 3. Calls on shares. 4. Forfeiture of share. 5. Surrender of shares. 6. Transfer and transmission of shares.
1. APPLICATION FOR SHARES When the public company brings out a fresh issue of shares, it invites applications from the public for the same. The following is the procedure involved in inviting applications for shares: 1. Vetting of prospectus: The company-secretary should prepare the prospectus and submit it to Securities & Exchange Board of India (SEBI), for the purpose of vetting (testing). Once SEBI examines it, the draft prospectus along with other documents is sent to the stock exchange where the issue is to be listed. 2. Appointment of underwriters: The company-secretary then proceeds to get the issue underwritten. The underwriters guarantee the minimum subscription for a consideration of commission. 3. Appointment of bankers: The company-secretary may appoint the bankers for the purpose of collecting application on behalf of the company. 4. Appointment of registrars: The company-secretary may appoint registrars to the issue to handle various tasks in connection with issue of shares. The tasks include processing of application forms, dispatch of allotment/refund letters, etc. 5. Appointment of brokers: The secretary then appoints brokers to facilitate the marketing of securities. Only registered brokers of the concerned stock exchange can be appointed.
6. Filing of prospectus with registrar of companies: The secretary
then proceeds to file the prospectus with the registrar of companies, along with the requisite documents as required by the Companies Act, 1956. 7. Printing and dispatch of prospectus and application form: The secretary then orders the printing of prospectus and application forms. The printed copies are sent to the brokers, under writers, and bankers to the issue. 8. Filing of initial listing application: Within 10 days of filing the prospectus, the initial listing application must be to the concerned stock exchange. 9. Promotion of issue: The secretary then undertakes to promote the issue of shares with the help of publicity and advertising campaign. 10. Statutory announcement: The statutory announcement of the issue must be made after seeking the approval of the lead stock exchange. The announcement must be published atleast 10 days prior to the opening of the subscription list. 11. Collection of application money: The bakers to the issue collects the share applications along with the application money. At least 5% of the face value or nominal value of the share is to be collected on application. 12. Processing of applications: The registrars to issue collect the application forms from the bankers and scrutinise them. They have to handle the further processing of the application forms for the purpose of allotment of shares. Companies issue IPO’s or the Initial Public Offering so that companies canThe companies can freely price their equity shares. However they have to give justification of the price in the offer document / letter of offer Book building process: SEBI allowed issuers of equity shares the option to issue through Book building process in 1998. Book building refers to the collection of bids from investors which is based on an indicative floor price, the issue price being fixed after the bid closing date. The book building process is undertaken basically to determine investor appetite for a share at a particular price. In book building process, a company asks for bids from interested investors. These are generally online. The company then analyses the bids and decides on the price of each share to be issued. It is then traded with.
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1. Approvals required: Approvals are required from the share holders 2.
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to the public issue. The issue management team: A team consisting of Book Running Lead Manager (BRLM) , Co-BRLM, syndicate members etc. are appointed to look after the book building process. Red Herring prospectus: BRLM conducts due diligence on the issuer during the preparation of a Red Herring prospectus which is filed with the SEBI. SEBI scrutinizes the Prospectus. Procedure for bidding: Investor has to bid online at various terminals and these bids are submitted. These bids are analised by the syndicate team. Price discovery: Book is built at various prices. Company and BRLM finally decide the price and the amount is collected from bidders.
2. ALLOTMENT OF SHARES ALLOTMENT CAN BE DEFINED AS “THE APPROPRIATION TO AN APPLICANT, BY A RESOLUTION OF THE BOARD OF DIRECTORS OF A CERTAIN NUMBER OF SHARES IN RESPONSE TO AN APPLICATION”. The allotment of shares is made to those who have applied for, and are eligible for the same. The board of directors decides the allotment of shares. The secretary of the company, or the registrars to the issue accordingly informs to the applicants. If the shares are oversubscribed, the allotment is done on proportionate basis. A SEBI nominated public representative, shall be associated in the process of finalisation of basis of allotment. Essentials of a valid allotment: The following are the essential conditions of a valid allotment: 1. Valid offer and acceptance: A valid allotment requires an offer and acceptance of that offer. The applicant puts the offer by applying for the shares. The board of directors accepts the offer by passing a resolution regarding allotment.
2. Unconditional allotment: The allotment must be absolute and
unconditional. It has to be done in accordance with the terms and conditions stated in the application form. 3. Amount payable on application: The amount payable on application on each share shall not be less than five percent of the face value or nominal amount of the share. 4. Application money to be deposited: The amount received on application for shares should be deposited in a scheduled bank. This money cannot be withdrawn until the company gets certificate of commencement of business, and where such certificates is received, then till the amount of minimum subscription is received. 5. Minimum subscription: No allotment can be made unless the company receives the minimum subscription. It should be collected within 120 days of issue of prospectus, otherwise, application money is to be refunded. As per SEBI guidelines 2000, the minimum subscription must be received within 60 days from the date of closure of the issue. 6. Time for allotment: No allotment of shares can be effected until the beginning of the fifth day from the date of issue of prospectus. The subscription list must be opened for at least 3 days, and disclosed in the prospectus. 7. SEBI’s representative: If the issue is oversubscribed, then the shares are to be allotted on proportionate basis. The SEBI nominated are to be allotted on proportionate basis. The SEBI nominated public representative is associated in the process of finalisation of basis of allotment. The basis of allotment has to be approved by the lead stock exchange. 8. In accordance with the documents: The board of directors has to make the allotment in accordance with the prospectus, the application form, the memorandum and the articles of association. The board has to pass a suitable resolution in this respect. 9. Proper communication: The allotment must be duly communicated to the applicant through the post. It is always advisable to send the communication through registered post. Along with the intimation of allotment/refund, the share certificates and a cheque for refund or excess amount is to be sent. 10. Filing of prospectus: A copy of prospectus or statement in lieu of prospectus must be filed with the registrar of companies
before allotment. At least 3 days must be passed after such filing before the allotment is taken up.
IRREGULAR ALLOTMENT Sec.17 of the companies act, states that if the allotment is made in violation of any of the above rules. Such allotment is called “irregular allotment”. Irregular allotment is null and void at the instance of the applicant. The allottee must give a notice to annul the allotment within two months from the date of statutory meeting or where there is no statutory meeting then within two months from the date of such allotment. Allotment procedure The following is the procedure to be followed by the secretary in the case of allotment of shares: 1. Fulfillment of statutory provision: The secretary has to see that the statutory provisions (essential conditions) for a valid allotment are fulfilled. This includes receipt of minimum subscription within 60 days from the date of closure of issue, the period of 3 days to keep the subscription list open, etc. 2. Appointment of allotment committee: If the issue is oversubscribed, the board appoints an allotment committee to finalise the basis of allotment. The allotment committee is assisted by the secretary of the issue. 3. Intimation to SEBI: The company has to intimate the SEBI to nominate a public representative. In case of oversubscription, the SEBI nominated public representative is associated in the process of finalisation of the basis of allotment. 4. Consultation or approval of stock exchange: The basis of allotment must be finalised in consultation with the lead stock exchange. The lead stock exchange is normally the stock exchange where the registered office is located. It is to be noted that SEBI’s representative and approval of the stock exchange is required only if the issue is oversubscribed. 5. Board’s resolution: The board of directors must pass a suitable resolution in respect of allotment of shares. The allotment of shares must be done in accordance with the prospectus, the application form, the memorandum and the articles of association.
6. Preparation of allotment advice/refund order: The secretary has
to prepare necessary allotment advice/refund order, and allotment money notice. The secretary prepares such notes on the basis of information in the allotment list. Now-a-days, companies appoint registrars to the issue to handle this work. 7. Preparation of allotment list: The allotment list must be prepared in respect of eligible allotees. Necessary details must be entered in the list in respect of number of shares allotted to a particular allotee, the amount paid on application, the amount adjusted against allotment money, the amount due to be refunded, if any, and so on. 8. Preparation of share certificates: The share certificates must be prepared with the required details in respect of the name of the shareholders, the amount paid on shares allotted, the certificate number, the distinctive numbers of shares, the dates of issue of certificate. The certificate must be signed by at least two directors and countersigned by secretary or authorised signatory. 9. Preparation of register of members: The details of the share certificate along with the address of the shareholder must be entered in the register of members. 10. Dispatch of allotment advice/regret letter: The secretary then makes necessary arrangements to dispatch the allotment advice/refund order, together with the share certificates. The secretary may send letters of renunciation of shares, and splitting of shares, especially in the case of allotment of shares by way of “right issue”. 11. Arrangement for letters of renunciation: The allottee can renounce or give up part or full quota of shares allotted to him either in favour of the company or third party. The secretary has to make necessary arrangements for the same. 12. Arrangement relating to splitting of shares: The allottee may request for splitting of shares in smaller lots. The secretary has to make necessary arrangement of the same. 13. Arrangement for cancellation of allotment money: The secretary has to make necessary arrangement to collect allotment money through the company bankers. 14. Submission of return of allotment: The secretary must submit to the registrar “return of allotment” within 30 days from the date of allotment of shares. Return of allotment contains such details as number of shares allotted names, address and occupation of the allottees and the amount paid on each.
Listing of stocks: Listing means admission of the stock of a company to trading on a stock exchange. The principal objectives of listing are to provide ready marketability and impart liquidity and free negotiability to socks and shares, ensure proper supervision and control of dealings therein and protect the interests of shareholders and of the general investing public. Stock exchange offers an open market where buyers and sellers from all over the country meet in terms of perfect equality and evolve a competitive market price. These dealings take place subject to well defined code of byelaws and regulations and full 3. Call on shares A company may not require the entire amount of share capital issued at the time of application and/or allotment of shares. The company may call for the unpaid amount on shares at any time as and need for additional capital arises. Such balance money on shares when demanded is called as call on shares. A CALL ON SARES IS DEFINED AS “A DEMAND MADE BY THE COMPANY ON ITS SHAREHOLDERS, TO PAY WHOLE OR PART OF THE UNPAID BALANCE ON EACH SHARE AT ANY TIME DURING THE LIFE TIME OF THE COMPANY”. The power to make a call vests in the board of directors. The board cannot delegate this power to a director or a committee if directors or any officer of the company. The board should pass a suitable resolution in respect of call on shares. Essentials of a valid call The provisions of the companies act must be followed to take a valid call. The following conditions must be followed 1. Uniform basis: A call must be made on uniform basis as regards all shares of a particular class. 2. Amount of call: A call should not exceed 25% of the face value of shares. 3. Time gap between two calls: The time period between two successive calls should not be less 30 days 4. Notice to shareholder: A shareholder must be given notice of at least 14 days for payment of call money.
5. Board’s resolution: The board must pas a suitable resolution in
respect of call on shares. 6. In accordance with articles: The calls must be made in accordance with the articles of association and the provisions of the companies act, 1956. 7. Postpone/revoke call: The board may decide to postpone or revoke a call. The shareholders must be informed accordingly. 8. Failure to pay call by directors: A director who fails to pay the call money within six months from the date of making call has to vacate the office. 9. Refusal to transfer shares: The board may refuse to transfer the shares on which the calls are in areas. 10. Voting rights: A defaulting member does not have voting rights until the call is paid. 11. Liability to pay interest: If the shareholder fails to pay the call, he is liable to pay the call along with the interest for a period from the due date of the call till the payment date of the call. Procedure-calls on shares The company secretary has to follow the following procedure in connection with the calls on share: 1. Board meeting: The secretary has to convene a board meeting in respect of call on shares. The necessary resolution is passed at the board meeting to call money on shares. The resolution should mention the amount of the call, the type of shares on which call is to be paid, the date and place of payment. 2. Closing of transfer books: The board must also pass a resolution in connection with the closure of transfer books. This enable the secretary to make necessary arrangement in respect of calls on shares. 3. Preparing a call list: After closing the transfer books, the secretary prepares the call list indicating the names of those shareholders on whom the call is made, along with other details. 4. Drafting of call letters: The secretary gets the call letter drafted. He then orders for printing of such letters. The call letter consist of three parts: (a) call notice: it is the first part of the call letter, which gives details as to the amount of the call, the date by which call is to be paid and the bank’s branch where money is to be deposited. (b) call receipt: this part is to be signed by the bank and returned to the shareholder. It gives details as to the receipt of call money by the
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bank.(c) call slip: this part is to be retained by bank and sent along with statement of account to the company. Dispatch of call letters: The secretary then makes necessary arrangements to send call letters to the registered address of the members. The company should give at least 14 days notice to the shareholders to pay the call. He is also required to publish the notice in the leading newspaper. Arrangement with bankers: The secretary makes necessary arrangement with the bakers to collect the call money on behalf of the company call money with the bankers. Within the validity of the call period, the shareholders can make payment at the designated branches of the concerned bank(s). Making entries in register of members: After the receipt of call slips from the bankers with details of payment noted therein, the secretary then makes necessary entries in the register of members. He then sends call payment stickers to the shareholders to stick on the share certificates. Now-a-days, there is no need to send the certificates by the shareholders to the company, for endorsement, in respect of payment of call. List of defaulters: The secretary then prepares the list of defaulters who have not yet paid the call money. The unpaid calls are known as “calls in areas”. The secretary has to send call reminder(s) to the share holders, of the board has to take necessary action for the recovery of dues or non-payment of call.
4. Forfeiture of shares Meaning: Forfeiture of shares means cancellation of shares. If the shareholder fails to make payment of the calls on shares within the stipulated time, his shares are liable for forfeiture. Normally, a shareholder does not pay for calls when he is in financial crisis or when he feels or knows that the company is not financially sound. The directors can sue the shareholders for non-payment of calls or forfeit his shares. Reason for forfeiture: The shares can be forfeited shares only on the grounds of non-payment of call money. However, it has been held by the Kolkata High Court that fully paid-up shares also can be forfeited in such cases, as default in fulfilling any engagement between the members, or expulsion of members, where the articles specifically provide therefore.
Proper notice: A proper notice of forfeiture must be served to the shareholder. The object of the notice is to give the shareholder an opportunity for payment of the call money, interest and expenses. The article of association may provide a reasonable period, say 14 days time for making payment of amount due from the date of such notice. The notice of forfeiture, be preferably sent by registered post. But the accidental non-receipt of notice of notice of forfeiture, by the defaulter is not a ground for relief against forfeiture regularly effected. Board’s resolution: The board of directors must pass a resolution regarding forfeiture of shares of the defaulting members. Effect of forfeiture: Forfeiture of shares results in termination of membership of the defaulting shareholder. The directors can forfeit the shares only when they are authorised by the articles of association, for doing so. There is no provision in the Companies Act, 1956 in respect of forfeiture of shares. However, the articles empowers the directors to forfeit the shares, if the situation so demands. Reissue of forfeited shares: The forfeited shares can be reissued by the company so such terms and conditions as the board of directors may think fit. However, the forfeiture of shares can be annulled or cancelled at the request of the member. The board of directors may consider such request. He is, however, liable to make the payment of the call. Essentials of a valid forfeiture: 1. In accordance with articles: The directors can forfeit the shares in accordance with the articles of association. Shares may be forfeited if the company’s articles specifically contain a provision in that behalf on such grounds as may be provided therein. 2. Non-payment of call: Shares can be forfeited only on the grounds of non-payment of call. Forfeiture is not possible in case of fully paidup shares. 3. Proper notice: A proper notice of forfeiture must be served to the shareholder. The object of the notice is to give the shareholder an opportunity for payment of the call money, interest and expenses. The articles of association may provide a reasonable period say 14 days time for making payment of amount due from the date of such notice. The notice of forfeiture, be preferably sent by registered post. But the accidental non-receipt of notice of forfeiture, by the defaulter is not a ground for relief against forfeiture regularly effected.
4. Board meeting: The forfeiture of shares is decided in the board
meeting. Improper forfeiture for example, poor quorum in board meeting may lead to action for damages. 5. Board’s resolution: The board of directors must pass a resolution regarding forfeiture of shares of the defaulting members. 6. Intimation of forfeiture: The company should intimate the concerned member regarding the board’s resolution to forfeit his/her shares. 7. Removal of names from the register of members: The company should remove the names of those defaulters whose shares are forfeited from the register of members. 8. Public notice: The company may give a notice in leading newspaper in respect of forfeiture of shares in the interest of general public. Procedure regarding forfeiture of shares The following are the secretarial duties in connection with the procedure of forfeiture of shares: 1. Preparation of defaulters list: The company secretary should collect the call slips from the bankers with details of payment mentioned therein. He should then make entries in the register of members. From this he can prepare a list of defaulters who have not yet paid the call on time. 2. Verification in the article: The secretary should verify the articles of association. If there is a provision regarding the forfeiture of shares. 3. Board’s meeting: The secretary has to call a board’s meeting to pass a resolution, authorising the secretary to send call reminders and/or warning letter of forfeiture. 4. Call reminders/warning letter of forfeiture: The secretary then drafts the call reminders and dispatches them to the defaulting members. If the defaulting members do not make any payment of the call within the stipulated period, the secretary may send them a warning notice of forfeiture 14 days period before the date of warning notice must be given to the defaulting member to make payment. 5. Board meeting for forfeiture: If the defaulting members do not heed to the warning letter of forfeiture, he then calls a board meeting to forfeiture the shares. The board must pass a resolution to forfeit the shares. 6. Notice of forfeiture: The secretary should then intimate the defaulting shareholder of the forfeiture of shares along with a copy of board’s resolution. 7. Removal of names from the register of members: The secretary then strikes off the names of the defaulting shareholders whose shares are forfeited from the register of members.
8. Public notice: The secretary may publish a notice of forfeiture of
shares of the concerned shareholders in a leading newspaper in the general interest of the public, so that they do not purchase or deal in such shares. 5. Surrenders of shares Meaning: It means voluntary return of shares by a shareholder of the company for the purpose of cancellation. Surrender of shares can be accepted by the board of directors only when they are permitted by articles of association. There is no provision for surrender of shares in the Companies Act. Reason for surrender: Surrender of shares should be only on account of non-payment of calls on shares. In no other circumstances, it is to be permitted, because it amounts to reduction of share capital which is illegal and void as per the Indian Companies Act, 1956. Reissue: Only partly paid shares can be surrendered and they can be reissued. Effect: On the surrender of shares, the shareholder ceases to be the member of the company. Normally, the shares are rarely surrendered. No payment of consideration: It is to be noted that the company cannot pay any consideration in exchange of surrender of shares. This would imply purchase of its shares by the company, which is prohibited under section 77 of the Companies Act, 1956. Secretarial duties regarding surrender of shares The secretary has to follow a certain procedure in connection with surrender of shares: 1. Verification in the articles: The secretary has to verify if there is a provision in the articles regarding the surrender of shares. 2. Verification of shareholder’s application: The secretary should verify the application of the shareholder. He has to find out whether the shares are fully paid or partly paid. Fully paid shares cannot be surrendered. 3. Placing the application before the board: The secretary then places the application of surrender before the board for their action. 4. Intimation to the shareholder: If the board accepts or rejects the application for surrender of shares, the secretary should then inform the applicant accordingly.
5. Follow-up of board’s decision: The secretary has to follow up the
board’s decision in this respect. He has to collect the dues from the shareholder, if the shares are not accepted for surrender. 6. Cancellation of names from register of members: If the board accepts the surrender of shares, the secretary has to delete the name of the member. 6. Transfer of shares The shares of a joint stock company are transferable subject to the provisions of articles of association. The shares of a public limited company are freely transferable. However, there are certain restrictions on transferability. For instance, preferential allotment to employees, the shares in such case normally cannot be transferred during the lock in period, say 3 years or so. Again, there is a lock in period for the promoters to transfer the shares. The shares of private limited company are not freely transferable because of restrictions imposed by articles of association. Certain points to be noted in case of transfer of shares:
1. Parties to transfer: there are two parties to a transfer of shares (a)
the transferor who s the member of the company, (b) the transferee in whose favour the shares are being transferred by the transferor.
2. No fees for transfer: According to the Securities Contracts Act,
1956, a listed company cannot charge any fee for regulation of transfer of shares.
3. Board’s refusal to transfer shares: The board of directors may refuse
the transfer of shares in the following cases: transfer of shares to a minor, transfer of shares to a person of unsound mind, when the instrument of transfer of unsound mind where the shares are partly paid, where the calls on shares are in arrears, where the company has a lien on such shares, where the instrument of transfer does not contain proper details. Any other reason as the board may think fit.
4. Notice of refusal to transfer: The board has to give a sufficient
notice to the transferor and the transferee regarding the refusal to transfer the shares. In public limited companies, the transferor and the transferee can appeal to the central government against the arbitrary decision of the board regarding the reusal to transfer shares.
5. Register of transfers: The company maintains a register of transfers,
where particulars of every transfer are recorded.
