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Discussion > Corporate Law > Others >

ALL on SHARES and SHARE CAPITAL

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CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:28 Report Abuse

SHARES AND SHARE CAPITAL

 

Introduction:

There are three main types of business organisation: (1) sole proprietorship (2) partnership (3) company. Each form of business organisation is required capital to carry on its business smoothly. On sole proprietorship the whole capital is contributed by sole proprietor in partnership the capital is invested by the partners and in case of company capital is invested by the public.

 

Meaning of share and share capital:

A share is one unit into which the total share capital is divided. Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares.

The amount collected by the company from the public towards its capital, collectively is known as share capital and individually is known as share.

A share is not a sum of money but is an interest measured by a sum of money and this interest also contains bundle of rights and obligations contained in the contract i.e. Article of Association.

Investment in the shares of any company is a basis of ownership in the company and the person who invest in the shares of any company, is known as the shareholder, member and the owner of that company.

 

Definition:

According to the section 2(46) of the Company’s Act 1956, share means a part in the share capital of the company and it also includes stock except where a distinction between stock and share capital is made expressed or implied.

 

Types of shares:

As per the provision of section 85 of the Companies Act, 1956, the share capital of a company consists of two classes of shares, namely:

Preference Shares

Equity Shares



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CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:31

Preference Shares:

 

According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the following two preferential rights:

(a)         The payment of dividend at fixed rate before paying dividend to equity shareholders.

(b)         The return of capital at the time of winding up of the company, before the payment to the equity shareholder.

Both the rights must exist to make any share a preference share and should be clearly mentioned in the Articles of Association.

Preference shareholders do not have any voting rights, but in the following conditions they can enjoy the voting rights:

(1)          In case of cumulative preference shares, if dividend is outstanding for more than two years.

(2)          In case of non-cumulative preference shares, if dividend is outstanding for more than three years.

(3)          On any resolution of winding up.

(4)          On any resolution of capital reduction.





CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:32

Types of preference shares:

 

In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows:

Cumulative Preference Shares: Cumulative preference shares are those shares on which the amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid divided will accumulate and will be paid in the subsequent years before any divided is paid to the equity share holders. Preference shares are always deemed to be cumulative unless any express provision is mentioned in the Articles.

 

1)             Non-Cumulative Preference Shares: Non-cumulative preference shares are those shares on which arrear of dividend do not accumulate. Therefore if divided is not paid on these shares in any year, the right receive the dividend lapses and as such, the arrear of divided is not paid out of the profits of the subsequent years.

 

2)             Participating Preference Shares: Participation preference shares are those shares, which, in addition to the basic preferential rights, also carry one or more of the following rights:

(a)         To receive dividend, out of surplus profit left after paying the dividend to equity shareholders.

(b)         To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.

 

4)             Non-Participating Preference Shares: Non-participation preference shares are those shares, which do not have the following rights:

(a)         To receive dividend, out of surplus profit left after paying the dividend to equity shareholders.

(b)         To have share in surplus assets, which remains after the entire capital has been paid on winding up of the company.

Preference shares are always deemed to be non-participating, if the Article of the company is silent.

5)             Convertible Preference Shares: Convertible preference shares are those shares, which can be converted into equity shares on or after the specified date according to terms mentioned in the prospectus.

 

6)             Non-Convertible Preference Shares: Non-convertible preference shares, which cannot be converted into equity shares. Preference shares are always being to be non-convertible, if the Article of the company is silent.

 

7)             Redeemable Preference Shares: Redeemable preference shares are those shares which can be redeemed by the company on or after the certain date after giving the prescribed notice. These shares are redeemed in accordance with the terms and sec. 80 of the Company’s Act 1956.

 

8)             Irredeemable Preference Shares: Irredeemable preference shares are those shares, which cannot be redeemed by the company during its life time, in other words it can be said that these shares can only be redeemed by the company at the time of winding up. But according to the sec. 80 (5A) of the Company’s (Amendment) Act 1988 no company can issue irredeemable preference shares.




CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:35

Equity shares:

 

According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the share, which is not preference shares. In other words equity shares are those shares, which do not have the following preferential rights:

(a)         Preference of dividend over others.

(b)         Preference for repayment of capital over others at the time of winding up of the company.

 

These shares are also known as ‘Risk Capital’, because they get dividend on the balance of profit if any, left after payment of dividend on preference shares and also at the time of winding up of the company, they are paid from the balance asset left after payment of other liabilities and preference share capital. Apart from this they have to claim dividend only, if the company in its A. G. M. declares the dividend. The rate of dividend on such shares is not pre-determined, but it depends on the profit earned by the company.

The equity shareholders have the right to vote on each and every resolution placed before the company and the holders of these shares are the real owners of the company.




CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:37

Distinction between Preference Shares and Equity Shares:

 

Basis of difference

Preference Share

Equity Share

Rate of dividend

The rate of dividend on preference share is fixed.

The rate of dividend on equity share is changed from year to year depending upon the availability of profits.

Payment of dividend

They have a right to receive dividend before any dividend is paid on equity shares.

Dividend on equity shares is paid, after any dividend is paid on preference shares.

Participation in management

Preference shareholders are not entitled to participate in management.

Equity shareholders are entitled to participate in management.

Winding up

On the winding up, they have a right to return of capital ahead (before) of the capital returned on equity shares.

In this case, they have been paid only when preferences capital is paid in full.

