LAW UNIT VI

8/2/2019 LAW UNIT VI

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UNIT VI

DIVIDENDS

STOCK EXCHANGE

DEPOSITORIES

DEMATERIALISATION OF SECURITIES


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DIVIDEND

Dividend means the share of the companys

profits distributed among the members

PROFITS VS DIVISIBLE PROFITS


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DIVIDEND

SOURCES OUT OF WHICH DIVIDEND CAN BE PAID:

CURRENT PROFITS

PAST RESERVES CREATED OUT OF PROFITS

OUT OF MONEY PROVIDED BY GOVERNMENT


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DIVIDEND

CURRENT PROFITS

Dividends may be declared out of the profits of the

company for the current year after providing for

depreciation

Else Central Govt. approval is required


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DIVIDEND

Compulsory transfer of profits to reserves:

A company must transfer a prescribed percentage of its

profits (usually not exceeding 10%) to its reserves

before declaring dividends

Where the dividend proposed exceeds 10% but not

12.5% of the paid up capital, the amount to be

transferred to the reserves shall not be less than 2.5%of the current profits


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DIVIDEND


Where the dividend proposed exceeds 12.5% but not

15% of the paid up capital, the amount to be transferred

to the reserves shall not be less than 5% of the current

profits

Where the dividend proposed exceeds 15% but not 20%

of the paid up capital, the amount to be transferred to thereserves shall not be less than 7.5% of the current profits


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DIVIDEND


Where the dividend proposed exceeds 20% of the paid

up capital, the amount to be transferred to the reserves

shall not be less than 10% of the current profits

No transfer to reserve is required if the rate of dividend

proposed is 10% or less.


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DIVIDEND

Out of past reserves :

Dividends may be declared out of the profits of the

company for any previous financial year or years arrived

at after providing for depreciation.

Else Central govt. approval is needed


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DIVIDEND

The rules framed by the Central Govt provides that in the

event of inadequacy of profits in any year, dividend may

be declared by the company out of past reserves if

following conditions are satisfied :

The rate of dividend declared does not exceed the

average of the rates at which dividend was declared by

it in the 5 yrs immediately preceding that year or 10%

of its paid up capital, whichever is less


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DIVIDEND

The rules framed by the Central Govt provides that in theevent of inadequacy of profits in any year, dividend may be declared by the company out of past reserves if


The total amount to be drawn from the accumulated profitsearned in the previous years & t/f to the reserves does notexceed an amount equal to 1/10th of the sum of its paid upcapital & free reserves and the amount so drawn must first

be utilised to set off the losses incurred in the financial year before any dividend in respect of preference or equityshares is declared


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DIVIDEND

The rules framed by the Central Govt provides that in the

event of inadequacy of profits in any year, dividend may

be declared by the company out of past reserves if


The balance of reserves after such withdrawal does not

fall below 15% of its paid up share capital


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DIVIDEND

Monies provided by the Govt.:

A company can also declare dividends out of the

monies provided by the Central Govt. or a State Govt.

for payment of such dividend in pursuance of a

guarantee given by that Govt.


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DECLARATION OF DIVIDEND ON

PREFERENCE SHARES

Preference shareholders get :

Fixed amount as dividend

Expressed as a percentage of nominal value or paid up

value of shares

Cumulative preference dividend

Non cumulative preference dividend

Participation in residual profits


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DECLARATION OF DIVIDEND ON

EQUITY SHARES

Equity shareholders get dividend :

Only after preference shareholders are paid off

Generally enjoys the privilege of higher dividends


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DECLARATION OF DIVIDEND

Articles commonly contain provisions on the

declaration of dividends

Usual practice is to leave it to the GM to sanction

or declare the final dividend

If a company could not declare dividend at an

AGM then it may do so at subsequent EGM (if

Articles provide) There can be no declaration of dividend for past

years, in respect of which accounts have already

been closed at previously held AGM


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NO DIVIDEND ON NON COMPLIANCE WITH

SEC. 80 - A

Dividends cannot be declared by a company on its

equity shares, if it fails to redeem the preference

shares


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DIVIDEND WARRANT

Any dividend payable in cash may be paid by cheque

or warrant and it shall be deemed to have been paid

when a cheque or warrant is posted to the registered

address of the shareholder

Dividend warrant is an order by the company to its

banker to pay the amount specified therein to the

shareholder whose name is written therein


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MODE OF PAYMENT

Any dividend payable in cash may be paid by

cheque or warrant through the post directed to the

registered address of the shareholder

In case of joint shareholders, it may be sent to the

registered address of one of the shareholders firstnamed in the register of members, or to such

person as shareholders may in writing direct


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DIVIDEND PAYABLE TO THE REGISTERED

