Learning Center
Plans & pricing Sign in
Sign Out

Share Capital Studies

VIEWS: 136 PAGES: 26

									          Share Capital
What you should know?
1 What is share capital?
2 Kinds of shares.
3 Rights shares and Bonus Shares
4 New types of Shares – Recently introduced
5 Share Certificate and Share Warrant
6 Reduction of Share Capital

What is share capital?
In modern company law, the word capital is used to
1. Share capital—the funds subscribed by members;
2. Loan capital –the fund provided by commercial
finance providers and investors holding debentures
or giving fixed deposits.
3. All funds whether provided by member, creditors
or by retention of profits; and
4. The assets in which all the funds have been

 Types of capital

  equity share capital
preference share capital

The term capital is used in the following senses
in the Company Law:

1. Nominal or authorised or registered capital:
2. Issued capital:
3 Subscribed capital:
4. Called up capital:
5. Paid up capital:
6. Reserve capital

   Share Capital
• 1. Nominal or authorised or registered capital : It is the
  sum stated in the memorandum as the capital of the
  company with which it is to be registered . it is the maximum
  amount which it is authorised to raise by issuing shares .

• 2. Issued capital; It is that part of authorised capital which
  is offered by the company for subscription. It is obligatory to
  disclose issued capital in balance sheet - Part I of Schedule
  For e.g. A company may have total authorised share capital
  of Rs. 10 lacs dividend into 1 lac shares of Rs. 10 each. It
  may decide to issue 80,000 shares of Rs. 10 each. In that
  case the issued capital shall be Rs. 8,00,000.
•3  Subscribed capital: It is the nominal amount of
shares taken up by the public. Out of the 80,000 shares
issued by the company, if applications are received for
only 70,000 shares of Rs. 10 each, the subscribed capital
will be Rs. 7,00,000.

• 4 Called up capital: It is that part of the subscribed
capital, which has been called up or demanded by the
company. A company may call the amount due on shares
in two or three installments. In the above example if the
company has called up Rs. 5 per share, then its called up
capital shall be 70,000x5=3.5 lacs.

• 5 Paid up capital: It is the total amount actually paid up
on shares by the subscribers. Sometimes a few
subscribers fail to pay the full amount called up. Thus paid
up capital is equal to called - up capital less calls in
arrears. In the example given above, if only Rs. 3,00,000 is
actually received by the company, then the paid up capital
shall be to Rs. 3,00,000.

• 6 Reserve capital: It is that parts of the uncalled capital
of the company which can be called up only in the event of
winding up.
2 Kinds of Shares.
a) Shares:

 The capital of a company is divided into a number of units of a
fixed amount. These units are known as ‗shares‘.

According to section 2(46) of the Companies Act, ― a share is a
share in the share capital of a company, and includes stocks
except where a distinction between stock and share is
expressed or implied.‖

b) Stock:

A share should be distinguished from a similar term ―stock‖ A
stock may be defined as the aggregate of fully paid -up
shares of a member merged into one fund of equal value.

The stock is expressed in terms of money. Stock has the
convenience of being divided into fractions of any amount.

Authorised by articles

Resolution in General Meeting

Conversion of fully paid-up shares

   c) Equity Shares:

   Equity Shares, with reference to any company limited by shares,
   are those, which are not preferences shares [Section 85(2) of
   1956 Act].

In Boreland Trustees v. Steel Bros. & Co., Justice Farewell defined
the shares as the interest of the shareholder in the company
measured by a sum of money, for the purpose of liability in the first
place, and of dividend in the second also consisting of series of
mutual covenants entered into by all the shareholders inter se in
accordance with the Companies Act.

d) Preference Shares:

 A preference share is defined to mean a share which fulfils the
following two requirements:

- During the life of the company it must be paid preferential
dividend either of fixed amount or at a fixed rate;

- On the winding up of the company it must carry a preferential
right to be repaid the capital in preference to the equity

Kinds of Preference Shares:

1. Cumulative preference shares:
2. Participating preference shares
3. Convertible preference shares
4. Redeemable preference shares (section 80)

3 Rights shares and Bonus Shares

Rights shares:

Rights shares are the shares offered to the existing members
in proportion to there existing shareholding.

