Tag: Board of Directors

Pro-rata Allotment of Shares refers to the proportional distribution of shares among applicants when the number of shares applied for exceeds the shares available for issuance, typically in cases of oversubscription. Under this system, each applicant receives shares in proportion to the amount they applied for. For example, if an investor applies for 1,000 shares in an issue that is oversubscribed by 200%, they may receive only 500 shares (i.e., half of their application). Pro-rata allotment ensures a fair and equitable distribution of shares to all applicants.

Reasons of Pro-rata basis Allotment of Shares:

1. Fair Distribution:

Pro-rata allotment ensures a fair and equitable distribution of shares among applicants. When demand exceeds supply, this method allows each applicant to receive shares in proportion to their applications, minimizing feelings of unfairness among investors.

2. Equity Among Investors:

By allotting shares on a pro-rata basis, companies uphold the principle of equity. Each applicant receives an opportunity to invest in proportion to their interest, regardless of the size of their application, thus maintaining investor confidence in the fairness of the process.

3. Mitigation of Oversubscription issues:

In cases where a public offering is oversubscribed, pro-rata allotment provides a structured way to address the excess demand. This method simplifies the allocation process and helps manage investor expectations, as they know they will receive a portion of their requested shares.

4. Transparency:

Pro-rata allotment promotes transparency in the share allocation process. The method is straightforward, and investors can easily understand how many shares they will receive based on their application size, enhancing trust in the company’s operations.

5. Encourages Participation:

Knowing that shares will be allotted fairly encourages more investors to participate in future offerings. This can lead to a more extensive shareholder base, which can be beneficial for companies in terms of stability and market presence.

6. Simplified Accounting:

From an accounting perspective, pro-rata allotment simplifies the share issuance process. Companies can easily calculate the number of shares to be allotted to each applicant based on the total number of shares applied for, streamlining record-keeping and reporting.

7. Reduced Administrative Burden:

By adopting a pro-rata approach, companies can reduce the administrative burden associated with managing oversubscriptions. Instead of handling individual requests and conducting lotteries or other complex allocation methods, a pro-rata system simplifies the process.

8. Legal Compliance:

Pro-rata allotment can help companies comply with regulatory requirements. Many jurisdictions have guidelines regarding fair allotment processes, and adhering to a pro-rata system can help ensure compliance with these rules, minimizing legal risks.

Accounting of Pro-rata basis Allotment of Shares:

Accounting for pro-rata allotment of shares involves recording the applications, allotment, and any refund due to oversubscription.

Example Scenario:

• A company issued 10,000 shares at ₹10 each.
• Applications were received for 15,000 shares, resulting in oversubscription.
• The company refunds 5,000 shares and allots the remaining 10,000 shares on a pro-rata basis.

Accounting Entries for Pro-rata Allotment:

Requirements of Companies Act

The following are the requirements of the Companies Act regarding the reissue of forfeited shares:

1. The forfeited shares are generally issued at a price lesser than their face value. But the discount so allowed to the new buyers should not exceed the amount already paid by the defaulting member.
2. A resolution sanctioning the reissue must be passed in the Board Meeting.
3. The forfeited shares are to be transferred in the name of the buyer and his name should be entered in the Register of Members.
4. A public notice in newspapers should be given stating that such and such shares have been forfeited due to the non-payment of calls.

Re-issue of Forfeited Shares

Forfeited shares are available with the company for sale. After the forfeiture of shares, the company is under an obligation to dispose off the forfeited shares.

The company requires to pass a resolution in its Board Meeting for the re-issue of forfeited shares. Re-issue of forfeited shares is a mere sale of shares for the company. A company does not make allotment of these shares.

The company auctions the forfeited shares and disposes them off. A company can re-issue these shares at any price but the total amount received on these shares should not be less than the amount in arrears on these shares. Here, total amount refers to the amount received from the original allottee and the second purchaser.

Notes:

• We show the Forfeited shares A/c under the heading ‘Share Capital’.
• When a company re-issues only a part of the forfeited shares, then it will transfer only the profit relating to this part to the capital reserve.
• When a company re-issues shares at a price more than their face value, it needs to transfer the excess amount to the Securities Premium A/c.

(a) Reissue of forfeited Share Originally Issued at Par:

When the forfeited shares are reissued at a discount, the amount of discount should not exceed the amount credited to Share Forfeited Account. If the discount allowed on reissue of shares is less than the forfeited amount, there will be some balance left in the Forfeited Account, which should be transferred to capital reserve, because it is a profit of capital nature.