Arrears of dividend

If dividend is not paid on these shares in any year, the arrear of dividend may accumulate.

In case of equity shares, dividend cannot accumulate.

Voting rights

Preference shareholders do not have any voting rights.

Equity shareholders enjoy voting rights.




CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:38

Sub-division of share capital:

 

The word capital in connection with a company may mean any of the following divisions of capital:

1)                                                       Authorised capital: An authorised capital refers to that amount which is stated in the ‘Capital Clause’ of the Memorandum of Association as the share capital of the company. This is the maximum limit of the company which it is authorised to raise and beyond which company cannot raise unless the capital clause in the Memorandum is altered in accordance with the provisions of Sec. 94 of the Companies Act, 1956.

 

2)                                                       Issued capital: An issued capital refers to the nominal value of that part of authorised capital, which has been (1) subscribed for by the signatories to the Memorandum of Association, (2) allotted for cash or for consideration other than cash and (3) allotted as Bonus shares.

 

3)                                                       Subscribed capital: Subscribed capital refers to the paid-up value of the issued capital i.e. the total amount called by the company less calls-in-arrear. It is only the actual liability for the company hence it will be only be added while totalling the liability side.




CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:40

Difference between Authorised Capital and Issued Capital:

 

Basis of difference

Authorised Capital

Issued Capital

Meaning

It refers to that amount which is stated in the Memorandum of Association as the share capital of the company.

It refers to the nominal (actual) value of that part of authorised capital which has been:

(i)                                                       Subscribed for by the signatories to the Memorandum of Association and

(ii)                                                      Allotted for cash or consideration for other than cash.

Consideration of future requirements

Its amount is determined after considering present and future requirements.

Its amount is determined after considering the present requirements.

Disclosure in Memorandum of Association

Its amount is required to be disclosed in Memorandum of Association.

Its amount is not required to be disclosed in Memorandum of Association.

Is it the based of stamp duty?

Stamp duty is payable on the based of authorised capital.

It is not based for calculating stamp duty.

Is it based of company registration fees?

Company registration fee is payable on the based of authorised capital.

It is not the basis for registration fees.

Does the change amount to an alteration of Memorandum?

Any change in the amount of authorised capital amounts to an alteration of Memorandum of Association.

Any change in the amount of issued capital does not amount to an alteration of Memorandum of Association.

Whether one can exceed other

It can exceed issued capital.

It cannot exceed authorised capital.




CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:42

Distinction between authorised capital and subscribed capital:

 

Basis of difference

Authorised Capital

Subscribed capital

Meaning

It refers to that amount which is stated in the Memorandum of Association as the share capital of the company.

It refers to the paid up value of the issued capital.

Consideration of future requirements

Its amount is determined after considering present and future requirements.

Its amount is determined after considering the present requirements.

Disclosure in Memorandum of Association

Its amount is required to be disclosed in Memorandum of Association.

Its amount is not required to be disclosed in Memorandum of Association.

Is it the based of stamp duty?

Stamp duty is payable on the based of authorised capital.

It is not based for calculating stamp duty.

Is it based of company registration fees?

Company registration fee is payable on the basis of authorised capital.

It is not the basis for registration fees.

Does the change amount to an alteration of Memorandum?

Any change in the amount of authorised capital amounts to an alteration of Memorandum of Association.

Any change in the amount of issued capital does not amount to an alteration of Memorandum of Association.

Whether one can exceed other

It can exceed subscribed capital.

It cannot exceed authorised capital.



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CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:43

Meaning of reserve capital:

 

Under Section 99 of the Companies Act 1956, sometimes a company by means of special resolution decides that certain portion of its uncalled capital shall not be called up during its existence and it would by available as an additional security to its creditors in the event of its liquidation. Such a portion of uncalled capital is termed as ‘Reserve Capital’. It cannot be converted into ordinary uncalled capital without the leave (order) of the court and also it cannot be charged by the company.

 

 

Meaning of Capital Reserve:

 

Capital Reserve originates from sources other than the regular activities of the business. In other words, the reserve, which is created out of capital profit, is known as capital reserve. Dividend cannot e distributed out of this reserve but it can be used to meet capital losses or to declare a bonus share.  It is shown in the liability side of the Balance Sheet under the heading of ‘Reserve and Surplus’ Following are the principal sources of capital reserve:

(a)                                                   Profit on sale of a fixed asset.

(b)                                                   Profit on revaluation of assets and liabilities.

(c)                                                   Profit on forfeiture and re-issue of forfeited shares.

(d)                                                   Profit on redemption of debentures at a discount.

(e)                                                   Profit earned by a company prior to its incorporation.




CA Dhiraj Ramchandani
CA, M. com

[ Scorecard : 10691]
Posted On 06 February 2010 at 16:46

Difference between Reserve capital and capital reserve:

 

 

Bases of difference

Reserve Capital

Capital Reserve

Meaning

It means that certain portion of uncalled share capital which shall not be called up except in the case of liquidation.

Capital reserve is that reserve which is created out of capital profits.

Resolution

A special resolution is passed by the company for its creation.

No need to pass any resolution for its creation.

Amount

It represents the amount which has not been received.

It represents the amount which has already been received.

Accounting treatment

No accounting treatment is made in the books.

Accounting treatment is made in the books and it is shown in the company’s Balance Sheet.

Use

It can be called up only at the time of liquidation and used by the company.

It can be used to meet capital losses or to declare a bonus share any time during the life of a company.



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