jnobia108 - Business Law

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5.Ch-5-B.Law-new-a096ea0651989e97382d28c8ab38b0b2.pptx

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Capital & financing Companies

Chapter - 5

Learning Objectives:

Describe the process of raising capital and capital maintenance

Finance is the money required for the organization, whenever it is needed. Without adequate capital, no enterprise can possibly accomplish its objectives. The subject of capital has been traditionally classified into two classes

Public Finance: Public capital deals with the requirements, receipts and disbursements of funds in the government institutions.

Private Finance: Private capital is concerned with requirements, receipts and disbursements of funds in case of an individual, profit seeking business organizations like general partnership, limited partnership and limited liability company (LLC)

Mainly, the required capital for a business can be classified under two categories; they are

Fixed Capital and

Working Capital

Finance

Long term funds are required to create production facilities through purchases of fixed assets such as plant, machinery, land, building, furniture etc. These investments are mainly called as fixed capital.

Funds are also needed for short term purposes viz. the purchase of raw material, payments of wages and other day-to-day expenses etc. These funds are known as working capital. The various sources of finance have been classified (a) According to period and (b) According to Ownership.

According to Period

Short Term Source: Bank Credit, Customer Advances, Trade Credit and Commercial Papers

Medium Term Source: Issues of Preference Share, Debentures, Bank Loan and Fixed Deposit.

Long Term Source: Issue of Share, Loans from specialized Financial Institutions and Debentures

Finance

According to Ownership

Owned Capital: Share Capital, Retained Earnings, Profits and Surplus

Borrowed Capital: Debentures, Bonds, Public Deposits and Loans

Share Capital:

The unit of ownership of a company is usually termed as "Share" with a single unit represented by equity in the form of company's capital structure. The persons who owns the share is known as "Shareholders" The distribution of shares in a company indicates the distribution of ownership in the company. The share value of a company or the investment is based on the price at which a share is sold in the market. The share price is a basic measure used to identify the company’s worth in terms of market value.

Shares can be of two types. Equity shares and Preference shares.

Finance

The following are the difference between Equity Shares and Preference Shares

Differences between Equity & Preference shares

Basis of Distinction	Equity Shares	Preference Shares
Rate of Dividend	May vary depending on the profits	Paid at fixed rate
Arrears of Dividend	No Accumulation	Get Accumulated for Cumulative Preference Shares
Preferential Rights	After preference shares	Before Equity Shares
When Winding Up	Only paid when preference share capital is paid fully	Have right to return of capital before equity shares, which means Safer.
Voting Rights	Voting Rights	No Voting Rights
Management Participation	Have rights to participate	No rights to participate

Advantages of Shares

Shares does not create any obligations to pay a fixed rate of dividend

Shares can be issued without creating any charges over the assets of the company

Shares are permanent sources of capital and the company does not repay it except under liquidation

Shareholders are the real gainers by way of increased dividends and appreciation in the value of shares.

Debenture

The debentures are also a type of debt instrument, which is not secured by physical assets. Debentures are backed only by the creditworthiness and reputation of the issuer. In case, the companies need to raise their capital they will issue this type of bonds. Like other types of bonds, debentures are documented in a register.

Share Capital

Differences between Shares & Debentures

Shares	Debentures
Shares is a part of owned capital	Debentures is an acknowledgement of a Debt
Shareholders are paid dividend	Debentures holders are paid interest
Rate of Dividend depends upon divisible profits and policy of the Company	Fixed rate of interest is paid on debentures irrespective of profit or loss
Shareholders have voting rights. They have control over the company	Debenture holders are only creditors. They have no say in the company

The following are the Advantages of Debentures

Debentures provide long term funds to a company

The rate of interest payable on debentures is usually lower than the rate of dividend paid on shares

Many companies prefer to issue debentures because of the fixed rate of interest attached to them irrespective of the changes in price levels.

Debentures provide flexibility in the capital structure of a company as the same can be redeemed when the company has surplus funds and desires to do so.

Debentures carry no votes they do not dilute or affect the control of the company.

The board does not need the authority of a general meeting to issue debentures.

Advantages of Debentures

Process of Raising Capital and Listing Requirement - Regular Market: Regular Market is that section of the secondary market where dealing on the floor is regulated in respect of companies’ shares subject to special listing conditions as specified by the Board of the Authority.

The Shares of companies and units of investment funds shall be listed in this market, subject to the following terms and conditions are satisfied; they are

The Paid-up Capital is not less than R.O. 2 million.

Shareholders' Equity is not less than the paid-up capital.

