Issuing Shares Under Companies Act 1965

FINANCIAL MANAGEMENT

LECTURER: A.P DR AMINAH BT. MOHD YUSOF ASSRUL REEDZA BIN ZULKIFLI MA111185

UNIVERSITI TEKNOLOGI MALAYSIA CIVIL ENGINEERING 24 MAY 2012

Process of share issuance for a company incorporated under the company Act 1965 and rules and regulations to be addressed in the process of issuing shares. Introduction Companies act 1965 is under the Malaysia law that govern the companies that operate and doing business in Malaysia. Under the this act part III constitution of company for incorporation state that to form a company, two or more person associated for any lawful purpose may by subscribing their names to a memorandum and complying with the requirements as to registration form an incorporated company. A company maybe a company limited by share, limited by guarantee, limited both by share and guarantee or unlimited company. This paper will focus on the company which is limited by share and the process of issuing share for incorporated company. In Malaysia, the most common company structure is a company limited by shares. Such limited companies may be incorporated either as a Private Limited Company known as Sendirian Berhad or Sdn Bhd as part of the companys name or a Public Limited Company known as Berhad or Bhd as part of the companys name. A company that has a share capital may be incorporated as a private company and these company can only be incorporated if it memorandum and articles of association: i. ii. iii. iv. Restricts the right to transfer it shares The member it shall be limit to 50, excluding employees in the employment of the company or its subsidiary and some former employees of the company or its subsidiary Prohibits any invitation to the public to subscribe for its shares and debentures Prohibits any invitation to the public to deposit money with the company for fixed periods of payable at call, whether interest-bearing or interest-free. A public company can apply to have its shares quoted on the Bursa Malaysia subject to compliance with the requirements laid down by the exchange. Any subsequent issue of securities requires the approval of the Securities Commission for example issue by way of rights or bonus, or issue arising from an acquisition and etc. According to company act 1965 section 4(1) Prospectus is define as any prospectus, notice, circular, advertisement or invitation inviting
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applications or offers from the public to subscribe for or purchase or offering to the public for subscription or purchase any shares in or debentures of or any units of shares in or units of debentures of a corporation or proposed corporation and, in relation to any prospectus registered under the Securities Commission Act 1993, means a prospectus as defined under that Act.

Shares Shares can be defined as a unit of ownership interest in a corporation or financial assets. Share issuance is the number of authorized shares that is sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors or the general public. (investopedia) Some investors may have large ownership interests in a given corporation, while other investors own a very small part. To keep track of each investor's ownership interest, corporations use a unit of measurement referred to as a "share" .The number of shares that an investor owns is printed on the investor's stock certificate. This information is also noted in the corporate secretary's record, a record which is not connected to the corporation's accounting records.

Process of Issuing Shares It has two method to issues shares by the company. The company who want to issues shares, it can be for cash or for consideration other than cash. When issuing share is for cash, it can be issued at same amount of share or at a discount. If the company does not have enough fund to purchase the fixed asset or to make payment to creditor, it may offer and allots it shares to vendor or creditor in lieu of cash. Any allotment of shares which is cash is no to be received is known as issue of shares for consideration other than cash. Issuing shares, to public via stock exchange is takes a long process which is it required to consider many factor

When a firm sells some of its authorized shares, the shares are described as "issued." The number of issued shares is often considerably less than the number of authorized shares. Why the firm issuing share? The answers is the firm issue or sell a shares of stock to obtain cash from investors, and to acquire another company and to acquire certain assets or services, and as an incentive/reward for key officers of the corporation. Par value of a share of is sometime defined as the legal capital of a corporation and it is usually in a very small insignificant amount that was required by law. Any proceeds that exceed the par value are credited to another stockholders' equity account. This required accounting which can determine the number of issued shares by dividing the balance in the par value account by the par value per share. According to Companies act 1965, the procedure in issuing share is : 1. Issue of prospectus 2. Receipt of application 3. Allotment of share Prospectus is an invitation to the public to invest. It consists of complete information about company background and the detail of investment matter for the prospective investor. So, the first step is the firm or companies that need funding to run their business to issue the prospectus to the public in order to attract them to invest. After issue the prospectus to the public, the public who are interested will intend to invest and subscribe to share of capital of the company. Then the public need to make an application in buying the shares of that company. Within 120 day, the companies who issue the share need to get the minimum subscription of share from the public. If failed, the company cannot proceed for the allotment of shares and the application money need to return within 130 days of the prospectus issuing date. If the minimum subscription of shares has been received, the company can proceed for the allotment of shares. Then, letter of allotment will be sent to the investor. When the allotment is made, it will result in a valid contract between the company and the applicant (investor) who now becomes the shareholder of the company. Share of the company is being issue either at par, at premium or at discount. Shares have been issued at par when their issues price is exactly equal to their nominal values according to the term and condition. When the share of company are issued more than nominal value (face value), is it
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known as at shares issue at premium. When the shares are issue at price less then the face value of a share is known as shares issues at discount. Rules and Regulation For issuing shares in Malaysia, the company shall folows company act 1965. In the act, part IV under Shares, Debenture and Charge, for issuing new shares by company limited by shares is as follows : PROSPECTUS Section 36A. Non-application of Divisions 1 and 4 to offers under the Securities Commission Act 1993

