Tag: Corporate Restructuring

According to the Companies Act, 2013, a meeting refers to a formal gathering of members, directors, or shareholders of a company, held to discuss, deliberate, and make decisions on specific matters related to the business of the company. The meeting must follow proper procedures, including notice, quorum, agenda, and other requisites to be legally valid. Meetings can include Board meetings, General meetings, Annual General Meetings (AGM), Extraordinary General Meetings (EGM), and committee meetings, each with distinct purposes and legal requirements.

Nature of Liquidation:

• Formal Process:

Liquidation is a formal legal procedure governed by the Companies Act, 2013. It must be conducted following specific rules and regulations, ensuring that all stakeholders are treated fairly. It can be voluntary (initiated by shareholders) or compulsory (ordered by a court).

• Cessation of Business:

Once liquidation starts, the company ceases its business operations, except for those necessary to complete the liquidation process. The company no longer carries out its primary business activities but focuses on settling liabilities and distributing assets.

• Appointment of Liquidator:

Liquidator is appointed to oversee the process, manage the company’s assets, and ensure debts are paid off. The liquidator acts in the interest of creditors and shareholders, ensuring the orderly liquidation of the company.

• Sale of Assets:

The company’s assets are sold or realized to generate cash, which is used to repay creditors. The liquidator handles the sale and distribution of assets, making sure the proceeds are maximized for the benefit of creditors and other stakeholders.

• Priority of Payments:

In liquidation, creditors have priority over shareholders. Secured creditors are paid first, followed by unsecured creditors. Shareholders receive any remaining balance after all debts and liabilities have been settled, often receiving little or nothing.

• Insolvency:

Liquidation is often the result of insolvency, where the company cannot meet its financial obligations. It provides a legal remedy for creditors to recover dues from the company’s assets.

• Dissolution of Company:

The final step in liquidation is the dissolution of the company, meaning it ceases to exist as a legal entity. After the liquidation process is completed and all obligations are settled, the company is officially struck off the register of companies.

• Distribution to Shareholders:

If any surplus remains after paying creditors, it is distributed among shareholders in accordance with their shareholding rights. Typically, preference shareholders are paid before equity shareholders.

Causes of Liquidation:

• Insolvency:

One of the most common causes of liquidation is insolvency, where a company is unable to pay its debts as they fall due. When liabilities exceed assets and the company cannot meet its financial obligations, it may be forced into liquidation to repay creditors through asset sales.

• Lack of Profitability:

Company that continually operates at a loss may not be able to sustain its business operations in the long term. If the company fails to generate enough profit to cover its expenses, it may opt for voluntary liquidation to avoid further financial decline.

• Statutory Requirements:

The Companies Act, 2013, allows creditors or shareholders to petition for liquidation when specific statutory conditions are met, such as non-compliance with filing requirements, failure to hold meetings, or significant operational issues.

• Court Order:

Compulsory liquidation may be initiated by a court order due to a petition filed by creditors, shareholders, or regulatory authorities. A court may order liquidation if the company has engaged in fraudulent activities, mismanagement, or violations of the law.

• Creditors’ Pressure:

In cases where the company owes large sums of money to creditors and fails to meet repayment deadlines, creditors may push for liquidation to recover their dues. Creditors may initiate winding-up proceedings to force the company to sell off its assets and settle outstanding debts.

• Voluntary Decision by Shareholders:

In some cases, shareholders may choose to voluntarily liquidate the company even when it is solvent. This may happen due to changes in market conditions, business restructuring, or a decision to exit the market while assets still hold value.

• Mergers and Acquisitions:

If a company is acquired by another entity or merges with another firm, the original company may be liquidated to allow the new entity to take over its operations, assets, and liabilities. In such cases, the liquidation is a strategic decision rather than a financial necessity.

