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 1 What is share capital? In modern company law, the word capital is used to cover: 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 invested. 2 Types of capital equity share capital preference share capital 3 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 4 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 VI. 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. 5 •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. 6 • 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. 7 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.‖ 8 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 9 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. 10 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 shareholders 11 Kinds of Preference Shares: 1. Cumulative preference shares: 2. Participating preference shares 3. Convertible preference shares 4. Redeemable preference shares (section 80) 12 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. 13 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 public. 14 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 circumstances: 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. 15 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. 16 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 reserves. * 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. 17 4 New types of Shares – Recently introduced - 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. 18 - 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. 19 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. 20 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. 21 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 22 * 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. 23 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. 24 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. 25 Procedure: 1. The articles should permit reduction in share capital. 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. 26
"Share Capital Studies"