According to section 81, the directors of the company are
under obligation to make offer of the new shares (known as
right shares) to the existing members of the company in
proportion to their shareholding.

Sec 81 grants the existing shareholders the right
of pre-emption, namely , the right to be first offered
the share before they are offered to the general

When shares need not be given to existing
shareholders? / Issue of shares to non-members and
other persons. However section (81[1A]) carves out an
exception to sec. 81. A company may offer further
shares to any person i.e., to the public, or issue by way
of private placement or preferential allotment to any
segment of shareholders, viz., promoters, foreign
collaborators, employees, etc., in the following

Special resolution. The further issue of capital to
outsiders/other persons can be made if it is approved by
a special resolution in a general meeting authorising that
shares need not be offered to the existing shareholders.
 Ordinary resolution: If a special resolution is not
  passed then, by an ordinary resolution in a general
  meeting shares can be offered to the outsiders
  provided an approval of Central Government is
  obtained thereto. The Central Government shall grant
  approval if it is satisfied that the proposal is beneficial
  to the company. [(Sec.81 (1a)]
 Issue before time limit: Shares need not be given to
  existing shareholders in case of an issue or allotment
  of shares within two years of the incorporation of a
  company or within one year after the first allotment
  whichever event occurs earlier.
 A private company need not offer its further issue first
  to existing shareholders. [Section 81 (3)].
 In the case of issue of shares against conversion of
  loans or debentures if certain conditions are satisfied.
Bonus shares:

A company may, if its articles so provide, capitalize profits by
issuing fully paid shares to the members. Such shares are
known as bonus shares.

* The articles of association must authorise capitalization of
* The company must pass resolution first at the Board
meeting and there after at company‘s General Meeting for
bonus issue.
* Management‘s intention regarding the rate of dividend to be
declared in the year immediately after the bonus issue should
be indicated in that resolution.

4 New types of Shares – Recently
- Sweat equity (introduced by Companies
(Amendment) Act, 1999).

Sweat equity shares refers to equity shares used by the
company to employees or directors
- at a discount or
- for consideration other than cash
- for providing know - how or making available rights in the
nature if intellectual property rights or value additions, by
whatever name called.

- Equity Shares with discriminating rights (introduced by
  Companies (Amendment) Act, 2000).

According to section 86 a company can issue equity shares
 with differential rights as to -
 a. dividend
 b. voting or
 c. otherwise in accordance with such rules and subject to
   such conditions as may be prescribed.

5 Share Certificate and Share Warrant
Share certificate

A share certificate is a document of title issued by the
company declaring that the person named therein is
the owner of a specified number of shares in the
capital of the company.

5a Share warrant ( s.114, 115)
 A share is a bearer document of title to shares specified
therein and is issued by the company against fully paid shares.

6 Alteration of Share Capital
Sec. 94 deals with alteration of share capital. While sections
100 to 103 lay down the procedure for reduction of share
capital. A company can alter its share capital, If authorised by
its articles, by an ordinary resolution, in 5 ways:

* Increase the share capital by issuing new shares
* Consolidate its existing shares into larger denomination

* Sub-divide its existing shares into smaller denomination

* Convert fully paid up shares into stock

* Cancel shares, which have not been taken up and diminish

the amount of the share capital by the number of shares so

cancelled. Such cancellation is not deemed as reduction of

share capital.

Reduction of share capital:

Reduction of share capital means reduction in respect of
that portion of:

(a) Issued capital which has been subscribed, called up
and paid up, or
(b) Issued capital which has been subscribed but not
called up.

Mechanism :Sec. 100 lays down that a company can
   reduce its capital –

 by reducing or extinguishing the liability of members in
  respect of uncalled or un-paid capital if Rs. 50 are paid
   up, on a share of Rs. 100 and the company extinguishes the
   liability of the remaining Rs. 50 , then it will amount to reduction
   in capital.
 by paying off or returning paid-up capital not wanted
  for the purposes of the company
 by paying off a part of the paid-up capital on the
  footing that it may be called-up again
 by writing off or cancelling the capital which has been
  lost or is unrepresented by the available assets.

1. The articles should permit reduction in share

2. Special resolution should be passed.

3. Confirmation of the High Court/NCLT must be
   taken to reduce the share capital.

4. The High Court /NCLT order should be filed with
   ROC and registered.


To top