Functions of Financial Markets, Share Allotment Procedure, SEBI, and Key Provisions

Posted on Mar 15, 2024 in Economy

Functions of Financial Market

Transfer of Resources: Financial Market facilitates the transfer of real economic resources from lenders to ultimate users.
Productive Usage: Financial Market allows productive use of the funds. In the hands of the investors, their excess funds would have remained idle. Borrowers use these funds for productive purposes.
Enhancing Income: Financial Market allows lenders to earn interest or dividend on their surplus funds, thus leading to the enhancement of the individual and national income.
Capital Formation: Financial Market provides a channel through which savings flow to industrial and commercial organizations in the form of capital. This leads to capital formation.
Price Determination: The financial instruments traded in a financial market get their prices from the mechanism of demand and supply. The investors are the suppliers of funds, and the corporates are the users. The interaction between the two and other market factors will help determine the prices.
Sale Mechanism: Financial Market provides a mechanism for selling a financial asset by an investor to offer the benefit of marketability and liquidity of such assets.
Mobilizing Funds: Idle funds in the hands of investors can be productively used by corporates. Investors who have savings must be linked with corporates that require investment. So, the financial market enables investors to invest their savings according to their choices and risk assessment. This will utilize idle funds, and the economy will boom.
Liquidity: Financial market provides a mechanism for liquidating financial instruments. This means investors can sell their financial instruments and convert them into cash at any given time. This is an important factor for investors who do not want to invest for a long period.
Easy Access: Both investors and industries need each other. The financial market provides a platform where buyers and sellers can find each other easily.
Industrial Development: Financial market helps in transforming savings into capital. Corporates use the funds of investors to undertake productive or commercial activities, thereby leading to economic development.

Procedure for Allotment of Shares

Allotment of shares means distributing shares to those applicants who have submitted a written application along with the application money.

Following is the procedure for allotment of shares:

Appointment of Allotment Committee: When the subscription list is closed, the Secretary informs the Board of Directors to make preparations for allotment of shares. If the issue is par subscribed or under-subscribed, the Board can do the allotment of shares. But if the issue is over-subscribed, the Board has to appoint an Allotment Committee to undertake the work of allotment. The Allotment Committee will decide the basis of allotment and submit a report to the Board.
Hold Board Meeting to Decide Basis of Allotment: Board Meeting is held to approve the allotment formula suggested by the Allotment Committee. A representative of SEBI is also present when the Allotment Committee prepares the allotment formula. If the shares are listed, the formula has to be also approved by the authorities of the concerned stock exchange. Once the allotment formula is approved, the application and allotment list is made. This list contains the names of the allottees, i.e., the applicants who will be allotted shares. The list has to be signed by the Chairman and Secretary.
Pass Board Resolution for Allotment: At the board meeting, a resolution is passed to allot shares. The resolution also authorizes the Secretary to issue letters of allotment and letters of regret. The Secretary has to send a Letter of Allotment to allottees, i.e., those applicants whose names appear in the application and allotment list. The Secretary has to send a Letter of Regret to those applicants to whom no shares have been issued. Along with the letter of regret, the application money is also refunded. For companies that issue shares in electronic mode, they do not issue Allotment Letters to individual applicants. Instead, the company informs the respective Depository, i.e., NSDL or CDSL, about the allotment of shares. It provides the Depository with the details of applicants who have been allotted shares, the number of shares allotted, etc.
Collection of Allotment Money: The letter of allotment states the money to be paid by the applicant on allotment of shares. The money has to be paid in the Bank specified by the company within the stipulated time.
For all public issues and Rights Issue (from Jan. 2016), ASBA is mandatory.
Arrangement Relating to Letters of Renunciation: An applicant who has been allotted shares can renounce the shares in favor of another person. The applicant has to fill up a form for renunciation and submit it with the original copy of the letter of allotment to the company. After approval from the Board, the Secretary enters the name of the new allottee in the application and allotment list.
Arrangement Relating to Splitting of Allotment Letters: Sometimes, the applicant who has been allotted shares can request splitting of allotment letters. Splitting means putting the shares in one or more names. After getting the approval of the Board for the splitting, the Secretary enters the details of the split in the list of split allotments. The Secretary has to also issue split letters.
File Return of Allotment: The Secretary has to file a ‘Return of Allotment’ with the Registrar of Companies within 30 days of allotment of shares. The return of allotment contains details of allotment of shares, including the names and addresses of allottees, the value of shares allotted, the amount paid or payable on each share, etc.
Prepare Register of Members and Issue Share Certificate: The Secretary has to enter the names of all those applicants who have paid the allotment money in the Register of Members. The Secretary also has to prepare the Share Certificates and distribute them to all the members within two months of allotment of shares. In the case of shares held in electronic form (dematerialized), the entries of applicants are made by the Depository.

Securities and Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulator of the capital markets in India. SEBI was established in 1992 under the Securities and Exchange Board of India Act, 1992. It has its headquarters in Mumbai and has many regional and local offices all over India.

Functions of SEBI:

To protect the interest of investors in the securities market.
To promote the development of securities markets.
To regulate the business in stock exchanges and any other securities market.
To register and regulate the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, and such other intermediaries who may be associated with the securities market.
To register and regulate the working of the Depositories, Depository Participants, Custodians of securities, foreign institutional investors, and credit rating agencies.
To register and regulate the working of venture capital funds and collective investment schemes, including mutual funds.
To promote and regulate self-regulatory organizations.
To prohibit fraudulent and unfair trade practices relating to securities markets.
To promote investors’ education and training of intermediaries of the securities market.
To prohibit insider trading in securities.