SHAREHOLDER

No dividend shall be payable by a company in

respect of any shares except to the registered

holder of such shares or to his order or to his

banker

In case of share warrant, payment should be made

to the bearer of the warrant or to his banker

Payment of dividend in case of sale of shares


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SEPARATE BANK ACCOUNT

The amount of dividend shall be deposited in a

separate bank account within 5 days from the date

of such declaration and the same shall be used forpayment of dividend


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DIVIDEND TO BE PAID WITHIN THE

PRESCRIBED TIME

Dividend must be paid within 30 days of its

declaration

Defaulters shall be punished

with simple imprisonment which may extend to 3 yrs

or

a fine of Rs. 1000/- per day during which such default

continues

The company shall also be liable to pay simple

interest @18% during the period for which such

default continues


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DIVIDEND TO BE PAID WITHIN THE

PRESCRIBED TIME

Director will not be held liable in following cases :

Where dividend could not be paid by reason of the operation of

any law

Where the shareholder has given directions to the companyregarding the payment of dividend and those directions cannot

be complied with

Where the dividend has been lawfully adjusted by the company

against any sum due to it from the shareholders

Where failure to pay dividend was not due to any default on the

part of the company


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DECLARED DIVIDEND A STATUTORY DEBT

A dividend becomes a debt from the date on which it is

declared and becomes payable

Shareholders entitled to it can enforce its payment

through court Even a shareholder can file a petition for winding up

the company


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INTERIM DIVIDEND ADDED BY THE

AMENDMENT ACT 2000

An interim dividend is that dividend which is declared

between two annual general meetings

Interim dividend may be declared by BOD provided

the Articles authorise in this behalf No meeting of the shareholders is essential for such a

dividend


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INTERIM DIVIDEND ADDED BY THE

AMENDMENT ACT 2000

The provisions of Sec 205, as amended in 2000,

provide as follows:

The BOD may declare interim dividend and the amount of

dividend including interim dividend shall be deposited in aseparate bank account within 5 days from the date of such

declaration

The amount so deposited above shall be used for payment of

interim dividend

Interim dividend, like final dividend, becomes a legally

enforceable debt against the company from the date it is

declared by the BOD


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UNPAID/UNCLAIMED DIVIDEND

Where a dividend has been declared by a company but

has not been paid to or claimed by any shareholder

within a period of 30 days from the date of declaration,

the company shall, within 7 days from the date ofexpiry of 30 days, transfer the unpaid or unclaimed

dividend to a special account to be called Unpaid

Dividend account of ..company

Dividend which remains unpaid means any dividend

in respect thereof has not been encashed or which has

otherwise not been paid or claimed


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REASONS

Wrong address of shareholders Death of shareholders without any notification

Relatives and heirs may not be aware of deceaseds shareholdings

Beneficiaries may have travelled without leaving a forwarding

address Many shareholders fail to monitor their investments

Minimum deposit requirements by commercial banks has forced

many small shareholders to close their accounts, hence, the high

incidence of return of dividend cheques back to registrars

Many individual small shareholders not satisfied with dividend

amount received, do not bother to claim dividend.

Ignorance of shareholders is generally regarded as one of the major

causes of unclaimed dividends in the country.


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UNPAID & UNCLAIMED DIVIDENDS

The shareholders can claim dividend amount upto 7 years from

the date of transfer of the amount of dividend to a separate bank

account

Interest @12% on amount not transferred

Transfer to Investor Education & Protection Fund (Sec. 205 C)

Any money transferred to the Unpaid dividend Account which

remains unpaid or unclaimed for a period of 7 years from the date of such

transfer shall be transferred by the company to the Transfer to InvestorEducation & Protection Fund


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ESTABLISHMENT OF INVESTOR EDUCATION

& PROTECTION FUND

Sec. 205 C empowers the Central Government to establish a

fund called the Investor Education & Protection Fund

The fund shall be utilised for promotion of Investor

awareness and protection of the investors interest


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ESTABLISHMENT OF INVESTOR EDUCATION

& PROTECTION FUND

The following amount shall be credited to this fund

Amounts in the unpaid dividend accounts of companies

Application money received by company for allotment of

securities & due for refundMatured deposits with companies

Matured debentures with companies

Interest accruing on above items

Grants & donations given to the fund

Interest or other income received out of investments made

from the fund


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DEMATERIALISATION

In India, a demat account, the abbreviation for dematerialised

account, is a type of banking account which dematerializes

paper-based physical stock shares. The dematerialised

account is used to avoid holding physical shares.