6. Instrument of transfer: The instrument of transfer should be in
writing in a prescribed form and must comply with the provisions of section 108 of the companies act, 1956.the company shall not register a transfer of shares unless a proper instrument of transfer is duly stamped and signed by the transferor and transferee. Procedure regarding total transfer of shares The following is the secretarial procedure regarding total transfer of shares: 1. Filling the instrument of transfer: The transfer form, must be duly signed by the transferor and the transferee in the presence of a witness. Necessary details must be entered in the share transfer form. The information regarding the name and address of the transferee, occupation, the name of the transferor, the details of the shares to be transferred and so on. 2. Stamping the instrument: The instrument of transfer must be duly stamped with stamp duty. The stamp duty is calculated on the basis of market value of the shares on the purchase date. At present it is 0.5% of the market value of shares. 3. Submission of instrument of transfer: The instrument of transfer duly filled and stamped must be deposited with the company’s office or the transfer agent’s office. The instrument of transfer must be accompanied by original share certificate. 4. Transfer receipt: The company’s office or the transfer agents of the company issues a transfer receipt to the transferee, acknowledging the receipt of instrument of transfer along with the share certificates with distinctive numbers of shares, therein. It is to be noted that companies, now-a-days are not issuing transfer receipt. Such acknowledgement is given when the share certificate are lodge by hand delivery. If share certificates are sent by post, then postal acknowledgement is received. 5. Notice of lodgement of transfer: The company secretary or the transfer agents issues the notice of lodgement of transfer to both the parties, i.e. the transferor and the transferee. However, only a few companies do send such notice and that-too, to the transfer, and not to the transferee. 6. Verification of transfer document: The secretary has to verify the details in the transfer deed such as: (a) the date of the transfer deed
form. (b) the signature of the transferor. (c) the amount of stamp duty affixed. (d) the date of executing of the transfer. (e) whether other details such as name, address, signature, occupation of the transferor have been properly filled or not. 7. Board meeting: The secretary may convene a board meeting to approve the transfer of shares. The board meeting is required especially when large number of shares are transferred in the name of one party. 8. Entries in the register of transfers: After verification of transfer deed, and if everything is proper, then the secretary makes entries in the register of transfers. 9. Entries in the register of members: After making necessary entries in the register of transfers, the secretary then makes entries in the register of members. He deletes the name of the transferor from the register and enters the name of the transferee as the member of the company. 10. Dispatch of certificates: After making necessary entries in the register of members, the secretary arranges to dispatch the certificates at the registered address of the transferee. The certificates are endorsed at the back of the share certificates in favour of the endorsee. Partial transfer When the shareholder wants to transfer only a part of the shares indicated in the share certificate, then this is a case of the partial transfer. It is to be noted that the procedure of partial transfer is slightly different. The procedure is divided into two stages: 1. Certification stages: Transferor presents transfer form to the company along with the share certificate. A balance ticket is issued to the transferor in respect of those shares which are not to be transferred. The company issues certified transfer form which is passed on by the transferor to the transferee. 2. Registration stage: The transferee completes the form and submits to the company. The company issues a transfer receipt on receipt of certified transfer form. The company secretary makes necessary entries in the register of transfers. He then prepares the new certificates in exchange of transfer receipt to the transferee and in exchange of balance ticket to the receipt. Blank transfer
Blank transfer is the one where the name of the transferee is not mentioned. The transferor signs in presence of witness the instrument of transfer and hands it over to the transferee along with the original share certificate. The transferee may in turn transfer the same, without making any entries therein, to another person. The shares can be transferred from one person to another by mere delivery of the instrument of transfer and the share certificates. If at any time, the holder of the instrument wants to get the shares transferred in his name, he can do so by lodging the transfer form and the original certificate with the company. It is to be noted that no changes are made in the register of members, as long as the shares are kept blank. The name of the first transferor continues to be on the register of members. The shares can be kept blank for a period of one year from the stamped date on the instrument of transfer. The main advantage is that the time consuming process involved in the transfer of shares is avoided by speculators. Stamp duty need not be paid as long as it is kept blank. The main disadvantage is that the dividend payable and other benefits such as bonus issue/rights issue, and dividend payable goes to the shareholder whose name is recorded in the register of members, and not the holder of the blank transfer. Transmission of shares Transmission of shares refers to transfer of shares by the operation of law. The shares are transferred to legal representative of the shareholder. Transmission of shares can take place in the following cases: The transmission of shares takes place in case of death, lunacy or bankruptcy. On the death of the shareholder, the shares are transferred to the person in whose favour the will is executed by the deceased shareholder. If no such will is there, then the transfer rights go to the next of kin of the deceased. On lunacy, the legal representative gets the transfer rights as decided by a competent court. On bankruptcy, the shares are transmitted to the official receiver appointed by the court. The official receiver can dispose of the shares and pay the amount to the creditors in certain proportion as decided by the court. Transfer Deed
When you buy shares of a company, the seller broker will collect the concerned share certificates accompanied by prescribed transfer forms duly signed by the seller and pass them on to you through your buyer broker. These may be filled in by you and sent to the concerned company along with the share certificates for transfer in your favour. Transfer of shares and debentures requires compliance with the following: i. There should be a proper instrument of transfer. ii. The instrument should be duly stamped iii. It should be executed by or on behalf of, both the transferor and the transferee. iv. It should contain the name, address and occupation of the transferee v. It should be delivered to the company along with the relevant share certificates/ debenture certificate Share transfer form or transfer deed, as is popularly known , is an instrument of transfer the format of which is prescribed by the Companies, Act, 1956. It has to be date stamped by the prescribed authority. According to Section 108(1A) of the Companies Act, transfer deeds are valid for a period of 112 months from the date of stamping by the prescribed authority or till the date on which the Register of Members are closed for the first time after the date-stamping by the prescribed authority, whichever is later. However, these are considered as good delivery for circulation in the market only till the closure of Register of Members of the company for the first time after the transfer deeds are date-stamped by the prescribed authority. Revalidity of outdated transfer deeds The procedure for revalidating outdated transfer deeds is prescribed under the Companies Act,1956. The transferee who holds outdated transfer deeds has to fill in the prescribed form and seek extension of time either from the registrar of companies of the state in which the registered office of the company is situated or from the Registered of companies of the state in which he ordinarily resides. Transfer stamps: Under the provision of Indian Stamps Act, the transfer deed for transfer of shares is required to be stamped at the rate of 50 p per Rs. 100 or part
thereof, calculated on the amount of consideration. However, in case of transfer of debentures, the stamps are required to be affixed at the prescribed rates-as in force in States-where the registered office of the companies are situated calculated on the face value of the debentures except in Maharashtra, where the stamp duty is payable on the value of consideration. The stamps so affixed are required to be defaced before they are logged with the Company for transfer. Secretarial procedure in transmission of shares 1. Accepting letter of request: The legal representative has to make a request to the company to register him as a member. He should make a proper application, and submit the original certificate and evidence regarding succession rights. 2. Scrutiny of letter of request: The secretary checks whether the application is proper, and whether it is accompanied by relevant documents. He verifies the request letter, along with the accompanying documents. 3. Board’s approval: If the request application is proper and the documents are found genuine then the secretary calls a board meeting to approve the transmission of shares. 4. Entry in register of members: On the approval by the board, the secretary makes necessary entries in the register of members, by deleting the name of the original shareholder and replacing with the name of the legal representative. 5. Dispatch of share certificates: After making necessary entries in the register of members, the secretary then dispatches the certificates to the legal representative, who is now the member of the company. 6. Entries in register of probates: The secretary has to make necessary entries in the register of probates. He has to record the details of the succession certificate or the probate of will details in the register of probates. TAX: Dividends received from Indian companies are tax-free. Indian Cos. are required to pay 10% tax on the dividends distributed. However the receiving investor is not required to pay any such taxes.
TRADING: Before computerisation, the stock exchanges, namely the BSE had an open outcry trading system. Brokers would assemble in a large hall in the stock exchange and trading would take place openly as if in an actual market. People would shout their lungs out to press for their price. The hall would be divided into sections, Each section contained brokers and jobbers dealing in particular company(s). A Sauda pad (trading pad) was maintained with the members of the stock exchange. This Sauda pad contained twos columns-one for buying while one for selling. At the end of the day, these Sauda pads were taken into consideration at the clearing house of the stock exchange and the index was calculated on this basis. to calculate the actual values of shares and the index was calculated on this basis. But after computerisation, situation changed. Internet based trading on stock exchanges, uses net as a medium for communicating the orders of clients to the exchanges through broker websites. Internet trading is the fastest way to get stock quotes. The prerequisites for internet trading are a computer, modem, telephone connection, registration with a broker, a bank account and a depository account. Thus the net is a universal platform providing access to infinite no. of users at any point of time. Interested investors initially register with a broker. The broker in turn provides with a login name, password and personal identification no. (PIN) For placing an order, an investor enters the symbol and series of the stock, quantity and price of the scrip all under the place order window. By clicking on the review option and at the send option, the investor is able to culminate the order. The investor gets the confirmation message after a lapse of few minutes where in order no. as well as the value of order are provided. Though there are different modes of payment, the one that is prevalent is the investor opening an account at the pre-designated bank. The mode of payment is through electronic transfer of fund. Internet trading is expected to increase the transparency in the markets and reduce settlement risks through improved liquidity by virtue of increased quote continuity and market depth. Internet not only provides Management Information System (MIS) but ensures a fair and efficient market apart from reduction of systematic risk. The scrips are graded into A, B1, B2 F and Z groups. A group refers to maximum volatility. Terminals are made with one central computer located at the stock exchange. Investors now invest or sell through these terminals at brokers. The central computer is placed in the clearing
department of the stock exchange. Clearing department settles the buying and selling of securities at the end of that day. During market hours prices of index scrips at which trades are executed are automatically used by the trading system to calculate the index every 15 seconds and continuously updated on all trading workstations connected to a stock exchange. A day’s opening, high and low prices are also given by the computer on an online trading basis. The closing prices are calculated using a spreadsheet for theoretical consistency. The closing index is computed taking weighted average of all the trades on the exchange constituents in the last 15 minutes of trading. If an exchange constituent has not traded in the last 15 minutes, then the most recent traded price is taken for computation of index closure. One of the most important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that additional issue of capital and other corporate announcements like bonus etc. do not destroy the value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the index should not per se affect the index values. The index cell of an exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index committee. The index cell takes special care to ensure that all indices maintain their benchmark properties by striking a delicate balance between high turnover in the index scrips and its representative character. Index selection and review policy is based on the objective of transparency and simplicity. Index committee meets every quarter generally to review all the indices. In case of a revision in the Index constituent scrips, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of index. The benchmarking properties of a stock exchange can be best understood in terms of: 1. Liquidity study: The parameters used for liquidity study are Average daily volume, no. of trades and no. of shares traded. 2. Impact cost study: It is cost of execution of a transaction in a security in proportion to the weight of its market capitalisation (no. of shares outstanding multiplied by current price) as against the index market capitalisation at any time. Thus impact cost of a security is the percentage markup suffered in buying or selling the security as compared to the ideal price. 3. Market capitalisation study: In order to be a true reflection, an index should adequately reflect market capitalisation of the entire universe listed on the exchange. The index should maintain a delicate balance between liquidity and representativeness.
Settlement Period In order to avoid settlement of too many transactions on a day-to-day basis, the Stock Exchange divides the periods of one year into settlement period. The settlement period in specified shares as well as non-specified Securities is one-week. The transactions entered during this period of a week are to be settled either by payment for purchase or by delivery of share certificates sold on notified days which are made known to the members of the Exchange through a clearing programme. The programme is announced six months in advance. Two most important dates covered in the programme are pay-in and payout .Pay in day is the date on which broker has to make payment to the clearing house for all purchases made by him and shares are to be delivered for all sales made by him in the previous settlement period. The pay-out day is the date on which the broker receives payment for sales made and share certificates together with the transfer deeds delivered to the clearing house. The actual amount a broker has to pay to the clearing house is, however, netted out taking into account the shares to be delivered and received, the differences of the transactions offset by counter transactions to be received or paid and also the differences to be received or paid between the contract price and the price at which the transactions are carried forward too the next settlement. Again, it will take the broker two to three days after the pay-out day to remit the sales proceeds to the concerned client. The broker normally expects to receive payment from his client as few days before the pay-in day, to allow for bank clearing and other paper work. Rolling Settlement: Rolling settlement was first introduced on India’s equity market by OTCEI. NSE while commencing demat trading in 1997 used rolling settlement. SEBI recently made it mandatory that all demat trading should use rolling settlement. In the present times, the markets use a week —long trading period for settlement following which delivery and payment takes place roughly a week later. All open positions at the end of a date turn into delivery and payment five working days later. Rolling settlement compresses the week—long cycle
into a day. Till date there is no ‘carry forward’ with rolling settlements. Rolling settlements has ushered in a new phase for investors in India, who were tormented by long delays in buying or selling shares. T+1 settlement would mean that shares sold today would yield funds the next day. This would be unprecedentedly convenient. From an investors perspective, rolling settlement reduces delays and the securities become ore liquid and are ore like money. Through rolling settlement can be done with physical certificates, it tends to become expensive if applied with physical certificates. Hence, to mitigate the same the depositories came into existence. Major markets in the world use T+3 rolling settlements, and are in the process of moving to T+2 or T+1 or T+0. Specified Shares and non specified shares: All the listed securities on the stock exchange are classified as either ‘Specified shares’ – ‘A’ Group shares or ‘Non specified shares’ – ‘B’ Group shares. The B group non specified group is further classified into B1, B, C, F and Z group. C represents odd lot shares, F represents corporate debts while Z represents shares which have not complied with certain clauses in the listing agreement. The main difference between specified and non specified shares is in the process of settlement of transactions. Only equity shares are included in the specified group of shares. The considerations for and the equity share to be included in the specified list are generally the size of company, no. of share holders, dividend records, growth prospects and average volume of business. Settlement of Transactions in specified shares: At the end of a settlement period, an investor, who has done his business in specified shares, has two options, viz., • Terminate his contract of sales by purchase and of purchase by ale by cross contracts within the settlement period. This is known as squaring up. • Complete the contract by delivery or payment, as the case may be. • Those who trade within a settlement are short-term investors, sometimes referred to as speculators. Settlement of Transaction in Non-specified Securities Transactions in non-specified securities are for delivery, unless they are offset by opposite transactions in the course of the settlement period itself. The exchange issues delivery orders and receives orders for all transactions
entered into during the settlement period which are not offset by opposite transactions. If the seller is not in a position to deliver the securities, the buyer has a right to demand delivery of the securities he has bought and can go in for an auction notice against the seller and claim the difference between the contract price and the auction price. Odd Lots and Market Lots Trading in equity shares on the Stock Exchange is confined to market lots. For shares having paid-up value of Rs.10, the market lot is generally fifty or hundred shares, and for shares of Rs. 100 paid-up value, the market lot is generally five or ten shares. In case of dematerialized shares odd lot doesn’t arise since market lot is one share. Market lots of shares of an actively traded company can be bought or sold easily in the stock markets through brokers. However, problems arise when one wants o buy or sell shares in lots which are different from markets lots. In stock markets, such lots are called odd lots. If a market lot of the shares is100, a transaction for say 50 shares is considered an odd lot transaction. Purchase and sale of odd lots are usually very difficult. Also, the price quotation for an odd lot could differ by as much as 5-10 per cent from the price quoted for the market lot. Odd lots generally as arise from issue of bonus or rights shares or convertible debenture. Book Closure/ Record Date Every company maintains a Register of its shareholders. The Register of Members contain the name, address and other particulars of each of its shareholders. As the ownership of shares keeps on changing due to the buying and selling activities and the consequent registration of transfer, the list of shareholders is constantly updated with the names of transferees added and those of transferors deleted. When a company declares a dividend or announces a bonus share or rights issue or wants to convene a meeting of the shareholders, it became necessary to freeze the list at a point of time to take stock of the shareholders entitled to the benefit. This is known as Closure of Register of Members or just Book Closure. During the period of Book Closure, no transfer of share is undertaken by the Company
Occasionally, a company may choose a Record Date instead of bonus shares or rights entitlements. As in thee case of shares, a company has also a Register of its debenture holders, whole list is also frozen occasionally for purposes like payment of interest, etc. through either Book Closure or Record Date. ‘Cum’ or ‘Ex’ Share prices are sometimes quoted ‘cum’ or ‘ex’ dividend, ‘cum’ or ‘ex’ bonus ‘cum’ or ‘ex’ rights. They are written as ‘cd’, or ‘cr’ if ‘cum’ and ‘xd’, ‘xb’ or ‘xr’ if ‘ex’. Unless specifically mentioned, all prices are ‘cum’ which means that all future dividends, bonuses and rights will accrue to the buyer. In case of doubts - which could arise if the trading date is close t the date on which a share change status from ‘cum’ or ‘ex’ –it is always advisable to get the doubt clarified with the broker before placing the order. If share are purchased when they are quoted ‘cum’ and sent for registration before the closure of books, dividends and other distributions, are made to the new purchaser who henceforth will be the registered holder of the shares. However, If the books are already closed, it is the responsibility of the buyer broker to collect the distribution (dividends, bonus, or rights) from the seller broker and pass the on to the purchaser.
Mutual funds They are trusts which mobilise savings from the people and use the funds to purchase securities. They usually have professional investment managers who make decisions about securities to be bought or to be sold. By pooling the financial resources of small investors, investors are able to participate in the securities market without taking much risks. Foreign Institutional Investors (FIIs) The rapidly growing Indian economy needs large investments or development. The govt. has removed many cobwebs of rules to encourage Direct Foreign Investment and Foreign Portfolio Investment. However, only recognised foreign institutions such as pension funds, mutual funds, etc., can have portfolio investment after taking permission of the RBI and SEBI. There are currently 532 institutional investors (FIIs) registered with
SEBI. FIIs are allowed to operate freely to operate in the primary and secondary market subject to certain prudential guidelines.
Custodial services All the post trading services provided by a company to an investor are defined as custodial services (or back office works)and the company providing the services is referred to as a custodian. .These include settlement and safe custody of securities, dividend/slash interests handling and collections, keeping track of rights, bonus, conversion/redemption of shares, keeping accounts and providing reports to the investor. Depository system Under depository system, transfer of ownership of securities is done by book entry similar to a bank deposit account. Under this system, delivery of shares against payment is ensured by the depository company. The company also undertakes to distribute dividends, bonus, shares etc. to its account holders and monitor all the accounts. Blue chips: Clip shares provides low to moderate yield and moderate to high capital gains yield. The price of such volatility shares is moderate. Clearing days/Settlement Days fixed in advance by the exchange for the first and last business days of each clearing. The intervening intervening period is called settlement period which is normally one week in the case of specified shares and ten days in the case of non-specified shares. Clearing House Each exchange maintains a clearing house to act as the central agency for effecting delivery and settlement of contracts between all members. The days on which members receive or pay amounts due to them are called pay-in or pay-out days. Floating Stock
The fraction of paid up equity capital of a company which normally participates in day to day trading. On an average, about 30 per cent of equity capital is held by promoters; another30 percent by financial institutions and the balance 40 percent by the public, mostly for long term investment. Consequently, the floating stock of a company rarely exceeds 15-20 percent of its equity capital. Low floating stock causes erratic price movements as in the case of securities in the non-specified list.
Listed Company A public limited company which satisfies certain listing conditions and signs a listing agreement with a stock exchange for trading in its securities. One important listing condition is that 25% of its issued capital should be offered to the public. STOCK EXCHNAGES: 1. NSE: Recognition: National Stock Exchange of India Limited (NSE) was given recognition as a stock exchange in April 1993.NSE was set up with the objectives of (a) establishing a nationwide trading facility for all types of securities, (b) ensuring access to all investors all over the country through an appropriate communication network, (c) providing a fair, efficient and transparent securities market using electronic trading system, (d) enabling shorter settlement cycles and book entry settlements, and (e) meeting the international benchmarks and standards. Within a short span of life, above objectives have been realized and the exchange has played a leading role as a change agent in transforming the Indian Capital Markets to its present form. NSE has set up infrastructure that serves as a role model for the securities industry in terms of trading systems, clearing and settlement practices and procedures. The standards set by NSE in terms of market practices, products, technology and service standards have become industry benchmarks and are being replicated by other market participants. It provides screen-based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location. The high level of information dissemination through on-line system has helped in integrating retail investors on a nation wide basis. The exchange currently operates three market
segments, namely Capital Market Segment, Wholesale Debt Market Segment and Futures and Optional segment. Ownership And Management NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the exchange. Its board comprises of senior executives from promoters institutions, eminent professionals and a full time executive. While the board deals with the board policy issues, the Executive Committees (ECs), while including trading members, formed under the Articles of Association and the Rules of NSE for different market segments, manage the day-to-day affairs of the Exchange. The ECs have constituted several committees, like Committee on Trade Related Issues, Committee on settlement Issues, etc, comprising mostly of trading members, to receive regulatory inputs from the market. The day-to-day management of the exchange is delegated to the Managing Director and CEO who is supported by a team of professional staff.
Requirements For Professional Clearing Membership (ALL VALUES IN Rs. LAKHS) Particulars CM segment F&O segment CM and F&O segment Eligibility Trading member of NSE/SEBI registered custodians/recognized banks Net worth 300 300 300 Interest Free Security 25 25 34 Deposit (IFSD) Collateral Security 25 25 50 Deposit (CSD) Annual subscription 2.5 nil 2.5
Listing Of Securities Listing means formal admission of security at the trading platform of the exchange. It provides liquidity to investors without compromising the need of the issuer for capital and ensures affective monitoring of
conduct of the issuer and trading of the securities satisfies listing requirements prescribed in the relevant statues and in the listing regulations of the exchange. It also agrees to pay the listing fees and comply with listing requirements on a continuous basis. Benefits Of Listing On NSE: The benefits of listing on NSE are: 1. NSE being the largest stock exchange in terms of reach, listing on NSE enables issuers to reach and service investors across the country. 2. NSE being the largest stock exchange in terms of trading volumes, the securities trade at low impact cost and are highly liquid. 3. The NSE network disseminates information and company announcements across the country, thus reducing the scope for price manipulation or misuse. 4. The facility of making initial public offers (IPO’s), using NSE’s network and software, results in significant reduction in cost and time of issues. 5. NSE’s web site www.nseindia.com provides a link to the web sites of the companies that are listed on NSE, so that the visitor interested in any company can visit that company’s web site from the NSE site. 6. Listed companies are provided with monthly trade statistics for the company listed on the exchange. 7. The listing fee is nominal. BSE BSE or the Mumbai Stock exchange was established in the year 1875 as the ‘Native Share and Stock Association’. It is the most active stock market in the country accounting over 70 per cent of the listed capital in the country while in terms of market capitalisation its share is over 75 per cent. The turnover on the Exchange accounts for nearly 1/3rd of the total turnover in securities all over India. The Exchange while providing an efficient market also upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or the brokers. It also strives to educate and enlighten investors by making available necessary informative inputs. A Governing Board comprising of 9 elected directors (one third of them retire every year by rotation), an Executive Director, three SEBI nominees, a Reserve Bank of India nominee and five public representatives, is the apex body which regulates the Exchange and decides its policies.
