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INTRODUCTION

In this topic we will discuss further about capital, dividend and shares. You will be exposed to the authorised, paid-up and uncalled capital. We will also look into the various types of shares.

CAPITAL

Generally speaking, in order to run a business, a company needs monetary funds to operate. The fund to run the business is known as the ÂcapitalÊ.

7.1

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Corporate Finance 1: Capital, Dividend and Shares

LEARNING OUTCOMES

By the end of this topic, you should be able to:

1. Elaborate the capital of a company;

2. Identify the process of raising the capital;

3. Explain dividend;

4. Define shares; and

5. Classify the various types of shares.

Copyright © Open University Malaysia (OUM)

TOPIC 7 CORPORATE FINANCE 1: CAPITAL, DIVIDEND AND SHARES 114

In reality, a company needs money to pay for Âoverhead costsÊ, such as, salary for staff, office rental, etc. The capital is raised through the contributions of the shareholders/contributors from the issuance of shares. Once the contributions or payments are made, the money belongs to the company and is no longer owned by the shareholders. They only hold their ÂinterestÊ in the company in terms of shares but strictly not the sum of money invested. Capital is defined as:

The money and assets contributed by members form the capital of the company. In return for the ÂcontributionÊ, the company issues shares to the contributors, that is, the members or shareholders. Capital of a company becomes payment of the shares whether in full or partly paid. When a shareholder subscribes any amount of shares, he is bound to pay for the amount of shares he holds. By paying up for the shares, he is contributing to the capital of the company. By virtue of section 62 (1)(b), the capital of a company may comprise of:

(a) Shares to be consolidated for bigger value; or

(b) Shares to be sub-divided for smaller value. The maximum capital that a company could raise is called the Âauthorised capitalÊ as provided by the memorandum. A company is at liberty to raise any amount of capital subject to the amount permitted in the memorandum. What is the authorised capital of the company?

„Money or other assets of a company contributed by its shareholders and used to operate the business of the company‰

(Bishop, 1993, p. 25)



Basically there are various types of capital in the operations of a company as shown in Figure 7.1:

Figure 7.1: Types of capital

7.1.1 Authorised Capital

„Authorised Capital‰ is defined as:

The authorised capital is the maximum amount of money permissible for the operations of the company. The amount of authorised capital could be altered or increased by altering the Memorandum of Association, subject to the approval of the Registrar of companies. It is a normal practice for a company that has just commenced operations not to issue all of the shares to form up the capital. Authorised capital is also known as nominal or registered capital.

ÂThe total of share capital a company is permitted to issue under its Memorandum of Association. The Memorandum must specify that the total is divided into shares of a fixed amount (par value). The authorised capital can only be increased by alteration of the Memorandum at a general meeting‰

(Bishop, 1993, p. 17)

ACTIVITY 7.1

Discuss what the figure for your authorised capital is if you were toincorporate a private limited. The figure has to be realistic!



7.1.2 Paid-up Capital

„Paid-up Capital‰ is defined as:

Basically the paid-up capital is the amount of money that has been fully paid by the shareholders. The amount that has been paid is the fund to be utilised by the company for business operations.

7.1.3 Uncalled Capital

The amount of money that has not been fully paid by the share subscribers is known as ÂUncalled capitalÊ.

DIVIDENDS

„Dividends‰ is defined as:

The rationale of forming a company is to do business and the intention of doing business is to gain profit. Shareholders will be rewarded with the profit of the company in return for their contributions. Since dividends are paid out of profit generated from the companyÊs business, therefore no dividend will be paid if the company is not making profits. Paying the dividends is indeed an internal matter. The amount of dividend to be paid is decided based on the profit made annually, upon recommendations made by the board of directors during the annual general meeting.

„Income paid periodically to the shareholders, out of the profit but not out of the company and not out of its capital‰

(Bishop, 1993, p. 56)

„The amount of issued capital of a company which has been paid for by the shareholders in the form of part paid shares‰

(Bishop, 1993, p. 124)

7.2



SHARES

„Share‰ is defined by as:

As capital is divided into shares, shares are units to measure a memberÊs interest in the company. The amount of shares held by any party determines the voting power. Section 100 of the Companies Act states that the shareholder will be issued share certificates as evidence that they are shareholders. A company have the authority to issue shares with different rights. The ÂrightsÊ here indicates special features in the shares issued, such as, carrying a voting right; these are known as the ordinary shares. This is the important feature of the ordinary shares.

7.3.1 Ordinary Shares

Ordinary shareholders are the ones who are taking the risk. Normally in a company the ordinary shareholders are the ones who contribute most to the companyÊs capital. If the companyÊs business fail and looses the capital, the shareholders will lose their money. The shareholders will be rewarded accordingly in terms of dividends paid if the companyÊs business is making profits. In return for their contributions and the risk they are taking, they are conferred with voting rights. Normally there is no fixed rate of dividend that arises from the profits; it depends very much on the companyÊs performance and policy in paying dividends. Under this heading there are preference shares issued with special features, as explained in the next subtopic.