The Securities and Exchange Board of India (SEBI)

mandates a demat account for share trading above 500

shares. As of April 2006, it became mandatory that any

person holding a demat account should possess a Permanent

Account Number (PAN).


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DEMATERIALISATION -PROCEDURE

1.Fill demat request form (DRF) (obtained from adepository participant or DP with whom your

depository account is opened.

2.Deface the share certificate(s) you want to

dematerialise by writing across Surrendered for

dematerialisation.

3.Submit the DRF & share certificate(s) to DP. DP

would forward them to the issuer / their R&T Agent .

4.After dematerialisation, your depository account

with your DP, would be credited with the

dematerialised securities.


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DEMATERIALISATION

PROBLEMS ENCOUNTERED BEFORE

Bad delivery due to faulty compliance of paper work.

Delays in settlement.

Loss, mutilation and theft of share certificates.

High cost (courier, stamp duty in case of transfer).

Restricted liquidity.


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DEPOSITORY

A depository is an organisation where the securities of

investors are held in electronic form.

Any person willing to avail of the services of thedepository can do so by entering into an agreement with

the depository through any of its Depository Participants.

A Depository Participant (DP) is described as an agent ofthe depository.


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DEPOSITORY

FEATURES

Multi depository system

Fungibility

Dematerialisation of securities not mandatory

Rematerialisation of securities

Rights of depositories & beneficial owners

Market lot under the depository mode

Depositories to indemnify loss

Securities become freely transferable

No stamp duty

Pledge or hypothecation of securities


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DEMAT PROCESS


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TRADING & SETTLEMENT

Depositories facilitate transfer of securities from oneaccount to another at the instruction of the a/c holder


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DEPOSITORIES BANKS

Holds securities in account Hold funds in account

Transfers securities in account Transfers funds between account

Safekeeping of securities Safekeeping of money


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DEPOSITORIES BANKS

No minimum balance required Minimum balance is required

Interest can be earned only by stock

lending scheme

Entitled for interest

Does not move balances in account

without account holders authorisation

Uses balances in accounts


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BENEFITS

Eliminates bad deliveries

No risk of loss, mutilation or theft of share certificates

No stamp duty for transfer of shares

Reduced paper work.

Shorter settlement cycle


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BENEFITS

Low interest rates on loans granted against pledge ofdematerialized securities by banks

Increase in liquidity of your securities because of faster transfer

and registration of securities in your account

Instant disbursement of bonus and rights into account

Regular account status updates at any point of time

Information of your holdings in equity at a glance.


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STOCK EXCHANGE

A Stock exchange can be understood to mean aplace where securities are bought are sold.

This market is a result of the transferability ofshares.

A stock exchange does not itself involve in thepurchase and sale of securities, rather it facilitatestrading between the buyer and the seller.


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STOCK EXCHANGE

ADVANTAGES OF TRADING

It facilitates buying and selling of securities verysmoothly as a ready market is created.

It encourages investors to invest in securities asreturns are high and instant

Market Capitalization of a Company isdetermined on the basis of the value of thesecurity as determined by the forces of demandand supply


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STOCK EXCHANGE


It is a good mode of acquiring funds for the

company.

It is an indicator of the growth and profitability

of the company.

Provides greater transparency to the investor

regarding the companies

It confers marketability and liquidity to the

securities


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STOCK EXCHANGE


Platform for continuous price information and

price discovery.

Accelerate the growth of the economy


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DEALINGS IN STOCK EXCHANGE

Stock exchange dealings are subject to the rules

and regulations of the Securities Contract

(Regulations )Act, 1956.

Securities Exchange Board of India (SEBI) is

the authority that monitors and regulates the

functions of the Stock exchanges.


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DEALINGS IN STOCK EXCHANGE

In order to trade on stock exchanges the

Company has to be listed on the stock

exchange.

Dealings are always on listed securities done

through the medium of members during fixed

working hours.


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ABOUT THE BOMBAY STOCK

EXCHANGE

It is the first stock exchange in India

established in the year 1875.

