SHARE CAPITAL
The
term ‘share capital' refers to the amount of capital raised (or to be raised) by
a company through the issue of shares.
Features of share
capital
The
main features of share capitals are
1.
Share
capital can be raised only by companies limited by shares and registered with
share capital
2.
Share
capital can be raised by a company either at the time of its formation for
starting its operations or later on for further expansion.
3.
Share
capitals (except in the case of redeemable preference share), one raised,
cannot be returned by the company to the shareholders as long as it continues
to exist, It can be returned only at time of the winding up of the company.
Classes Types or Kinds of Share Capital:
The
various kinds or sub-divisions of share capital are:
1. Authorised
Capital, Registered Capital or Nominal Capital:
Authorised capital is the sum stated in the
capital clause of the memorandum of association as the capital of a company. It
is the maximum amount of share capital, which the company is authorized by its
memorandum of association to raise through the issue of shares. It is called
authorized capital, because it is the capital, which a company is authorized to
raise from the public. It is called registered capital, because it is the
capital with which a company is registered. It is also called nominal capital,
because it is not the real or actual capital of a company. A company has this
capital only in name. Further, it is the total nominal value of the shares,
which a company can Issue.
2. Issued
Capital:
A company, usually, does not need the whole
of the authorized capital in the beginning. It needs only a part of the
authorized capital. So, in the beginning, it, usually, issues only a part of
the authorized capital to the public for subscription. That part of the
authorized capital to the public for subscription. The part of the authorized
capital which is issued or offered, for the time being, to the public for
subscription is, usually, called the issued capital.
3. Subscribed
Capital:
There is no guarantee that the entire
capital issued by a company to the public for subscription will be subscribed
or taken up by the public. The public may subscribe in full or in part. That
part of the issued capital, which is subscribed or taken up by the public, is
called subscribed capital.
4. Called-up
Capital:
Generally, a company does not need the entire face
value of the shares subscribed by the public immediately. So, it calls or
demands only a part of the nominal value of the shares subscribed or taken up
by the public immediately and collects the balance later, as and when
necessary, by making further calls. That part of the subscribed capital, which
has been called up or demanded by the company is called called-up capital.
5. Paid
-up Capital:
There is no guarantee that all the subscribers pay the
full amount called up or demanded from them. In fact, in many cases, some of
the subscribers do no pay the full amount called up from them. That means,
often, only a part of the called-up capital may be paid by the subscribers or
shareholders. That part of the called-up capital, which has been actually paid,
by the subscribers or shareholders is called paid-up capital.
SHARES
A share is the interest of a shareholder in
the company, measured by a sum of money for the purpose of liability in the
first place, and of interest in the second, but also consisting of other rights
given by the articles. A share can be defined as, "a share is a fractional
part of the capital of a company which forms the basis of certain rights of a
member of the company as well as his liabilities vis-à-vis (i.e., as against)
the company"
Features of Shares:
The main features of shares are.
i. A share
is not a sum of money. It is only an interest or right, measured in .a
sum of money, to participate in the
profits of the company during its life and in the assets of the company when it is wound up.
ii.
A share is given a face or nominal value, and is paid for in
money or money's worth.
iii.
The person who holds the share or shares of a company
is called a shareholder or
member of the company.
iv.
The title of a member to a
sharp is evidenced by the share
certificate issued by the company under its Common seal.
v.
Each share in a company having share
capital is distinguished by its specific or appropriate number.
Kinds or Types
of Shares:
A company issue different types of shares
in order to satisfy the requirements of different classes of investors and to
collect more capital. A public company can issue only two types of shares,
viz., (1) Preference Shares. (2) Equity Shares.
1.
PREFERENCE SHARES.
Meaning of
Preference shares:
Preference shares are shares, which have
preferential rights (i.e., first priority or preference over other kinds of
shares) in respect of payment of dividend during the existence of the company,
and also in respect of repayment or refund of share capital in the event of the
winding up of the company. In fact,
it is because of their preferential rights in respect of the payment of
dividend and repayment of capital that these shares are 1 mown as preference
shares.