• Operational Mismanagement:

Poor management practices, such as inefficiencies, lack of strategic planning, or fraud, can lead to the company’s failure. Over time, these factors can erode a company’s financial health, making liquidation the only viable option to pay off debts and close the business.

Types of Liquidation:

Liquidation is the process by which a company’s assets are sold off to pay its debts, and the company is ultimately dissolved. There are different types of liquidation based on the circumstances and the parties initiating the process. The two main types of liquidation are Voluntary liquidation and Compulsory liquidation.

1. Voluntary Liquidation

Voluntary liquidation occurs when the company’s directors or shareholders decide to wind up the company. It can be initiated even when the company is solvent or insolvent. Voluntary liquidation is further divided into two types:

Members’ Voluntary Liquidation (MVL):

• This type of liquidation is initiated by the members (shareholders) when the company is solvent, meaning it can pay off its debts in full.
• The company’s directors declare a solvency statement, stating that the company will be able to pay all its debts within a specified period, usually 12 months.
• After all debts are settled, the remaining assets are distributed among the shareholders.
• MVL is typically used when the company no longer has a business purpose, the owners wish to retire, or a restructuring is planned.

Creditors’ Voluntary Liquidation (CVL):

• This type of liquidation is initiated by the company’s directors or shareholders when the company is insolvent and unable to pay its debts.
• The creditors are involved in the process as they are likely to receive payment from the proceeds of asset sales.
• A liquidator is appointed to manage the liquidation, sell the company’s assets, and distribute the proceeds to the creditors in a predetermined order of priority.

2. Compulsory Liquidation

Compulsory liquidation is ordered by a court, usually upon a petition from a creditor, the company, or certain stakeholders. This occurs when the company is unable to pay its debts or has committed serious legal violations.

Court-Ordered Liquidation:

• This type of liquidation happens when a creditor, regulatory authority, or even the company itself files a petition in the court for winding up due to insolvency or legal breaches.
• The court may issue a winding-up order if the company cannot meet its financial obligations or has violated legal norms.
• A liquidator is appointed by the court to take control of the company’s assets and distribute them according to the priority of claims, with secured creditors being paid first.

3. Voluntary Winding-Up Under Supervision

This type of liquidation occurs when a company begins a voluntary liquidation process, but the court steps in to supervise the proceedings. The court’s supervision ensures that the liquidation follows proper procedures and that creditors’ interests are protected.

4. Provisional Liquidation

In this type of liquidation, a court appoints a provisional liquidator to safeguard the company’s assets before a winding-up order is made. This may happen if there is concern that the company’s assets might be misused, removed, or wasted before the final court decision is made.

A follow-on public offering (FPO) is the issuance of shares to investors by a company listed on a stock exchange. A follow-on offering is an issuance of additional shares made by a company after an initial public offering (IPO). Follow-on offerings are also known as secondary offerings.

FPO is an abbreviation of a Follow-On Public Offer. The process of FPO starts after an IPO. FPO is a public issue of shares to investors at large by a publicly listed company. In FPO, the company goes for a further issue of shares to the general public with a view to diversifying its equity base. A prospectus is offered by the company.

There are two types of FPO:

• Dilutive offering: In dilutive FPO, the company issues an additional number of shares in the market for the public to buy however the value of the company remains the same. This reduces the price of shares and automatically reduces the earnings per share also.
• Non-Dilutive offering: Non-dilutive IPO takes place when the larger shareholders of the company like the board of directors or founders sell their privately held shares in the market. This technique does not increase the number of shares for the company, just the number of shares available for the public increases. Unlike dilutive FPO, since this method is not doing anything to the number of shares of the company, it does not do anything to the company’s EPS.

How follow-on Public offering is different from initial public offering.

• IPO is made when company seeks to raise capital via public investment while FPO is subsequent public contribution.
• First issue of shares by the company is made through IPO when company first becoming a publicly traded company on a national exchange while Follow on Public Offering is the public issue of shares for an already listed company.