„The capital of the company is divided into units called shares. A share represents a legal right of its holder (shareholder) to participate in the business affairs of the company. The share is negotiable and has monetary value. It provides them with an entitlement to vote at a meeting, a share of profits and a dividend paid each year‰

(Bishop, 1993, p. 161)

7.3



7.3.2 Preference Shares

There are shares that do not carry any voting power. Shares that give the holder the ÂpriorityÊ are called the preference shares. The subscribers are given the priority to receive payment in the event the company is being wound up. Subscribers of the preference share do not have the voting power and control of the company; they shall have to leave the management (voting) powers to the ordinary shareholders. Holders of preference shares are given the privilege of a fixed amount of dividend, normally at a fixed rate, before the ordinary shareholders receive their dividend. The voting rights are restricted to matters concerning the interest of preference shareholders. Preference share holder is given the priority of repayment in case the company is being wound up. A disadvantage of preference share holders is that it focuses towards monetary gains but not the power to vote. On the other hand the idea of having power to vote is a defence mechanism against Âhostile takeoversÊ which will be discussed in a later topic. In terms of profit, they are entitled to a fixed rate irrespective of the company making even higher profit; the entitlement for the dividend would always be based on the same rate.

(a) Variation of Class right As discussed earlier, shares issued by a company vary according to categories of shares. These categories of shares carry different rights as the shareholder may require for holding such shares. These shareholders would want to protect and stick to their rights against any attempt by holders of other classes or categories of shares to vary their rights. Section 65 of the Companies Act provides protection against any attempt to vary or abrogate the rights of certain class. The general principle of this particular provision is that the right of a particular share shall not be altered except in accordance with the procedure, such as, the Articles of the company. However, the procedure being adhered to does not stop the particular shareholderÊs right to make an application to enforce his rights in court. Under this provision a shareholder of 10 per cent shares may apply to court against any abrogation or variation of his rights.



Another relevant provision is Section 181 of the Companies Act where the shareholder may express any variation which is oppressive to him. There are preference shares issued with special features, such as:

(i) Equity Shares Equity shares are actually preference shares that carriy voting rights.

(ii) Redeemable Preference Share Redeemable preference share is actually preference share that could be redeemed by the company. The issuance of Redeemable Preference Share is contrary to the basic principle of - a company may not buy back its own shares, as it may cause a decrease in the companyÊs capital. However, section 61 of the Companies Act allows this practice if it is spelled out in the Memorandum and Articles of the company.

(b) Who may issue shares? The power to issue shares is vested in the directors and members. The relevant provision would be section 132(D) and 132(D)(3) of the Companies Act. Directors may not exercise power to issue shares without obtaining prior approval of members during the Annual General Meeting via an ordinary resolution, which is to be lodged with the Registrar of Companies by virtue of section 132(D)(5) of the Companies Act.

SELF-CHECK 7.1

Answer ÂYesÊ or ÂNoÊ

1. Since preference shares have no voting power, the subsciber is rewarded monetarily, whereas ordinary shares which carries voting powers are the ones which participate in the company.

2. Redeemable preference shares are meant for short term investment.



A companyÊs authorised capital is the amount of the share capital which the

company is allowed to issue.

Paid-up capital is the amount paid up by subscribers on shares issued which forms the capital that has been raised.

Uncalled capital is the amount unpaid up by subscribers on shares issued which the company could call upon for a full settlement.

Private company is not permitted by law to invite the public to become subscribers of its share.

Dividends are only paid if the company is making profit and it is illegal to pay dividends out of capital, or if the company is running at a loss.

Preference shares enjoy the privilege of being paid dividends but do not have the right to vote of ordinary shareholders.

Authorised capital

Dividend

Equity share

Issued capital

Ordinary share

Paid-up capital

Preference share

Redeemable preference share

Uncalled capital

1. Define briefly in your own words the distintive features of a preference

share holder.

2. Define briefly in your own words the privilege of an ordinary share holder.



3. In the earlier discussions, the general rule is that a private company is prohibited from inviting the public to subscribe shares. A who is a member of company XYZ Pte. Ltd. decided that he no longer desires to become a member in company XYZ Pte. Ltd. due to health problems and old age. Through his arrangement, A ÂtransferedÊ his shares to an outsider. Does this act violate the law? Discuss.

4. When a person subscibes to shares in a company he is considered to be a contributor to the capital of the company. Discuss the practical application of the statement.

Bishop, J. M., (1993). Legal words & phrases simplified. Selangor: Tioman-

Blackstone Edition.


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