Types of
Preference Shares:
1.
Cumulative Preference Shares: The holders of cumulative preference share
are entitled to receive a fixed percentage of dividend before anything is
given, tot other classes of shareholders. Apart from this right, in the case of
these shares, if the company has no profits or inadequate profits in any year
to declare dividend, the arrears of dividend would accumulate and become
payable out of the future profits before anything is given to other classes of
shareholders.
2.
Non-Cumulative Preference Shares: Non-Cumulative preference shares are
entitled to a fixed rate of dividend in the first instance (i,e., before
anything is given to other types of shareholders). But they are entitled to receive
the fixed percentage of dividend in the first instance only for the year or
years when the company earns sufficient profits and dividend is declared. In
case the company has no or inadequate profits in any year to declare dividend,
then, the arrears of dividend do not accumulate and become payable out of
future profits in the case of these shares.
3.
Participating
Preference Share: The
holders of these shares, in addition to a fixed percentage of dividend, are
also entitled to participate in the surplus profits of the company along with
the equity shareholders. Only if there is a specific or special provision in
the articles of association of the company giving the holders of these shares
special rights to participate in the surplus profits. They are also entitled to
participate in surplus assets of the company on its winding up.
4.
Non-Participating
Preference Share: The
holders of non-participating preference shares will get only a fixed rate of
dividend, of course, in the first instance (i.e., before any dividend is paid
to equity shareholders). But they are not entitled to participate in the
surplus profits of the company.
5.
Convertible
Preference Shares: The
holders of convertible preference shares are given the rights to convert their
shares into equity shares later on (i.e., after a certain period).
6.
Non-Convertible Preference Share: The holders of non-convertible preference
share are not given the right to convert their shares into equity shares later
on.
7.
Redeemable Preference Shares: Redeemable preference shares are those preference
shares, which can be redeemed (i.e., returned or paid back) even during the
existence of the company. These shares can be redeemed as per the terms of
issue either at a definite date after the expiry of a stipulated (fixed) period
or at the option of the company, i.e., whenever the company wants, after giving
proper notice.
Redeemable preference shares can, be redeemed by a
company. But their redemption is subject to the conditions
a)
The
articles of association of the company should provide for the issue and
redemption of these shares.
b)
Only
fully paid shares can be redeemed. Partly paid shares cannot be redeemed.
c)
They
can be redeemed only out of the profits of the company which would be otherwise
available for dividend (i.e., out of the divisible profits of the company) or
out of the proceeds of fresh issue of shares made for the purpose of
redemption.
d)
Any
premium paid on their redemption must be paid out of the profits of the company
or out of the company's share premium account.
8.
Irredeemable Preference Shares: Irredeemable preference shares are those
preference Share, which are not (i.e. refundable) until the company is wound
up.
2.
EQUITY SHARES.
Equity snares are those, which are not preference
shares. In other words, these are shares, which do not enjoy any preferential
right either in respect of payment of dividend or in respect of the repayment
of capital at the time of the winding up of the company. These shares are knows
as equity shares, as they are the 'ownership shares' conferring the ownership
of the company on the holders of these shares, i.e., the holders of these
shares are the real owners of the company.
Differences between
Preference Shares and Equity Share:
There
are many differences between preferences shares and equity shares. The main
differences between them are:
1.
Generally,
the face value of preference shares is relatively higher than that of equity
shares.
2.
Preference
shares have priority over equity shares in the payment of dividend as will in
the repayment of capital in the event of the winding up of the company.
3.
The
rate of dividend on preference shares remains fixed from year to year. But the
rate of dividend on equity shares varies from year to year depending upon the
amount of profits available for distribution.
4.
The
rate of dividend on preference shares, in generally, fixed by the articles of
association. But the rate of dividend on equity shares is dependent on the
discretion of the board of directors.
5.
Preference
shares cannot participate in the surplus profits and in the surplus assets in
the event of the winding up to the company. Even the participating preference
shares can participate in the surplus profits and in surplus assets only if
there is a specific provision to that effect in the surplus profits and in
surplus assets always.
