With the impetus in the practice of corporate laws, it has become necessary to know some basic laws concerning a company. One such law is the Companies Act, 2013 (hereinafter referred to as “Companies Act”). Nonetheless, a mere study of the Companies Act would not suffice and a Corporate Lawyer needs to be updated with the latest Rules as well as Amendments concerning the Companies Act. Therefore, every law student must be aware of certain basic terms that are used in connection with a Company. In this article, we will be understanding the meaning of share capital, shares and it’s types.
Although most companies have share capital, it is not an essential ingredient in the incorporation of a Company. For instance, it could be a company limited by guarantee. The Share Capital of a company is usually divided into shares of equal amounts. The maximum Share Capital of a Company must be mentioned in the Memorandum of Association (hereinafter referred to as “MOA”) of the said Company and is referred to as the Company’s authorised capital. This is also referred to as its nominal capital and the company cannot raise more capital than its authorized capital. In order to exceed the authorized capital amount, the MOA must be amended accordingly. Nonetheless, the Company may issue an amount smaller than the Authorized Share Capital and this is known as its Issued Share Capital. Therefore, the amount that is issued from the Authorized Share Capital is known as its Issued Share Capital. Furthermore, it is not necessary that the entire Issued Share Capital might be taken up and that is why only the part that is subscribed to is known as the Subscribed Share Capital.
The part of the Subscribed Capital that the company calls up for payment is known as the called up share capital. The part that is not called up for payment is the uncalled capital. By passing the Special Resolution, the uncalled Capital can be transformed into reserve share capital. Subsequently, the part of the called up capital that the shareholders actually pay is called the paid up share capital, while the unpaid part is referred to as its unpaid capital.
The capital of the company seldom comprises of a ‘single unit’, in fact, it comprises of numerous indivisible units. These units are of a specific amount. Therefore, when a person purchases such a unit or several units, he purchases a certain defined percentage of the share capital of the company. In this case, he becomes one of the many shareholders of that company. The Companies Act has provided an extremely vague and ambiguous definition to share and defines it as ‘a share is share in the Share Capital of the company’.[i] Although there are various ways of looking at this, a share is not merely a sum of money, but a clear depiction of interest a shareholder hold’s in a company.
Section 2 (7) of the Sale of Goods Act, 1930 (hereinafter referred to as “Sale of Goods Act”) defines goods as movable property that does not include actionable claims and money, but includes shares and stocks. Nonetheless, it cannot be solely regulated as per the Sale of Goods Act simply because it has been regarded as a movable property.
At times, shareholders tend to confuse share with a share certificate. It is pertinent to note that there lies a thin line of difference between an actual share that makes a part of the share capital and a share certificate. As per the provisions of the Companies Act, a share certificate acts as a prima facie evidence of the title of the shareholder to the shares or stock. A share can either remain a part of Company’s share capital or be owned by a shareholder. Even when the share is owned by a shareholder, it forms a part of the company. Section 44 of the Companies Act, 2013 mentions that a share is a movable property transferable in the manner provided by the articles of the company. On the contrary, section 46 states that share certificate means a certificate, under the common seal of the company, specifying any shares held by any member. A similar distinction was drawn between a share and share certificate in Shree Gopal Paper Mills Ltd. v. CIT.[ii]
As per Section 43 of the Companies Act, the share capital of a company limited by shares shall be of two kinds i.e., equity share capital or preference share capital, unless otherwise provided by MOA or Articles of Association (hereinafter referred to as “AOA”) of a private company.
Preference shares are the shares where shareholders get a preferential dividend. The dividend may consist of a fixed amount that is payable to preference shareholders. As the name suggests, the preference shareholders get a ‘preference’ over the equity shareholders in receiving dividends. At times, the equity shareholders may not even receive profits. The dividend amount paid to them may be calculated at a fixed rate. The preference shareholders vote only on such resolutions that directly affect their rights as preference shares and a resolution for the winding-up of the company or for the repayment or reduction of its equity or preference share capital.
Nonetheless, where the preference dividend is not paid for two years or more, the preference shareholders get voting right on every resolution placed before the company. Voting rights of a preference shareholder, on a poll, shall be in proportion to his share in the paid-up preference share capital of the company.
Furthermore, during the winding-up of the company the preference shareholders get a right to be paid, i.e., amount paid up on preference shares must be paid back before anything is paid to the equity shareholders. Preference shares can be bifurcated into six kinds, namely, cumulative preference shares, non – cumulative preference shares, participating preference shares, non – participating preference shares, redeemable preference shares and non – redeemable preference shares.