A President, a Vice-President and an Honorary Treasurer are annually elected from among the elected directors, by the Governing Board following the election of directors. The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Exchange. Important Landmarks of the Stock Exchange, Mumbai The Stock Exchange, Mumbai has along but fascinating history. Earliest records of securities trading in India are available from the end of the eighteenth century. Before 1185,there was business conducted in Mumbai in shares of banks and the securities of the East India Company which were considered as securities for buying, selling, and exchange. The shares of the Commercial Bank, Mercantile Bank and Bank of Mumbai were some of the prominent shares traded. The business was conducted under a sprawling banyan tree in front of the Town Hall, which is now in the Horniman Circle Park. In 1850, the Companies Act was passed and that heralded the commencement of the joint stock companies in India. It was the American civil war that helped Indians to establish broking business. The leading broker, Shri Premchand Roychand was responsible for developing conventions and procedures. In 1874, the Dalal Street became the prominent place of meeting of the brokers to conduct their business. The brokers organized an association on 9th July,1875 known as the Native Share Brokers Association to protect character, status and interest of the Native Brokers and that was the foundation of the Stock exchange, Mumbai.. The Exchange was established with 318 members. The no. increased to 333 in 1896 and at present it is 641. The membership fee has increased gradually from Re.1 in1887 to Rs.1000/- in 1896, Rs.48,000/- in 1920, Rs.7.51 lakhs in 1986 and Rs.55 lakhs at present. In January 1899, the Brokers’ Hall was inaugurated by Mr. James M. Maclean, M.P and he said, “A Mumbai broker is a very useful member of the society, whose virtues are not sufficiently recognise, although his faults are emblazoned forth. With rare exceptions, he is honest to the core and pays to the last pie.” After the first world war, the stock Exchange was housed properly at an old building near the Town Hall. In 1928, the present premises were acquired surrounded by Dalal Street, Mumbai Samachar Marg and Hamam Street. A new building was constructed and was occupied on the 1sst December, 1930. The present 28 storeyed two phased building called Phiroze Jeejeebhoy Tower, named after late Phiroze Jashedji Jeejeebhoy, who a was the
Chairman of the Exchange from the 1st April,1966,till his death on the 9th February,1980, was constructed between 1973 and 1983. This was occupied in phases from 1980-81. In 1950, The Stock Exchange became an exclusively central government subject following adoption of the constitution of India. In 1956,, The Securities Contracts (Regulation) Act was passed. In 1992, the Securities Exchange Board of India Act was passed though the Securities Exchange Board Of India (SEBI) came into existence in 1988. In the last three years SEBI has been empowered by the Central government to regulate and develop capital markets in India. In 1992, the Over The Counter Exchange Of India(OTCEI) came into existence where equities of small Companies are listed. In 1994, birth of the National Stock Exchange took place. In 1995, the Exchange rapidly computerized its trading operations and thus the open out-cry system of share trading was replaced by screen based trading in The Stock Exchange, Mumbai. In January 1996, the revised carry forward system was introduced. In September 1997,BSE ON-Line Trading System network went nationwide. SENSEX and other indices: The prices of shares are not stable with thousands of people operating simultaneously on the market. It is almost like a national poll. The prices are determined by the forces of demand and supply. Factors which influence share prices are the political situation, state of economy, performance of the company and expectations of the investing public. There are risks in investment. But the risks can be anticipated by knowledge, information, study, judgement, advice, awareness and research. Index nos. are indicators which reflect the relative changes in the level of a certain phenomenon in any given period called current period with respect to is values in some fixed period called the base period selected for comparison. The phenomenon or variable under consideration may be: 1. The price of a particular commodity or a group of commodities 2. Volume of trade, factory production, imports or exports, shares and stocks, sales and profits etc. 3. National income of the country, wage structure, bank deposits, foreign exchanges Index is a statistical device for indicating the relative movements of the share prices of stocks under consideration. Different indices are based on size:
BSE Sensex Nifty Nikkie NASDAQ
Constituted of 30 scrips Constituted of 50 scrips Constituted of 225 scrips Constituted of around 4700 scrips
Not all indices are created in the same way. Following methods are primarily used to construct indices: 1. Market value weighted method: Each stock is given weighting proportional to its market capitalisation 2. Price weighted method: Each stock is given a weighting proportional to its market price. 3. Equal weighted method: Stocks are weighed equally. 4. Free float method: Only the portion of market capitalisation of a company is considered which is held by non-promoters. This portion is actually available for trading in the market
LAWS: NEED FOR LAWS: FRAUDS: FRAUDS: Frauds are the result of attempts to make fast money. Frauds have been attempted in the stock markets. Popular frauds were attempted by the late Harshad Mehta and Ketan Pareikh. The strategy of both the ‘scamsters’ was the same. It was based on the principle that demand and supply effects price. More the demand, less the supply, greater will be the price. Thus, in the stock exchange, if an artificial scarcity of stocks was created, the prices of stocks would automatically increase. Hence, both would acquire huge funds from various banks for example, Madhavpura Co-op. bank, which provided huge funds to Ketan Pareikh. But these banks never asked for any kind of guarantee or security for the loans provided to buy stocks. Thus, it was more of a ‘bank scam’ The funds provided by banks was used to buy stocks of various companies. These included a lot of companies which actually did not exist. Thus due to hoarding of stocks, there was less supply of these stocks and the prices of these stocks increased. This affected the Sensex and the Nifty, which rose to their peaks. As the prices of these stocks and the indices rose to a sufficient level, these ‘scamsters’ would dump in the stocks. They also printed fake share certificates and used them to dump into the stock markets. Thus, the prices of stocks and the indices would fall down all of a sudden, due to the sale of stocks. The profits were booked by the ‘scamsters’ who became millionaires. Little would they realize that this money was not only their investment, but was of thousands of other investors who had invested in the stock markets with a lot of faith and expectations. After the crash of stock markets, it was then that the matter was detected. SBI checked the accounts and found foul play. This was later investigated into and the ‘scamsters’ were put behind bars. CODE OF CONDUCT for BROKERS: SEBI has prescribed a code of conduct for members of the stock exchanges with a view to ensure that the functioning of the capital market is fair, healthy and efficient. The code of conduct has been divided into three broad areas: 1. General: This broadly deals with the general role of the stock broker while conducting business for or on behalf of investors.
Duty to investor: This enumerates the duty of a stock broker towards investors, particularly in relation to the execution of orders of investors. 3. Stock brokers vis-à-vis other stockbroker: This deals with the conduct of the stockbroker with other stockbrokers in the course of conducting business with them. It thus emphasises the duties of the stockbroker in settlement of trades with other stock brokers. The code of conduct as specified at Schedule II under Regulation 7 of the SEBI regulations, 1992 for stock brokers are as follows: GENERAL: ? INTEGRITY: A stock broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. ? EXERCISE OF DUE SKILL AND CARE: A stock broker shall act with due skill, care and diligence in the conduct of all his businesses. ? MANIPULATION: A stock broker shall not indulge in manipulation, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. ? COMPLIANCE WITH STATUTORY REQUIREMENTS: A stockbroker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the sock exchange from time to time as may be applicable. DUTY TO THE INVESTOR: ? EXECUTION OF ORDER: A stock broker shall faithfully execute orders for buying and selling of stocks at the best available market price and not refuse to deal with small investors merely on the ground of volume of business involved. A stockbroker shall promptly inform his clients about the execution of any order and make prompt payment with respect to stocks sold and arrange for prompt delivery of securities purchased by clients. ? ISSUE OF CONTRACT NOTE: A stock broker shall issue without delay to his clients a contract note for all transactions in the form specified by the stock exchange. ? BREACH OF TRUST: A stock broker shall not disclose or discuss with a third person details of
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personal investments and other information of confidential nature of the client. BUSINESS and COMMISSION: A stock broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission. He shall not furnish false or misleading quotations or give false information to his clients to induce him to do business in particular securities and enable himself to earn brokerage. BUSINESS OF DEFAULTING CLIENTS: A stock broker shall not deal or transact business knowingly, directly or indirectly or execute an order for a client who has failed to carry out his business with other stock broker. FAIRNESS TO CLIENT: A stock broker when dealing with a client shall disclose whether he is acting as a principal or as an agent and shall ensure that no conflict f interests arises between him and his client. In the event of conflict of interest, he shall inform the client accordingly and shall not seek to gain personal advantage from the situation and shall not consider client’s interests inferior to his own. INVESTMENT ADVICE: A stock broker shall not make a recommendation to any client who might be expected to rely thereon to acquire, dispose or retain any shares unless he has reasonable grounds for believing that the recommendation is suitable for such a client upon the basis of facts. COMPETENCE OF STOCK BROKER: A stock broker should have adequately trained staff and arrangements to render fair and prompt services to his clients.
STOCKS BROKER VIS-À-VIS OTHER STOCK BROKER. • CONDUCT OF DEALINGS: A stock broker shall cooperate with other contracting party in comparing unmatched transactions. A stock broker shall not knowingly and willfully deliver documents which constitute bad delivery and shall co-operate with contracting party for prompt replacements of documents which are declared as bad delivery.
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PROTECTION OF CLIENTS: A stock broker shall extend fullest co-operation to other stock brokers in protecting the interests of his clients regarding their rights to dividends, bonus, shares, right shares and any other rights related to such securities. TRANSACTION WITH OTHER STOCK BROKER: A stock broker shall carry out his transactions with other stock brokers and shall comply with his obligations in completing the settlement of transactions with them. ADVERTISING and PUBLICITY: A stock broker shall not advertise his business publicly unless if permitted by the stock exchange. INDUCEMENT OF CLIENTS: A stock broker shall not resort to unfair means of inducing clients from other stock broker. FASLE or MISLEADING RETUNS: A stock broker shall not neglect or fail to submit the required returns and not make any false or misleading statements on any returns required to be submitted to the Board and the stock exchange.
Guidelines for issue of IPO’s: The exchanges have laid down criteria for listing of new issues by companies, IPOs by knowledge based issuers, companies listed on other exchanges, and companies formed by amalgamation/restructuring, etc. in conformity with the Securities Contracts rules, 1957 and directions of the Central Government and the Securities and Exchange board of India (SEBI). The criteria include minimum paid-up capital and market capitalization, project appraisal, company/promoter’s track record, etc. The issuers of securities are required to adhere to provisions of the Securities Contracts act, 1956, the Companies act, 1956, the Securities and Exchange Board of India act, 1992, and the rules, circulars, notifications, guidelines, etc prescribed there under. Unlisted companies issuing shares: The following norms have to be followed by companies where issue size does not exceed five times its pre-issue net worth as per the last audited accountants:
1. Track record of distributable profits for at least three years out of immediately preceding five years in terms of Section 205 of the Companies Act, 1956 2. Pre-issue net worth of not less than Rs. 1 crore in three out of immediately preceding five years. The minimum net worth criteria also to be met in immediately preceding two years. 3. In case a company does not satisfy the above two criteria or its proposed size exceeds five times its pre-issue net worth, then it can make a public issue through book building route provided further that 60% of the issue would be allotted to qualified institutional buyers i.e. financial institutions, FIIs etc. The same goes on for a listed company issuing IPO has to follow the above procedure. Other guidelines: ? In a public issue by an unlisted company, promoters’ shall contribute not less than 20% of the post-issue capital. This will be locked in for a period of three years. ? Entire pre-issue share capital other than locked in promoters’ contribution shall be locked in for a period of one year. ? All companies making a public issue are required to have atleast one SEBI registered Merchant Banker to handle the public or rights issue. ? Minimum of 25% of the post-issue capital is required to be offered to the public. (All companies are exempt from the above requirement if the offer is not less than 10%of the shares issued, or a minimum of 20 lakh share are issued) ? Companies are required to deposit 1% of shares on the stock exchange. ? Companies are require to disclose all material facts and risks to investors ? Delayed refund beyond 78 days attracts interest @ 15% in terms of Sec. 73 of the Companies Act, 1956. However as per listing agreement, the interest is payable beyond 30 days. ? Companies should collect 90% of the issue amount within 60 days or refund the amount forthwith. ? Basis of allotment could be changed to proportionate allotment. ? Minimum 50% of shares is to be issued for investors applying up to 1000 shares.
? 10% of over subscription can be retained for allotting shares in market lots.
Continuing listing requirements: To ensure availability of floating stock on continuous basis SEBI has prescribed the following: • All companies would be required to maintain on a continuous basis non-promoter holding at the same level as applicable at the time of entry. • For Companies with less than 10% of non-promoters’ level, companies will be given a year’s time to raise level of nonpromoters’ level to 10% • No preferential allotment/buy back of listed companies would be permitted.
INTERVIEWS: 1. BSE manager: 1. What is a stock exchange? Why is it required? Stock exchange is a place which creates a platform for trading in shares and stocks. There are some people who buy shares while there are others who sell shares, A stock exchange creates a platform to bring such people together so that they can trade share. But trading has to take place through members of the stock exchange or brokers. 2. Which is the oldest stock exchange in the world? The oldest stock exchange should be the New York Stock Exchange (NYSE) In India, the BSE is the oldest and is 125 years old. 3. Affect of other stock exchanges on the BSEOther stock exchanges do have an effect on the BSE. For example, the NSE has a wider reach. It is at a national level and is promoted by the government. This does not mean BSE does not have a national reach. People from other states can invest in shares and stocks of companies listed on the BSE through sub-brokers. 4. What do the terms mean: badla, ulta badla, bull, bear and IPO?
Badla is a term used in concept trading. Badla is referred to when shares are not in a person’s ownership and yet he sells those shares under the intention that he will acquire those later. But he is penalized for this i.e. interest is charged on the person for not having shares in hands yet selling those. Ulta badla is opposite to badla. It means buying shares without having money. Again, interest is charged on such kind of buying. Bullish means a sense of upward movement while bearish means a sense of downward movement. IPO is Initial Public Offering. It is an issue through which a company expresses its intention to be listed on the stock exchange and it wants buyers for its shares to be issued. 5. How did trading take place? Initially, trading took place in physical manner. Shares were traded in a large trading hall and brokers had to trade shares in the trading hall of the stock exchange. Traders would shout their lungs out as if in any other market. Buyers would bargain with sellers. At the end of the transaction, they were supposed to send the details of their transactions to the clearing house which would clear all transactions. In this way, Sensex would be calculated using complicated calculations. Now-a-days, brokers need not be present in the stock exchange as we have terminals linked to a central computer in the stock exchange. Transactions are automatically taken care of by computers and Sensex was later calculated based on these. 6. What is Sensex? Sensex is a benchmark. It is the average of all the values of scrips. Scrips are classified into groups. E.g. Group A represents specified and most volatile scrips. The market cap is taken into consideration as we now use free float technology. Thus volume of shares of a company in the market plays an important role in calculating Sensex. More the volume, more the weight-age. Volumes are based on base values. Thus, if 12 shares are traded out of 1000, then the percentage of trade is 12 x 100 = 12 % 1000 7. What is SEBI? Securities Exchange Board of India or the SEBI is a watch dog or a regulator. It looks into the transactions at all the stock exchanges in India. Earlier, stock exchanges themselves had their own governing bodies to look into the rules and regulations of transactions. But after January 1992, the SEBI acquired statutory status regulate and promote capital market. They have a huge list of guidelines for everyone who is someway or the other related to the capital market.
8. What are the necessary formalities for a company issuing an IPO? There are a lot of formalities to be fulfilled before issuing an IPO. The SEBI guidelines is a long list. But prominent among them are that companies should come out with an issue of atleast Rs. 10 crore, it should b a dividend paying company, promoters should not subscribe to more than 20% of shares and the company must have a minimum of three years experience in capital market. 9. Which are the frauds created in the past? Frauds are as a result of an attempt to make fast money. In the past, frauds have been conducted by Harshad Mehta and Ketan Parikh. These are not just frauds in the stock exchange, but these were also a kind of banking scams. When these people approached banks for funds, the banks didn’t ask for any kind of security or guarantee. Prominent among them was the Madhavpura Co-op bank, After receiving the money, these people created an artificial scarcity of shares by hoarding shares. As supply became less and demand for shares increased, prices of shares also increased. Prices of many shares of companies which didn’t even exist rose. After the Sensex and the price of those scrips increased, shares were dumped at the high price. 10.What are the qualifications required by the brokers? Brokers need to be a graduate. They must have atleast three years experience in the capital market. Besides, they must pay a broker fee of Rs. 55 lakhs. 11.What are depository accounts? Depository accounts are parallel to banking systems. Earlier, share papers and certificates were with investors as well as with the stock exchanges. But now, these are with banks. These are not in paper form, but are in electronic form with banks. Just like RBI is depository for commercial transactions, these banks have depository accounts with them. All transactions are verified through banks. 2. Broker-1 1. What is the job of a broker? A broker buys and sells shares on the behalf of his clients. Clients are generally investors in the stock market. At times, they also include companies which invest into the share market. An investor has to utilise the services of a registered broker for buying or selling shares in the stock market. The broker charges commission or brokerage for his services
which is regulated and which has to be shown separately in the contract which must be issued to the client. Brokers act as agents for their clients. 2. What is the need of a broker? For buying things for our day-to-day activities, we go to a shop to buy these. We don’t directly go to the company to buy such things. Thus, we can say that a shop-keeper is acting like an agent between customers and company. We can compare a shop-keeper to a broker and things with shares. Brokers act as links between investors and share market. Investors have to go to a broker to buy or sell stocks Broker links share market with investors. It is not possible for stock markets to allow investors directly. They need to have members, which can deal with investors. Brokers are members of stock exchange and investors have to deal through authorised brokers. 3. Who is a sub-broker? Sub-brokers work under a broker. Clients may deal with a sub-broker who in turn will transact business through a registered broker. It is not possible for brokers to deal with investors of the entire country as they are just few hundreds in numbers. Hence we have sub-brokers mainly to increase the reach of share market. At present, sub-brokers are required to register themselves with the SEBI for doing business. 4. On what basis do you charge your brokerage/commission? Brokers charge commission on investments, from their clients. They are not supposed to charge more than 2% of the invested amount, as per rules. Generally, brokers charge 0.5% of the investment as commission. Subbrokers charge slightly more i.e. around 1% of the investment. But these values keep on changing from brokers to brokers and it also depends on the scrips in which they are dealing with. 5. What are the requirements of a broker? Brokers are required to purchase a card now from the Stock exchange. The value of this card keeps on changing. It was Rs. 10 lakhs initially but now it costs around Rs. 55 lakhs. Besides, they also need to be registered now with the SEBI as well. Besides these requirements, they must have an efficient network, working space, computers, internet and other such formalities. Now, they also have to clear a couple of exams to be a broker at some exchanges like the NSE 6. How do you trade now?
Initially, we had physical trading of shares. A broker had to be at the stock market physically to deal with shares and jobbers used to calculate values of shares. Now we have online trading, where in we can directly deal with the stocks without being at the market. Due to internet, we can trade online. According to clients’ needs, we have to place orders on the internet and trading takes place electronically 7. How can a broker at BSE trade at the NSE? A broker dealing with the BSE for example can deal with the NSE also. There is no connection between BSE and NSE as far as registration of brokers go. Both have similar requirements and if a person satisfies those requirements, he can be a broker at any of the stock exchanges. 8. Can you explain frauds? Frauds are transactions which are not legal in layman’s words. These are not recorded in any book of accounts. In the stock markets, prices of shares can be artificially jacked-up through some means, that person can later reap the benefits of high prices of scrips. Ketan Pareikh and Harshad Mehta had similar tactics. They acquired funds from banks, purchased shares, printed fake share certificates and dumped them in to the stock exchanges when the stock prices were high. They were later behind bars. 9. What is SEBI? SEBI or the Securities Exchange Board of India. It is the regulator of stock exchanges. It issues new guidelines to keep away bad intentions of bad people. It looks into the trading and catches hold of defaulters. 3. Broker-2: 1. Who is a broker? A broker is a person who deals with the stock markets on behalf of his clients. He buys or sells shares and stocks on behalf of his clients who are investors. Investors include small investors as well as companies which invest into the stock exchange. A broker acts as an agent between the markets and the investors. He executes orders placed by his clients. 2. How is a transaction carried out by you? There are three ways or methods One is market rate where in you buy or sell stocks at the market rates. Second is Limit order where in a price limit is fixed and once that limit is reached, the order is executed . Third is follow up prices where in investors keep a track of price of the shares and accordingly deal in markets.
3. What is the need of a sub-broker? There are limitations on behalf of a broker. There are few hundred brokers and each broker can deal with a limited no. of people. Thus, brokers can’t reach out to the entire nation. Here arises the need of a sub-broker, who can deal with a larger no. of people. Just as you have retailers and distributors for a product, we also have sub-brokers. The sub-brokers have to get registered with the SEBI through the stock exchange. 4. On what basis do you charge brokerage? Brokerage or commission depends upon the shares scrips. Different brokers charge at different rates. Generally, 0.5% of investment is charged. Sub-brokers charge slightly more. But brokers are not supposed to charge more than 2% as per rules. 5. How does trading take place? Earlier, trading used to take place physically. Brokers had to be at the trading hall in the exchange. They would bargain on prices of scrips. Brokers were given permission to deal with 8 persons at a time. The 8 persons were called batches. In a hall, counters were arranged. There was a particular counters for particular scrips. Later on, the transactions were recorded on Sauda sheet with codes e.g. 786/6 where 786 is the broker code and 6 is the batch no. The recordings were done by jobbers. Each Sauda sheet used to have two columns one for selling one for buying. The transaction was supposed to be maintained by both seller and buyer. In case of a mismatch i.e. Vanda transaction, the mismatch was cleared after personal meet. Now we have computerized system where in we can directly trade with stock exchanges without being at the stock market. Deals are placed online. It is a simple system through which we can deal with the stock markets through terminals attached to the main computer at the stock exchange. The computer analyse the transactions and prices of scrips as well as the index is calculated through a computer. For calculation of index, scrips are classified into A, B1, B2 or Z group. Where in A could be classified as the best group while Z includes those companies which don’t have a good track record and they might not provide proper dividends to their investors. For calculation of Sensex, top 30 volatile scrips are taken into consideration while for the Nifty, top 50 scrips. The market value is compared with the base value and the volatility of scrips is taken into consideration for calculating the index. 6. What are the requirements of a broker?