6.
Except
those preference shares which are issued as non-cumulative, all preference
shares are cumulative. That means, preference shares can get the arrears of
dividend. But equity shares cannot get the arrears of dividend.
7.
As the
rate of dividend on preference shares is fixed or stable, the market value of
preference shares remains more or less stable. On the other hand, as the rate
of dividend on equity shares fluctuate from year to year, the market value of
equity shares fluctuates greatly from year to year.
8.
Preference
shares, i.e., redeemable preference shares, are redeemable during the existence
of the company. But equity shares are not redeemable during the life of the
company.
9.
Preference
shares have limited voting rights. They have voting rights only on those
matters, which directly affect their interests. On the other hand, equity
shares have full voting rights. They can vote on any matter, which may come up
before the company.
10. As
there is steady dividend like rent, preference shares capital is considered as
rentier capital. On the other hand, as there is much risk in equity shares,
equity share capital is considered as risk capital.
11. As there is not much risk in preference
shares, preference shares appeal to cautious investors who do not want to
assume risks. On the other hand, equity shares appeal to adventurous investors
who are prepared to assume risks.
12. The holders of preference shares do not
have much control over the management of the company. On the other hand, the holders
of equity shares have much control over the management of the company.
Issue of Shares or Terms
of Issue of Shares :
Issue of Shares
at Par:
When
shares are issued by a company to the public at a price equal to their face
value (i.e., the price written on the face of the share certificates), they are
said to be issued at par. For example, if shares of the face value of Rs.10
each are issued by a company to the public at Rs.10 each, the shares are said
to be issued at par.
Issue of Shares
at a Premium:
When
a company finds at there is a great demand for its shares, it may issue shares
at a premium. Issue of shares at a premium means the issue of shares by a
company at a price higher than the face value of the shares. (The difference
between the issue price, i.e., the price at which the shares are issued, and
the face value of the shares is called share premium) for example, when shares
of the face value of Rs.10 each are issued at a price of Rs.12 per share, the
shares are said to be issued at a premium.
Issue of shares
at a Discount:
When
a company wants to raise further capital at a time when its shares are not
demanded, and so, quoted in the market below par, it may issue shares at a
discount.
Issue of shares at a discount means the issue of
shares at a price less than the face value of the shares. (The differences
between the face value and the issue price of the shares are the discount
allowed on the shares. The discount allowed is a capital loss to the company.).
For instance, when shares of the face value of Rs.10 each are issued at Rs.9
each, the shares are said to be issued at a discount.
RIGHTS SHARES
If a public company issues additional or
further shares at any time after the expiry of two years of its formation or
one year of the first allotment of shares, which ever is earlier, such
additional shares must be offered to the existing equity shareholders of the
company in proportion to the capital paid up on their shares, such shares are
called rights shares. Such shares are called rights shares, as the existing
equity shareholders are given preferential rights (i.e., first preference) in
the allotment of such shares.
The right of existing equity shareholders to be
offered new shares before they are offered to the public is called shareholders'
right of preemption.
Object of Right Issues:
The object of rights issue is that there
should be an equitable distribution of shares among the existing equity
shareholders and the proportion of holding of shares by the existing equity
shareholders should not be affected by the issue of the additional shares.
BONUS SHARES
Bonus
shares are shares issued by a company out of its accumulated reserves or
profits to the existing equity share holders either as fully paid shares or
partly paid shares free of cost.
Differences
between Bonus Shares and Rights Shares:
1.
Bonus
shares are issued to the existing members (i.e. free of costs. But rights
shares are issued to the existing member for money.
2.
Bonus
shares can be issued by a company only when it has sufficient. Accumulated reserves
or profits. But the issue of rights shares is not at all related to the
availability of accumulated reserves or profits.
3.
The
purpose of bonus issue is to bring the issued capital of the company in line
with the true worth of the undertaking so that the net profit of the company
may not appear to be excessively high as compared to its paid -up capital. But
the purpose of rights issue is to raise additional share capital for the
company.
4.