IPO vs FPO

		IPO	FPO
1.	Meaning	The first issue of shares by a company	Issuance of shares by a company to raise additional capital after IPO
2.	Price	Fixed or variable price range	Price is market-driven and dependent on number of shares increasing or decreasing
3.	Share capital	Increases because the company issues fresh capital to the public for listing.	Number of shares increases in dilutive FPO and remains the same in non-dilutive FPO
4.	Value	Expensive	Cheaper in most cases because the value of the company is getting further diluted.
5.	Risk	Riskier	Comparatively less risky
6.	Status of the company	An unlisted company issues an IPO	An already listed company issues an FPO

 

A company can issue its shares either at par, at a premium or even at a discount. The shares will be at par is when the shares are sold at their nominal value. Shares sold at a premium cost more than their nominal value, and the amount in excess of the face value is the premium. And of course, shares sold at discount cost less than the face/nominal value.

Under Section 78 of the Act, the amount of securities premium can be used wholly or in part for:

(i) Paying up unissued shares of the company to be issued to members of the company as bonus shares

(ii) Writing off the preliminary expenses of the company

(iii) Writing off the expenses of or the commission paid or discount allowed on shares or debentures of the company

(iv) Providing for the premium payable on the redemption of redeemable preference shares or debentures of the company.

Shares Issued at Par

On Application Money Received

Application of shares does not guarantee allotment of shares. Some applications will be rejected. So, when the application money is received, we do not credit the share capital account. For the sake of convenience, we open a new account- share application account.

This money collected on the application must be deposited in the bank account in a Schedule Bank according to the Companies Act. This account is exclusively opened to deal with the application money. The journal entry for this transaction in the books of the company is as follows:

Date	Particulars		Amount	Amount
	Bank A/c	Dr	xxx
	To Share Application A/c			xxx
	(Being share application amount received for ___ shares @ Rs ___ per share)

The accounting entries pertaining to the issue of shares are as follows:

1. On receipt of applications money:

Bank a/c Dr.

  To share application a/c

(Being share application money received)

2. On allotment of shares:

(a) Share application a/c Dr.

  To share capital a/c

(Being appropriation of application money towards share capital)

(b) Share Allotment a/c Dr.

  To share capital a/c

(Being allotment money due on shares @ Rs. per share)

3. When allotment money is received, the following entry is passed:

Bank a/c Dr.

  To share allotment a/c (Being allotment money received)

4. (a) If any call is made on the shares, the following entries are passed:

Share call a/c Dr.

  To share capital a/c

(b) On receipt of call money:

Bank a/c Dr.

  To share call a/c

5. Issue of Share at Premium (Accounting Entries):

Section 78 of the companies Act, as amended by the Companies Amendment Act 1999 provides that the amount of premium on the securities issued by the company shall be transferred to Securities Premium Account. Generally, premium money is received along-with allotment money.

In such a case, the following entries are passed:

(a) Bank a/c Dr.

  To share application a/c

(Being application money received)

(b) Share application a/c Dr.

  To share capital a/c

(Being application appropriated towards capital a/c)

(c) Share Allotment a/c Dr.

  To share capital a/c

  To securities premium a/c

(Being allotment money and premium money due on share)

Bank a/c Dr.

  To share allotment a/c

(Being allotment money received)

Issue of Shares at Premium

A company issues its shares at a premium when the price at which it sells the shares is higher than their par value. This is quite common, since the par value is typically set at a minimal value, such as $0.01 per share. The amount of the premium is the difference between the par value and the selling price. If shares do not have a par value, then there is no premium. In this case, the entire amount paid is recorded in the common stock account (if the payment is for common stock, rather than for some form of preferred stock). For example, if ABC Company sells a share of common stock to an investor for $10, and the stock has a par value of $0.01, then it has issued the share at a premium of $9.99.

