CORPORATE FINANCE

LONG TERM FINANCE

UDAY KULKARNI FCA, CIA, CISA.

SHARE CAPITAL

 What is Capital?
---Owners contribution/Investment in the
Business or Profession.
 Individual Business- Proprietor’s Capital.
 Partnership Business- Partner’s Capital.

UDAY KULKARNI FCA, CIA, CISA.

SHARE CAPITAL
 In the Company form business – Share
Capital

 Company Act 1956- Section -86 allows-

- Equity Share Capital
- Preference Share Capital

UDAY KULKARNI FCA, CIA, CISA.

EQUITY SHARE CAPITAL
 Equity Share—
- Equity Interest in Company
- Equity Share in Profits
- Equity Share in Company’s Assets
 Equity Shareholders are the owners
of business.
 Equity Shareholders have the right to
vote.
UDAY KULKARNI FCA, CIA, CISA.
EQUITY SHARE CAPITAL
ADVANTAGES to Company-
 No fixed charges attached to equity
shares.
 Equity Shares carry no fixed maturity.
 Sale of Equity Shares increases the
creditworthiness of the company.
 Sale of Equity Shares is easy.

UDAY KULKARNI FCA, CIA, CISA.

EQUITY SHARE CAPITAL
DISADVANTAGES to Company-
 Extend voting rights or Control to
shareholders.
 The cost of underwriting and
distribution is high.
 Dividend payable to equity
shareholders is not allowed as
expenses under Income Tax act.

UDAY KULKARNI FCA, CIA, CISA.

EQUITY SHARE CAPITAL
 Company pays dividend to equity
shareholders from distributable profits
after all other claims are met.
 Dividend rate is not fixed- vary year to
year.
 Equity shareholders have right to vote
on every resolution placed in AGM-
proportionate to share capital.

UDAY KULKARNI FCA, CIA, CISA.

EQUITY SHARE CAPITAL

Section 86 of Company Act allows

two types of Equity Share Capital

With differential rights as to dividend ,

With voting Rights
voting Or subject to other conditions.

UDAY KULKARNI FCA, CIA, CISA.

PREFERENCE SHARE CAPITAL
 Section 85 of Company Act defines
Preference Share Capital – It is that
part of Share Capital which fulfills
both the following two conditions-
a) that in respect of dividend, it
carries or will carry preferential right,
to be paid in fixed amount or an
amount calculated at a fixed rate.

UDAY KULKARNI FCA, CIA, CISA.

PREFERENCE SHARE CAPITAL

b) that as respect capital- it carries or

will carry on a winding up or
repayment of capital a preferential
right, to be repaid the amount of the
paid up capital or deemed to have
been paid up.

UDAY KULKARNI FCA, CIA, CISA.

PREFERENCE SHARE CAPITAL
 Preference Shareholders have
preferential rights in respect of-
- Dividends
- Company’s Assets

 The dividend of Preference Shares is

fixed.

UDAY KULKARNI FCA, CIA, CISA.

PREFERENCE SHARE CAPITAL
Advantages to Company-
 It permits company to avoid sharing
control through participation in voting.
 If preference Shares are irredeemable
they are flexible than debentures.
 Obligation to pay fixed rate of interest
is not binding.

UDAY KULKARNI FCA, CIA, CISA.

PREFERENCE SHARE CAPITAL
Disadvantage to Company-
 Dividend is not allowed as an
expenses under Income Tax Act.
 Cost is far greater than the cost of
debentures.
 Non payment of dividend gives right

to preference shareholders to
participate in voting.

UDAY KULKARNI FCA, CIA, CISA.

PREFERENCE SHARE CAPITAL
GENERAL TYPES
 CUMULATIVE
Cumulative gives right to demand the unpaid
dividend of any year during the year
when profits are ample. It allows
accumulation of dividend in case of loss
to company.
 PARTICIPATING
These shares are entitled to fixed dividend and
in addition carry a right to participate in
the surplus profits along with equity
shareholders after a dividend at a certain
rate has been paid to equity
shareholders. Also in case of winding up
after paying both the preference and
equity shareholders if any surplus left
then get additional share in surplus
assets of the company.
 REDEEMABLE
These shares are to be redeemed at a fixed
date or after certain period of time.
UDAY KULKARNI FCA, CIA, CISA.
 NON-CUMULATIVE
Non Cumulative can not claim unpaid dividend. They carry
a right to fixed dividend out of the profits of any
year. It does not allow accumulation of dividend.
 NON-PARTICIPATING
Additional rights are not available to these
shareholders. Unless expressly
provided either in memorandum or
articles or in the term of issue
preference shares are non
participating.
 NON-REDEEMABLE
The Company Act 1956 prohibits the
issue of non redeemable or
redeemable after the expiry of a
period of twenty years from the
date of issue of preference
shares.
VOTING RIGHTS

 Voting Rights provides Control on the

Company.