For
the issue of bonus shares, the permission of the controller of capital issues
is necessary; whatever may be the amount of issue of bonus shares. On the other
hand, for the issue of right shares, the permission of the controller of
capital issues is necessary only when the issue exceeds Rs.1 crore in a period
of 12 months.
5.
For
the issue of bonus shares, sanction of the shareholders is necessary always.
But for the issue of rights shares, the sanction of the shareholders is
necessary only when the rights issue involves increase in the authorized
capital. ,
STOCK
Stock can be defined as, "stock is a
bundle of fully paid shares put together for convenience". In other words,
it is the aggregate of fully-paid shares of a company consolidated or put
together for the purpose of facilitating its division and transfer in fraction
of any denomination or amount.(i.e., for helping the stock holders to sub-divide
and transfer their stocks in fractions or parts of any amount, even odd
amount).
Features of Stock:
The
main features of stock are:
·
A
stock is the consolidated amount of fully-paid shares. In other words, it is
the capital which consists of fully-paid shares put together for convenience.
·
There
cannot be an original issue of stocks by a company. Only fully paid shares can
be converted into stock.
·
A
stock may be split up and transferred by the holders in fraction of any
denomination or amount.
·
Stocks
are not divided into uniform or equal denomination.
·
Stocks
do no bear distinctive numbers.
·
The
title of the holders of stocks is represented by stock certificates issued to
them. The holders of stock are also the members of a company.
·
The
stock holders enjoy the same rights and privileges which are enjoyed by the
shareholders
·
Stock
can be reconverted into shares of any denomination.
Advantages of Stock Holders and the
company-
Stocks
are advantageous to the stockholders and the company
The
main advantages of stocks to the stockholders are'
1.
A
stock holders can enjoy all the rights and privileges enjoyed by a shareholder
2.
Besides
enjoying the rights and privileges of a shareholder, a stock holder has an
additional advantage. That is, he can split up or divide and transfer his stock
in fractions of any amount, even in odd amount.
3.
Stock
denotes that the company has recognized the fact that the holder of stock has
paid the complete or full payment due from him to the company this recognition
will help the stockholder to transfer his stock easily,
The
main advantage of the stock to the company is that, as the stocks are not
numbered, the company need not keep a detailed record of stocks transferred.
Differences
between Shares and Stock:
Shares differ from stocks' in many respects. The main
differences between shares arid stocks are:
1.
Shares
may be fully or partly paid. But stocks are always fully paid.
2.
Shares
have distinctive numbers, whereas stocks do not have distinctive numbers.
3.
A share
has nominal value, whereas a stock has no nominal value.
4.
Shares
are always of equal denominations or values. But stocks can be of various
denominations or values.
5.
Shares
can be issued not only by limited companies having share capital, but also by
unlimited companies. But stocks can be issued only by limited companies having
share capital.
6.
Shares
can be issued by a company originally. But stocks cannot be issued by a company
originally. But the stocks cannot be issued by a company originally. Only fully
paid shares can be converted into stock later on.
7.
Consent
of the shareholders is not necessary for the issue of shares. But the consent
of the shareholders is necessary for the issue of stocks.
8.
Shares
can be transferred only in round numbers. They cannot be transferred in
fraction. But stocks can be transferred in fraction.
9.
Registration
of share capital with the registrar of companies is necessary before the issue
of shares. But stocks can be issuer by just giving a notice of conversion with
the registrar of companies.
10. The holder of shares is a member of the
company. But the holders of stocks is not necessarily a member of the company.
SHARE CERTIFICATE:
A
share certificate is a document issued by a company under its common seal specifying the
number of shares held by a member
and the amount paid on each share and evidencing the title of the member to
those shares. It is a prima
facie evidence of the title of a member
of the shares specified therein.
Contents of a Share
Certificate:
A share certificate must contain the name
and the registered office of the company. It must bear the common seal of the
company. It must contain the signatures of at least two directors who are
authorized to sign and also the counter signature of the secretary of the
company.
In
addition to the above, it must contain the following particulars:
1.
Name
and address of the member
2.