Accounting entries:

On reissue of shares at discount:

Bank A/c … Dr. (With reissue price)

Share Forfeited A/c …Dr. (With the discount allowed on reissue)

To Share Capital A/c (With the amount called up)

Transfer to Capital Reserve:

The balance remaining in share forfeited account is in the nature of capital gain and would be closed by transfer to the capital reserve account.

The necessary journal entry will be:

Share forfeited a/c Dr. (with credit balance left in share forfeited account after reissue)

To Capital reserve a/c

(Being share forfeited account transferred)

(b) Reissue of forfeited shares originally issued at discount:

If the shares which were originally issued at a discount are forfeited and reissued, then on reissue the new allottee would get the advantage of discount, besides getting some additional discount from share forfeited account.

The requisite entry in this case will be:

Bank a/c Dr. (with amount received on reissue)

Discount on issue of shares a/c Dr. (with normal discount)

Share forfeited a/c Dr. (with extra discount on reissue)

To Share capital a/c Dr. (with total amount)

(Being forfeited shares reissued, originally issued at discount)

Journal Entries for Re-issue of Forfeited Shares:

Auditor’s Duty regarding reissue of forfeited shares

1. The auditor should ascertain whether the Articles authorize the Board of Directors to reissue the forfeited shares.
2. He should examine the resolution passed by the Board of Directors at their meeting under which the forfeited shares have been re-allotted.
3. He should vouch the entries made for re-allotment in the Cash Book.
4. He should see that the balance remaining in the forfeited shares account has been transferred to the Capital Reserve Account.
5. In case the shares were reissued at a price above par value, he should see that the excess has been transferred to the Share Premium Account.
6. He should vouch the copy of the return of allotment filed with the Registrar of Joint Stock Companies.

Section 81 of the Companies Act requires that a public limited company, whenever it proposes to increase its subscribed capital after the expiry of two years from the date of its incorporation or after the expiry of one year from the date of allotment of shares in that company, made for the first time after its formation, whichever is earlier, shall be required to offer those shares to the existing equity shareholders in the proportion of paid-up capital as nearly as possible. Such shares are known as rights shares.

From an accounting perspective, a bonus issue is a simple reclassification of reserves which causes an increase in the share capital of the company on the one hand and an equal decrease in other reserves. The total equity of the company therefore remains the same although its composition is changed.

The price at which these shares are offered to the existing shareholders is normally below the market price of the shares. The existing shareholders thus have a specific advantage in the sense that market price of the shares offered is more than its issue price. This specific advantage has a money value called as value of the right.

The value of the right can be calculated as follows:

1. Ascertain the total market value of the shares which a shareholder is required to possess in order to get additional shares from of the fresh issue.
2. Add to the above market price, the amount to be paid to the company for additional shares of the fresh issue.
3. Find average price. This can be calculated by dividing the total prices calculated under step 2 by the total number of shares.
4. Deduct average price from market price. This difference is called value of the right.

The accounting entries in each of these cases would be as follows:

(A) For converting partly paid shares into fully paid shares

(i) Equity share final call a/c Dr.

  To equity capital a/c

(Being call money due on … shares)

(ii) P&L a/c Dr.

Securities Premium a/c

Reserve a/c Dr.

  To bonus to shareholders a/c

(Being bonus declared)

(iii) Bonus to shareholders a/c Dr.

  To equity share final call a/c

(Conversion of partly paid equity shares into fully paid equity shares)

(B) For fully paid bonus shares

(i) P&L a/c

Securities Premium a/c

Reserve a/c Dr.

  To bonus to shareholders a/c

(ii) Bonus to shareholders a/c Dr.

  To equity share capital a/c

(Being bonus utilised to issue fully paid up bonus shares)

Following journal entries are required to account for a bonus issue:

Advantages

• Cash-starved companies can issue bonus shares instead of cash dividends to provide temporary relief to shareholders.
• Issuing bonus shares improves the perception of company’s size by increasing the issued share capital of the company.
• When distributable reserves (e.g. un-appropriated profits) are used to account for a bonus issue, it decreases the risk to creditors as it reduces the amount of reserves available for distribution to the shareholders of the company.

Disadvantages

• It is not a meaningful alternative to cash dividends for shareholders as selling the bonus shares to meet liquidity requirements would lower their percentage stake in the company.
• Bonus issue does not generate cash for the company.
• As bonus shares increase the issued share capital of the company without any cash consideration to the company, it could cause a decline in the dividends per share in the future which may not be interpreted rationally by all market participants.