Brokers have to register themselves with SEBI through the stock markets. They have to purchase a card from the stock exchange. The card currently costs Rs. 55 lakhs while it was Rs. 10 lakhs initially. Besides they also have to provide personal details, they must have an efficient network, working space, computers, internet and other such formalities. Now, they also have to clear an exam to be a broker at some exchanges like the NSE 7. What is the difference between share markets and stock markets? There are various types of shares and stocks. A share market deals with equity and preference shares while a stock market deals with stocks, bonds, gilts etc. 8. Is it compulsory for share holders to open a deemat account? Yes, now it is compulsory to have a deemat account. 9. How does transfer of shares take place? Earlier, it used to take place physically. A transfer deed used to be attached. It contained details of the seller and the buyer like name, signatures which were supposed too be registered with the registrar of the company. It also had the folio nos. of shares. Besides, a tax of 0.5% is to be paid. This value changes with different states and different types of shares and stocks. The seller gets the money according to the market rate present on the day he sells his shares. Now, everything is electrically done and deemat account has to be opened for the same. 10.What are frauds? Scams and Frauds are illegal transactions carried out without being recorded in the books of accounts. They are an attempt to make fast money. In the past, share prices have been artificially increased by hoarding shares. Besides, fake share certificates were printed which were dumped into the stock markets when the prices of shares shot up. Frauds were carried out by Harshad Mehta and Ketan Pareikh who used the same tactics of hoarding stocks and then dumping these. 11.What is SEBI? SEBI or Securities Exchange Board of India is the regulator which looks after the trading in the capital markets. It prevents bad intention of making fast money. Regulating the businesses in stock exchanges. It does work like registering and regulating stock securities market and collective investment schemes like mutual funds, promoting and regulating other self regulatory authorities, prohibiting fraudulent and unfair trade practices in the stock market, inspection and enquiries of intermediaries and self
regulatory organizations in the stock market. But it has not been very effective in its work as it is partial to some people. 4. Company with stock market: ACC. 1. When was ACC started? ACC or Associated Cement Companies was started in the year 1936. There were eleven companies which were amalgamated to form ACC. It was on 1st August 1936, ACC was formed. 2. How is the face value of public issues decided? There are various rules and regulations which have to be followed to determine the face value of issues. In May 99, our public issue was released at a rate of Rs. 100. But now, we have sub-divided it into shares worth Rs. 10 per share, as per guidelines. The current trend is to issue at Re. 1 or Rs. 10 per share. But old companies have issues at high rate. This is done so that people can afford to buy shares. There are a lot of people who buy public issues in small nos. If share prices are priced high, it may discourage them from buying shares and investing in stocks. The market is more buoyant now. ACC had issued rights issue in 1999. The price was Rs. 55 of which Rs. 45 was the premium and Rs. 10 was the face value. Before that, we had issued it in 1995 at a rate of Rs. 4000 which included Rs. 3900 as premium value and Rs. 100 was the face value. Such tactics are followed s that more people will be interested in stock markets. 3. How are shares allotted? We open a public issue. The total no. of applications and no. of shares to be issued are taken into consideration. Generally, issues are oversubscribed. Under such circumstances, all cannot be allotted shares. Here, all people with equal investment amounts are considered together. A lot is then drawn and it is settled accordingly .i.e. if the issue if oversubscribed five times, then one out of five people is allotted the proportion of shares. For doing this, statistics is to be considered. Companies also have rights issue. If an applicant applies for investment, he must get the shares to be allotted to him or according to the proportion company can give and this is his right. The extra shares are then proportionally given. Companies also have firm allotment. Under this, the applicant for investment has to be given the shares which he has applied for. Even under oversubscription, the person(s) has to be given the no. of shares which he/they have applied for.
Old companies also used to give preferential shares. These are shares given to a particular kind of people. Thus, all applicants from the public wont have access to preferential shares. Besides, all those companies which had issued public issues long ago try to concentrate on the existing share holders and don’t go in for more public issues unless the need arises. They reward the shareholders by issuing bonus shares, give privileges to them and take are of the employees through an Employees Stock Options Scheme. These share are neither preference nor are equity. General public is now-a-days given only equity shares. 4. When are bonus shares issued? Bonus shares are issued when the company has got extra profits. Under such circumstances, the share holders are rewarded for their stake in the company. The profits are disposed off to the shareholders by issuing bonus shares. Such shares are given on the basis of their stake in the company. Such shares are direct incentives to the shareholders especially to those who have high stale in the company as funds are given according to the ratio of allotment. Under such cases, investors are freely given shares. As shares are freely distributed, the price of shares may get reduced slightly. ACC last issued bonus shares in 1996 5. What are the fees required to be paid by ACC for its stocks to be listed? Companies need to pay listing fees to the stock exchange. Besides, deemat charges are also to be paid to CDL or NSDL for connectivity in deemat accounts. ACC shares are compulsorily in deemat form i.e. scrip-less trading takes place. This is done so that paper work can be avoided. These prices are calculated by the stock exchanges and values keep on changing. 6. On which stock exchanges is ACC listed? ACC is currently listed on six of India’s stock exchanges. These are the regional stock exchange i.e. the Mumbai Stock Exchange, the National Stock Exchange, Madras Stock Exchange, Calcutta Stock Exchange, Ahmadabad Stock Exchange, Cochin Stock Exchange and the Delhi Stock Exchange. 7. Who are the various agencies behind ACC’s listing? ACC shares are allotted by the share department of the company. The actual details of the public stake is looked after by the management, the bankers and the registrar of the company. Different bodies look after different parts of the process. For example, in 1999, Corporation Bank
looked after banking to issue, Tata Share Reg. processed shares to issue while J P Morgan Stanley lead managers to the issue
CONCLUSION: Shares and Stocks offer wide range of options to the public for investment. It is a big investment option. It is that field where people earn hundreds of rupees for few rupees invested. It is also that field where people loose the amount they had invested. Thus, it is also a big source of risk. But one will earn more if he has taken more risks. But risks are not to be taken casually. Only calculated risk needs to be taken. Before investing, one must study the market and its pattern for atleast a couple of years before investing. Careful investment will lead to huge returns.
doc_473325099.doc
Law Shares & Stocks BSE NSE
Contents
1. Shares and Stocks -
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Share Capital Joint Stock Company Shares Kinds of shares Share stock Share certificates and share warrant.
2. Market • Financial markets • Stock exchange • Broker • SEBI • Capital formation-Role of a Co. Secretary • Procedure for issue of shares • Essential elements for shares • How is trading done: online & through brokers • Stock exchanges-NSE & BSE 3. Laws: • Need for Law-Frauds • Rules for brokers • Rules for issuing • Rules for listing 4. Conclusion
INTRODUCTION
A newly floated company as well as an existing one can collect funds through external sources by issuing shares and debentures, by accepting public deposits, by taking long-term loans, and bank credit etc. The important external sources are briefly discussed as under: (a) ISSUE OF SHARES: The company can collect long-term funds by issuing shares to the public (share capital). (b) ISSUE OF DEBENTURES: The company can collect medium term funds by the issue of debentures to the public (borrowed capital).
SHARE CAPITAL:
Share capital means the capital raised by a company by the issue of shares. The share capital of a company is divided into several classes as stated below: 1] AUTHORISED CAPITAL: This is the nominal value of the shares which a company is authorized to issue by its Memorandum of Association. It is also known as ‘Registered Capital’. This is the maximum capital which the company will have during its lifetime until it is increased. 2] ISSUED AND SUBSCRIBED CAPITAL: Issued capital is the nominal value of the shares which are offered to the public for subscription. A company does not normally issue all its capital at once. The issued capital can never exceed the authorised capital.
3] CALLED-UP CAPITAL: This is that part of the issued capital which has been called up on the shares. 4] PAID-UP CAPITAL: This is that part of the issued capital which has been paid up by the shareholders or which is credited as paid-up on the shares. 5] UNCALLED CAPITAL: This is the remainder of the issued capital which has not been called. The company may call this amount any time but this is subject to the terms of issue of shares and the provisions of the Articles 6] RESERVE CAPITAL: This is that part of the uncalled capital of a company which can be called only in the event of its winding up. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company. Joint Stock Company :It is large scale commercial organization, having its capital divided into shares, the ownership of which is the pre-condition for membership. Features • Large capital • Greater managerial skills • High degree of specialization • Limited liability • Large number of shareholders • Separation of ownership and management Articles of Association define the rules and regulations for the internal management of the company. Registration of the Articles is the second step in the process of incorporation of a company. All companies must have their own articles. However a public company, limited by shares, can adopt all or any of the regulations contained in ‘Table A’, attached to the first schedule of the companies act, 1956.’Table A’ contains a model set of articles.
Articles of Association, is a subsidiary to the Memorandum of Association, therefore it has to be within the limits of the latter. This document lays down the powers and duties of directors. It defines the relationship between the company and its shareholders.
SHARE: The Oxford dictionary defines a share as ‘each of the equal parts
into which a company’s capital is divided, entitling its owner to a proportion of profits’. Similarly, a stock is defined as ‘capital of a business’ A joint stock company collects its owned capital by issuing shares. The share capital of the company is divided into a no. of equal parts. Each part is called a share. Thus a share is one part of the total share capital of the company. SECTION 2(46) OF INDIAN COMPANIES ACT, 1956 DEFINES SHARE AS “ A SHARE IS THE SHARE CAPITAL OF A COMPANY, AND INCLUDES STOCK EXCEPT WHEN A DISTINCTION BETWEEN STOCK AND SHARES IS EXPRESSED AND IMPLIED.” KINDS OF SHARES: The company can issue different kinds of shares, which enjoy varying rights and privileges. Under the Indian Companies’ Act, 1956, a public limited company can issue 2 kinds of shares: Equity shares and preference shares. Equity shares (or ordinary shares) is supposed to be issued by every company. The equity shareholders enjoy dividends (rewards) as well as bear the risk of the company. . The equity shareholder receive dividend only if the company makes profits for a particular year. In case of winding up of the company, the claim of the equity shareholders regarding repayment of the capital comes last, only after repayment of capital to preference share holders. Advantages: 1. It represents permanent capital. There is no liability for repayment during the lifetime of the company only in the winding up of the company. Equity share holders are paid and that too after payment to creditors and preference shareholders 2. It does not involve any fixed obligations for payment of dividend. 3. It enhances creditworthiness of the company.
4. The equity share capital does not create any charge on the assets of the company. 5. Equity shareholders enjoy control over the management of the company 6. The dividend can be very high in the case of highly profitable companies. 7. The existing share holders are eligible for bonus shares and rights of the shares. Features: 1. Permanent capital: equity share capital represents permanent capital of the company. There is no obligation on the part of the company to repay the capital during the life time of the company, except at the winding up of a company. 2. Risk to capital: There is no guarantee of return of capital. Equity share holder has a residual claim on the winding up of the company. 3. Fluctuating dividends: There is no guarantee of minimum dividend. The rate if dividend depends upon the earnings of the company. Thus if a company accumulates losses, shareholders get no dividends. 4. Voting rights: The equity share holder enjoy normally voting rights. They can actually vote on all resolutions passed at the shareholders meeting. They can exercise their rights either by person or by proxy the preference. 5. Capital appreciation: Equity shareholders are subject to capital appreciation or depreciation. Appreciation takes place when the market value of shares increases on the stock exchange due to excellent performance of the company, while depreciation takes place when the market value of the share decline on the stock exchange. 6. Bonus shares: When the company ‘s performance is exceptionally good, the company may issue bonus shares by distributing the profits by way of dividend bonus. 7. Benefit of rights issue: When an existing company raises further capital by way of shares, first preference is given to existing shareholders. 8. Transferability of shares: The shares of a public company are freely transferable. If the share holder wants to sell or transfer the shares, he can easily do so. In case of certain preferential allotment, such as preferential allotment to employees, there is a lock-in period. Shareholders can transfer shares after expiry of lock-in period. Preference shares:
PREFERENCE SHARES ARE THOSE SHARES WHICH ENJOY PREFERENCE OVER EQUITY SHARE CAPITAL. THE TWO MAIN PREFERENCES ARE: • FIXED ANNUAL DIVIDENDS. • RETURN OF CAPITAL IN THE EVENT OF WINDING UP OF THE COMPANY. Although the preference shareholders enjoy the above preferences, they do not enjoy normail voting rights. They are entitled to vote only on those matters that affect their interests. The maximum rate of interest permissible is 14%. Features: 1. Reference for dividend The preference shareholder get a preference for dividend 2. Payment of capital: The preference shareholders get preference in repayment of capital at the time of winding up of a company. 3. Redeemabiltiy of shares: As per the Companies’ amendment Act, 1988, a company cannot issue irredeemable preference shares. Thus, preference shares have to be redeemed after a certain period of time . 4. Dividend rate: The preference shareholders gets a regular dividend, which is fixed. 5. Risk factor: As preference share holders have preference for dividend and return of capital, there is lower risks as compared to equity shares. 6. Bonus Shares: Preference Shareholders are not entitled for the issue of bonus shares. They are also not entitled for ‘right issue of shares’. 7. Voting rights: They do not enjoy normal voting rights at company meetings. They have voting rights in respect of only those matters which affects their interests. 8. Nature of shareholders: Normally, catious investors who do not like to take large risks prefer to go for preference shares. Types of preference shares: 1. Participating and non-participating shares: The participating preference shareholders (along with the equity shareholders) have the right to participate in the surplus profits of the company, whereas, non-participating do not have such right. The nonparticipating share holders are entitled to a fixed rate of dividend. 2. Cumulative and non cumulative shares: The cumulative preference shares accumulate unpaid dividend on shares. This
means, if the dividend is not paid in one or more years due to poor performance of the company then such unpaid dividend gets accumulated. The accumulated dividend is to be paid before making any payments of equity shareholders. Non-cumulative preference shares do not accumulate the unpaid dividend. If the dividend is not paid in one year due to poor performance, the non-cumulative shareholders forfeit the right to get such unpaid dividend in the subsequent years. 3. Redeemable and irredeemable shares: The redeemable preference shares are repaid after a certain period of time, but the irredeemable preference shares are payable only on the winding up of the capital. The irredeemable shares carry more risk because there are chances they may not get their capital back on winding up of the company. As per the amendment made on 15th June,1988, In the Indian Companies Act, the issue of irredeemable preference shares has been abolished. If any irredeemable preference shares are issued prior to this amendment, then such shares are to be redeemed. Deferred Shares: This type of shares are also known as “FOUNDER SHARES” or “MANAGEMENT SHARES”. In India, The Indian Companies Act,1956 does not permit the issue of deferred shares in the case of Public Limited Companies. As per Sec.85 And Sec.86 Of Companies Act, 1956, the shares capital of a company limited by shares, shall be of two kinds only, namely: (a) Equity Share Capital, And (b) Preference Share Capital. The above section do not apply to a private company unless it is a subsidiary of a public company. That means such a private company may issue share capital of such other kinds as it may fit. So a pure private company can issue deferred shares. Bonus Shares: Profitable companies issue bonus shares to equity shareholders. Issue of bonus shares is called as “Capitalisation of Reserves”(undistributed profits). The bonus shares enjoys all rights and privilege of equity shareholder. The bonus shares are equity shares. The only difference is that they are issued to equity shareholders free of cost or as a gift by the company.
When the company earns huge profits, the entire profit is not distributed by way of dividend. It transfers a part of the profits to reserves. Out of such reserves, the bonus shares can be issued. Conditions for issue of Bonus Shares: 1. No Bonus Shares can be issued within 12 Months of any public/rights issue. 2. The Bonus issue is to be made out of free reserves built out of genuine profits or share premium collected in cash only. Reserves created by revaluation of fixed assets are not to be taken into consideration, while calculating free reserves. 3. There should be a provision in articles of association to this effect. If there is no such provision, the company should pass a resolution at its general body meeting making provisions in the articles for capitalization of reserves. 4. The bonus issue is not made unless the party-paid shares, if any existing, are made fully paid-up. 5. A Company which announces its bonus issue after the approval of the board of directors must implement the approval within a period of six months from the date of such approval and shall not have the option of changing the decision. 6. Consequent to the issue of bonus shares, if the subscribed and paid-up capital exceed the authorized capital, a resolution should be passed by the company at its general body meeting for increasing the authorized capital. 7. No bonus issue can be made by the company which will dilute the value or rights of the holders of convertible debentures, fully or partly. 8. The residual reserves after the proposed capitalization (issue of bonus shares) should be atleast 40% of the increased paidup capital. 9. There can be issue of bonus shares only twice in a period of 5 years. SHARE STOCK THE INDIAN COMPANIES ACT, 1956, DEFINES A STOCK AS “A BUNDLE OF FULLY PAID SHARES PUT TOGETHER FOR CONVENIENCE, SO THAT IT MAY BE DIVIDED INTO ANY AMOUNT AND TRANSFERRED INTO ANY FRACTIONS AND SUBDIVISIONS WITHOUT REGARD TO THE ORIGINAL FACE VALU OF THE SHARES”.
The stock represents a portion of share capital of the company. It is used for the convenience of the shareholders of fully paid shares. Thus, a shareholder may have a no. of shares certificates. He may request the company to issue him only one certificate by surrendering all the share certificates. Conditions for issue of stock: 1. Only a public limited company can issue a stock. A private company is prohibited to convert its shares into a stocks. 2. Only fully paid shares can be converted into a stock 3. Articles of association must permit issue of stock. if article do not permit such issue, then they must be amended by passing a suitable resolution, before issue of stocks. 4. The registrar of companies must be given intimation of such conversion within 30 days after doing so. 5. An ordinary resolution must be passed by the shareholders in the general meeting in respect of conversion.
OTHER KINDS OF SHARES?STOCKS in MARKET
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Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held. Cumulative Preference Shares. A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Participating Preference Share: The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.
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Bond: A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows – Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond. Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Debentures: Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured/charged against the asset of the company in favor of debenture holder Commercial Paper: A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in form of a promissory note redeemable at par to the holder on maturity and therefore doesn’t require any guarantee. Commercial paper is a money market instrument issued for the tenure of 90 days. Coupons: Tokens for payment of interest attached to bearer securities. Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.
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SHARE CERTIFICATE A share certificate is a document of title to shares. It is issued to the shareholders of the company, as an evidence to their shareholding in the company. A SHARE CERTIFICATE IS DEFINED AS A DOCUMENT OF TITLE TO SHARES ISSUED BY A COMPANY UNDER ITS COMMON SEAL. Contents of a share certificate: 1. Name and address of the registered office of the company. 2. Name(s) of the shareholder(s) 3. Registered folio no. and certificate number. 4. Number of share(s) held. 5. The type of share 6. Date of issue of certificate. 7. Signature of two directors and one authorised signatory. 8. Lock in period if any. 9. Seal of the company against the affixed revenue stamp. 10.The face value of shares. 11.Whether the face value is fully paid or paid partly. Statutory provisions regarding issue of share certificate. The Indian companies Act, 1956, lays down the following provisions regarding the issue of share certificate: 1. Time limit for issue: Share certificates must be issued within three months of the date of allotment and within two months of date of request for registration of transfer. 2. Resolution: Issue of share certificates must be sanctioned by a resolution passed at a board meeting. 3. Penalty for fraudulent renewal: If a company fraudulently renews certificates, then the company is liable to pay a fine of Rs. 10000/and every officer of the company in default is liable to punishment for a term upto six months or a fine of Rs..10,000/- or both. 4. Details: Every share certificate should specify the name of the holder, the no. and the type of share held by him and the amount paid on each share. 5. Register of members: On the issue of a share certificate, the prescribed particulars of member concerned, should be entered in the register of members. 6. Duplicate certificate: The duplicate certificate issued must contain the fact that it is a duplicate certificate.
7. Other relevant provision: such as entries in the register of members must be initialed and authenticated by an authorised person. Procedure involved in the issue of share certificate: The company secretary has to look after the procedure of issuing share certificates to the members. Following are the duties which the company secretary with respect to procedure involved in the issue of share certificate: 1. Printing of share certificate: The secretary has to get the shares printed with the necessary details required. 2. Board meeting for allotment: The secretary calls for a board meeting soon after the collection of share application forms. The board appoints a committee to finalise the allotment and submits a report to the board. 3. Dispatch of allotment letters: The secretary may dispatch allotment/regret letter to the share applicant. 4. Preparation of register of members: The names and other details of those who are allotted shares are entered in the register of members. 5. Board meeting to sign certificates: The board meeting is called to sign on the share certificates. This work may be done earlier in the previous meeting too.. 6. Preparation of share certificate: share certificates are prepared by entering the necessary details. 7. Intimation to shareholders: The shareholders will be informed regarding the dispatch of share certificate in exchange of allotment letter and the bankers’ receipt for a payment of allotted money. 8. Dispatch of share certificate: The secretary will send the duly completed certificates to members, It could also be sent along with notice of allotment. Issue of duplicate share certificate: A company can issue a duplicate share certificate to its members when the member requests for the same. If the original share certificate is damaged or worn out, the member has to surrender the original certificate to company to obtain a duplicate certificate. Member has to give a statutory certificate stating that the original share certificate is lost. A letter of indemnity in favour of the company is required by the member to protect the company. The cost of public notice issued by the company with respect to the loss has to be borne by the member and a bank guarantee may be asked by the company. 1. The secretary has to verify the details of application for duplicate certificate. The board has to approve the issue of a duplicate
certificate while a public notice must be put in a newspaper regarding the loss of original share certificate. Finally a duplicate certificate is prepared and is sent to the applicant by registered post. SHARE WARRANT A SHARE WARRANT IS DEFINED AS “A DOCUMENT ISSUED BY A COMPANY UNDER ITS COMMON SEAL STATING THAT THE BEARER OF THE WARRANT IS ENTITLED TO THE NUMBER OF SHARES MENTIONED THEREIN”. A Share certificate can be converted into a share warrant in respect of fully paid-up. It can be issued only by public limited companies. A share warrant is a bearer document. It is transferable by mere delivery. It’s a negotiable document. The holder of the share warrant is entitled to the no. of shares mentioned therein. A share warrant may have coupons attached to it, for the purpose of future dividend on the shares included in the warrant. Normally, there are three parts to a share warrant: (a) The counterfoil (b) The share warrant paper and (c) The dividend coupons Conditions for the issue of a share warrant: 1. Only a public limited company by shares can issue share warrants. 2. A company can issue share warrants only in case of fully paid shares. 3. Articles of Association must permit the issue of such warrants. 4. Prior permission is needed from Central govt. for the issue of such warrants. 5. Share warrants are issued only at the request of the members. SHAREHOLDERS Shareholders are the owners of the company who provide capital for the company. They elect Board of Directors to run the business on their behalf. RIGHTS OF SHAREHOLDERS Under the Companies Act, the following are some of the basic rights of members. 1. To receive notices and circulars of general meetings, statutory report, annual report of directors, annual accounts, auditor’s report, dividend warrant etc.