Share certificate no.
3.
Number and class of shares.
4.
Distinctive numbers of the shares included in the
certificate.
5.
Face value of the amount paid on each
share.
6.
Date of
issue of the share certificate.
7.
A revenue stamp.
SHARE
WARRANTS OR SHARE WARRANT PER BEARER OR SHARE WARRANTS TO BEARER
A share warrant is a document issued by a
public limited company under its common seal to its shareholders in respect of
fully paid shares, stating that the bearer of the instrument (i.e., the share
warrant) is entitled to the shares mentioned therein. In short, it is bearer
document of title to the shares issued by a public limited company to its
shareholders.
Advantages of Share Warrants:
Share warrants have certain advantages. They are:
1.
Share
warrants are bearer instruments. So, they are transferable by mere delivery.
2.
A
share warrant is regarded as a negotiable instrument under mercantile custom
and usage.
3.
Share
warrants are very helpful in securing loans from banks or other financial
institutions.
Limitation of Share holders:
1.
There
is the risk of loss of ownership of shares represented by a share warrant. As a
share warrant is transferable by mere delivery , in case of loss of a share
warrant, the finder of the share warrant becomes its owner
2.
Heavy stamp duty is payable (n share
warrants. On account of these serious limitations, share
warrants are not popular.
Differences between a Share
Certificate and Share Warrant:
They are many
differences between a share certificate and a share warrant. They are
1.
Share
certificates can be issued by public companies as well as private companies.
But share warrants can be issued only by public companies limited by shares.
2.
Share
Certificates can be issued for fully-paid as well as partly paid shares,
whereas share warrants can be issued only for fully paid shares.
3.
No authorization by the articles of
association is necessary for the issue of shares certificates. But share
warrants cannot be issued by a company unless their issue is authorized by the
articles of association.
4.
No
sanction or approval of the Central Government is necessary for the issue of
shares certificates, whereas the approval of the Central Government s necessary
for the issue of share warrants.
5.
Shares
represented by a share certificate are considered as qualification shares for
the directorship of a company. But the shares represented by a share warrant
are not considered as qualification shares for the directorship of a company.
6.
The
stamp duty payable on the issued of share certificates is just nominal, whereas
the stamp duty payable on the issued of share warrants is heavy
7.
The
name of the bolder of a share certificate appears in the register of members.
But the name of the holder of a share warrant does not appear in the register
of members.
8.
A
share certificate is not a negotiable instrument, whereas a share warrant is
considered as a negotiable instrument under mercantile usage and custom.
9.
A
share certificate can be issued originally. But a share warrant cannot be
issued originally. Only share certificates can be converted into share warrants
later on.
10. A share certificate is only a prima facie
evidence of the title of the holder to the shares specified therein. On the
other hand, a share warrant is a conclusive evidence of the title of the holder
to the shares specified therein, provided he is a bonafide holder for value.
Secretary's
duties in connection with the Issue of Share warrants:
o
He
should make sure that the articles of the company provide for the issue of the
share warrants.
o
On the
receipt of the application for the issue of share warrants, he should check up
whether the application is accompanied by the relevant share certificates. He
should issue a lodgment ticket to the applicant acknowledging the receipt of
the share certificate for the issue of share warrants.
o
He
should convene a board meeting for the approval of the issue of share warrants.
o
He should
also make the necessary arrangements for the issue of share warrants.
o
On the
receipt of the Central Government's approval, he should proceed with the work
of preparation of the share warrants. He should get them sealed and signed by
the directors and counter-signed by him self.
o
He
should see that a circular is issued to the applicants asking them tot take
delivery of the share warrants in exchanges for the lodgments tickets.
o
After
the issue or delivery of the share warrants, he should see that the names of
such shareholders are struck off from the register of members, and the
necessary particulars regarding the issue of share warrants are entered in the
remarks column of the register for the members. He must also see that the names
of the shareholders to whom share warrants are issued are entered in a separate
register called The Register of Share Warrant Holders.
o
He
should see that the unused share warrant forms are kept in safe custody so as
to prevend their misuse.