Case 1

When new fully paid up bonus shares are issued

a) for providing amount of bonus

Capital reserve account debit xxxx

share premium account debit xxxx

Capital redemption reserve account debit xxxx

Other general reserve account debit xxxx

Profit and loss account debit xxxx

Bonus to shareholder account credit xxxx

b) for issue of bonus

Bonus to equity shareholder account debit

Equity share capital account credit

Director Loans

Section 185 of the Companies Act, 2013 lays down certain restrictions with regard to the granting of loans to Directors in order to monitor their working.

When the Companies Act, 1956 was in force, public companies were permitted to grant loans, guarantees, and securities as long as they obtained prior permission from the Central Government to do so. The companies used to exercise a practice of borrowing funds and passing them to subsidiaries and other associate companies through inter-corporate loans.

However, when it came to compliance with the terms of the loan agreement, the holding companies used to take a step back, leaving the subsidiaries in the lurch. In order to put a stop to the exploitation of the subsidiaries, Section 185 of the Companies Act, 2013 came into force.

Section 185 (as amended by the Companies (Amendment) Act, 2017):

• Limits the prohibition on loans, advances, etc. to Directors of the company or its holding company or any partner of such Director or any partner of such Director or any firm in which such Director or relative is a partner.
• Allows the company to give a loan or guarantee or provide security in connection with any loan to any person/ entity in whom any of the Directors are interested, subject to:-
  • Passing of Special Resolution by the company in a General Meeting (Approval of at least 75% of the members is required).
  • Utilization of loans by the borrowing company shall be solely for its principal business activities.
• The penalty provisions as set out under Section 185 (4) of the Act, in addition to the Company, now extends to an officer in default of the company (which includes any Director, Manager or KMP or any person in accordance with whose directions BODs are accustomed to act).

Exemptions with Regard to Loans Given to Directors

• Loans to the Managing Director or Whole Time Director:
• The loans to MD or WTD may be given only if the following conditions are met with:
  • Where it is part of the Policy of Service of the company to grant loans to all employees.
  • Pursuant to any scheme which is duly approved by the members by way of a Special Resolution
• Loans to Subsidiary Company:

Where the holding company grants the loan, guarantee or security to its wholly-owned subsidiary company, which uses the same for its principal activity of business only.

• Loans to Companies as part of Ordinary Business:

If the rate of interest charged on such loans is not lesser than the rate prescribed by RBI at the time, loans may be given to companies in the ordinary course of business.

• Loans given by Banks and Financial Institutions to Subsidiaries:

Grant of loan is permitted based on:

• Where the holding company provides the security or guarantee with respect to the loan made by the bank or any financial institution to the subsidiary company.
• The loan must be utilised for the subsidiary’s principal activity of the business.

Director Remuneration

‘Remuneration’ means any money or its equivalent given to any person for services rendered by him and includes the perquisites mentioned in the Income-tax Act, 1961.

Managerial remuneration in simple words is the remuneration paid to managerial personals. Here, managerial personals mean directors including managing director and whole-time director, and manager.

Directors’ remuneration is the process by which directors of a company are compensated, either through fees, salary, or the use of the company’s property, with approval from the shareholders and board of directors.

The process of directors’ remuneration came about because of shareholder concerns that directors were rewarding themselves large salaries despite showing poor profits or revenue.

Therefore, the process was initiated by which shareholders were able to agree to or reject fees paid to directors in general. This amount is the upper limit that can be paid to the board of directors.

The board of directors, in turn, will determine how those fee payments are split up among the directors, including the general director of the company.

On the other hand, director’s remuneration, meaning the salaries and bonuses paid out to directors, is part of the directors’ employment contract signed with the company. The board of directors then has direct control over that remuneration agreement.

Shareholders may sue the directors if they pay excessive amounts that exceed the agreed payment or if they pay themselves a disproportionately large number of profits instead of distributing it to the stockholders as dividends.

Permissible managerial remuneration

• Total managerial remuneration payable by a public company, to its directors, managing director and whole-time director and its manager in respect of any financial year:

The percentages displayed above shall be exclusive of any fees payable under section 197(5).

Until now, any managerial remuneration in excess of 11% required government approval. However, now a public company can pay its managerial personnel remuneration in excess of 11% without prior approval of the Central Government. A special resolution approved by the shareholders will be sufficient.

In case a company has defaulted in paying its dues or failed to pay its dues, permission from the lenders will be necessary.

• When the company has inadequate profits/no profits:In case a company has inadequate profits/no profits in any financial year, no amount shall be payable by way of remuneration except if these provisions are followed.