2. To exercise the right to elect directors, auditors and to approve the annual accounts of the company. 3. To decide remuneration for directors and auditors. 4. To remove directors and auditors, if required. 5. To exercise borrowing powers. 6. To approve the dividend declared. 7. To receive dividend. 8. To appoint proxy and to exercise voting rights through proxy. 9. To demand a poll in a general meeting. 10.To inspect the statutory books. 11.To receive share certificate. 12.T transfer shares as per Articles. 13.To call an extra-ordinary general meeting under special circumstances. 14.To receive pro-rata offer of newly issued shares. 15.To receive bonus shares. 16.To alter Memorandum and Articles of Association of the company. 17.To receive a share in the assets and properties of company on dissolution. DUTIES TO SHAREHOLDERS OF COMPANY SECRETRIAL • Arranging for issue of capital. • Sending allotment letters. • Issuing call notices. • Issuing dividend warrants. • Certifying valid transfers. SOCIAL RESPONSIBILITY TOWARDS SHAREHOLDERS Business organizations have the following social responsibilities towards shareholders, who are the owners and risk bearers of business. 1. Fair return: Since shareholders have invested their funds and borne the business risk, they expect a fair and adequate return on their investment. What constitutes fair return depends on the level of risk but it should definitely be higher than the interest paid by banks on similar investment. 2. Capital Market: To provide the country with a strong, sound and well-organized capital market, undue fluctuations in share prices in stock market brought about by manipulations made by directors, should be avoided because it adversely affects the shareholder’s confidence in the organization. 3. Shareholders participation: To encourage the participation of shareholders in the administration of organization and to pass on the
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benefits of capital appreciation to shareholders. Eg. Bonus shares can be issued to shareholders from time to time. Effective Use of Shareholders Funds: Shareholders’ funds should be employed in the best possible manner by the organization, so as to maximize both short and long run returns to shareholders. Expansion Programmes: The management should undertake expansion and diversification programmes, research and development activities, to maximize the profitability and also to pave the way for long-term survival and growth of business. Accurate information: The management should keep the shareholders updated regarding business affairs. Meetings of shareholders should be held regularly and the relevant reports and circulars should be made available to all shareholders. Good Reputation: The management should take care that the company maintains its goodwill and reputation in the market to boost the morale of shareholders. Audited Annual Accounts: A copy of the audited Profit and Loss Account and Balance Sheet should be sent to each and every shareholder annually.
Specimen of a share certificate:
SELL WELL INDIA LIMITED (INCORPORATED UNDER THE COMPANIES ACT, 1956) REGD. OFFICE: 116, S.V. ROAD, MUMBAI – 400 056 SHARE CERTIFICATE THIS IS TO CERTIFY THAT THE PERSON(S) NAMED IN THIS CERTIFICATE IS/ARE THE REGISTERED HOLDER(S) OF THE WITHIN MENTIONED SHARE(S) BEARING THE DISTINCTIVE NUMBER(S) HEREIN SPECIFIED IN THE ABOVE COMPANY SUBJECT TO THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPANY AND THAT THE AMOUNT ENDORSED HEREON HAS BEEN PAID UP ON EACH SUCH SHARE EQUITY SHARES EACH OF Rs.10-00 AMOUNT PAID UP PER SHARE Rs.10-00 REG. FOLIO NO. 1/10 CERTIFICATE NO. 420 NAME(S) OF HOLDER(S): BABU RAO NO. OF SHARE(S) HELD: 100 DISTINCTIVE NO.(S): 58450 TO 58549 GIVEN UNDER THE COMMON SEAL OF THE COMPANY THIS 12TH DAY OF OCTOBER 2003. CHAIRMAN SEAL NOTE: NO TRANSFER OF ANY OF THE SHARE COMPRISED IN THIS CERTIFICATE WILL BE REGISTERED UNLESS ACCOMPANIED BY THIS CERTIFICATE. MANAGING DIRECTOR AUTHORISED SIGNATORY
Specimen of a share warrant.
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SELL WELL INDIA LIMITED (INCORPORATED UNDER THE COMPANIES ACT,1956) REGD. OFFICE: 116,S.V. ROAD, MUMBAI – 400 056.
SELL WELL INDIA LTD FOR 1000 EQUITY SHARES NUMBERED :6100 – 7900 NO. OF CERTIFICATE : S 840 ISSUED TO: BABU RAO DATE: 8TH FEBRUARY, 2003 FOLIO NO, IN REGISTER OF MEMBERS: J49 SHARE WARRANT SHARE WARRANT NO. SW 210 THIS IS TO CERTIFY THAT THE BEARERR OF THIS WARRANT IS ENTITLED TO 1000 FULLY PAID SHARES OF Rs.10 EACH NUMBERED 6100 TI 7900 (BOTH INCLUSIVE) IN, SELL WELL INDIA LIMITED, SUBJECT TO THE ARTICLES OF ASSOCIATION OF THE COMPANY AND THE CONDITIONS ENDORSED THEREON. GIVEN UNDER THE COMMON SEAL OF THE COMPANY THIS 8TH OF FEBRUARY 2003. CHAIRMAN SIGNATORY SEAL MANAGING DIRECTOR AUTHORISED
MARKETS FINANCIAL MARKETS: The financial markets can broadly be divided into money and capital market. Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre- issued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-theCounter (OTC) is a part of the dealer market. STOCK EXCHANGE: A stock exchange is a market place, like any other centralised market where buyers and sellers can transact business in shares and securities at a given point of time in a convenient and competitive manner at the fairest possible price. Now-a-days, the business is done using a screen based method through duly authorised members or brokers of the exchange. The
stock exchange is open to any one, big or small with money to invest or securities to sell. A stock Exchange means any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Investment in shares offers a wide range of choice. There is something for every type of investors. There are three types of investors depending on their income, needs and expectations: 1.investors who are risk averse 2. Cautious investors who would like to take some risks. 3.Speculative investors. The stock exchange allows tan individual to invest in any securities he likes. His capital is free to move from one security to another which enables him to make profits if the venture succeeds or to incur losses if it fails. The screen based system of stock exchange is continuous auction market but it is not like the conventional auction where buyers compete and there is only one seller. In the stock exchange, there is two way auction. The bidders compete with each other to purchase at the lowest price the shares they want to buy. Similarly, those who want to sell compete with each other to get the highest price for the shares they are offering. When the buyer bidding the highest price and the seller offering the lowest price match, a transaction is executed by the exchange. Both quotations and orders of sale are entered now-a-days using a computer. New York Stock Exchange or the NYSE, was the first known stock exchange in the world. It is in continuous operation since 1792. There are 24 recognised stock markets in India with 9879 Cos. listed on these markets having 50 million investors. Prominent among them are Mumbai Stock Exchange and the National Stock Exchange. BROKER: An investor has to utilise the services of a registered broker for buying or selling shares in the stock market. It may be noted that brokers act as agents for their clients. At times, clients may deal with a sub-broker who in turn will transact business through a registered broker. At present, sub-brokers are required to register themselves with the SEBI for doing business. The broker charges commission or brokerage for his services which is regulated and which has to be shown separately in the contract which must be issued to the client. After a broker executes an order of a client, he is statutorily required to issue a contract notice to the client. This note is in a prescribed form and confirms that certain no. of securities have been bought or sold at the
stated price by your order and to your account, and the brokerage amount has to be shown separately in the contract note. The brokerage cannot exceed Rs. 0.25 per share or 2.5 per cent of the contract price, whichever is higher subject to a minimum charge of Rs.25per contract. The contract is an important evidence of a real transaction. Once it is delivered and accepted, it blinds the broker and the client; neither can then repudiate the contract. A good broker ensures that the contract note is sent to the client by hand delivery or by post on he same day or on the following day of the transaction. Some of the brokers or their authorised assistants act as jobbers. Jobbers are important players in the market who buy and sell shares on their account by giving two way quotations. An order is executed when it matches either a jobber’s quote or another broker’s order. Jobbers specialise in trading on their own account in one or more listed securities. By trading in and out of the market, they are helping in maintaining a liquid and continuous market in the stock in which they specialise. For active shares, there may be several jobbers trading in them. For inactive shares or for thinly traded shares, only one jobber may be doing trading in many of them. Jobbers specialise in particular shares. There may be more than one jobber and the price quoted by them may differ. But all jobbers try to square of their deals at the end of the day. It means whatever they buy or sell, or whatever they have earlier bought or sold are recorded in the books. They normally do not keep any outstanding business to be carried forward for the next day. A jobber gives two way quotations. A higher price represents the figure at which the jobber is willing to sell. The lower price represents the price at which he is willing to buy. The difference is the jobber’s spread. It is generally a fraction of 1% of the price for actively traded but if the share is not traded frequently, the spread becomes wider. Bull is an operator who expects the share prices to rise. He buys shares without any intention of taking delivery. When the prices rise, he sells the shares and squares up the transaction at a profit. This is called Long purchase. The counterpart of a bull is a bear. A bear expects share prices to decline and sells shares which he may not own. His intention is to buy those shares at a later date when the prices decline and then square up the transaction with a profit. This activity is referred to as selling short. A Stag is a person who subscribes to the new issue with the primary objective to selling at profit no sooner than he gets the allotment.
SEBI With increased liberalization, abolition of the Office of Controller of Capital Issues and free competition, it was felt that without adequate safeguards, free competition may degenerate into a free-for-all where the prospect for short-term profits may attract market participants whose credentials may be doubtful. The issuers and intermediaries in the primary market and the intermediaries in the secondary market may be insensitive to the rights of the investors. There was therefore a need for an authority to lay down the entry norms for market intermediaries, prescribe code of conduct, rules and regulations for all players in the market and then ensure that the game is played according to rules . In order to ensure that the rules, regulations and operations of stock exchanges are fair and an effective balance is struck between the needs of investor protection and competitive provision of financial services the need for a formal organization like the Securities Exchange Board of India (SEBI) with statutory powers was felt. This concept was formalized in April 1992 with the passing of SEBI Act, 1992. Similarly, in the US, Securities Exchange Commission 1934,Securities and Investment Board 1982 are other renowned bodies like the SEBI. SEBI’s main functions are: 1. Regulating the businesses in stock exchanges 2. Registering and regulating stock securities market and collective investment schemes like mutual funds 3. Promoting and regulating other self regulatory authorities 4. Prohibiting fraudulent and unfair trade practices in the stock market 5. Inspection and enquiries of intermediaries and self regulatory organizations in the stock market. 6. Performing other such functions as mentioned in the Securities Contracts Regulation Act, 1956. Due to the involvement of SEBI in stock exchanges, trading hours have increased, settlement cycle has been shortened to a week, rolling settlements and bad delivery cells have been introduced, computerization of stock exchanges has taken place and better guidelines have been issued for trading.
CAPITAL FORMATION-ROLE OF A COMPANY SECRETARY A Company Secretary is a person who is incharge of the legal aspects of a company. The company secretary plays an important role in the capital formation of the company. To collect long term funds by way of shares, the company secretary has to perform a number of duties as follows: 1. Consent of SEBI: When the public issue of shares exceeds Rs. 1 crore, the company has to take prior consent of the SEBI. only after getting the approval o f the SEBI, the company can proceed to raise funds from the market. 2. Vetting of prospectus: The company should properly draft the prospectus giving all the necessary details. The draft prospectus containing the disclosures has to be vetted by SEBI before a public issue is made. Once SEBI examines it, the draft prospectus and application form together with articles and memorandum of association must be forwarded to the stock exchange for approval. 3. Appointment of underwriters: The company then proceeds to get the issue underwritten. The underwriters guarantee the subscription for a consideration of commission. The issue can be guaranteed by a consortium consisting of IDBI, IFCI, and others. Each underwriter is responsible for the amount of shares underwritten by him. 4. Appointment of bankers: The bankers to the issue must be appointed to collect application money on behalf of the company. Normally, the company appoints its own bankers to handle the issue. Many-a-times, the underwriting bank also acts as a banker to the issue. 5. Appointment of registrars: The company also need to appoint registrars to handle various tasks in connection with the issue of capital. The registrars normally performs the following tasks: collection of application forms from the banks. 6. Appointment of brokers: The brokers facilitate the marketing of securities. There are certain restrictions regarding the appointment of brokers. Only registered brokers of the concerned stock exchange can be appointed as brokers. Brokers who serve as underwriters need to be appointed as brokers as well. The appointment of the broker has to be approved by the concerned stock exchange. There is also restriction on the number of brokers. 7. Filing of the prospectus with the registrar of companies: Once the prospectus is approved is approved by the concerned stock exchange and necessary appointments are made in respect of bankers, registrars, underwriters and brokers, the company then proceeds to file the prospectus with the registrar of companies,
along with the requisite documents as required under the Companies Act, 1956. 8. Printing and despatch of prospectus and application forms: The company then orders the printing of prospectus and application forms. The printed copies are sent to the brokers, underwriters and bankers to the issue. They must be sent to the brokers at least 21 days before the first announcement in the newspaper regarding the issue. The brokers normally receive printed copies from the registrars or the company. The brokers then distribute the prospectus and the application forms among investors. 9. Filing of initial listing application: Within 10 days of filing the prospectus, the initial listing of application must be made with the concerned stock exchange, along with the requisite fees. 10. Promotion of the issue: The company normally undertakes to promote the issue with the help of a publicity and advertising campaign. Some companies may get good reports in the newspaper columns with support of editors. 11. Statutory announcement: The statutory announcement of the issue must be made after seeking the approval of the lead stock exchange. The announcement must be published at least 10 days prior to the opening of the subscription list. 12. Collection of application money: The bankers to the issue collects the application of shares from the members of public along with the application money. 13. Processing of applications: The registrars to the issue collects the application forms from the banked and scrutinise them. Necessary information is tabulated and coded for the purpose of allotment of shares. 14. Establishing the liability of underwriters: If the issue is undersubscribed, the liability of the underwriters has to be established. Each underwriter has to subscribe the unsubscribed amount of shares in the agreed proportion at the time of underwriting agreement. 15. Allotment of shares: The registrars make arrangement to allot the shares. If the capital is just or undersubscribed, then they allot the shares after taking formal approval of the concerned stock exchange(s).if the capital is oversubscribed, then they have to decide the basis of allotment in consultation with stock exchanges and SEBI. 16. Listing of the issue: The detailed listing application should be submitted to the concerned stock exchange(s) along with the listing
agreement and the listing fee. The listing formalities after subscription list is closed. 17. Calls on shares: The company makes a call on its share holders to pay the unpaid amount of shares, if any. ISSUE OF SHARES Issue of shares is one of the most important stages in capital raising of a joint stock company. Issue of share involves the following aspects: 1. Application of shares. 2. Allotment of shares 3. Calls on shares. 4. Forfeiture of share. 5. Surrender of shares. 6. Transfer and transmission of shares.
1. APPLICATION FOR SHARES When the public company brings out a fresh issue of shares, it invites applications from the public for the same. The following is the procedure involved in inviting applications for shares: 1. Vetting of prospectus: The company-secretary should prepare the prospectus and submit it to Securities & Exchange Board of India (SEBI), for the purpose of vetting (testing). Once SEBI examines it, the draft prospectus along with other documents is sent to the stock exchange where the issue is to be listed. 2. Appointment of underwriters: The company-secretary then proceeds to get the issue underwritten. The underwriters guarantee the minimum subscription for a consideration of commission. 3. Appointment of bankers: The company-secretary may appoint the bankers for the purpose of collecting application on behalf of the company. 4. Appointment of registrars: The company-secretary may appoint registrars to the issue to handle various tasks in connection with issue of shares. The tasks include processing of application forms, dispatch of allotment/refund letters, etc. 5. Appointment of brokers: The secretary then appoints brokers to facilitate the marketing of securities. Only registered brokers of the concerned stock exchange can be appointed.
6. Filing of prospectus with registrar of companies: The secretary
then proceeds to file the prospectus with the registrar of companies, along with the requisite documents as required by the Companies Act, 1956. 7. Printing and dispatch of prospectus and application form: The secretary then orders the printing of prospectus and application forms. The printed copies are sent to the brokers, under writers, and bankers to the issue. 8. Filing of initial listing application: Within 10 days of filing the prospectus, the initial listing application must be to the concerned stock exchange. 9. Promotion of issue: The secretary then undertakes to promote the issue of shares with the help of publicity and advertising campaign. 10. Statutory announcement: The statutory announcement of the issue must be made after seeking the approval of the lead stock exchange. The announcement must be published atleast 10 days prior to the opening of the subscription list. 11. Collection of application money: The bakers to the issue collects the share applications along with the application money. At least 5% of the face value or nominal value of the share is to be collected on application. 12. Processing of applications: The registrars to issue collect the application forms from the bankers and scrutinise them. They have to handle the further processing of the application forms for the purpose of allotment of shares. Companies issue IPO’s or the Initial Public Offering so that companies canThe companies can freely price their equity shares. However they have to give justification of the price in the offer document / letter of offer Book building process: SEBI allowed issuers of equity shares the option to issue through Book building process in 1998. Book building refers to the collection of bids from investors which is based on an indicative floor price, the issue price being fixed after the bid closing date. The book building process is undertaken basically to determine investor appetite for a share at a particular price. In book building process, a company asks for bids from interested investors. These are generally online. The company then analyses the bids and decides on the price of each share to be issued. It is then traded with.
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1. Approvals required: Approvals are required from the share holders 2.
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to the public issue. The issue management team: A team consisting of Book Running Lead Manager (BRLM) , Co-BRLM, syndicate members etc. are appointed to look after the book building process. Red Herring prospectus: BRLM conducts due diligence on the issuer during the preparation of a Red Herring prospectus which is filed with the SEBI. SEBI scrutinizes the Prospectus. Procedure for bidding: Investor has to bid online at various terminals and these bids are submitted. These bids are analised by the syndicate team. Price discovery: Book is built at various prices. Company and BRLM finally decide the price and the amount is collected from bidders.
2. ALLOTMENT OF SHARES ALLOTMENT CAN BE DEFINED AS “THE APPROPRIATION TO AN APPLICANT, BY A RESOLUTION OF THE BOARD OF DIRECTORS OF A CERTAIN NUMBER OF SHARES IN RESPONSE TO AN APPLICATION”. The allotment of shares is made to those who have applied for, and are eligible for the same. The board of directors decides the allotment of shares. The secretary of the company, or the registrars to the issue accordingly informs to the applicants. If the shares are oversubscribed, the allotment is done on proportionate basis. A SEBI nominated public representative, shall be associated in the process of finalisation of basis of allotment. Essentials of a valid allotment: The following are the essential conditions of a valid allotment: 1. Valid offer and acceptance: A valid allotment requires an offer and acceptance of that offer. The applicant puts the offer by applying for the shares. The board of directors accepts the offer by passing a resolution regarding allotment.
2. Unconditional allotment: The allotment must be absolute and
unconditional. It has to be done in accordance with the terms and conditions stated in the application form. 3. Amount payable on application: The amount payable on application on each share shall not be less than five percent of the face value or nominal amount of the share. 4. Application money to be deposited: The amount received on application for shares should be deposited in a scheduled bank. This money cannot be withdrawn until the company gets certificate of commencement of business, and where such certificates is received, then till the amount of minimum subscription is received. 5. Minimum subscription: No allotment can be made unless the company receives the minimum subscription. It should be collected within 120 days of issue of prospectus, otherwise, application money is to be refunded. As per SEBI guidelines 2000, the minimum subscription must be received within 60 days from the date of closure of the issue. 6. Time for allotment: No allotment of shares can be effected until the beginning of the fifth day from the date of issue of prospectus. The subscription list must be opened for at least 3 days, and disclosed in the prospectus. 7. SEBI’s representative: If the issue is oversubscribed, then the shares are to be allotted on proportionate basis. The SEBI nominated are to be allotted on proportionate basis. The SEBI nominated public representative is associated in the process of finalisation of basis of allotment. The basis of allotment has to be approved by the lead stock exchange. 8. In accordance with the documents: The board of directors has to make the allotment in accordance with the prospectus, the application form, the memorandum and the articles of association. The board has to pass a suitable resolution in this respect. 9. Proper communication: The allotment must be duly communicated to the applicant through the post. It is always advisable to send the communication through registered post. Along with the intimation of allotment/refund, the share certificates and a cheque for refund or excess amount is to be sent. 10. Filing of prospectus: A copy of prospectus or statement in lieu of prospectus must be filed with the registrar of companies
before allotment. At least 3 days must be passed after such filing before the allotment is taken up.
IRREGULAR ALLOTMENT Sec.17 of the companies act, states that if the allotment is made in violation of any of the above rules. Such allotment is called “irregular allotment”. Irregular allotment is null and void at the instance of the applicant. The allottee must give a notice to annul the allotment within two months from the date of statutory meeting or where there is no statutory meeting then within two months from the date of such allotment. Allotment procedure The following is the procedure to be followed by the secretary in the case of allotment of shares: 1. Fulfillment of statutory provision: The secretary has to see that the statutory provisions (essential conditions) for a valid allotment are fulfilled. This includes receipt of minimum subscription within 60 days from the date of closure of issue, the period of 3 days to keep the subscription list open, etc. 2. Appointment of allotment committee: If the issue is oversubscribed, the board appoints an allotment committee to finalise the basis of allotment. The allotment committee is assisted by the secretary of the issue. 3. Intimation to SEBI: The company has to intimate the SEBI to nominate a public representative. In case of oversubscription, the SEBI nominated public representative is associated in the process of finalisation of the basis of allotment. 4. Consultation or approval of stock exchange: The basis of allotment must be finalised in consultation with the lead stock exchange. The lead stock exchange is normally the stock exchange where the registered office is located. It is to be noted that SEBI’s representative and approval of the stock exchange is required only if the issue is oversubscribed. 5. Board’s resolution: The board of directors must pass a suitable resolution in respect of allotment of shares. The allotment of shares must be done in accordance with the prospectus, the application form, the memorandum and the articles of association.
