Legal Aspects of Business | Raising Capital | Corporate Governance
1. Raising of Capital
Private Placement of Shares
- A company can raise capital privately without offering shares to the public.
- Underwriters/brokers find buyers among their clients.
- No need for a prospectus, but a statement must be filed with the Registrar at least 3 days before share allotment.
Offer for Sale
- The company allocates shares to financial institutions or issue houses.
- These entities sell shares to the public at a higher price or at par.
- The document offering shares is considered a prospectus.
Public Offering through Prospectus
- Most common method to raise capital.
- The company invites the public to subscribe to shares or debentures through a prospectus.
Issue of Shares to Existing Shareholders
- Shares offered to existing shareholders in proportion to their holdings.
- Known as rights shares.
2. Book Building
Concept
- A process to collect orders from investors within a price range, helping to determine the final offer price for an IPO.
- The price is based on demand from investors.
Process
- A draft prospectus is filed with SEBI, excluding the price.
- A book runner (lead merchant banker) is appointed to handle the process.
- Price determination follows after consultation with institutional buyers.
- The finalized prospectus is filed within 2 days.
Benefits
- Realistic price determination.
- Reduced uncertainties and improved investor confidence.
- Efficient capital raising with reduced costs and paperwork.
3. Green Shoe Option (GSO)
- An option granted to underwriters to purchase extra shares at the original price, stabilizing the IPO price.
- If the stock price falls, the underwriter buys excess shares, helping to maintain stability.
- Benefits investors by providing better capital preservation.
4. Minimum Subscription
- A company can’t allot shares unless the minimum subscription amount is met (90% of the issue).
- Subscription must be completed within 60 days from the closure of the issue.
5. Underwriting
- Underwriting guarantees a minimum subscription level, with underwriters buying the unsold shares.
- Optional but acts as insurance against insufficient subscription.
- Lead merchant bankers must ensure underwriters can meet their commitments.
- Maximum commission: 5% for shares, 2.5% for debentures.
6. Buy Back of Shares
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Companies can buy back shares under certain conditions:
- Must be authorized by the articles and a special resolution.
- Buyback cannot exceed 25% of paid-up capital and reserves.
- Must be completed within 12 months.
- Shares bought back are destroyed, and the details are filed with SEBI and ROC.
7. Rights Shares
- Additional shares issued to existing shareholders in proportion to their original holdings.
- Offer is made before offering shares to outsiders.
- Usually occurs after 2 years from the company's incorporation or 1 year from the first allotment.
8. Bonus Shares
- Fully paid shares issued to existing shareholders by capitalizing profits.
- No charge to shareholders, and the shares are issued free of charge.
9. Inter-Corporate Loans & Investments
- Restrictions on loans, guarantees, or investments exceeding 60% of paid-up capital and free reserves, or 100% of free reserves.
- This ensures a more balanced approach to corporate financing.
10. Company Management: Directors
Meaning of Director
- A director is any person holding the position of a director in a company, regardless of title.
Qualifications and Disqualifications
- No mandatory qualifications, but companies may require a share qualification.
- Disqualified if found unsound mind, undischarged insolvent, convicted of moral turpitude, or has unpaid calls.
Legal Position
- Directors are agents and trustees of the company’s assets.
- The company acts through its directors and is liable for their actions.
Minimum & Maximum Directors
- Public company: Minimum 3 directors.
- Private company: Minimum 2 directors.
- No maximum limit unless specified in the articles.
11. Appointment and Removal of Directors
- First Directors: Appointed by articles or by subscribers to the memorandum.
- General Meeting: Directors must be appointed in a general meeting.
- Additional Directors: Appointed by the board if authorized by articles.
- Casual Vacancy: Filled by the board in case of death, resignation, or disqualification.
- Alternate Directors: Appointed to fill temporary vacancies due to the original director's absence.
- Nominee Directors: Nominated by institutions like the government or financial institutions.
- Removal: Can be removed by shareholders through an ordinary resolution.
12. Managerial Remuneration
- Remuneration for directors is capped at 11% of the net profits.
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Specific limits for individual directors:
- 1% if a managing or whole-time director exists.
- 3% if there is no such director.
- The managing or whole-time director can earn up to 5% of the profits, or 10% for all such directors combined, with government approval.
13. Elements of Corporate Governance
- Good governance includes honesty, transparency, and decisions made in the best interest of stakeholders.
- Corporate governance affects investor confidence and company valuation.
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Principles:
- Independent Board: Balanced representation of non-executive and independent directors.
- Transparency: Open decision-making with proper information.
- Stakeholder Interests: Board addresses concerns of shareholders, employees, and other stakeholders.
- Regular Monitoring: Board actively monitors company performance.