The Public Company invites the public to apply for and subscribe to its share capital. For this purpose, it also issues a Prospectus. The company generally issues its shares at par i.e., at its face value. However, a company may choose to bring an Issue of Shares at Premium.

According to Section 78 of the Companies Act, securities premium may be applied by the company for:

(i) Issuing to members of the company fully paid bonus shares.

(ii) Writing off the preliminary expenses of the company.

(iii) Writing off the expenses of, or the commission paid or discount allowed on issue of shares or debentures of the company.

(iv) Providing for the premium payable on the redemption of any redeemable preference shares or debentures.

Accounting treatment of Securities Premium

The company needs to credit the amount of Premium in a separate account i.e. Securities Premium A/c, as it is not a part of the Share Capital. It is actually a gain for the company. As per the Companies Act, 2013 the company shows the credit balance of the Securities Premium A/c under the heading ‘Reserves and Surplus’ on the liabilities side of the Balance Sheet.

Also, section 52 of the Companies Act, 2013 states how a company can use the Securities Premium. The following are the provisions regarding this:

• The company can use the amount towards the issue of un-issued shares to the shareholders or members of the company as fully paid bonus shares.
• It can use this amount to write off the preliminary expenses.
• The company may use it to pay the premium on the redemption of debentures or redeemable preference shares.
• It can also use this amount to write off the expenses incurred, commission paid or discount allowed on the issue of any securities or debentures.
• It can also use it for buy-back of own shares or any other securities.

Issue of Shares at Discount

A company may have to raise additional capital for its growth or preservation or whatever the reason might be. It is allowed for such further issue of share capital as u/s. 62 of the Companies Act 2013

In the rights issue, the company may choose to issue shares to its existing shareholders instead of resorting to issue of shares to the public. Such shares are issued at a discount given in the market price. It also helps to increase the stake of the existing shareholders.

“The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resort to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out.

Since a rights issue results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.”

Conditions for Issue of Shares at Discount

• In order to issue the shares at a price less than the face value, the company has to get permission from the relevant authority. For seeking permission, they should call and upon a general meeting and discuss and authorize the matter in that meeting.
• There is a cap on the rate of discount. A company cannot issue any shares at more than 10% discount.
• The company should issue the shares within 60 days of receiving permission from the relevant authority. In certain cases, the company can extend this time frame after getting permission in the permission.
• The company cannot issue these shares before passing of 1 year from the date of commencement of business.
• The shares must belong to the same class of shares which are already available in the market. For example, if the has previously issued Equity shares then this time also, the company has to issue Equity shares only.
• Also, the company has to acquire the sanction by the Central Government after getting approval from the general meeting.

Following conditions as laid down in Sec. 79 of the Companies Act:

(a) The shares to be issued at a discount must be of a class already issued.

(b) The issue must be authorised by a resolution passed by the company in General Meeting and sanctioned by the Company Law Board.

(c) Rate of discount should not be more than 10%.

(d) One year must have passed since the date at which the Company was allowed to commence business.

(e) The issue of such shares must take place within two months after the date of court’s sanction or within such extended time as the Court may allow.

Accounting Treatment:

1. Generally, the ‘Discount on Shares’ is recorded at the Time of Allotment:

Share Allotment A/c … Dr. (With the amt., due)

Discount on Issue of Shares A/c … Dr. (With discount)

To Share Capital A/c (Total amount)

(Being the allotment money due)

(ii) To Write off ‘Discount on Shares’

Profit & Loss A/c/Securities Premium Reserve A/c ……..Dr

To Discount on Issue of Shares A/c

Note. Discount on issue of shares is recorded at the time of allotment made due.

Journal Entries

Generally, the shares are issued at discount at the time of allotment of shares. So, all the entries other than the allotment entries will be unaffected by these shares.