6. Preparation of allotment advice/refund order: The secretary has
to prepare necessary allotment advice/refund order, and allotment money notice. The secretary prepares such notes on the basis of information in the allotment list. Now-a-days, companies appoint registrars to the issue to handle this work. 7. Preparation of allotment list: The allotment list must be prepared in respect of eligible allotees. Necessary details must be entered in the list in respect of number of shares allotted to a particular allotee, the amount paid on application, the amount adjusted against allotment money, the amount due to be refunded, if any, and so on. 8. Preparation of share certificates: The share certificates must be prepared with the required details in respect of the name of the shareholders, the amount paid on shares allotted, the certificate number, the distinctive numbers of shares, the dates of issue of certificate. The certificate must be signed by at least two directors and countersigned by secretary or authorised signatory. 9. Preparation of register of members: The details of the share certificate along with the address of the shareholder must be entered in the register of members. 10. Dispatch of allotment advice/regret letter: The secretary then makes necessary arrangements to dispatch the allotment advice/refund order, together with the share certificates. The secretary may send letters of renunciation of shares, and splitting of shares, especially in the case of allotment of shares by way of “right issue”. 11. Arrangement for letters of renunciation: The allottee can renounce or give up part or full quota of shares allotted to him either in favour of the company or third party. The secretary has to make necessary arrangements for the same. 12. Arrangement relating to splitting of shares: The allottee may request for splitting of shares in smaller lots. The secretary has to make necessary arrangement of the same. 13. Arrangement for cancellation of allotment money: The secretary has to make necessary arrangement to collect allotment money through the company bankers. 14. Submission of return of allotment: The secretary must submit to the registrar “return of allotment” within 30 days from the date of allotment of shares. Return of allotment contains such details as number of shares allotted names, address and occupation of the allottees and the amount paid on each.
Listing of stocks: Listing means admission of the stock of a company to trading on a stock exchange. The principal objectives of listing are to provide ready marketability and impart liquidity and free negotiability to socks and shares, ensure proper supervision and control of dealings therein and protect the interests of shareholders and of the general investing public. Stock exchange offers an open market where buyers and sellers from all over the country meet in terms of perfect equality and evolve a competitive market price. These dealings take place subject to well defined code of byelaws and regulations and full 3. Call on shares A company may not require the entire amount of share capital issued at the time of application and/or allotment of shares. The company may call for the unpaid amount on shares at any time as and need for additional capital arises. Such balance money on shares when demanded is called as call on shares. A CALL ON SARES IS DEFINED AS “A DEMAND MADE BY THE COMPANY ON ITS SHAREHOLDERS, TO PAY WHOLE OR PART OF THE UNPAID BALANCE ON EACH SHARE AT ANY TIME DURING THE LIFE TIME OF THE COMPANY”. The power to make a call vests in the board of directors. The board cannot delegate this power to a director or a committee if directors or any officer of the company. The board should pass a suitable resolution in respect of call on shares. Essentials of a valid call The provisions of the companies act must be followed to take a valid call. The following conditions must be followed 1. Uniform basis: A call must be made on uniform basis as regards all shares of a particular class. 2. Amount of call: A call should not exceed 25% of the face value of shares. 3. Time gap between two calls: The time period between two successive calls should not be less 30 days 4. Notice to shareholder: A shareholder must be given notice of at least 14 days for payment of call money.
5. Board’s resolution: The board must pas a suitable resolution in
respect of call on shares. 6. In accordance with articles: The calls must be made in accordance with the articles of association and the provisions of the companies act, 1956. 7. Postpone/revoke call: The board may decide to postpone or revoke a call. The shareholders must be informed accordingly. 8. Failure to pay call by directors: A director who fails to pay the call money within six months from the date of making call has to vacate the office. 9. Refusal to transfer shares: The board may refuse to transfer the shares on which the calls are in areas. 10. Voting rights: A defaulting member does not have voting rights until the call is paid. 11. Liability to pay interest: If the shareholder fails to pay the call, he is liable to pay the call along with the interest for a period from the due date of the call till the payment date of the call. Procedure-calls on shares The company secretary has to follow the following procedure in connection with the calls on share: 1. Board meeting: The secretary has to convene a board meeting in respect of call on shares. The necessary resolution is passed at the board meeting to call money on shares. The resolution should mention the amount of the call, the type of shares on which call is to be paid, the date and place of payment. 2. Closing of transfer books: The board must also pass a resolution in connection with the closure of transfer books. This enable the secretary to make necessary arrangement in respect of calls on shares. 3. Preparing a call list: After closing the transfer books, the secretary prepares the call list indicating the names of those shareholders on whom the call is made, along with other details. 4. Drafting of call letters: The secretary gets the call letter drafted. He then orders for printing of such letters. The call letter consist of three parts: (a) call notice: it is the first part of the call letter, which gives details as to the amount of the call, the date by which call is to be paid and the bank’s branch where money is to be deposited. (b) call receipt: this part is to be signed by the bank and returned to the shareholder. It gives details as to the receipt of call money by the
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bank.(c) call slip: this part is to be retained by bank and sent along with statement of account to the company. Dispatch of call letters: The secretary then makes necessary arrangements to send call letters to the registered address of the members. The company should give at least 14 days notice to the shareholders to pay the call. He is also required to publish the notice in the leading newspaper. Arrangement with bankers: The secretary makes necessary arrangement with the bakers to collect the call money on behalf of the company call money with the bankers. Within the validity of the call period, the shareholders can make payment at the designated branches of the concerned bank(s). Making entries in register of members: After the receipt of call slips from the bankers with details of payment noted therein, the secretary then makes necessary entries in the register of members. He then sends call payment stickers to the shareholders to stick on the share certificates. Now-a-days, there is no need to send the certificates by the shareholders to the company, for endorsement, in respect of payment of call. List of defaulters: The secretary then prepares the list of defaulters who have not yet paid the call money. The unpaid calls are known as “calls in areas”. The secretary has to send call reminder(s) to the share holders, of the board has to take necessary action for the recovery of dues or non-payment of call.
4. Forfeiture of shares Meaning: Forfeiture of shares means cancellation of shares. If the shareholder fails to make payment of the calls on shares within the stipulated time, his shares are liable for forfeiture. Normally, a shareholder does not pay for calls when he is in financial crisis or when he feels or knows that the company is not financially sound. The directors can sue the shareholders for non-payment of calls or forfeit his shares. Reason for forfeiture: The shares can be forfeited shares only on the grounds of non-payment of call money. However, it has been held by the Kolkata High Court that fully paid-up shares also can be forfeited in such cases, as default in fulfilling any engagement between the members, or expulsion of members, where the articles specifically provide therefore.
Proper notice: A proper notice of forfeiture must be served to the shareholder. The object of the notice is to give the shareholder an opportunity for payment of the call money, interest and expenses. The article of association may provide a reasonable period, say 14 days time for making payment of amount due from the date of such notice. The notice of forfeiture, be preferably sent by registered post. But the accidental non-receipt of notice of notice of forfeiture, by the defaulter is not a ground for relief against forfeiture regularly effected. Board’s resolution: The board of directors must pass a resolution regarding forfeiture of shares of the defaulting members. Effect of forfeiture: Forfeiture of shares results in termination of membership of the defaulting shareholder. The directors can forfeit the shares only when they are authorised by the articles of association, for doing so. There is no provision in the Companies Act, 1956 in respect of forfeiture of shares. However, the articles empowers the directors to forfeit the shares, if the situation so demands. Reissue of forfeited shares: The forfeited shares can be reissued by the company so such terms and conditions as the board of directors may think fit. However, the forfeiture of shares can be annulled or cancelled at the request of the member. The board of directors may consider such request. He is, however, liable to make the payment of the call. Essentials of a valid forfeiture: 1. In accordance with articles: The directors can forfeit the shares in accordance with the articles of association. Shares may be forfeited if the company’s articles specifically contain a provision in that behalf on such grounds as may be provided therein. 2. Non-payment of call: Shares can be forfeited only on the grounds of non-payment of call. Forfeiture is not possible in case of fully paidup shares. 3. Proper notice: A proper notice of forfeiture must be served to the shareholder. The object of the notice is to give the shareholder an opportunity for payment of the call money, interest and expenses. The articles of association may provide a reasonable period say 14 days time for making payment of amount due from the date of such notice. The notice of forfeiture, be preferably sent by registered post. But the accidental non-receipt of notice of forfeiture, by the defaulter is not a ground for relief against forfeiture regularly effected.
4. Board meeting: The forfeiture of shares is decided in the board
meeting. Improper forfeiture for example, poor quorum in board meeting may lead to action for damages. 5. Board’s resolution: The board of directors must pass a resolution regarding forfeiture of shares of the defaulting members. 6. Intimation of forfeiture: The company should intimate the concerned member regarding the board’s resolution to forfeit his/her shares. 7. Removal of names from the register of members: The company should remove the names of those defaulters whose shares are forfeited from the register of members. 8. Public notice: The company may give a notice in leading newspaper in respect of forfeiture of shares in the interest of general public. Procedure regarding forfeiture of shares The following are the secretarial duties in connection with the procedure of forfeiture of shares: 1. Preparation of defaulters list: The company secretary should collect the call slips from the bankers with details of payment mentioned therein. He should then make entries in the register of members. From this he can prepare a list of defaulters who have not yet paid the call on time. 2. Verification in the article: The secretary should verify the articles of association. If there is a provision regarding the forfeiture of shares. 3. Board’s meeting: The secretary has to call a board’s meeting to pass a resolution, authorising the secretary to send call reminders and/or warning letter of forfeiture. 4. Call reminders/warning letter of forfeiture: The secretary then drafts the call reminders and dispatches them to the defaulting members. If the defaulting members do not make any payment of the call within the stipulated period, the secretary may send them a warning notice of forfeiture 14 days period before the date of warning notice must be given to the defaulting member to make payment. 5. Board meeting for forfeiture: If the defaulting members do not heed to the warning letter of forfeiture, he then calls a board meeting to forfeiture the shares. The board must pass a resolution to forfeit the shares. 6. Notice of forfeiture: The secretary should then intimate the defaulting shareholder of the forfeiture of shares along with a copy of board’s resolution. 7. Removal of names from the register of members: The secretary then strikes off the names of the defaulting shareholders whose shares are forfeited from the register of members.
8. Public notice: The secretary may publish a notice of forfeiture of
shares of the concerned shareholders in a leading newspaper in the general interest of the public, so that they do not purchase or deal in such shares. 5. Surrenders of shares Meaning: It means voluntary return of shares by a shareholder of the company for the purpose of cancellation. Surrender of shares can be accepted by the board of directors only when they are permitted by articles of association. There is no provision for surrender of shares in the Companies Act. Reason for surrender: Surrender of shares should be only on account of non-payment of calls on shares. In no other circumstances, it is to be permitted, because it amounts to reduction of share capital which is illegal and void as per the Indian Companies Act, 1956. Reissue: Only partly paid shares can be surrendered and they can be reissued. Effect: On the surrender of shares, the shareholder ceases to be the member of the company. Normally, the shares are rarely surrendered. No payment of consideration: It is to be noted that the company cannot pay any consideration in exchange of surrender of shares. This would imply purchase of its shares by the company, which is prohibited under section 77 of the Companies Act, 1956. Secretarial duties regarding surrender of shares The secretary has to follow a certain procedure in connection with surrender of shares: 1. Verification in the articles: The secretary has to verify if there is a provision in the articles regarding the surrender of shares. 2. Verification of shareholder’s application: The secretary should verify the application of the shareholder. He has to find out whether the shares are fully paid or partly paid. Fully paid shares cannot be surrendered. 3. Placing the application before the board: The secretary then places the application of surrender before the board for their action. 4. Intimation to the shareholder: If the board accepts or rejects the application for surrender of shares, the secretary should then inform the applicant accordingly.
5. Follow-up of board’s decision: The secretary has to follow up the
board’s decision in this respect. He has to collect the dues from the shareholder, if the shares are not accepted for surrender. 6. Cancellation of names from register of members: If the board accepts the surrender of shares, the secretary has to delete the name of the member. 6. Transfer of shares The shares of a joint stock company are transferable subject to the provisions of articles of association. The shares of a public limited company are freely transferable. However, there are certain restrictions on transferability. For instance, preferential allotment to employees, the shares in such case normally cannot be transferred during the lock in period, say 3 years or so. Again, there is a lock in period for the promoters to transfer the shares. The shares of private limited company are not freely transferable because of restrictions imposed by articles of association. Certain points to be noted in case of transfer of shares:
1. Parties to transfer: there are two parties to a transfer of shares (a)
the transferor who s the member of the company, (b) the transferee in whose favour the shares are being transferred by the transferor.
2. No fees for transfer: According to the Securities Contracts Act,
1956, a listed company cannot charge any fee for regulation of transfer of shares.
3. Board’s refusal to transfer shares: The board of directors may refuse
the transfer of shares in the following cases: transfer of shares to a minor, transfer of shares to a person of unsound mind, when the instrument of transfer of unsound mind where the shares are partly paid, where the calls on shares are in arrears, where the company has a lien on such shares, where the instrument of transfer does not contain proper details. Any other reason as the board may think fit.
4. Notice of refusal to transfer: The board has to give a sufficient
notice to the transferor and the transferee regarding the refusal to transfer the shares. In public limited companies, the transferor and the transferee can appeal to the central government against the arbitrary decision of the board regarding the reusal to transfer shares.
5. Register of transfers: The company maintains a register of transfers,
where particulars of every transfer are recorded.
6. Instrument of transfer: The instrument of transfer should be in
writing in a prescribed form and must comply with the provisions of section 108 of the companies act, 1956.the company shall not register a transfer of shares unless a proper instrument of transfer is duly stamped and signed by the transferor and transferee. Procedure regarding total transfer of shares The following is the secretarial procedure regarding total transfer of shares: 1. Filling the instrument of transfer: The transfer form, must be duly signed by the transferor and the transferee in the presence of a witness. Necessary details must be entered in the share transfer form. The information regarding the name and address of the transferee, occupation, the name of the transferor, the details of the shares to be transferred and so on. 2. Stamping the instrument: The instrument of transfer must be duly stamped with stamp duty. The stamp duty is calculated on the basis of market value of the shares on the purchase date. At present it is 0.5% of the market value of shares. 3. Submission of instrument of transfer: The instrument of transfer duly filled and stamped must be deposited with the company’s office or the transfer agent’s office. The instrument of transfer must be accompanied by original share certificate. 4. Transfer receipt: The company’s office or the transfer agents of the company issues a transfer receipt to the transferee, acknowledging the receipt of instrument of transfer along with the share certificates with distinctive numbers of shares, therein. It is to be noted that companies, now-a-days are not issuing transfer receipt. Such acknowledgement is given when the share certificate are lodge by hand delivery. If share certificates are sent by post, then postal acknowledgement is received. 5. Notice of lodgement of transfer: The company secretary or the transfer agents issues the notice of lodgement of transfer to both the parties, i.e. the transferor and the transferee. However, only a few companies do send such notice and that-too, to the transfer, and not to the transferee. 6. Verification of transfer document: The secretary has to verify the details in the transfer deed such as: (a) the date of the transfer deed
form. (b) the signature of the transferor. (c) the amount of stamp duty affixed. (d) the date of executing of the transfer. (e) whether other details such as name, address, signature, occupation of the transferor have been properly filled or not. 7. Board meeting: The secretary may convene a board meeting to approve the transfer of shares. The board meeting is required especially when large number of shares are transferred in the name of one party. 8. Entries in the register of transfers: After verification of transfer deed, and if everything is proper, then the secretary makes entries in the register of transfers. 9. Entries in the register of members: After making necessary entries in the register of transfers, the secretary then makes entries in the register of members. He deletes the name of the transferor from the register and enters the name of the transferee as the member of the company. 10. Dispatch of certificates: After making necessary entries in the register of members, the secretary arranges to dispatch the certificates at the registered address of the transferee. The certificates are endorsed at the back of the share certificates in favour of the endorsee. Partial transfer When the shareholder wants to transfer only a part of the shares indicated in the share certificate, then this is a case of the partial transfer. It is to be noted that the procedure of partial transfer is slightly different. The procedure is divided into two stages: 1. Certification stages: Transferor presents transfer form to the company along with the share certificate. A balance ticket is issued to the transferor in respect of those shares which are not to be transferred. The company issues certified transfer form which is passed on by the transferor to the transferee. 2. Registration stage: The transferee completes the form and submits to the company. The company issues a transfer receipt on receipt of certified transfer form. The company secretary makes necessary entries in the register of transfers. He then prepares the new certificates in exchange of transfer receipt to the transferee and in exchange of balance ticket to the receipt. Blank transfer
Blank transfer is the one where the name of the transferee is not mentioned. The transferor signs in presence of witness the instrument of transfer and hands it over to the transferee along with the original share certificate. The transferee may in turn transfer the same, without making any entries therein, to another person. The shares can be transferred from one person to another by mere delivery of the instrument of transfer and the share certificates. If at any time, the holder of the instrument wants to get the shares transferred in his name, he can do so by lodging the transfer form and the original certificate with the company. It is to be noted that no changes are made in the register of members, as long as the shares are kept blank. The name of the first transferor continues to be on the register of members. The shares can be kept blank for a period of one year from the stamped date on the instrument of transfer. The main advantage is that the time consuming process involved in the transfer of shares is avoided by speculators. Stamp duty need not be paid as long as it is kept blank. The main disadvantage is that the dividend payable and other benefits such as bonus issue/rights issue, and dividend payable goes to the shareholder whose name is recorded in the register of members, and not the holder of the blank transfer. Transmission of shares Transmission of shares refers to transfer of shares by the operation of law. The shares are transferred to legal representative of the shareholder. Transmission of shares can take place in the following cases: The transmission of shares takes place in case of death, lunacy or bankruptcy. On the death of the shareholder, the shares are transferred to the person in whose favour the will is executed by the deceased shareholder. If no such will is there, then the transfer rights go to the next of kin of the deceased. On lunacy, the legal representative gets the transfer rights as decided by a competent court. On bankruptcy, the shares are transmitted to the official receiver appointed by the court. The official receiver can dispose of the shares and pay the amount to the creditors in certain proportion as decided by the court. Transfer Deed
When you buy shares of a company, the seller broker will collect the concerned share certificates accompanied by prescribed transfer forms duly signed by the seller and pass them on to you through your buyer broker. These may be filled in by you and sent to the concerned company along with the share certificates for transfer in your favour. Transfer of shares and debentures requires compliance with the following: i. There should be a proper instrument of transfer. ii. The instrument should be duly stamped iii. It should be executed by or on behalf of, both the transferor and the transferee. iv. It should contain the name, address and occupation of the transferee v. It should be delivered to the company along with the relevant share certificates/ debenture certificate Share transfer form or transfer deed, as is popularly known , is an instrument of transfer the format of which is prescribed by the Companies, Act, 1956. It has to be date stamped by the prescribed authority. According to Section 108(1A) of the Companies Act, transfer deeds are valid for a period of 112 months from the date of stamping by the prescribed authority or till the date on which the Register of Members are closed for the first time after the date-stamping by the prescribed authority, whichever is later. However, these are considered as good delivery for circulation in the market only till the closure of Register of Members of the company for the first time after the transfer deeds are date-stamped by the prescribed authority. Revalidity of outdated transfer deeds The procedure for revalidating outdated transfer deeds is prescribed under the Companies Act,1956. The transferee who holds outdated transfer deeds has to fill in the prescribed form and seek extension of time either from the registrar of companies of the state in which the registered office of the company is situated or from the Registered of companies of the state in which he ordinarily resides. Transfer stamps: Under the provision of Indian Stamps Act, the transfer deed for transfer of shares is required to be stamped at the rate of 50 p per Rs. 100 or part
thereof, calculated on the amount of consideration. However, in case of transfer of debentures, the stamps are required to be affixed at the prescribed rates-as in force in States-where the registered office of the companies are situated calculated on the face value of the debentures except in Maharashtra, where the stamp duty is payable on the value of consideration. The stamps so affixed are required to be defaced before they are logged with the Company for transfer. Secretarial procedure in transmission of shares 1. Accepting letter of request: The legal representative has to make a request to the company to register him as a member. He should make a proper application, and submit the original certificate and evidence regarding succession rights. 2. Scrutiny of letter of request: The secretary checks whether the application is proper, and whether it is accompanied by relevant documents. He verifies the request letter, along with the accompanying documents. 3. Board’s approval: If the request application is proper and the documents are found genuine then the secretary calls a board meeting to approve the transmission of shares. 4. Entry in register of members: On the approval by the board, the secretary makes necessary entries in the register of members, by deleting the name of the original shareholder and replacing with the name of the legal representative. 5. Dispatch of share certificates: After making necessary entries in the register of members, the secretary then dispatches the certificates to the legal representative, who is now the member of the company. 6. Entries in register of probates: The secretary has to make necessary entries in the register of probates. He has to record the details of the succession certificate or the probate of will details in the register of probates. TAX: Dividends received from Indian companies are tax-free. Indian Cos. are required to pay 10% tax on the dividends distributed. However the receiving investor is not required to pay any such taxes.