TRANSFER AND
TRANSMISSION OF SHARES
TRANSFER OF SHARES:
When a registered shareholder passed on the
property or interest in his shares by sale or otherwise (say) by gift) to
another person voluntarily) there is said to be transfer of shares. So,
transfer of shares refers to the passing on of the property or interest in the
shares by a registered shareholder to some other person voluntarily for a
valuable consideration.
TRANSMISSION OF SHARES:
Transmission
of shares refers to the passing of property in shares by the operation of law,
and not by sale by the original owner, on the happening such events as death,
insolvency or lunacy of a shareholder, to his legal representative.
Differences between Transfer of Shares
and Transmission of Shares:
The main points of
distinction between transfer of shares and transmission of share are:
1.
Transfer
of shares is the result of a voluntary and deliberate act of the holder of
shares, whereas transmission of shares is the result of the operation of law.
2.
Transfer
of shares is a common or general method of passing of property in the shares
from one person to another. But transmission of shares takes place only under
certain special circumstances, such as the death, lunacy or insolvency of a
shareholder.
3.
As the
transfer of shares is a voluntary act of the parties, there must be adequate
and valid consideration for the transfer of shares. On the other hand, as the
transmission of shares is the result of the operation of law, the question of
consideration does not arise in the case of the transmission of shares.
4.
As the
transfer of shares take place for valid consideration, stamp duty is payable in
case of Transfer of shares. (The stamp duty is payable on the market value of
the shares transferred). But as the transmission of shares take place without
any consideration, no stamp duty is payable in the case of transmission of
shares.
5.
For
the transfer of shares, an instrument of transfer is required to be executed by
the transferor in favour of the transferee. On the other hand, for the
transmission of shares, there is no need for an instrument of transfer. Share
are transmitted to the legal representative on his producing mere proof of his
title to the shares transmitted.
6.
In the
case of transfer of shares, as soon as the transfer is complete, the liability
of the transferor ceases completely. But in the case of transmission of shares,
the shares transmitted continue to be subject to the liability of the original
holder to the company.
What is Forfeiture of shares?
Forfeiture
of shares means the confiscation (i.e., taking away) of the shares of a
shareholder by way of penalty for the non-repayment of any call made on him,
and compulsory termination of his membership.
What is Surrender of shares?
Surrender
of shares means the return (i.e., giving back) of shares by a shareholder to
the company voluntarily for cancellation. It is a shortcut to the long and
cumbersome procedure of forfeiture of shares.
What is Lien on shares?
Lien
is the right of a person to retain the property of another person in respect of
any lawful debt due from the latter to the former. So, lien on shares is the
right of a company to retain the shares and even the dividends payable thereon
belonging to a shareholder in respect of the outstanding call amount or any
other debt (except trade debt) due from the shareholder to the company
What
is Blank
transfer?
When
an instrument of transfer duly completed and signed by the transferor, but the
name, address and signature of the transferee left blank, is delivered by the
transferor to the transferee along with the relevant share certificate, there
is said to be a blank transfer. A blank transfer is so called, because the
name, address and signature of the transferee are left blank in the transfer
form.
What
is Forged transfer?
An instrument of transfer which is not
signed by the true owner of shares, but is signed by some other person as the
true owner is called a forged transfer. In
other words, an instrument of transfer which contains the forged
signature of the transferor is called a forged transfer.
What is Certificate of Transfer?
When a shareholder wants to transfer only a part of
the shares represented by one share certificate or wants to transfer the shares
represented by one share certificate to two or more buyers, he, generally,
executes a transfer form [ where only a part of the shares are transferred to
one buyer] or two or more transfer forms [ where the shares are transferred to
two or more buyers] and sends the transfer form or forms to the company along
with the original share certificate for certification. After a preliminary
scrutiny of the transfer form or forms and the share certificate, if the
secretary is satisfied that everything is in order, he affixes the rubber stamp
called "Certification Stamp" and puts his signature. This process is
known as Certificate of transfer, and the instrument of transfer is known as
"certified transfer" or "certified transfer form".
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