Features of Dividend

It is the portion of profits of the company paid to its shareholders.
It is payable out of the profits of the company.
Dividend is an unconditional payment made by the company.
The company can pay dividends only to shareholders, viz. (1) Equity (2) Preference.
If the company has issued equity shares with differential rights as to dividend, the terms of issue of such shares will govern the shareholders’ rights about receiving the dividend.
Dividend cannot be declared out of capital.
Dividend can be declared only on the recommendation of the Board of Directors.
Dividend, as recommended by the Board of Directors, is approved and declared by a resolution passed at the Annual General Meeting by the shareholders.
Dividend for any previous year cannot be declared once that year’s Annual Account has been approved in the AGM.
Dividend, once approved and declared by shareholders, creates a debt. It cannot be revoked.
Dividend includes Interim Dividend.
Dividend must be paid in cash and not in kind.
Dividend is to be paid on the paid-up value of shares.
Dividend cannot be paid on calls paid in advance.

Provisions for Issue of Debentures as per Companies Act, 2013

Following are some provisions of the Act that a company has to comply with while issuing debentures:

No Voting Rights: A company cannot issue debentures with voting rights. Debenture holders are creditors of the company, and so they do not have any voting rights except in matters affecting them.
Types of Debentures: A company can issue secured or unsecured debentures and fully or partly convertible debentures or non-convertible debentures. To issue convertible debentures, a Special Resolution has to be passed in the General Meeting. All debentures are redeemable in nature.
Payment of Interest and Redemption: A company shall redeem the debentures and pay interest as per the terms and conditions of their issue.
Debenture Certificate: The company has to issue a Debenture certificate to the debenture holders within 6 months of allotment of Debentures.
Create Debenture Redemption Reserve: The company has to create a Debenture Redemption Reserve Account out of the profits of the company available for payment of dividends. This money can be used only for the redemption of debentures. As per the Companies (Share Capital and Debentures) Amendment Rules 2019, MCA has removed the Debenture Redemption Reserve requirement for Listed companies, NBFCs, and Housing Finance Companies.
Appointment of Debenture Trustees: If the company issues a prospectus or invites more than 500 people (either to the Public or its Members), the company has to appoint one or more Debenture Trustees. Debenture trustees protect the interest of the debenture holders. The company has to appoint trustees by entering into a contract with them called a Debenture Trust Deed.
Debenture Trustees can approach NCLT: Debenture Trustees have to redress the grievances of debenture holders. If the company defaults in repaying the principal amount on maturity or defaults in paying interest thereon, the Debenture Trustees can approach the National Company Law Tribunal for redressal.
Impose Restrictions: When the Debenture Trustee is of the opinion that the assets of the company are insufficient or likely to become insufficient to redeem the principal amount of debentures, it may approach the NCLT. NCLT can order a company to restrict incurring further liabilities to protect the interest of the debenture holders.
Punishment for Contravention of Provisions of the Companies Act: If the company fails to comply with any provisions of the Act, then the company and its officers shall be liable to pay a fine or imprisonment or both as prescribed in the Act.

Functions of SEBI

SEBI was set up with the objective of promoting the securities market, protecting the interest of investors in the securities market, and regulating the securities market. SEBI issues rules and regulations to be followed by the issuers of securities, market intermediaries, and investors. It is a regulator of all the Stock exchanges in India.

The Various Functions of SEBI Are:

1. To protect the interest of investors in securities market.

2. To promote the development of securities markets.

3. To regulate the business in stock exchanges and any other securities market.

4. To register and regulate the working of stock brokers, sub-brokers, share transfer

agents, bankers to an issue, trustee of trust deeds, registrars to an issue, merchants

bankers, underwriters, and such other intermediaries who may be associated with

securities market.

5. To register and regulate the working of the Depositories, Depository Participants,

Custodians of securities, foreign institutional investors, credit rating agencies.

6. To register and regulate the working of venture capital funds and collective investment

schemes including mutual funds.

7. To promote and regulate self-regulatory organization’s.

8. To prohibit fraudulent and unfair trade practice relating to securities markets.

9. To promote investors’ education and training of intermediaries of securities market.

10. To prohibit insider trading in securities.

Shares

The term share is defined by Section 2 (84) of the Companies Act 2013, ‘Share means ashare in the share capital of a company and includes stock’.Share is a unit by which the share capital is divided. The total capital of company is divided into small parts and each part is called share and the value of each part / unit is known as face value. Share is a small unit of capital of a company. It facilitates the public to subscribe to the capital in smaller amount.A person can purchase any number of shares as he wishes. A person who purchases shares of a company is known as a shareholder or a member of that company.

Features of Shares :

1. Meaning : Share is a smallest unit in the total share capital of a company.

2. Ownership : The owner of share is called as shareholder. It shows the ownership of a shareholders in the company.

3. Distinctive Number : Unless dematerialised, each share has distinct number for identification. It is mentioned in the Share Certificate.

4. Evidence of title : A share certificate is issued by a company under it’s common seal.It is a document of title of ownership of shares. A share is not any visible thing. It is shown by share certificate or in the form of Demat share.

5. Value of a Share : Each share has a value expressed in terms of money. There may be :

(a) Face value : This value is written on the share certificate and mentioned in the Memorandum of Association.

(b) Issue price : It is the price at which company sells it’s shares.

the share market.

6. Rights : A share confers certain rights on its holder such as right to receive dividend,

right to inspect statutory books, right to attend shareholders’ meetings and right to vote

at such meetings, etc.

7. Income : A shareholder is entitled to get a share in the net profit of the company. It is

called dividend.

8. Transferability : The shares of public limited company are freely transferable in the

manner provided in the Articles of Association.

9. Property of Shareholder : Share is a movable property of a shareholder.

Functions of Financial Markets, Share Allotment Procedure, SEBI, and Key Provisions