Company Law Project:

SHARE CAPITAL

Submitted to:
Prof. Rajinder Kaur

Submitted by:
Vikramaditya Singh
35/19
Section A
B.A. LL.B
 SHARE CAPITAL

Definition and Nature of Shares

Section 2(84) of the 2013 Act defines a share as "a share in the share capital of between a company,
and includes stock except where a distinction 1 stock and shares is expressed or implied."

In Company Law, the "Capital" is the share capital of a company. Share capital is not a necessary
condition of incorporation, although greater number of companies are registered with it than
without it.

In relation to a company limited by shares, the word "capital" means the share capital i.e. the capital
in terms of rupees divided into specified number of shares of a fixed amount each. For example,
share capital of a company is Rs. 1,00,000 which can be divided into 10,000 shares of Rs. 10 each
or 1,000 shares of Rs. 100 each, whichever is feasible to the company.

A share means a share in the capital of the company. A person who holds such a share is known as
the shareholder. Each shareholder, therefore, holds a portion of the company's capital. But
shareholders are not, in the ges of law, part owners of the undertaking. The undertaking is
something different from the totality of the shareholdings [Short v Treasury Commissioners (1948)
1 KB 116]. All the assets of the company are vested in the corporate body and not in the individuals
comprising it. Hence a share does not constitute the holder a part owner of the company's capital.

But shareholders are the owners of certain rights and interests and subject to some liabilities. A
share is the interest of a shareholder in the company measured by a sum of money, for the purposes
of liability and dividends in the first place, and of interest, in the second, and also consisting of a
series of contract as contained in the articles of association [Borland's Trustee v Steel Bros. (1901) 1
Ch 279].

A share is not a sum of money but a bundle of rights and liabilities; it is an interest measured by a
sum of money. These rights and liabilities are regulated by the articles of a company.

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or property Section 44 of the Companies Act, 2013, provides that "a share other interest of any
member in a company is a movable transferable in the manner provided by the articles of the
company." Thus, shares are a peculiar kind of movable property which cannot pass from hand to
hand like bales of cotton.

A share is a right to a specified amount of the share capital of a company, carrying with it certain
rights and liabilities while the company is a going concern and in its winding up (Halsbury's Laws
of England). A share is a right to participate in the profits made by a company, while it is a going
concern and in the assets of company when it is wound up [Bacha Guzdar v CIT 57 Bom. L.R. 617
(SC)].

A share entitles the holder to receive a proportionate part of the profits of the company; to take part
in the management of the company's business in accordance with the articles; to receive a
proportion of the assets in the event of winding up; and all other benefits of membership. A share
also carries some liabilities, for example, the liability to pay the full value in winding up. All these
rights and liabilities are subject to the terms and conditions in the company's articles.

Rights and liabilities as regulated by articles are of the very essence of a share. When, therefore, the
owner of the share dies, what passes upon his death and what has to be valued is nothing more than
the totality of his rights and liabilities as they exist under the provisions of the Companies Act and
the constitution of the particular company [Pauline, Re (1935) 1 KB 26 (CA)]

Kinds of Shares
Capital must be divided into shares of a fixed amount. All the shares may be of only one class or
may be divided into two different classes of secure ties. For this purpose securities means securities
defined in Section 20 Securities Contracts (Regulation) Act, 1956 [S. 2(81)] and includes "hybrids
The Act permitted only two kinds of shares to be issued, namely:

1. Equity share capital, that is, ordinary shares, and

2. Preference shares, which constitute the preference share capital.

Ordinary share capital or "equity share capital" is defined in the Act as meaning all share capital
which is not preference share capital.
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The share capital of a company limited by shares shall be of two kinds only, namely: (a) equity
share capital (i) with voting rights; or (ii) with differential rights as to dividend, voting as otherwise
in accordance with such rules and subject to such conditions as may be prescribed; (b) preference
share capital. [S. 43]

I. Equity Shares
As per explanation to Sec. 43, "equity share capital", with reference to any company limited by
shares, means all share capital which is not preference share capital.

Thus, equity or ordinary shares are those shares which are not preference shares. Dividend is paid to
equity shareholders after payment of dividend to preference shareholders. Similarly, in the event of
winding up, they rank after preference shareholders. The rate of dividend is not fixed on equity
share.
Equity share capital may be with similar rights or equity shares with different voting rights as
described in Rule 4 of Companies (Share Capital and Debentures) Rules, 2014. No company limited
by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless
it complies with the following conditions, namely:-

- Articles of association to authorise the issue.

- An ordinary resolution is to be passed at a general meeting the shareholders.

- It shall not exceed 25% of the total issued share capital.

- Consistent track record of distributable profits for the last 3 years. No default in filing financial
statements and annual returns for the last three financial years.

- No subsisting default in the payment of a declared dividend or repayment of its matured deposits
or redemption of its preference shares or debentures that have become due.