 Section 87 of Company Act 1956

allows voting rights to shareholders.

UDAY KULKARNI FCA, CIA, CISA.

VOTING RIGHT
 EQUITY SHAREHOLDER-
Section 87 (1) (a) Every member of a
company limited by shares and holding any
equity share capital therein shall have a right
to vote on every resolution placed before the
company; and
(b) His voting on a poll shall be in proportion to
his share of the paid up equity capital.

UDAY KULKARNI FCA, CIA, CISA.

VOTING RIGHT
 PREFERENCE SHAREHOLDERS-
Section 87 (2)(a) – Every member of a
company limited by shares and
holding any preference share capital
therein shall, have a right to vote
only on resolutions placed before
the company which directly affect
the rights attached to his
preference shares.
UDAY KULKARNI FCA, CIA, CISA.
VOTING RIGHT
 PREFERENCE SHAREHOLDERS-
Section 87 (2)(b) Every member of a company
limited by shares and holding any
preference share capital therein shall, be
entitled to vote on every resolution
placed before the company at any meeting,
if dividend due on such capital or any
part of such dividend has remained
unpaid.

UDAY KULKARNI FCA, CIA, CISA.

 ISSUE OF SHARE CAPITAL

ISSUE OF
SHARE CAPITAL

ISSUE SHARES ISSUE SHARES ISSUE SHARES

AT PAR AT PREMIUM AT DISCOUNT

UDAY KULKARNI FCA, CIA, CISA.

ISSUE SHARES AT PREMIUM
 Section 78 of Company Act Permits to issue
shares at Premium.
 Premium Amount must be transferred to an
account – Share Premium Account.
 It can not be regarded as Capital.
 It can not be treated as Profit and can not
be distributed.
 May be used to write down fictitious assets-
preliminary expenses, underwriting
commission etc.

UDAY KULKARNI FCA, CIA, CISA.

ISSUE SHARES AT DISCOUNT
 Section 79 of Company Act permits to
issue shares at a discount-
 It should be authorized at AGM.
 Maximum rate of discount must not
exceed 10%.
 Issue of shares can be done only a
year after the commencement of the
business.

UDAY KULKARNI FCA, CIA, CISA.

ISSUE OF SHARE CAPITAL
METHODS
 PRIVATE PLACEMENT
 RIGHTS ISSUE
 PREFERNTIAL ALLOTMENT
 INITIAL PUBLIC OFFER
 SECONDARY PUBLIC OFFER
 SWEAT EQUITY SHARES
 EMPLOYEE STOCK OPTIONS

UDAY KULKARNI FCA, CIA, CISA.

ISSUE OF SHARE CAPITAL
METHODS
RIGHT ISSUE-
 It is offer to existing shareholders the

opportunity to subscribe further shares.

 Right of entitlement can be sold.
 Lower cost of issue.
 Shareholders are able to maintain their
original proportion of share ownership.

UDAY KULKARNI FCA, CIA, CISA.

ISSUE OF SHARE CAPITAL
METHODS
SWEAT EQUITY SHARES-
Section 79 A of company Act permits to
issue sweat equity shares to
employees or directors of company at
discount or for consideration other
than cash- for providing know-how,
making available rights of intellectual
property or value additions etc.

UDAY KULKARNI FCA, CIA, CISA.

ISSUE OF SHARE CAPITAL
METHODS
STOCK OPTIONS-
The right to buy a designated stock at the
option of the holder at any time with a
specified period at a determinable price. It
can also represent the right to sell
designated stocks within an agreed period
at a determinable price.
Options are granted to management and key
employees.

UDAY KULKARNI FCA, CIA, CISA.

ISSUE OF SHARE CAPITAL
METHODS
INITIAL PUBLIC OFFER-IPO-
IPO is regulated by-
 Company Act 1956

 Securities Contracts Act 1956

 The Securities and Exchange Board
of India.
 Listing Agreements of Stock
Exchanges.
UDAY KULKARNI FCA, CIA, CISA.
ISSUE OF SHARE CAPITAL
METHODS
INITIAL PUBLIC OFFER-IPO-
 It is new issue of shares in Primary

Market by unlisted company.

 Through prospectus a company

invites offers from public to subscribe

its shares.
 It requires underwriting of issue

 High cost of issue.

UDAY KULKARNI FCA, CIA, CISA.

ISSUE OF SHARE CAPITAL
METHODS
SECONDARY MARKET & PUBLIC OFFER-
 Securities that are already outstanding and
owned by investors are usually purchased
and sold through secondary market.
 In this market outstanding issues are
permitted to trade through stock
exchanges.
 Secondary Public Offer – Issue by listed
company.

UDAY KULKARNI FCA, CIA, CISA.

SHARE CAPITAL

QUESTIONS?

UDAY KULKARNI FCA, CIA, CISA.