The Company has earned achieved net profits in the last two years.

The numbers of days during which the shares and units are traded are not less than 30 trading days in a year and annual turnover of the share or unit is not less than 5%.

Process of raising capital & Listing Requirements

….contd

Process of Raising Capital and Listing Requirement - Parallel Market: Parallel Market is that section of the Secondary Market where dealing on the Floor is regulated in respect of companies’ shares subject to simplified listing requirements specified for such Market, in order to facilitate the provision of early liquidity for the Securities listed therein prior to their listing in the Regular Market.

The shares of companies and units of investment funds shall be listed in this market in case of the following in Parallel Market:

Newly established Joint Stock Companies and Investment Funds.

Joint Stock Companies and investment funds whose shareholders' equity is not less than 50% of the paid -up capital.

Public Joint Stock Companies and investment funds who fail to satisfy the requirements of listing in the Regular Market.

Listing Requirements – Parallel Market

….contd

Process of Raising Capital and Listing Requirement - Third Market: Third Market is that section of the Secondary Market where off-floor dealings take place at the Brokers’ offices in respect of the companies’ shares to which the specific listing conditions for trading on the Floor do not apply, or where ownership of Securities is transferred off-Floor without a Broker. The listing requirements are

Closed Joint Stock Companies.

Joint Stock Companies and investment funds whose shareholders' equity is less than 50% of the paid-up capital.

Public Joint Stock Companies and investment funds who fail to satisfy the requirements of listing in the Regular Market

Listing Requirements – Third Market

Contribution to share capital shall be in the form of money, or in the form of contributions in kind (property, property rights)

The value of all the contributions to the share capital of the company shall be specified in terms of money in its Constitutive Documents.

If the contribution in kind of one of the partners or shareholders has been overvalued, such partner or shareholder must pay to the company the difference in cash.

If a partner defaults in making his contribution to the capital of the Company, the remaining partners may either expel him from the Company or insist on the performance of his obligation to the Company.

If the contribution provided by a partner or a shareholder is a property right or any other real rights, such partner or shareholder shall be responsible to the company for any hidden defects or defects of the property right.

Capital contribution & division of Profits & losses

….contd

Distribution of the profits and losses shall be in the proportion of the contribution to the share capital unless the Constitutive Documents provide otherwise.

Any provision which deprives a partner or a shareholder from participation in the profits or exempts him/her from losses shall be null and void.

Any partners in a commercial company shall not without prior approval of all partners, perform to their benefit or to the benefit of third parties businesses similar to those of the company.

Capital contribution & division of Profits & losses

….contd

If the Articles of Association permit, a company can issue tradable securities or bonds to raise money, by following the provisions of the Capital Market Law.

The articles of association of the company may limit the power of the company of issuance of securities or bonds.

A security or bond shall not be divisible nor shall it be owned jointly by more than one person except in the case of inheritance.

Securities or bonds shall be of nominal value, and their value must be fully paid at the time of subscription therefor.

All securities or bonds of each issue must also be of the same value, entitlement and duration.

Rules must be followed, relating to the increase of share capital when it issues securities or bonds with automatic conversion.

Any convertible securities or bonds shall not be converted before the lapse of at least two (2) years from the date of issue.

Joint Stock Company – Securities & Bonds

After the lapse of such period, the holder of such security should be given the option to convert in to shares or to recover their value.

If company is dissolved, holders of securities or bonds can recover their value even before the due date maturity.

All securities or bonds of each issue shall enjoy equal rights. The most important of these rights are:

the right to recover their value from the funds of the company

the right to attend the general meeting of holders of securities or bonds and to inspect the financial statements and obtain a copy thereof

the right to convene a general meeting of holders of securities or bonds especially pursuant to a request of ten percent (10%) of holders of securities or bondholders for consideration of the financial statements and matters

the right to inspect the minutes of the general meetings of the company.

….contd

Joint Stock Company – Securities & Bonds

The meeting of the general meeting of holders of securities or bonds shall not be valid unless such general meeting is attended, in person or by proxy, by a number of holders of securities or bondholders representing at least two-thirds of the securities or bonds of the issue, failing which a second general meeting shall be convened.

The second general meeting shall be valid if it is attended by a number representing one third of the holders of securities or bonds, provided that such second general meeting shall be held within thirty (30) days of the date of the first general meeting.

A proxy for attending the meeting of such general meeting must be made in writing failing which it will not be valid.

Joint Stock Company – Securities & Bonds

Reference

ROYAL DECREE No.18/2019 PROMULGATING THE COMMERCIAL COMPANIES LAW

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