TRADING: Before computerisation, the stock exchanges, namely the BSE had an open outcry trading system. Brokers would assemble in a large hall in the stock exchange and trading would take place openly as if in an actual market. People would shout their lungs out to press for their price. The hall would be divided into sections, Each section contained brokers and jobbers dealing in particular company(s). A Sauda pad (trading pad) was maintained with the members of the stock exchange. This Sauda pad contained twos columns-one for buying while one for selling. At the end of the day, these Sauda pads were taken into consideration at the clearing house of the stock exchange and the index was calculated on this basis. to calculate the actual values of shares and the index was calculated on this basis. But after computerisation, situation changed. Internet based trading on stock exchanges, uses net as a medium for communicating the orders of clients to the exchanges through broker websites. Internet trading is the fastest way to get stock quotes. The prerequisites for internet trading are a computer, modem, telephone connection, registration with a broker, a bank account and a depository account. Thus the net is a universal platform providing access to infinite no. of users at any point of time. Interested investors initially register with a broker. The broker in turn provides with a login name, password and personal identification no. (PIN) For placing an order, an investor enters the symbol and series of the stock, quantity and price of the scrip all under the place order window. By clicking on the review option and at the send option, the investor is able to culminate the order. The investor gets the confirmation message after a lapse of few minutes where in order no. as well as the value of order are provided. Though there are different modes of payment, the one that is prevalent is the investor opening an account at the pre-designated bank. The mode of payment is through electronic transfer of fund. Internet trading is expected to increase the transparency in the markets and reduce settlement risks through improved liquidity by virtue of increased quote continuity and market depth. Internet not only provides Management Information System (MIS) but ensures a fair and efficient market apart from reduction of systematic risk. The scrips are graded into A, B1, B2 F and Z groups. A group refers to maximum volatility. Terminals are made with one central computer located at the stock exchange. Investors now invest or sell through these terminals at brokers. The central computer is placed in the clearing
department of the stock exchange. Clearing department settles the buying and selling of securities at the end of that day. During market hours prices of index scrips at which trades are executed are automatically used by the trading system to calculate the index every 15 seconds and continuously updated on all trading workstations connected to a stock exchange. A day’s opening, high and low prices are also given by the computer on an online trading basis. The closing prices are calculated using a spreadsheet for theoretical consistency. The closing index is computed taking weighted average of all the trades on the exchange constituents in the last 15 minutes of trading. If an exchange constituent has not traded in the last 15 minutes, then the most recent traded price is taken for computation of index closure. One of the most important aspects of maintaining continuity with the past is to update the base year average. The base year value adjustment ensures that additional issue of capital and other corporate announcements like bonus etc. do not destroy the value of the index. The beauty of maintenance lies in the fact that adjustments for corporate actions in the index should not per se affect the index values. The index cell of an exchange does the day-to-day maintenance of the index within the broad index policy framework set by the Index committee. The index cell takes special care to ensure that all indices maintain their benchmark properties by striking a delicate balance between high turnover in the index scrips and its representative character. Index selection and review policy is based on the objective of transparency and simplicity. Index committee meets every quarter generally to review all the indices. In case of a revision in the Index constituent scrips, the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of index. The benchmarking properties of a stock exchange can be best understood in terms of: 1. Liquidity study: The parameters used for liquidity study are Average daily volume, no. of trades and no. of shares traded. 2. Impact cost study: It is cost of execution of a transaction in a security in proportion to the weight of its market capitalisation (no. of shares outstanding multiplied by current price) as against the index market capitalisation at any time. Thus impact cost of a security is the percentage markup suffered in buying or selling the security as compared to the ideal price. 3. Market capitalisation study: In order to be a true reflection, an index should adequately reflect market capitalisation of the entire universe listed on the exchange. The index should maintain a delicate balance between liquidity and representativeness.
Settlement Period In order to avoid settlement of too many transactions on a day-to-day basis, the Stock Exchange divides the periods of one year into settlement period. The settlement period in specified shares as well as non-specified Securities is one-week. The transactions entered during this period of a week are to be settled either by payment for purchase or by delivery of share certificates sold on notified days which are made known to the members of the Exchange through a clearing programme. The programme is announced six months in advance. Two most important dates covered in the programme are pay-in and payout .Pay in day is the date on which broker has to make payment to the clearing house for all purchases made by him and shares are to be delivered for all sales made by him in the previous settlement period. The pay-out day is the date on which the broker receives payment for sales made and share certificates together with the transfer deeds delivered to the clearing house. The actual amount a broker has to pay to the clearing house is, however, netted out taking into account the shares to be delivered and received, the differences of the transactions offset by counter transactions to be received or paid and also the differences to be received or paid between the contract price and the price at which the transactions are carried forward too the next settlement. Again, it will take the broker two to three days after the pay-out day to remit the sales proceeds to the concerned client. The broker normally expects to receive payment from his client as few days before the pay-in day, to allow for bank clearing and other paper work. Rolling Settlement: Rolling settlement was first introduced on India’s equity market by OTCEI. NSE while commencing demat trading in 1997 used rolling settlement. SEBI recently made it mandatory that all demat trading should use rolling settlement. In the present times, the markets use a week —long trading period for settlement following which delivery and payment takes place roughly a week later. All open positions at the end of a date turn into delivery and payment five working days later. Rolling settlement compresses the week—long cycle
into a day. Till date there is no ‘carry forward’ with rolling settlements. Rolling settlements has ushered in a new phase for investors in India, who were tormented by long delays in buying or selling shares. T+1 settlement would mean that shares sold today would yield funds the next day. This would be unprecedentedly convenient. From an investors perspective, rolling settlement reduces delays and the securities become ore liquid and are ore like money. Through rolling settlement can be done with physical certificates, it tends to become expensive if applied with physical certificates. Hence, to mitigate the same the depositories came into existence. Major markets in the world use T+3 rolling settlements, and are in the process of moving to T+2 or T+1 or T+0. Specified Shares and non specified shares: All the listed securities on the stock exchange are classified as either ‘Specified shares’ – ‘A’ Group shares or ‘Non specified shares’ – ‘B’ Group shares. The B group non specified group is further classified into B1, B, C, F and Z group. C represents odd lot shares, F represents corporate debts while Z represents shares which have not complied with certain clauses in the listing agreement. The main difference between specified and non specified shares is in the process of settlement of transactions. Only equity shares are included in the specified group of shares. The considerations for and the equity share to be included in the specified list are generally the size of company, no. of share holders, dividend records, growth prospects and average volume of business. Settlement of Transactions in specified shares: At the end of a settlement period, an investor, who has done his business in specified shares, has two options, viz., • Terminate his contract of sales by purchase and of purchase by ale by cross contracts within the settlement period. This is known as squaring up. • Complete the contract by delivery or payment, as the case may be. • Those who trade within a settlement are short-term investors, sometimes referred to as speculators. Settlement of Transaction in Non-specified Securities Transactions in non-specified securities are for delivery, unless they are offset by opposite transactions in the course of the settlement period itself. The exchange issues delivery orders and receives orders for all transactions
entered into during the settlement period which are not offset by opposite transactions. If the seller is not in a position to deliver the securities, the buyer has a right to demand delivery of the securities he has bought and can go in for an auction notice against the seller and claim the difference between the contract price and the auction price. Odd Lots and Market Lots Trading in equity shares on the Stock Exchange is confined to market lots. For shares having paid-up value of Rs.10, the market lot is generally fifty or hundred shares, and for shares of Rs. 100 paid-up value, the market lot is generally five or ten shares. In case of dematerialized shares odd lot doesn’t arise since market lot is one share. Market lots of shares of an actively traded company can be bought or sold easily in the stock markets through brokers. However, problems arise when one wants o buy or sell shares in lots which are different from markets lots. In stock markets, such lots are called odd lots. If a market lot of the shares is100, a transaction for say 50 shares is considered an odd lot transaction. Purchase and sale of odd lots are usually very difficult. Also, the price quotation for an odd lot could differ by as much as 5-10 per cent from the price quoted for the market lot. Odd lots generally as arise from issue of bonus or rights shares or convertible debenture. Book Closure/ Record Date Every company maintains a Register of its shareholders. The Register of Members contain the name, address and other particulars of each of its shareholders. As the ownership of shares keeps on changing due to the buying and selling activities and the consequent registration of transfer, the list of shareholders is constantly updated with the names of transferees added and those of transferors deleted. When a company declares a dividend or announces a bonus share or rights issue or wants to convene a meeting of the shareholders, it became necessary to freeze the list at a point of time to take stock of the shareholders entitled to the benefit. This is known as Closure of Register of Members or just Book Closure. During the period of Book Closure, no transfer of share is undertaken by the Company
Occasionally, a company may choose a Record Date instead of bonus shares or rights entitlements. As in thee case of shares, a company has also a Register of its debenture holders, whole list is also frozen occasionally for purposes like payment of interest, etc. through either Book Closure or Record Date. ‘Cum’ or ‘Ex’ Share prices are sometimes quoted ‘cum’ or ‘ex’ dividend, ‘cum’ or ‘ex’ bonus ‘cum’ or ‘ex’ rights. They are written as ‘cd’, or ‘cr’ if ‘cum’ and ‘xd’, ‘xb’ or ‘xr’ if ‘ex’. Unless specifically mentioned, all prices are ‘cum’ which means that all future dividends, bonuses and rights will accrue to the buyer. In case of doubts - which could arise if the trading date is close t the date on which a share change status from ‘cum’ or ‘ex’ –it is always advisable to get the doubt clarified with the broker before placing the order. If share are purchased when they are quoted ‘cum’ and sent for registration before the closure of books, dividends and other distributions, are made to the new purchaser who henceforth will be the registered holder of the shares. However, If the books are already closed, it is the responsibility of the buyer broker to collect the distribution (dividends, bonus, or rights) from the seller broker and pass the on to the purchaser.
Mutual funds They are trusts which mobilise savings from the people and use the funds to purchase securities. They usually have professional investment managers who make decisions about securities to be bought or to be sold. By pooling the financial resources of small investors, investors are able to participate in the securities market without taking much risks. Foreign Institutional Investors (FIIs) The rapidly growing Indian economy needs large investments or development. The govt. has removed many cobwebs of rules to encourage Direct Foreign Investment and Foreign Portfolio Investment. However, only recognised foreign institutions such as pension funds, mutual funds, etc., can have portfolio investment after taking permission of the RBI and SEBI. There are currently 532 institutional investors (FIIs) registered with
SEBI. FIIs are allowed to operate freely to operate in the primary and secondary market subject to certain prudential guidelines.
Custodial services All the post trading services provided by a company to an investor are defined as custodial services (or back office works)and the company providing the services is referred to as a custodian. .These include settlement and safe custody of securities, dividend/slash interests handling and collections, keeping track of rights, bonus, conversion/redemption of shares, keeping accounts and providing reports to the investor. Depository system Under depository system, transfer of ownership of securities is done by book entry similar to a bank deposit account. Under this system, delivery of shares against payment is ensured by the depository company. The company also undertakes to distribute dividends, bonus, shares etc. to its account holders and monitor all the accounts. Blue chips: Clip shares provides low to moderate yield and moderate to high capital gains yield. The price of such volatility shares is moderate. Clearing days/Settlement Days fixed in advance by the exchange for the first and last business days of each clearing. The intervening intervening period is called settlement period which is normally one week in the case of specified shares and ten days in the case of non-specified shares. Clearing House Each exchange maintains a clearing house to act as the central agency for effecting delivery and settlement of contracts between all members. The days on which members receive or pay amounts due to them are called pay-in or pay-out days. Floating Stock
The fraction of paid up equity capital of a company which normally participates in day to day trading. On an average, about 30 per cent of equity capital is held by promoters; another30 percent by financial institutions and the balance 40 percent by the public, mostly for long term investment. Consequently, the floating stock of a company rarely exceeds 15-20 percent of its equity capital. Low floating stock causes erratic price movements as in the case of securities in the non-specified list.
Listed Company A public limited company which satisfies certain listing conditions and signs a listing agreement with a stock exchange for trading in its securities. One important listing condition is that 25% of its issued capital should be offered to the public. STOCK EXCHNAGES: 1. NSE: Recognition: National Stock Exchange of India Limited (NSE) was given recognition as a stock exchange in April 1993.NSE was set up with the objectives of (a) establishing a nationwide trading facility for all types of securities, (b) ensuring access to all investors all over the country through an appropriate communication network, (c) providing a fair, efficient and transparent securities market using electronic trading system, (d) enabling shorter settlement cycles and book entry settlements, and (e) meeting the international benchmarks and standards. Within a short span of life, above objectives have been realized and the exchange has played a leading role as a change agent in transforming the Indian Capital Markets to its present form. NSE has set up infrastructure that serves as a role model for the securities industry in terms of trading systems, clearing and settlement practices and procedures. The standards set by NSE in terms of market practices, products, technology and service standards have become industry benchmarks and are being replicated by other market participants. It provides screen-based automated trading system with a high degree of transparency and equal access to investors irrespective of geographical location. The high level of information dissemination through on-line system has helped in integrating retail investors on a nation wide basis. The exchange currently operates three market
segments, namely Capital Market Segment, Wholesale Debt Market Segment and Futures and Optional segment. Ownership And Management NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the exchange. Its board comprises of senior executives from promoters institutions, eminent professionals and a full time executive. While the board deals with the board policy issues, the Executive Committees (ECs), while including trading members, formed under the Articles of Association and the Rules of NSE for different market segments, manage the day-to-day affairs of the Exchange. The ECs have constituted several committees, like Committee on Trade Related Issues, Committee on settlement Issues, etc, comprising mostly of trading members, to receive regulatory inputs from the market. The day-to-day management of the exchange is delegated to the Managing Director and CEO who is supported by a team of professional staff.
Requirements For Professional Clearing Membership (ALL VALUES IN Rs. LAKHS) Particulars CM segment F&O segment CM and F&O segment Eligibility Trading member of NSE/SEBI registered custodians/recognized banks Net worth 300 300 300 Interest Free Security 25 25 34 Deposit (IFSD) Collateral Security 25 25 50 Deposit (CSD) Annual subscription 2.5 nil 2.5
Listing Of Securities Listing means formal admission of security at the trading platform of the exchange. It provides liquidity to investors without compromising the need of the issuer for capital and ensures affective monitoring of
conduct of the issuer and trading of the securities satisfies listing requirements prescribed in the relevant statues and in the listing regulations of the exchange. It also agrees to pay the listing fees and comply with listing requirements on a continuous basis. Benefits Of Listing On NSE: The benefits of listing on NSE are: 1. NSE being the largest stock exchange in terms of reach, listing on NSE enables issuers to reach and service investors across the country. 2. NSE being the largest stock exchange in terms of trading volumes, the securities trade at low impact cost and are highly liquid. 3. The NSE network disseminates information and company announcements across the country, thus reducing the scope for price manipulation or misuse. 4. The facility of making initial public offers (IPO’s), using NSE’s network and software, results in significant reduction in cost and time of issues. 5. NSE’s web site www.nseindia.com provides a link to the web sites of the companies that are listed on NSE, so that the visitor interested in any company can visit that company’s web site from the NSE site. 6. Listed companies are provided with monthly trade statistics for the company listed on the exchange. 7. The listing fee is nominal. BSE BSE or the Mumbai Stock exchange was established in the year 1875 as the ‘Native Share and Stock Association’. It is the most active stock market in the country accounting over 70 per cent of the listed capital in the country while in terms of market capitalisation its share is over 75 per cent. The turnover on the Exchange accounts for nearly 1/3rd of the total turnover in securities all over India. The Exchange while providing an efficient market also upholds the interests of the investors and ensures redressal of their grievances, whether against the companies or the brokers. It also strives to educate and enlighten investors by making available necessary informative inputs. A Governing Board comprising of 9 elected directors (one third of them retire every year by rotation), an Executive Director, three SEBI nominees, a Reserve Bank of India nominee and five public representatives, is the apex body which regulates the Exchange and decides its policies.
A President, a Vice-President and an Honorary Treasurer are annually elected from among the elected directors, by the Governing Board following the election of directors. The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Exchange. Important Landmarks of the Stock Exchange, Mumbai The Stock Exchange, Mumbai has along but fascinating history. Earliest records of securities trading in India are available from the end of the eighteenth century. Before 1185,there was business conducted in Mumbai in shares of banks and the securities of the East India Company which were considered as securities for buying, selling, and exchange. The shares of the Commercial Bank, Mercantile Bank and Bank of Mumbai were some of the prominent shares traded. The business was conducted under a sprawling banyan tree in front of the Town Hall, which is now in the Horniman Circle Park. In 1850, the Companies Act was passed and that heralded the commencement of the joint stock companies in India. It was the American civil war that helped Indians to establish broking business. The leading broker, Shri Premchand Roychand was responsible for developing conventions and procedures. In 1874, the Dalal Street became the prominent place of meeting of the brokers to conduct their business. The brokers organized an association on 9th July,1875 known as the Native Share Brokers Association to protect character, status and interest of the Native Brokers and that was the foundation of the Stock exchange, Mumbai.. The Exchange was established with 318 members. The no. increased to 333 in 1896 and at present it is 641. The membership fee has increased gradually from Re.1 in1887 to Rs.1000/- in 1896, Rs.48,000/- in 1920, Rs.7.51 lakhs in 1986 and Rs.55 lakhs at present. In January 1899, the Brokers’ Hall was inaugurated by Mr. James M. Maclean, M.P and he said, “A Mumbai broker is a very useful member of the society, whose virtues are not sufficiently recognise, although his faults are emblazoned forth. With rare exceptions, he is honest to the core and pays to the last pie.” After the first world war, the stock Exchange was housed properly at an old building near the Town Hall. In 1928, the present premises were acquired surrounded by Dalal Street, Mumbai Samachar Marg and Hamam Street. A new building was constructed and was occupied on the 1sst December, 1930. The present 28 storeyed two phased building called Phiroze Jeejeebhoy Tower, named after late Phiroze Jashedji Jeejeebhoy, who a was the
Chairman of the Exchange from the 1st April,1966,till his death on the 9th February,1980, was constructed between 1973 and 1983. This was occupied in phases from 1980-81. In 1950, The Stock Exchange became an exclusively central government subject following adoption of the constitution of India. In 1956,, The Securities Contracts (Regulation) Act was passed. In 1992, the Securities Exchange Board of India Act was passed though the Securities Exchange Board Of India (SEBI) came into existence in 1988. In the last three years SEBI has been empowered by the Central government to regulate and develop capital markets in India. In 1992, the Over The Counter Exchange Of India(OTCEI) came into existence where equities of small Companies are listed. In 1994, birth of the National Stock Exchange took place. In 1995, the Exchange rapidly computerized its trading operations and thus the open out-cry system of share trading was replaced by screen based trading in The Stock Exchange, Mumbai. In January 1996, the revised carry forward system was introduced. In September 1997,BSE ON-Line Trading System network went nationwide. SENSEX and other indices: The prices of shares are not stable with thousands of people operating simultaneously on the market. It is almost like a national poll. The prices are determined by the forces of demand and supply. Factors which influence share prices are the political situation, state of economy, performance of the company and expectations of the investing public. There are risks in investment. But the risks can be anticipated by knowledge, information, study, judgement, advice, awareness and research. Index nos. are indicators which reflect the relative changes in the level of a certain phenomenon in any given period called current period with respect to is values in some fixed period called the base period selected for comparison. The phenomenon or variable under consideration may be: 1. The price of a particular commodity or a group of commodities 2. Volume of trade, factory production, imports or exports, shares and stocks, sales and profits etc. 3. National income of the country, wage structure, bank deposits, foreign exchanges Index is a statistical device for indicating the relative movements of the share prices of stocks under consideration. Different indices are based on size:
BSE Sensex Nifty Nikkie NASDAQ
Constituted of 30 scrips Constituted of 50 scrips Constituted of 225 scrips Constituted of around 4700 scrips
Not all indices are created in the same way. Following methods are primarily used to construct indices: 1. Market value weighted method: Each stock is given weighting proportional to its market capitalisation 2. Price weighted method: Each stock is given a weighting proportional to its market price. 3. Equal weighted method: Stocks are weighed equally. 4. Free float method: Only the portion of market capitalisation of a company is considered which is held by non-promoters. This portion is actually available for trading in the market
LAWS: NEED FOR LAWS: FRAUDS: FRAUDS: Frauds are the result of attempts to make fast money. Frauds have been attempted in the stock markets. Popular frauds were attempted by the late Harshad Mehta and Ketan Pareikh. The strategy of both the ‘scamsters’ was the same. It was based on the principle that demand and supply effects price. More the demand, less the supply, greater will be the price. Thus, in the stock exchange, if an artificial scarcity of stocks was created, the prices of stocks would automatically increase. Hence, both would acquire huge funds from various banks for example, Madhavpura Co-op. bank, which provided huge funds to Ketan Pareikh. But these banks never asked for any kind of guarantee or security for the loans provided to buy stocks. Thus, it was more of a ‘bank scam’ The funds provided by banks was used to buy stocks of various companies. These included a lot of companies which actually did not exist. Thus due to hoarding of stocks, there was less supply of these stocks and the prices of these stocks increased. This affected the Sensex and the Nifty, which rose to their peaks. As the prices of these stocks and the indices rose to a sufficient level, these ‘scamsters’ would dump in the stocks. They also printed fake share certificates and used them to dump into the stock markets. Thus, the prices of stocks and the indices would fall down all of a sudden, due to the sale of stocks. The profits were booked by the ‘scamsters’ who became millionaires. Little would they realize that this money was not only their investment, but was of thousands of other investors who had invested in the stock markets with a lot of faith and expectations. After the crash of stock markets, it was then that the matter was detected. SBI checked the accounts and found foul play. This was later investigated into and the ‘scamsters’ were put behind bars. CODE OF CONDUCT for BROKERS: SEBI has prescribed a code of conduct for members of the stock exchanges with a view to ensure that the functioning of the capital market is fair, healthy and efficient. The code of conduct has been divided into three broad areas: 1. General: This broadly deals with the general role of the stock broker while conducting business for or on behalf of investors.
