Page 281 - DMGT407Corporate and Business Laws

Corporate and Business Laws

Notes
Though there are no set guidelines on the price, analysts said most times the price is fixed
at 20-25 per cent premium over the prevailing market price. “This is mainly to ensure that
share prices do not fall beyond a certain level during the buyback period,” said an official
in an investment bank.
For instance, the buyback price by SRF Ltd., which is for about 10 per cent of its equity
capital, is fixed at ` 250 per share, compared to the prevailing price of ` 200-range. This is
a premium of 25 per cent. Similarly, Caro Info Services set a price of ` 40 per share,
compared to the prevailing price of ` 33, a premium of 21 per cent.
According to Mr Shah, Networth Stock Broking, the buyback offer should not be at the cost
of capital expenditure plans of companies.
Source: thehindubusinessline.com

11.5 Raising of Capital/Issue of Shares

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. (i) By private placement of shares; (ii) By
allotting entire shares to an issue-house, which in turn, offers the shares for sale to the public;
and (iii) By inviting the public to subscribe for shares in the company through a prospectus.
Private placement of shares. A private company limited by shares is prohibited by the Act and
the Articles from inviting the public for subscription of 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 for subscription of 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 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.

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.

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.

274 LOVELY PROFESSIONAL UNIVERSITY