1. Entry for Due of Allotment

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Share Allotment A/c                                                Dr.		With the amount due
	Discount on Issue of Shares A/c                           Dr.		With the amount of discount
	To Share Capital A/c                                           Cr.			Total Amount (Due Amount + Discount)
	(Being the allotment money due)

2. Entry for Amount Received

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Bank A/c                                                                    Dr.		With the amount of money received
	To Shares Allotment A/c                                   Cr			Amount of money received
	(Being the receipt of the amount of allotment)

3. Writing-off the Discount on Issue of Shares

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Profit and Loss A/c/ Securities Premium A/c  Dr.		With the amount of discount
	To Discount on Issue of Shares                       Cr.			With the Amount of Discount
	(Being the amount of discount on issue of shares written off)

Entry if shares are issued to the underwriters

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Bank A/c                                                                  Dr.		With the amount received
	Issue of Shares at Discount A/c                          Dr.		Amount of Discount
	Share Capital A/c                                              Cr.			Total amount (Amount received and amount of discount)
	(Hence, the application money received after adjustment of discount)

Entry if shares are issued to the promoters for their service

Journal

Date	Particulars	L.F.	Amount Dr.	Amount Cr.
	Preliminary expenses A/c                                   Dr.		Amount of Preliminary Expenses
	Issue of Shares at Discount A/c                         Dr.		With the amount of discount
	Share Capital A/c                                            Cr.			With total amount (Preliminary expenses and the amount of discount)
	(Being the shares given to the Promoters for their services)

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:

Transaction	Journal Entry	Amount (₹)
1. On receipt of application Money:	Bank A/c Dr.	1,50,000
–	To Share Application A/c	1,50,000
(Being application money received for 15,000 shares @ ₹10 per share)	–	–
2. On transfer of application money to share Capital:	Share Application A/c Dr.	1,00,000
	To Share Capital A/c	1,00,000
(Being application money for 10,000 shares transferred to share capital)	–	–
3. On refund of excess application Money:	Share Application A/c Dr.	50,000
–	To Bank A/c	50,000
(Being refund made to applicants for 5,000 shares on pro-rata basis)	–	–
4. On allotment of Shares:	Share Allotment A/c Dr.	50,000
–	To Share Capital A/c	50,000
(Being allotment of 10,000 shares at ₹10 each)	–	–

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:

Date	Particulars		Amount (Dr.)	Amount (Cr.)
1. On re-issue of shares	Bank A/c (Actual amount received)	Dr.	XXX
	Forfeited Shares A/c (loss on re-issue)	Dr.	XXX
	To Share Capital A/c	Cr.		XXX
	(Being ….. forfeited shares re-issued @ ₹…each as per the Board’s Resolution no… dated….)
2. On transfer of profit on re-issue	Forfeited Shares A/c	Dr.	XXX
	To Capital Reserve A/c	Cr.		XXX
	(Being profit on re-issue of the shares transferred to capital reserve)

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:

Debit	Undistributed Profit Reserves / Share Premium Reserve / or Other reserves	Number of bonus shares × nominal value of 1 share
Credit	Share Capital Account	Number of bonus shares × nominal value of 1 share

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:

Condition	Max Remuneration in any financial year
Company with one Managing director/whole time director/manager	5% of the net profits of the company
Company with more than one Managing director/whole time director/manager	10% of the net profits of the company
Overall Limit on Managerial Remuneration	11% of the net profits of the company
Remuneration payable to directors who are neither managing directors nor whole-time directors
For directors who are neither managing director or whole-time directors	1% of the net profits of the company if there is a managing director/whole time director
If there is a director who is neither a Managing director/whole time director	3% of the net profits of the company if there is no managing director/whole time director

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.

Where the effective capital is:	Limits of yearly remuneration
Negative or less than 5 Crores	60 Lakhs
5 crores and above but less than 100 Crores	84 Lakhs
100 Crores and above but less than 250 Crores	120 Lakhs
250 Crores and above	120 Lakhs plus 0.01% of the effective capital in excess of 250 Crores

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.