First, we would see an example. Suppose A is a beggar. He needs money because he has to recharge his girlfriend mobile number with Rs 300. Now, he has two options, first, he would beg Rs 300 from one person and second he would beg 5, 10 or 20 rupees from many persons. In this scenario, option second is more feasible and can be relied upon it. The reason behind this is that no person would agree to give Rs 300 at one go. But, he can get nominal money from each person.
The broad definition of Share Capital is the capital collected by the company for its business purposes. Both public and private companies can issue shares. Companies issue thousands of shares in their lifetime. They manage their accounts by making a joint of all shareholders. Data of individual shareholders can be collected by using DEMAT Account. The meaning of DEMAT Account is Dematerialisation Account. For e.g. suppose there is a cold drinks company.
The company only manufactures cold drinks. Last year, the company made a huge profit. So, this year the company wants to open a store of cold drinks also. For that purpose, the company needs 10 million rupees. For that, it may approach to any private investor, but in real life, it is not possible. It may approach the banks, but because of low credit rating and past records, the sanction of a loan of 10 million rupees is an easy task. Then, a simple and easy way is to ask for money from the general public. They will promise them, that they will work hard and pay them the dividends.
Advantages
- No mandatory payment– It is no mandated for the company to pay dividends to the shareholders every year. It can stop the payment if it faces loss in the business
- New shares increases flexibility– If a company has more money, then it can build new infrastructure, create new assets or pay their liabilities. This creates flexibility in the working of the company.
- Permanent Source of Finance– Company is required to pay only dividends to the shareholders and not the whole principle amount. The principal amount shall be paid only at the time of the dissolution of the company.
Disadvantages
- By offering shares, the company is somewhat giving control of the business into the hands of the investors.
- The investors always expect a greater amount of returns because they have risked their money in the company. If the company becomes bankrupt, the stock in the business is usually sold to the investors but at a lower cost, enabling them to recover the portion of their investment[1].
ALTERATION OF SHARE CAPITAL
Alteration of Share Capital is mentioned under Section 61 of the Companies Act, 2013. We can understand this through the following example. Suppose there is a company, its limited capital is a hundred thousand rupees. The company decided to keep the face value of each share at rupees ten. Then, the company will give ten thousand shares only. But the problem arises when the company wants to change the face value of each share. Then, Section 61 of the Companies Act, 2013 comes into the picture.
The company at the limited shareholder can increase its share capital by changing its memorandum and its articles must permit it. After doing this, the company can increase its authorized share capital by such amount as it thinks fit. It can also increase the face value of its every share provided that if such alteration leads to infringement of the voting rights of shareholders, then such alteration in share capital cannot be given effect unless it is approved by the tribunal.
The company can also convert its shares into stock and vice versa. It can also sub-divide its share into a smaller amount as mentioned in the memorandum or it can cancel its share. But this cancellation of the share shall not be deemed to be a reduction of share capital[2].
CONCLUSION
Share Capital is the money that is collected by the company from different sources to meet the capital expenditure of it. In this system, a small amount of money is collected from many peoples. The total aggregate money becomes a considerable amount for the money. The company also pays dividends to these small investors also called shareholders. The company can alter its share capital value, changes its the number of shares or manipulate the face value of its share.
[2] Bare Act of Companies Act, 2013.
This Article is Authored by CHETAN KUMAR, 2018-23 and B.A.LL.B. (H.) Student at Central University of South Bihar.
Also Read – What Is The Procedure For Issuing Of Shares In India?
