Prospectus, Share Types and Share Capital Regulations
Prospectus
A prospectus is a legal document issued by a public company inviting public subscriptions for shares or debentures, containing detailed disclosures on company objectives, financials, risks, management, and capital structure per SEBI (ICDR) Regulations and Companies Act, Section 26 [from previous]. It ensures investor protection through mandatory information such as material contracts, litigation, and promoter details; shelf/deemed prospectuses apply for follow-on offers [from previous]. Non-compliance leads to liability for untrue statements. [11]
Shares and Types of Shares
Shares represent ownership units in a company’s capital, divisible into equity (ordinary) shares with voting and dividend rights and preference shares with priority claims. Types include:
- Authorized — maximum issuable;
- Issued — offered to investors;
- Subscribed — applied for by investors;
- Called-up — amount demanded by the company;
- Paid-up — amount received by the company;
- Reserve — unissued portion of authorized capital.
[12][11]
Preference Shares: Classes and Differences
Classes of preference shares:
- Cumulative / Non-cumulative (arrears carry forward)
- Participating / Non-participating (share in extra profits)
- Convertible / Non-convertible
- Redeemable / Irredeemable
- Compulsory / Optional redemption [11]
| Aspect | Preference Shares | Equity Shares |
|---|---|---|
| Dividend | Fixed priority [11] | Residual, variable [12] |
| Voting Rights | Limited / none [11] | Full [12] |
| Capital Repayment | Priority in liquidation [11] | Residual [12] |
| Risk / Return | Lower risk, fixed return [11] | Higher risk, unlimited upside [12] |
Sweat Equity Shares and Issuing Conditions
Sweat equity shares reward employees and directors for non-cash contributions such as know-how or intellectual property via discounted equity or non-cash issue. Conditions (Section 54, Rule 8):
- Special resolution by shareholders;
- Maximum 15% of paid-up capital or ₹5 Crore per year (whichever is higher);
- Aggregate cap of 25% of the total paid-up equity capital;
- Three-year lock-in period;
- Valuation by a registered valuer;
- Eligible recipients: employees and directors with at least one year of service;
- Startups: different caps permitted up to 50% / 10 years;
- Maintain register SH-3.
[1][2][3]
Stock: Difference Between Shares and Stock
Stock aggregates fully paid shares into undivided units, transferable in any amount. Key differences:
- Shares are fixed units and distinct; stock is consolidated and undivided;
- Shares can be partly paid; stock is fully paid;
- Shares are typically numbered; stock is not. [12][11]
Procedure for Issuing Shares
- Board approves issue size and terms. [11]
- Special resolution if required (e.g., increase of paid-up capital or rights issue). [12]
- Valuation by merchant banker or registered valuer.
- SEBI approval for listed companies; ROC filing (SPICe+) for others.
- Allotment within 60 days; refund oversubscription.
- Demat credit and listing application. [11]
Share Capital and Its Types
Share capital is funds raised from issuing shares. Categories include:
- Authorized — maximum per Memorandum of Association;
- Issued — offered to investors;
- Subscribed / Allotted — taken by applicants;
- Called-up — amount due from shareholders;
- Paid-up — amount received;
- Reserve / Unissued — portion not issued yet.
Types: equity and preference; nominal vs. real capital. [12][11]
Reserve Capital vs Capital Reserve
Reserve capital is an uncalled portion of capital, pledged to be called only on winding up; it is not distributable. Capital reserve arises from non-trading sources (e.g., share premium on cancellation, forfeiture) and is generally not distributable except as permitted for bonus issues. [11][12]
Accounting Treatment for Issue of Shares
Issue for cash (par): Dr Bank; Cr Share Capital. [from previous]
Issue with premium: Dr Bank; Cr Share Capital (face value); Cr Securities Premium (excess). [13]
Issue at discount: Dr Bank; Dr Discount on Shares; Cr Share Capital (face); discount is written off over time. [14]
Analysis table (Par / Premium / Discount example — 100 shares, ₹10 face):
| Issue Price | Cash Dr | Share Cap Cr | Sec Prem Cr | Discount Dr |
|---|---|---|---|---|
| Par ₹10 | 1,000 | 1,000 | — | — |
| Premium ₹12 | 1,200 | 1,000 | 200 | — |
| Discount ₹9 | 900 | 1,000 | — | 100 |
[13]
Two Classes of Shares
The two principal classes are equity (voting, residual claim) and preference (fixed dividend, priority in repayment). [11]
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Uses of Securities Premium
Per Section 52, securities premium can be used to:
- Issue fully paid bonus shares;
- Write off preliminary expenses or a share issue loss;
- Pay premium on redemption of debentures or preference shares;
- Buy back shares.
Prohibited use: payment of dividends. [12][11]
Conditions for Issuing Shares at Discount
Section 53 requirements:
- For ordinary companies only;
- Maximum 10% discount on the first issue (within 5 years of incorporation);
- Requires a special resolution;
- ROC filing within two months of the issue;
- Not available to promoters. [12][11]
Shares for Consideration Other Than Cash
Purchase of asset: Dr Asset; Cr Share Capital (face); Cr Securities Premium (excess). [15]
Purchase of business: Dr Net Assets / Sundry Assets; Cr Liabilities; Cr Share Capital / Premium; recognize goodwill if consideration exceeds net assets. [15]
Issued to promoters: Dr Preliminary Expenses / Promoters A/c; Cr Share Capital / Premium. [15]
Calls in Arrears, Advance and Interest
Arrears: Dr Calls-in-Arrears; Cr Calls A/c. Interest: Dr Calls-in-Arrears / Debtor — Interest Receivable; Cr Interest A/c. [15]
Advance: Dr Bank; Cr Calls-in-Advance. Interest on advances: Dr Interest A/c; Cr Calls-in-Advance. [15]
Undersubscription, Oversubscription and Pro Rata
Undersubscription: allot applicants; balance remains unissued. [15]
Oversubscription: refund the excess or allot pro rata (proportionate to application). [15]
Forfeiture and Surrender of Shares
Forfeiture (non-payment): Dr Forfeited Shares (paid-up); Dr Calls-in-Arrears; Cr Calls A/c; Cr Share Capital. Reissue may be at discount or par. Surrender (return of shares) is treated similarly for promoters’ shares returned. Cases include full or part payment, with or without interest. [13]
Reissue of Forfeited Shares
On reissue: Dr Bank; Cr Forfeited Shares (gain). Any excess is transferred to Capital Reserve. Cases include reissue at discount (gain offsets original discount), at par, or at premium. [13]