Duty to investor: This enumerates the duty of a stock broker towards investors, particularly in relation to the execution of orders of investors. 3. Stock brokers vis-à-vis other stockbroker: This deals with the conduct of the stockbroker with other stockbrokers in the course of conducting business with them. It thus emphasises the duties of the stockbroker in settlement of trades with other stock brokers. The code of conduct as specified at Schedule II under Regulation 7 of the SEBI regulations, 1992 for stock brokers are as follows: GENERAL: ? INTEGRITY: A stock broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business. ? EXERCISE OF DUE SKILL AND CARE: A stock broker shall act with due skill, care and diligence in the conduct of all his businesses. ? MANIPULATION: A stock broker shall not indulge in manipulation, fraudulent or deceptive transactions or schemes or spread rumours with a view to distorting market equilibrium or making personal gains. ? COMPLIANCE WITH STATUTORY REQUIREMENTS: A stockbroker shall abide by all the provisions of the Act and the rules, regulations issued by the Government, the Board and the sock exchange from time to time as may be applicable. DUTY TO THE INVESTOR: ? EXECUTION OF ORDER: A stock broker shall faithfully execute orders for buying and selling of stocks at the best available market price and not refuse to deal with small investors merely on the ground of volume of business involved. A stockbroker shall promptly inform his clients about the execution of any order and make prompt payment with respect to stocks sold and arrange for prompt delivery of securities purchased by clients. ? ISSUE OF CONTRACT NOTE: A stock broker shall issue without delay to his clients a contract note for all transactions in the form specified by the stock exchange. ? BREACH OF TRUST: A stock broker shall not disclose or discuss with a third person details of
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personal investments and other information of confidential nature of the client. BUSINESS and COMMISSION: A stock broker shall not encourage sales or purchases of securities with the sole object of generating brokerage or commission. He shall not furnish false or misleading quotations or give false information to his clients to induce him to do business in particular securities and enable himself to earn brokerage. BUSINESS OF DEFAULTING CLIENTS: A stock broker shall not deal or transact business knowingly, directly or indirectly or execute an order for a client who has failed to carry out his business with other stock broker. FAIRNESS TO CLIENT: A stock broker when dealing with a client shall disclose whether he is acting as a principal or as an agent and shall ensure that no conflict f interests arises between him and his client. In the event of conflict of interest, he shall inform the client accordingly and shall not seek to gain personal advantage from the situation and shall not consider client’s interests inferior to his own. INVESTMENT ADVICE: A stock broker shall not make a recommendation to any client who might be expected to rely thereon to acquire, dispose or retain any shares unless he has reasonable grounds for believing that the recommendation is suitable for such a client upon the basis of facts. COMPETENCE OF STOCK BROKER: A stock broker should have adequately trained staff and arrangements to render fair and prompt services to his clients.
STOCKS BROKER VIS-À-VIS OTHER STOCK BROKER. • CONDUCT OF DEALINGS: A stock broker shall cooperate with other contracting party in comparing unmatched transactions. A stock broker shall not knowingly and willfully deliver documents which constitute bad delivery and shall co-operate with contracting party for prompt replacements of documents which are declared as bad delivery.
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PROTECTION OF CLIENTS: A stock broker shall extend fullest co-operation to other stock brokers in protecting the interests of his clients regarding their rights to dividends, bonus, shares, right shares and any other rights related to such securities. TRANSACTION WITH OTHER STOCK BROKER: A stock broker shall carry out his transactions with other stock brokers and shall comply with his obligations in completing the settlement of transactions with them. ADVERTISING and PUBLICITY: A stock broker shall not advertise his business publicly unless if permitted by the stock exchange. INDUCEMENT OF CLIENTS: A stock broker shall not resort to unfair means of inducing clients from other stock broker. FASLE or MISLEADING RETUNS: A stock broker shall not neglect or fail to submit the required returns and not make any false or misleading statements on any returns required to be submitted to the Board and the stock exchange.
Guidelines for issue of IPO’s: The exchanges have laid down criteria for listing of new issues by companies, IPOs by knowledge based issuers, companies listed on other exchanges, and companies formed by amalgamation/restructuring, etc. in conformity with the Securities Contracts rules, 1957 and directions of the Central Government and the Securities and Exchange board of India (SEBI). The criteria include minimum paid-up capital and market capitalization, project appraisal, company/promoter’s track record, etc. The issuers of securities are required to adhere to provisions of the Securities Contracts act, 1956, the Companies act, 1956, the Securities and Exchange Board of India act, 1992, and the rules, circulars, notifications, guidelines, etc prescribed there under. Unlisted companies issuing shares: The following norms have to be followed by companies where issue size does not exceed five times its pre-issue net worth as per the last audited accountants:
1. Track record of distributable profits for at least three years out of immediately preceding five years in terms of Section 205 of the Companies Act, 1956 2. Pre-issue net worth of not less than Rs. 1 crore in three out of immediately preceding five years. The minimum net worth criteria also to be met in immediately preceding two years. 3. In case a company does not satisfy the above two criteria or its proposed size exceeds five times its pre-issue net worth, then it can make a public issue through book building route provided further that 60% of the issue would be allotted to qualified institutional buyers i.e. financial institutions, FIIs etc. The same goes on for a listed company issuing IPO has to follow the above procedure. Other guidelines: ? In a public issue by an unlisted company, promoters’ shall contribute not less than 20% of the post-issue capital. This will be locked in for a period of three years. ? Entire pre-issue share capital other than locked in promoters’ contribution shall be locked in for a period of one year. ? All companies making a public issue are required to have atleast one SEBI registered Merchant Banker to handle the public or rights issue. ? Minimum of 25% of the post-issue capital is required to be offered to the public. (All companies are exempt from the above requirement if the offer is not less than 10%of the shares issued, or a minimum of 20 lakh share are issued) ? Companies are required to deposit 1% of shares on the stock exchange. ? Companies are require to disclose all material facts and risks to investors ? Delayed refund beyond 78 days attracts interest @ 15% in terms of Sec. 73 of the Companies Act, 1956. However as per listing agreement, the interest is payable beyond 30 days. ? Companies should collect 90% of the issue amount within 60 days or refund the amount forthwith. ? Basis of allotment could be changed to proportionate allotment. ? Minimum 50% of shares is to be issued for investors applying up to 1000 shares.
? 10% of over subscription can be retained for allotting shares in market lots.
Continuing listing requirements: To ensure availability of floating stock on continuous basis SEBI has prescribed the following: • All companies would be required to maintain on a continuous basis non-promoter holding at the same level as applicable at the time of entry. • For Companies with less than 10% of non-promoters’ level, companies will be given a year’s time to raise level of nonpromoters’ level to 10% • No preferential allotment/buy back of listed companies would be permitted.
INTERVIEWS: 1. BSE manager: 1. What is a stock exchange? Why is it required? Stock exchange is a place which creates a platform for trading in shares and stocks. There are some people who buy shares while there are others who sell shares, A stock exchange creates a platform to bring such people together so that they can trade share. But trading has to take place through members of the stock exchange or brokers. 2. Which is the oldest stock exchange in the world? The oldest stock exchange should be the New York Stock Exchange (NYSE) In India, the BSE is the oldest and is 125 years old. 3. Affect of other stock exchanges on the BSEOther stock exchanges do have an effect on the BSE. For example, the NSE has a wider reach. It is at a national level and is promoted by the government. This does not mean BSE does not have a national reach. People from other states can invest in shares and stocks of companies listed on the BSE through sub-brokers. 4. What do the terms mean: badla, ulta badla, bull, bear and IPO?
Badla is a term used in concept trading. Badla is referred to when shares are not in a person’s ownership and yet he sells those shares under the intention that he will acquire those later. But he is penalized for this i.e. interest is charged on the person for not having shares in hands yet selling those. Ulta badla is opposite to badla. It means buying shares without having money. Again, interest is charged on such kind of buying. Bullish means a sense of upward movement while bearish means a sense of downward movement. IPO is Initial Public Offering. It is an issue through which a company expresses its intention to be listed on the stock exchange and it wants buyers for its shares to be issued. 5. How did trading take place? Initially, trading took place in physical manner. Shares were traded in a large trading hall and brokers had to trade shares in the trading hall of the stock exchange. Traders would shout their lungs out as if in any other market. Buyers would bargain with sellers. At the end of the transaction, they were supposed to send the details of their transactions to the clearing house which would clear all transactions. In this way, Sensex would be calculated using complicated calculations. Now-a-days, brokers need not be present in the stock exchange as we have terminals linked to a central computer in the stock exchange. Transactions are automatically taken care of by computers and Sensex was later calculated based on these. 6. What is Sensex? Sensex is a benchmark. It is the average of all the values of scrips. Scrips are classified into groups. E.g. Group A represents specified and most volatile scrips. The market cap is taken into consideration as we now use free float technology. Thus volume of shares of a company in the market plays an important role in calculating Sensex. More the volume, more the weight-age. Volumes are based on base values. Thus, if 12 shares are traded out of 1000, then the percentage of trade is 12 x 100 = 12 % 1000 7. What is SEBI? Securities Exchange Board of India or the SEBI is a watch dog or a regulator. It looks into the transactions at all the stock exchanges in India. Earlier, stock exchanges themselves had their own governing bodies to look into the rules and regulations of transactions. But after January 1992, the SEBI acquired statutory status regulate and promote capital market. They have a huge list of guidelines for everyone who is someway or the other related to the capital market.
8. What are the necessary formalities for a company issuing an IPO? There are a lot of formalities to be fulfilled before issuing an IPO. The SEBI guidelines is a long list. But prominent among them are that companies should come out with an issue of atleast Rs. 10 crore, it should b a dividend paying company, promoters should not subscribe to more than 20% of shares and the company must have a minimum of three years experience in capital market. 9. Which are the frauds created in the past? Frauds are as a result of an attempt to make fast money. In the past, frauds have been conducted by Harshad Mehta and Ketan Parikh. These are not just frauds in the stock exchange, but these were also a kind of banking scams. When these people approached banks for funds, the banks didn’t ask for any kind of security or guarantee. Prominent among them was the Madhavpura Co-op bank, After receiving the money, these people created an artificial scarcity of shares by hoarding shares. As supply became less and demand for shares increased, prices of shares also increased. Prices of many shares of companies which didn’t even exist rose. After the Sensex and the price of those scrips increased, shares were dumped at the high price. 10.What are the qualifications required by the brokers? Brokers need to be a graduate. They must have atleast three years experience in the capital market. Besides, they must pay a broker fee of Rs. 55 lakhs. 11.What are depository accounts? Depository accounts are parallel to banking systems. Earlier, share papers and certificates were with investors as well as with the stock exchanges. But now, these are with banks. These are not in paper form, but are in electronic form with banks. Just like RBI is depository for commercial transactions, these banks have depository accounts with them. All transactions are verified through banks. 2. Broker-1 1. What is the job of a broker? A broker buys and sells shares on the behalf of his clients. Clients are generally investors in the stock market. At times, they also include companies which invest into the share market. An investor has to utilise the services of a registered broker for buying or selling shares in the stock market. The broker charges commission or brokerage for his services
which is regulated and which has to be shown separately in the contract which must be issued to the client. Brokers act as agents for their clients. 2. What is the need of a broker? For buying things for our day-to-day activities, we go to a shop to buy these. We don’t directly go to the company to buy such things. Thus, we can say that a shop-keeper is acting like an agent between customers and company. We can compare a shop-keeper to a broker and things with shares. Brokers act as links between investors and share market. Investors have to go to a broker to buy or sell stocks Broker links share market with investors. It is not possible for stock markets to allow investors directly. They need to have members, which can deal with investors. Brokers are members of stock exchange and investors have to deal through authorised brokers. 3. Who is a sub-broker? Sub-brokers work under a broker. Clients may deal with a sub-broker who in turn will transact business through a registered broker. It is not possible for brokers to deal with investors of the entire country as they are just few hundreds in numbers. Hence we have sub-brokers mainly to increase the reach of share market. At present, sub-brokers are required to register themselves with the SEBI for doing business. 4. On what basis do you charge your brokerage/commission? Brokers charge commission on investments, from their clients. They are not supposed to charge more than 2% of the invested amount, as per rules. Generally, brokers charge 0.5% of the investment as commission. Subbrokers charge slightly more i.e. around 1% of the investment. But these values keep on changing from brokers to brokers and it also depends on the scrips in which they are dealing with. 5. What are the requirements of a broker? Brokers are required to purchase a card now from the Stock exchange. The value of this card keeps on changing. It was Rs. 10 lakhs initially but now it costs around Rs. 55 lakhs. Besides, they also need to be registered now with the SEBI as well. Besides these requirements, they must have an efficient network, working space, computers, internet and other such formalities. Now, they also have to clear a couple of exams to be a broker at some exchanges like the NSE 6. How do you trade now?
Initially, we had physical trading of shares. A broker had to be at the stock market physically to deal with shares and jobbers used to calculate values of shares. Now we have online trading, where in we can directly deal with the stocks without being at the market. Due to internet, we can trade online. According to clients’ needs, we have to place orders on the internet and trading takes place electronically 7. How can a broker at BSE trade at the NSE? A broker dealing with the BSE for example can deal with the NSE also. There is no connection between BSE and NSE as far as registration of brokers go. Both have similar requirements and if a person satisfies those requirements, he can be a broker at any of the stock exchanges. 8. Can you explain frauds? Frauds are transactions which are not legal in layman’s words. These are not recorded in any book of accounts. In the stock markets, prices of shares can be artificially jacked-up through some means, that person can later reap the benefits of high prices of scrips. Ketan Pareikh and Harshad Mehta had similar tactics. They acquired funds from banks, purchased shares, printed fake share certificates and dumped them in to the stock exchanges when the stock prices were high. They were later behind bars. 9. What is SEBI? SEBI or the Securities Exchange Board of India. It is the regulator of stock exchanges. It issues new guidelines to keep away bad intentions of bad people. It looks into the trading and catches hold of defaulters. 3. Broker-2: 1. Who is a broker? A broker is a person who deals with the stock markets on behalf of his clients. He buys or sells shares and stocks on behalf of his clients who are investors. Investors include small investors as well as companies which invest into the stock exchange. A broker acts as an agent between the markets and the investors. He executes orders placed by his clients. 2. How is a transaction carried out by you? There are three ways or methods One is market rate where in you buy or sell stocks at the market rates. Second is Limit order where in a price limit is fixed and once that limit is reached, the order is executed . Third is follow up prices where in investors keep a track of price of the shares and accordingly deal in markets.
3. What is the need of a sub-broker? There are limitations on behalf of a broker. There are few hundred brokers and each broker can deal with a limited no. of people. Thus, brokers can’t reach out to the entire nation. Here arises the need of a sub-broker, who can deal with a larger no. of people. Just as you have retailers and distributors for a product, we also have sub-brokers. The sub-brokers have to get registered with the SEBI through the stock exchange. 4. On what basis do you charge brokerage? Brokerage or commission depends upon the shares scrips. Different brokers charge at different rates. Generally, 0.5% of investment is charged. Sub-brokers charge slightly more. But brokers are not supposed to charge more than 2% as per rules. 5. How does trading take place? Earlier, trading used to take place physically. Brokers had to be at the trading hall in the exchange. They would bargain on prices of scrips. Brokers were given permission to deal with 8 persons at a time. The 8 persons were called batches. In a hall, counters were arranged. There was a particular counters for particular scrips. Later on, the transactions were recorded on Sauda sheet with codes e.g. 786/6 where 786 is the broker code and 6 is the batch no. The recordings were done by jobbers. Each Sauda sheet used to have two columns one for selling one for buying. The transaction was supposed to be maintained by both seller and buyer. In case of a mismatch i.e. Vanda transaction, the mismatch was cleared after personal meet. Now we have computerized system where in we can directly trade with stock exchanges without being at the stock market. Deals are placed online. It is a simple system through which we can deal with the stock markets through terminals attached to the main computer at the stock exchange. The computer analyse the transactions and prices of scrips as well as the index is calculated through a computer. For calculation of index, scrips are classified into A, B1, B2 or Z group. Where in A could be classified as the best group while Z includes those companies which don’t have a good track record and they might not provide proper dividends to their investors. For calculation of Sensex, top 30 volatile scrips are taken into consideration while for the Nifty, top 50 scrips. The market value is compared with the base value and the volatility of scrips is taken into consideration for calculating the index. 6. What are the requirements of a broker?
Brokers have to register themselves with SEBI through the stock markets. They have to purchase a card from the stock exchange. The card currently costs Rs. 55 lakhs while it was Rs. 10 lakhs initially. Besides they also have to provide personal details, they must have an efficient network, working space, computers, internet and other such formalities. Now, they also have to clear an exam to be a broker at some exchanges like the NSE 7. What is the difference between share markets and stock markets? There are various types of shares and stocks. A share market deals with equity and preference shares while a stock market deals with stocks, bonds, gilts etc. 8. Is it compulsory for share holders to open a deemat account? Yes, now it is compulsory to have a deemat account. 9. How does transfer of shares take place? Earlier, it used to take place physically. A transfer deed used to be attached. It contained details of the seller and the buyer like name, signatures which were supposed too be registered with the registrar of the company. It also had the folio nos. of shares. Besides, a tax of 0.5% is to be paid. This value changes with different states and different types of shares and stocks. The seller gets the money according to the market rate present on the day he sells his shares. Now, everything is electrically done and deemat account has to be opened for the same. 10.What are frauds? Scams and Frauds are illegal transactions carried out without being recorded in the books of accounts. They are an attempt to make fast money. In the past, share prices have been artificially increased by hoarding shares. Besides, fake share certificates were printed which were dumped into the stock markets when the prices of shares shot up. Frauds were carried out by Harshad Mehta and Ketan Pareikh who used the same tactics of hoarding stocks and then dumping these. 11.What is SEBI? SEBI or Securities Exchange Board of India is the regulator which looks after the trading in the capital markets. It prevents bad intention of making fast money. Regulating the businesses in stock exchanges. It does work like registering and regulating stock securities market and collective investment schemes like mutual funds, promoting and regulating other self regulatory authorities, prohibiting fraudulent and unfair trade practices in the stock market, inspection and enquiries of intermediaries and self
regulatory organizations in the stock market. But it has not been very effective in its work as it is partial to some people. 4. Company with stock market: ACC. 1. When was ACC started? ACC or Associated Cement Companies was started in the year 1936. There were eleven companies which were amalgamated to form ACC. It was on 1st August 1936, ACC was formed. 2. How is the face value of public issues decided? There are various rules and regulations which have to be followed to determine the face value of issues. In May 99, our public issue was released at a rate of Rs. 100. But now, we have sub-divided it into shares worth Rs. 10 per share, as per guidelines. The current trend is to issue at Re. 1 or Rs. 10 per share. But old companies have issues at high rate. This is done so that people can afford to buy shares. There are a lot of people who buy public issues in small nos. If share prices are priced high, it may discourage them from buying shares and investing in stocks. The market is more buoyant now. ACC had issued rights issue in 1999. The price was Rs. 55 of which Rs. 45 was the premium and Rs. 10 was the face value. Before that, we had issued it in 1995 at a rate of Rs. 4000 which included Rs. 3900 as premium value and Rs. 100 was the face value. Such tactics are followed s that more people will be interested in stock markets. 3. How are shares allotted? We open a public issue. The total no. of applications and no. of shares to be issued are taken into consideration. Generally, issues are oversubscribed. Under such circumstances, all cannot be allotted shares. Here, all people with equal investment amounts are considered together. A lot is then drawn and it is settled accordingly .i.e. if the issue if oversubscribed five times, then one out of five people is allotted the proportion of shares. For doing this, statistics is to be considered. Companies also have rights issue. If an applicant applies for investment, he must get the shares to be allotted to him or according to the proportion company can give and this is his right. The extra shares are then proportionally given. Companies also have firm allotment. Under this, the applicant for investment has to be given the shares which he has applied for. Even under oversubscription, the person(s) has to be given the no. of shares which he/they have applied for.
Old companies also used to give preferential shares. These are shares given to a particular kind of people. Thus, all applicants from the public wont have access to preferential shares. Besides, all those companies which had issued public issues long ago try to concentrate on the existing share holders and don’t go in for more public issues unless the need arises. They reward the shareholders by issuing bonus shares, give privileges to them and take are of the employees through an Employees Stock Options Scheme. These share are neither preference nor are equity. General public is now-a-days given only equity shares. 4. When are bonus shares issued? Bonus shares are issued when the company has got extra profits. Under such circumstances, the share holders are rewarded for their stake in the company. The profits are disposed off to the shareholders by issuing bonus shares. Such shares are given on the basis of their stake in the company. Such shares are direct incentives to the shareholders especially to those who have high stale in the company as funds are given according to the ratio of allotment. Under such cases, investors are freely given shares. As shares are freely distributed, the price of shares may get reduced slightly. ACC last issued bonus shares in 1996 5. What are the fees required to be paid by ACC for its stocks to be listed? Companies need to pay listing fees to the stock exchange. Besides, deemat charges are also to be paid to CDL or NSDL for connectivity in deemat accounts. ACC shares are compulsorily in deemat form i.e. scrip-less trading takes place. This is done so that paper work can be avoided. These prices are calculated by the stock exchanges and values keep on changing. 6. On which stock exchanges is ACC listed? ACC is currently listed on six of India’s stock exchanges. These are the regional stock exchange i.e. the Mumbai Stock Exchange, the National Stock Exchange, Madras Stock Exchange, Calcutta Stock Exchange, Ahmadabad Stock Exchange, Cochin Stock Exchange and the Delhi Stock Exchange. 7. Who are the various agencies behind ACC’s listing? ACC shares are allotted by the share department of the company. The actual details of the public stake is looked after by the management, the bankers and the registrar of the company. Different bodies look after different parts of the process. For example, in 1999, Corporation Bank
looked after banking to issue, Tata Share Reg. processed shares to issue while J P Morgan Stanley lead managers to the issue
CONCLUSION: Shares and Stocks offer wide range of options to the public for investment. It is a big investment option. It is that field where people earn hundreds of rupees for few rupees invested. It is also that field where people loose the amount they had invested. Thus, it is also a big source of risk. But one will earn more if he has taken more risks. But risks are not to be taken casually. Only calculated risk needs to be taken. Before investing, one must study the market and its pattern for atleast a couple of years before investing. Careful investment will lead to huge returns.
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