Qualifications of a Director:

The Act has a dedicated provision which is Section 162 that underlines the reasons for which a person may not appoint as a director. There is no such provision regarding the qualification under the Act.

As regards to the qualification of directors, there is no direct provision in the Companies Act, 2013.But, according to the different provisions relating to the directors; the following qualifications may be mentioned:

1. A director must be a person of sound mind.
2. A director must hold share qualification, if the article of association provides such.
3. A director must be an individual.
4. A director should be a solvent person.
5. A director should not be convicted by the Court for any offence, etc.

Rule 5 of The Companies (Appointment and Qualification of Directors) Rules, 2014 states the qualification of the Independent Director as follows

“An independent director shall possess appropriate skills, experience, and knowledge in one or more fields of finance, law, management, sales, marking, administration, research, corporate governance, technical operations, or other disciplines related to the company’s business.”

Disqualifications of a director:

The relevant provision of the law that deals with the disqualification of directors are Section 152, 164, 165, and 188 of the Act and The Companies (Appointment and Qualification of Directors) Rules, 2014.

Section 164 of Companies Act, 2013, has mentioned the disqualification as mentioned below:

1) A person shall not be capable of being appointed director of a company, if the director is

(a) Of unsound mind by a court of competent jurisdiction and the finding is in force;

(b) An undischarged insolvent;

(c) Has applied to be adjudicated as an insolvent and his application is pending;

(d) Has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence;

(e) Has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or

(f) An order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section;

2) Such person is already a director of a public company which:

(a) Has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or

(b) Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:

Effects of Disqualification

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company. This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act. It has recently published the names of the disqualified Directors on the government website.

Remedies against Disqualification

In case of disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT). He/she can temporarily ask for a stay order. Under the Companies Act 2013, an order disqualifying a Director does not take effect within the next 30 days of it being passed. As soon as an appeal is initiated, the disqualified person will still continue to be a director for the next seven days. Within this period, he can file his annual returns to stay the order of disqualification. However, there exists no procedure to reappoint a disqualified director. He can only be reappointed after a period of five years has elapsed from the date of disqualification.

Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or paid dividend referred to in clause (B).

When a meeting is to be convened, a notice is required to be sent to all who are to attend it.

It should satisfy these conditions:

1. It should be under proper authority
2. It should state the name of the organisation
3. It should state the day, date, time, and place. Also, sometimes, how to reach the place
4. It should be well in advance. Some require seven days’ notice, some 48 hours’
5. It should state the purpose and, if possible, the agenda
6. It should carry the date of circulation and convener’s/secretary’s signature
7. It should go to all persons required at the meet
8. It should mention the TA/DA etc. payable and the arrangements for this

In practice, it is necessary to ensure that the notice has reached in time. This may be done telephonically. Dispatch section and post are prone to delays

We often find that between the date of a letter from a major public organisation and the post mark on the letter, there is a gap of 10-12 days. A notice that should reach seven days before a meet should not reach seven days after the meet.

Proxy

Proxy means substitute. In the world of meetings proxy means a substitute sent by a member to attend a meeting on his behalf. The idea comes from the Companies Act. Sec. 176 of the Act provides that a member of a company is entitled to send another person to attend a meeting and to vote on his behalf.

According to Sec. 176 of the Companies Act:

(1) Any member entitled to attend a general meeting and to vote may send a proxy to attend the meeting and to vote on his behalf.

But the following rules have to be followed for the purpose:

(a) In case of a company not having share capital, a proxy can be sent provided it is mentioned in the Articles of the company.

(b) A member of a private company cannot send more than one proxy unless otherwise provided in the Articles.

(c) A proxy can vote at the meeting only by poll unless otherwise provided in the Articles but he cannot speak.

(d) In the notice for the meeting it shall be clearly mentioned that a proxy can be sent and a proxy form is attached to the notice.

(e) A member intending to send a proxy shall fill in the form naming the proxy and signing on stamps of prescribed value and send it to the company at least forty-eight hours before the meeting. A legally appointed representative of the member may sign on his behalf on the proxy form.

(f) The proxy sent by a member need not be a member and may be an outsider.

(g) Any member may inspect the proxy forms sent by other members provided he gives three days’ notice to the company.

(h) Inspection shall be allowed by the company at least twenty-four hours before the meeting, during business hours.

(2) A proxy is not counted when quorum is counted. But at an annual general meeting held at the order of the Central Government (Sec. 167) or at a meeting of members held at the order of the Company Law Board (Sec. 186), only one member on whose complaint meeting has been so ordered, may be present by proxy and that proxy will make the quorum.

(3) It has to be noted that no proxy can be sent by a director to attend a Board meeting on his behalf.

