Page 138 - DCOM106_COMPANY_LAW

Unit 9: Share and Share Capital

Notes

Task X, Y and Z are the three shareholders in a company representing three distinct
groups of shareholders. At one stage, when the company needs additional funds and
therefore, seeks to issue fresh shares, Z maintains that the new shares be issued to the
existing shareholder proportionately. X and Y manage to get majority shareholders to
pass a special resolution to the effect that the shares shall be directly offered to the public.
Can Z seek a remedy on the ground of oppression of minority? [Hint: No, there is no
remedy available to him as provisions of s. 81 have not been contravened.]

9.6 Reorganisation of Capital

The companies limited by shares have to issue shares to raise the necessary capital for their
operations. Issue of shares may be made in three ways:
1. By private placement of shares.
2. By allotting entire shares to an issue-house, which in turn, offers the shares for sale to the
public.
3. By inviting the public to subscribe for shares in the company through a prospectus.
1. Private Placement of Shares: A private company limited by shares is prohibited by the
Act and the articles from inviting the public to subscribe in shares or debentures. It also
need not file statement in lieu of prospectus. Its shares are issued privately, to a small
number of persons known to the promoters or related to them by family connections.
A public company can also raise its capital by placing the shares privately and, without
inviting the public to subscribe to its shares or debentures. In this kind of arrangement, an
underwriter or broker finds persons, normally his clients who wish to buy the shares. He
acts merely as an agent and his function is simply to procure buyer for the shares, i.e., to
place them. Since no public offer is made for shares, there is no need to issue any prospectus.
However, under s.70, such a company is required to file with the Registrar a statement in
lieu of prospectus, at least 3 days before making allotment of any shares or debentures.
As per the guidelines issued by SEBI in June, 1992, private placement of shares should not
be made by subscription of shares from unrelated investors through any kind of market
intermediaries. This means a promoters’ share should not be contributed by subscription
of those shares, by unrelated investors through brokers, merchant bankers, etc. However,
subscription of such shares by friends, relatives and associates is allowed.

2. By an Offer for Sale: Under this arrangement, the company allots or agrees to allot shares
or debentures at a price to a financial institution or an issue-house for sale to the public.
The issue-house publishes a document called an offer for sale, with an application form
attached, offering to the public shares or debentures for sale at a price higher than what is
paid by it or at par. This document is deemed to be a prospectus [s.64(1)]. On receipt of
applications from the public, the issue-house renounces the allotment of the number of
shares mentioned in the application in favour of the applicant purchaser who becomes a
direct allottee of the shares.

3. By Inviting Public through Prospectus: This is the most common method by which a
company seeks to raise capital from the public. The company invites offers from members
of the public to subscribe for the shares or debentures through prospectus. An investor is
expected to study the prospectus and if convinced about the prospects of the company,
apply for shares.

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