- No default in repayment of any term loan from a public financial institution or scheduled Bank.

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- Not to be penalized by Court or Tribunal during the last three years of any offence under
specified legislations.

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

II. Preference Shares

As per explanation to Sec. 43, "preference share capital", with reference to any company limited by
shares, means that part of the issued share capital of the company which carries or would carry a
preferential right with respect to -

(a) payment of dividend, either at a fixed amount or an amount calculated at a fixed rate, which may
either be free of or subject to income-tax; and

(b) repayment, in the case of a winding up or repayment of capitalof the amount of the share capital
paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment
of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of
the company.

A preference share or preference share capital is that part of share capital which carries a
preferential right with respect to both dividend and capital. A preference share' has a preference in
regard to payment of fixed amount of dividend or fixed rate of dividend and preferential rig of the
repayment of capital in the event of winding up of company

Preference shares may be of various types, namely participating and non-participating, cumulative
and non-cumulative shares, redeemable and irredeemable preference shares.

i) Cumulative Preference Share - Cumulative Share are those preference Shares, the holders. of
which are entitled to recover the arrears of preference dividend before any dividend is paid on
equity Shares. This means that if in any year, the profits of insufficient to pay dividend on
dividend keeps on accumulating till the company are shares, the till it is fully paid.

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ii) Non- Cumulative Preference Share - The holder of such shares get a fixed amount of
dividend out profits of each year. If no dividend is declared in any year due to any reason, such
shareholders get nothing, nor can claim unpaid dividend of any year subsequent year.
iii) Participating Preference Share - of such shares, in addition to the fixed preference dividend,
carry a right to participate in the surplus profits, if any, after dividend at a stipulated rate has
been ad to equity shareholders. Similarly, in the event winding up, if after paying back both
preference and equity shareholders there is still some surplus left, such shareholders are entitled
to receive a determined proportion of surplus.
iv) Non-participating Preference Share - Such shares get only a fixed rate of dividend every year
and do not carry a right to participate in the surplus profits or in any surplus on winding up.
v) Redeemable Reference Share - Such shares are those which will be repaid by the Company
within a to stipulated period in accordance within the terms of issue and the fulfilment of
certain conditions laid down in sect 55 of the Companies Act, 2013.
vi) Irredeemable Preference Share - Such shares are those, the capital of which cannot be refund
before winding up. According to Section 55 of Companies Act, 2013.
vii) Convertible Preference Share - Holders of those shares have a right to get their preference
share convertible into equity shares at their option according to service of issue.
viii) Non- Convertible Share - When the holder of the Preference shares have not been conferred
the right to getting their preference shares converted not equity shares, such shares are called
non-convertible Share.

Preference Shares Compared with Equity Shares

1. 'Preference shares' are entitled to a fixed rate of dividend. The rate of dividend on 'equity shares'
depends upon the amount of profit available and the funds requirements of the company for future
expansion, etc.

2. Dividend on the 'preference shares' is paid in preference to the equity shares. The dividend on
'equity shares' is paid only a the preference dividend has been paid.

3. In case of winding up, 'preference shareholder' gets preference over 'equity shareholders' with
regard to the payment of capital. 4. Dividend on 'preference shares' may be cumulative. The

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 dividend on 'equity shares' is paid only after the preference dividend has been paid and it is not
cumulative.

5. The voting rights of 'preference shareholders' are restricted. A preference shareholder can vote
only when his special rights as a preference shareholder are being varied, or on any resolution for
the winding up of the company or for the repayment or reduction of its equity or preference share
capital or their dividend has not been paid for a period of two years or more [Sec. 47(2)]. An 'equity
shareholder' can vote on all matters affecting the company.

6. No bonus shares/right shares are issued to 'preference shareholders.' A company may issue rights/
bonus shares to the company's existing 'equity shareholders."

7. Voting right of a 'preference shareholder' on a poll shall be in proportion to his share in the paid-
up preference share capital of the company. Voting right of an 'equity shareholder' on a poll shall be
in proportion to his share in the paid-up equity share capital of the company.

Types of Shares
1. Authorized Share Capital
Authorized share capital refers to the maximum number of shares a company may issue. The
Memorandum of Association limits the authorized capital to a fixed amount. Authorized share capital
is more than the total outstanding shares.
A company may increase its authorized capital for several reasons, such as acquiring another company
or employee stock options. Any change in the authorized capital requires shareholder approval since
an increase in the authorized capital may shift the balance of power between the shareholders and
other stakeholders.

2. Unissued Share Capital

Unissued shares still need to be issued to the general public or employees. Unissued stock forms part
of the company's treasury and does not impact the shareholders. The Board of Directors controls
unissued shares. Unissued shares are not tradeable in the secondary market.
Most companies hold a significant percentage of their unissued shares. The value of unissued share
capital is low. The objective is to sell or allocate unissued shares at a premium in the future. The
company may use unissued stock to pay off debt or to raise money for new investments. Directors
may even allocate unissued shares to a minority shareholder if necessary.