(4) Generally, associations other than companies do not allow proxy.

(5) It is a duty of the secretary to collect the proxy forms and prepare a Proxy List.

(6) In case of Government Companies, the shares are often held in the name of the President of India or a Governor, who invariably sends a representative (Sec. 187 A). Same is true when one body corporate (not necessarily a ‘company’) holds shares in another body corporate then the shareholder body corporate send a representative to the meetings.

Such a representative is selected by a resolution of the Body of Directors (or Governing Body) of the shareholder body corporate. A representative is not merely a proxy (Sec. 187). A representative is counted for counting quorum and can speak at the meeting unlike a proxy. The word ‘proxy’ has double meaning. It means the person who is sent as substitute as well as the form or the instrument to be filled in by a member for appointing a proxy.

Shareholder Meeting is a formal gathering of the shareholders of a corporation, where they come together to discuss significant issues concerning the company. These meetings can be annual or special and serve as a platform for shareholders to exercise their rights, express opinions, and make decisions on key matters affecting the company. They play a crucial role in corporate governance and ensure that shareholders have a say in the direction of the company.

Importance of Shareholder Meetings:

• Democratic Process:

Shareholder meetings embody the democratic principle of corporate governance, allowing shareholders to voice their opinions and vote on critical issues.

• Decision-Making:

These meetings are crucial for making decisions regarding the appointment of directors, approval of financial statements, dividends, mergers, and other significant corporate actions.

• Transparency:

Shareholder meetings provide an opportunity for management to present the company’s performance and future prospects, promoting transparency and accountability.

• Shareholder Rights:

They protect shareholders’ rights by enabling them to participate in decisions that affect their investments and hold management accountable.

• Communication:

Shareholder meetings facilitate direct communication between management and shareholders, allowing for questions and discussions about the company’s operations and strategies.

• Legal Compliance:

Conducting annual shareholder meetings is often a legal requirement under corporate laws, ensuring that the company adheres to regulatory obligations.

• Building Trust:

Regular engagement with shareholders through meetings can foster trust and confidence in management and the company’s strategic direction.

Components of Shareholder Meetings:

1. Notice of Meeting:

A formal communication sent to shareholders detailing the date, time, location, and agenda of the meeting.

2. Agenda:

A list of topics to be discussed during the meeting, ensuring all relevant matters are covered.

3. Minutes of Meeting:

A written record of the proceedings, including discussions, decisions made, and action items assigned.

4. Participants:

Shareholders who attend the meeting, which can include both individual and institutional investors.

5. Chairperson:

An appointed individual who leads the meeting, ensuring it runs smoothly and that all agenda items are addressed.

6. Voting Procedures:

Guidelines for how decisions will be made, including methods for casting votes (e.g., show of hands, ballots, electronic voting).

7. Financial Statements:

Presentation of the company’s financial performance, often a key agenda item for annual meetings.

Advantages of Shareholder Meetings:

• Empowerment of Shareholders:

Shareholder meetings empower investors to influence company decisions and express their views on corporate governance.

• Enhanced Accountability:

Meetings create a forum for shareholders to hold management accountable for their actions and company performance.

• Opportunity for Dialogue:

They provide a platform for open dialogue between shareholders and management, fostering better relationships.

• Transparency in Operations:

Shareholders can gain insights into the company’s strategies and performance, promoting transparency.

• Networking Opportunities:

Meetings allow shareholders to network with other investors, management, and board members.

• Compliance with Regulations:

Holding regular meetings ensures that the company complies with legal and regulatory requirements.

• Facilitates Long-term Planning:

Shareholder involvement in discussions encourages a focus on long-term strategic goals and sustainability.

Disadvantages of Shareholder Meetings:

• Time-Consuming:

Meetings can be lengthy and require significant time from both management and shareholders.

• Cost Implications:

Organizing meetings incurs expenses, such as venue costs, printing materials, and refreshments, which can be burdensome for the company.

• Potential for Conflict:

Shareholder meetings can lead to disagreements or conflicts, particularly when there are opposing views among shareholders.

• Inefficiency:

Poorly organized meetings may result in unproductive discussions or a lack of focus on critical issues.

• Limited Participation:

Not all shareholders may attend, especially smaller ones, leading to decisions that may not represent the views of the entire shareholder base.

• Pressure from Activist Shareholders:

Meetings can attract activist shareholders, whose demands may disrupt the meeting’s agenda and lead to tensions.

• Decision Delays:

Complex discussions can delay decisions that may be critical for the company’s immediate needs or future direction.