In the year 1995, it switched from open out cry

system to screen based system

The Bombay Stock Exchange uses the BSE

Sensex, an index of 30 large, developed BSE

stocks.


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BSE

This index gives a measure of the overall

performance of the Bombay Stock Exchange,

and is closely followed around the world.

The Bombay Stock Exchange is also actively

involved with the development of the retail debt

market.


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NSE

The National Stock Exchange of India is thelargest and most advanced exchange with 1016companies listed and 726 trading members.

Established in the year 1994, its trading wasfully automated, membership was open toeveryone across the country.

The NSE is owned by the group of leading

financial institutions such as Indian Bank orLife Insurance Corporation of India.


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WORKING OF A STOCK EXCHANGE

A person desirous of buying/selling shares inthe market has to first place his order with abroker.

When the buy order of the shares iscommunicated to the broker he routes the orderthrough his system to the exchange.

The order stays in the queue exchange'ssystems and gets executed when the order logson to the system within buy limit that has beenspecified.

The shares purchased will be sent to thepurchaser by the broker either in physical or

demat format.


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WHAT IS ELECTRONIC TRADING?

Electronic trading eliminates the need forphysical trading floors.

Brokers can trade from their offices, using fully

automated screen-based processes. Their workstations are connected to a Stock

Exchange's central computer via satellite usingVery Small Aperture Terminus ( VSATs ).

The orders placed by brokers reach theExchange's central computer and are matchedelectronically.


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BEARS

An investor who believes that a particular

security or market is headed downward.

A market condition in which the prices of

securities are falling or are expected to fall.

When you see a bear what do you do? Tuck in

your arms and play dead! Fighting back can be

extremely dangerous. It is quite difficult for

an investor to make stellar gains during a bear

market.


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BULL

An investor who thinks the market, a specificsecurity or an industry will rise.

Bulls are optimistic investors who are presentlypredicting good things for the market, and areattempting to profit from this upwardmovement.

Bulls are the exact opposite of the market'sbears, who are pessimistic and believe that a particular security, commodity or entity will

suffer a decline in price.


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LISTING

Listing means admission of the securities to

dealings on a recognized stock exchange.

The objectives of listing are mainly to:

provide liquidity to securities;

mobilize savings for economic development;

protect interest of investors by ensuring full

disclosures.


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SEBI ACT, 1992

Capital Issues (Control)Act,1947

As a part of liberalization process this Act wasrepealed and SEBI Act,1992 was enacted for

Protecting the interests of investors in securities

Promoting the development of the securities market &

Regulating the securities market


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CONSTITUTION OF SEBI

The Central Govt. has constituted a Board by the nameof SEBI under Sec 3 of SEBI Act.

Head office is in Mumbai

SEBI consists of the following membersChairman

2 members from amongst the officials of the Ministry

of the Central Govt. dealing with Finance &

Administration of Companies Act,1956

1 member from amongst the officials of RBI

5 other members of whom at least 3 shall be whole

time members to be appointed by the Central Govt.


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CONSTITUTION OF SEBI

The general superintendence, direction and managementof the affairs of SEBI vests in a Board of Members and

Chairman

The Chairman and all other members are from amongst

the persons of ability, integrity and standing who have

shown capacity in dealing with problem relating to

securities market


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FUNCTIONS OF SEBI

Regulating the business in stock exchanges Registering and regulating the work of stock brokers,

sub brokers, bankers to the issue, trustees of trust deeds,

merchant bankers, underwriters etc

Registering and regulating the work of depositories, FIIs,credit rating agencies etc

Registering and regulating the work of venture capital

funds

Prohibiting fraudulent and UTPs relating to securities

market

Promoting investors education and training of

intermediaries of securities markets


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FUNCTIONS OF SEBI

Prohibiting insider trading in securities Regulating take over of companies

Calling for information from, undertaking inspection,

conducting inquiries and audits of stock exchanges,

mutual funds , other persons associated securities market

Calling for information and record from any bank or any

other authority established or constituted by or under any

Central, State or Provincial Act in respect of any

transaction in securities which is under investigation


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REGISTRATION OF INTERMEDIARIES

The intermediaries and persons associated with securitiesmarket shall buy, sell or deal in securities after obtaining

a certificate of registration from SEBI

Stock broker

Sub broker

Banker to an issue

Merchant banker

UnderwriterDepository

DP

Mutual fund etc.


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LAW UNIT VI