There may be times when the company does not generate profits and therefore fails to give dividends. Preference shareholders who own cumulative preference shares can be paid from the profits made in the subsequent years for the current year’s dividends that are in arrears. Until it is fully paid, the fixed dividend keeps on accumulating. The non-cumulative preference share gives the right to its holder to a fixed amount or a fixed percentage of dividend out of the profits of each year. If no profits are available in any year or no dividend is declared, the preference shareholders get nothing, nor can they claim unpaid dividends in the coming year. Preference shares are cumulative unless expressly stated to be non-cumulative and the same was held in Foster v. Coles[iii] where it was observed that mere deletion of the word cumulative would not render the preference shares non – cumulative.
The shares which are entitled to a fixed preferential dividend are known as Participating preference shares. Additionally, they have a right to participate in the surplus profits along with equity shareholders after dividend at a certain rate has been paid to equity shareholders. For example, after 20% dividend has been paid to equity shareholders, the preference shareholders may share the surplus profits equally with equity shareholders. Again, in the event of winding-up, if after paying back both the preference and equity shareholders, there is still some surplus left, then the participating preference shareholders get additional share in the surplus assets of the company. Unless expressly provided, preference shareholders get only the fixed preferential dividend and return of capital in the event of winding-up out of realised values of assets after meeting all external liabilities and nothing more. It is pertinent to note that Participating Preference Shareholder’s right to participate shall be provided either in the MOA or AOA or by virtue of their terms of issue.
Although equity shares are not redeemable, as per section 55 of the Companies Act, preference shares can either be redeemable or irredeemable. Redeemable preference shares refer to those shares where the shareholders can be repaid after an estimated period of time. This act of repayment is referred to as redemption of preference shares. Therefore, in cases where the shareholder is issued a redeemable preference share, they are entitled to receive that amount after the completion of the stipulated period. Where the amount cannot be redeemed even after the completion of the stipulated period, such shares will be referred to as irredeemable preference shares. According to Section 55 of the Companies Act, a company that is limited by shares cannot issue redeemable preference shares. Nonetheless, it may only issue redeemable preference shares if authorized by the AOA of the said company, and are liable to be redeemed within a period that does not go beyond 20 years from the date of their issue. However, subject to certain conditions given in the provisions of the Companies Act and the Rules and Regulations, a company may issue such preference shares for infrastructure projects for a period exceeding 20 years.
The most common kind of shares that we hear about on a daily basis are equity shares. Equity shares are defined as those shares that are not preference shares, this simply means that shares which do not enjoy any preferential right in the matter of payment of dividend or repayment of capital, are known as equity shares. After the rights of preference shareholders are done, the equity shareholders get their share in the remaining amount of distributable profits of the company. But there may be times when the company may not accrue any profits as dividend to its equity shareholders even when it has distributable profits. The dividend on equity shares is not fixed and may differ every year depending on the profits available. Equity shareholders of a company limited by shares get a right to vote on every resolution placed before the company and their voting rights on a poll are in proportion to the share in the paid-up equity share capital of the company. But if the MOA or the AOA of the company allows it provide differential voting rights it may do so.
According to section 54 of the Companies Act, a company can issue sweat equity shares. These equity shares are issued by a company to its own employees or directors. Such shares are generally issued at a discount. Such shares might also be issued for consideration other than cash like for rendering know how or making some Intellectual Property Rights available for the company, etc. All limitations, restrictions and other provisions that are applicable to equity shares are also applicable to sweat equity shares. Sweat equity shareholders rank pari passu with regular equity shareholders.
Bonus shares are always issued to existing members. According to Article 63, a company is free to issue fully paid up bonus shares to the members out of its Securities Premium Account, its free reserves and Capital Redemption Reserve Account. In Standard Chartered Bank v. The Custodian[iv], the court stated that such kind of shares can be described as a distribution of capitalized undivided profit. Furthermore, the Court added that when bonus shares are issued, there is an increase in the company’s capital due to transferring the amount from the company’s reserve to the Capital Account of the company. This results in additional or extra shares being issued to the shareholders. In the aforementioned case, the Supreme Court even went on to state “A bonus share is a property which comes into existence with an identity and value of its own and capable of being bought and sold as such.”
Often people end up confusing a share of a company with its stock or a share certificate. Therefore, while studying Company Law, it becomes extremely essential to study certain basic concepts like the exact meaning of shares, its various types, as well as the structure of share capital.
- H. D. Pithawala, Company Law (C. Jamnadas & Co., Mumbai, 2019)
- G. K. Kapoor and Dr. Sanjay Dhamija, Taxmann’s Company Law And Practice (Taxmann Publications (P.) Ltd., 24th Edition/August 2019)
[i] The Companies Act, 2013, ACT NO. 18 OF 2013, section 2 (84).
[ii] Shree Gopal Paper Mills Ltd. v. CIT  37 Comp. Cas. 240 (Cal.)
[iii] Foster v. Coles, Foster & Sons Ltd. [(1906) 22 TLR 555]
[iv] Standard Chartered Bank v. The Custodian, (2000) 6 SCC 427
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