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3. Issued Share Capital
Issued share capital is the number of shares a company issues to its shareholders. Issued share capital
is a mix of common equity shares and preferred capital.
It is a major component of the shareholder's funds under the liabilities of a balance sheet. Also,
analysts use issued capital to evaluate the worth of common equity stock. For example, ABC Ltd
issues thousand shares with a face value of Rs. 10. The company issues the shares for Rs. 15 per share.
Therefore, ABC Ltd. raises Rs. 10,000 from the initial sales of shares. Rs. 5,000 is surplus and
constitutes the company's reserves.

4. Subscribed Capital
A company's authorized share capital is equal to its registered capital. A fraction of the issued capital
is the subscribed capital. Shareholders promise to purchase or subscribe to a company's shares. The
payment of subscribed share capital may be in instalments.
Subscribed capital represents the portion of a company's issued capital accepted by the public. The
public shows interest in a company by way of a subscription. A company can only issue part of the
share capital in one instance.

It may issue additional shares over time. Moreover, the company may only require payment of part of
the share's entire face value.

5. Paid-Up Capital
Paid-up capital is investment received by a company from a share issue. Typically, a company issues
fresh capital to raise funds. Fresh share capital constitutes the company's paid-up capital. As per the
Companies Act 2013, the minimum paid-up capital requirement is Rs. 1 lakh.
Paid-up Capital is essential for fundamental analysis. A company with a low paid-up capital may have
to rely on debt to finance its operations. Conversely, high paid-up capital signifies less reliance on
borrowed funds.

6. Called-Up Capital
Called-up Capital is the subscribed capital section that consists of the shareholder's payment. The
balance sheet separately captures called-up capital under the shareholders' equity. Called-up capital is
useful for companies with unforeseen or emergency fund requirements.
On issuance of shares, the company calls upon its shareholders to pay a part of the capital. Thus,
called-up capital offers more flexibility in the investment and payment terms.

7. Reserve Share Capital

Reserve capital refers to share capital that a company cannot access except in case of bankruptcy. The

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company can issue reserve share capital only with a special resolution. Moreover, a company cannot
modify the articles of association to issue reserve share capital. The purpose of reserve share capital is
to make liquidation easier. Reserve capital represents the company's emergency funds and is subject to
multiple restrictions.

8. Uncalled Share Capital

Uncalled share capital is shares issued but not claimed. Uncalled share capital appears in the
company's contingent liabilities. It represents the balance amount after the adjustment of the called-up
capital from the total shares allotted.

Advantages of Raising Share Capital

a. Fixed Cost – Contrary to debt instruments, share capital restricts the company's fixed cost. While
the company must pay interest on loans or fixed instruments, the dividend payment is voluntary.

b. Creditworthiness – Investors and lenders prefer companies with a minimum level of share
capital. Share capital signifies financial security. An overly leveraged company may raise concerns for
liquidity or stability.

c. Financial Flexibility - Share capital allows companies flexibility and discretion for fund usage.
However, lenders may prescribe certain conditions to use capital. Companies also have a prerogative
over issued capital and the share's nominal value. They may raise additional funds in the future.

d. Default Risk - Share capital increases confidence level concerning default or bankruptcy.
Shareholders have an inherent interest in the company's overall success and function in the company's
best interest.

Disadvantages of Raising Share Capital

a. Control and ownership – Share capital bequeaths voting rights to investors. Hence, it reduces the
control and ownership of founders.

b. Share dilution – An additional share issue may dilute the cost of existing shareholders. It will
also affect dividend payments and voting rights.

c. Public Disclosure – Public companies are subject to extensive compliance and reporting

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requirements. Also, it provides more access to the public about the company's finances.

d. Shareholder Risk – An increase in the nominal value of shares increase the shareholder's future
limited liability. It is significant, especially in case of liquidation or winding up.

e. IPO cost – The cost of an initial public offering is extremely high. It involves the preparation of a
prospectus, underwriting cost, finance, legal fees, listing charges, and advertising.

Conclusion

Share capital is the par value of a company's asset. The sale of shares to the general public generates
funds for the business and is a primary source of capital finance. However, the issue of shares has its
pros and cons. Therefore, companies must carefully evaluate all possible alternatives while making
financing decisions.

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 References

• Singh, A. (2019) Company Law, Eastern Book Company

• Kaur, S. (n.d.) Share Capital- iambi.org. Retrieved February 28, 2023, from
https://www.ijbmi.org/papers/Vol(4)1/Version-2/F0412060066.pdf
• Dubey, Kirti (2018) “Share Capital : Exploring The backbone of Company
Law”.

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