37. Requirement to issue form of application for shares or debentures with a prospectus 38. As to inivitations to the public to lend money to or deposit money with a corporation 39. 39A. 39B. 40. 41. 42. 42A. 43. 44. 45. 46. 47. 47A. 47B. Contents of prospectuses (Deleted) Relief from requirements as to from and content of a prospectus Certain advertisements deemed to be prospectuses As to retention of over-subscriptions in debenture issues Registration of prospectus Supplemental prospectus Document containing offer of shares for sale to be deemed prospectus (Deleted) Experts consent to issue of prospectus containing statement by him Civil liability for misstatements in prospectus Criminal liability for statement in prospectus Power of Minister to exempt Exempted offers

RESTRICTIONS ON ALLOTMENT AND COMMENCEMENT OF BUSINESS

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Section 48. 49. 50. 51. 52. 53. Prohibition of allotment unless minimum subscription received Application moneys to be held in trust until allotment Restriction on allotment in certain cases Requirements as to statements in lieu of prospectus Restrictions on commencement of business in certain circumstances Restriction on varying contracts referred to in prospectus, etc.

SHARES 54. 55. 56. 57. Return as to allotments As to voting rights of equity shares in certain companies Differences in calls and payments, etc. Share warrants

58. Power to pay certain commissions, and prohibition of payment of all other commissions, discounts, etc. 59. 60. 61. 62. 63. 64. 65. 66. 67. 67A. 68. 68A. 69/ Power to issue shares at a discount Issue of shares at a premium Redeemable preference shares Power of company to alter its share capital Validation of shares improperly issued Special resolution for reduction of share capital Rights of holders of classes of shares Rights of holders of preference shares to be set out in memorandum or articles Dealing by a company in its own shares, etc. Purchase by a company of its own shares, etc. Options over unissued shares Registrar of options to take up unissued shares Power of company to pay interest out of capital in certain cases

69A. Furnishing of information and particulars of shareholding *Refer company act 1965, for detail Pro and Cons of Listing a Company in Bursa Malaysia

Advantages
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A listing on the stock market has considerable benefits and opens many doors and opportunities for companies. A company can raise additional resources to finance business activities and its expansion plans is for example, to fund research and development, purchase machinery and set up new offices. Other advantage is a company can also issue new shares via a rights issue to raise additional funds. Hence, raising capital from the listing exercise enables the firm to raise public equity without having to make periodic interest payments to creditors i.e. banks and other financial institutions is one of its major advantages. Listing adds value to the firm and greatly elevates the corporate profile since the Initial Public Offering (IPO) garners a great amount of publicity for the firm can enhance corporate profile and improved valuation. An elevated public profile will most likely enhance and increase business opportunities as there is an added element of trust and credibility gained from a successful listing exercise. Being listed is one of the many exit strategies for business owners as it provides a mechanism for them to nurture and expand the business, working towards improving the listed entitys share price performance and selling their shares prior to an exit, as it offers the highest potential payout. Furthermore, the listing amplifies brand and product awareness, and increases liquidity and valuation of the firm which in turn, projects the performance and market perception of the said firm. Disadvantages There are also several potential drawbacks of going public that owners have to be aware of. The main disadvantages are that business owners will have to share ownership with other investors, and shareholders now have a voice in policies that affect company operations. Control of the company can also be taken away from the existing management if a dissident investor or group of investors obtains majority control. Being listed means going public can lead to additional obligations and reporting requirements as public companies have to comply with a wide range of regulatory requirements and meet accepted standards of corporate governance. For example, listed companies must prepare comprehensive audited financial statements and publish annual reports that result to higher costs will be incurred due to high level of reporting requirements. A company will also have to face of a loss of privacy as a result of media interest and full disclosure requirements regarding its operations and plans. For example, the public will want to
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know about the compensation of officers and directors, details regarding stock option plans, details of significant contracts such as lease agreements. And as well as information about the business operations such as sales, cost of sales, gross profits, net income, borrowings and plans for the future. This may cause the competitor will know everything about the company strength. The high cost of planning and launching an IPO is also can be consider as disadvantage of being listed. The process is tedious and requires the involvement of many parties, including issue managers and underwriters, solicitors, investigating accountants and other professional advisors. Being listed going public adds a new layer of financial administration that requires extra effort, staffing and expenses. Furthermore, firms need to comply with the full disclosure requirements, tight regulation policies and is subject to a loss of privacy. Conversely, it could also be the fastest way to raise equity to grow the business.

Reference

Laws of Malaysia, Act 125, Company Act 1965 (2006), The commissioner of Revision laws, Malaysia RSM EYE - By Girish Ramachandran, Pros And Cons Of Listing A Company, The Star newspaper released on October 13, 2009.
1. http://www.bursamalaysia.com/website/bm/ 2. http://www.klmanagement.com.my/blog/business-entity-part-2-company-limited-by-

shares-sdn-bhd-sendirian-berhad/
3. http://www.investopedia.com/terms/s/shares.asp