COMPANY LAW

•SHARES, &•SHARECAPITAL

SHARESDEFINITIONS

• The Companies Act defines a share as “Share in the Share Capital of the company, and includes stock except where a distinction between stock and share is expressed.”

• According to J.Farwell a share is “ the interest of a shareholder in a company measured by the sum of money, for the purpose of liability in the first place and of interest in the second.”

• Thus, a share-(i) measures the right of a shareholder to receive a certain proportion of the profits of the company when it is a going concern and to contribute to assets of the company when it is being wound up; and (ii) forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.

NATURE OF A SHARE

• Shares in India, are both goods as well as chose – in – action. It is bundle of rights, each one of which is a legal chose – in – action. The legal title to the share is vested in the person entitled to it, either by the company or by transfer from a former holder.

TYPES OF SHARES• Before passing Companies Act, 1956, shares used to be in

three types Ordinary Shares Preference Shares Deferred Shares

• After Companies Act , companies issued only two types of shares

Preference Shares Equity Shares

Preference Shares- must satisfy 2 conditions:-• It shall carry a preferential right as to the

payment of dividend at a fixed rate;• In the event of winding up, there must be

a preferential right to the payment of the paid-up capital.

Kinds of Preference Shares

• Cumulative and Non- cumulative preference shares:- In the case of cumulative preference shares, if the profits of the company in any year are not sufficient to pay the fixed dividend on the preference shares, the deficiency must be made out of the profits of subsequent years (i.e., right to claim the arrears of dividend)

In the case of non-cumulative preference shares, the dividend is only payable out of the profits of each year. If there are no profits for the year, the arrears of dividend cannot be claimed in the subsequent year.

Participating and Non-participating preference shares:-

• Participating preference shares are those which are entitled to participate in the surplus profits ( after they get a fixed rate of dividend on their shares). They may also have the right to share in the surplus assets of the company on its winding up.

• Non- participating preference shares are entitled only to a fixed rate of dividend. They do not have the right to share in the surplus profits and surplus assets of the company.

Convertible and Non-convertible preference shares:-

• Convertible preference shares are those which can be converted into equity shares within a certain period.

• Non-convertible preference shares are those which do not carry the right of conversion into equity shares.

Redeemable and Irredeemable preference shares:-

• Redeemable preference shares are those which may be redeemed after a certain period of time.

• Irredeemable preference shares are those which cannot be redeemed, and the capital is to be returned on the winding up of the company.

Equity Shares/ ordinary shares

• All the shares which are not preference shares are equity shares.

• Equity shareholders have a residual claim on the income of the company. They may get higher dividends if the company is prosperous or may not get anything if the business flops.

• In the winding up, the equity shares are entitled to the assets remaining after the payment of the liabilities and the capital of the company.

Deferred Shares

• These shares are held by the promoters and directors of the company. These are also called as founders’ shares. There shares carry right to substantial dividends from the profit left after paying off preference and equity dividend.

ALLOTMENT OF SHARES

• Offers are made on application forms supplied by the company. When an application is accepted, it is an allotment. “Allotment” is generally neither more nor less than the acceptance by the company of the offer to take shares.

• Allotment creates a binding contract between the parties.

• A valid allotment has to comply with the requirements of the Act and the principles of the law of contract relating to acceptance of offers.

STATUTORY RESTRICTIONS ON ALLOTMENT

These may be discussed under two heads:-(i)When no public offer is made (ii)When public offer is made:--- First allotment of shares--Subsequent allotment of shares--Allotment of debentures

STATUTORY RESTRICTIONS ON ALLOTMENT

• Minimum subscription and application money [s. 69]: It means the amount which is, in the estimate of the directors, enough to meet the needs like purchase price of any property partly or wholly, preliminary expenses, and working capital.

• Statement of lieu of prospectus [s.70]: Where prospectus has not been issued, no allotment shall be made unless at least three days before a statement in lieu of prospectus has been filled with the register.

• Opening of subscription list [s.72]:Shares can not be allotted at once after the issue of the prospectus . No allotment shall be done until the beginning of the 5th day from the date of the issue of the prospectus.

• SHARES TO BE DEALT IN ON STOCK EXCHANGE [S.73] :

Every company intending to offer shares to the public by the issue of a prospectus has to make an application before the issue to any one or more of the Stock Exchanges for permission for the shares to be dealt with at Stock Exchange. An allotment shall be void if the permission has not been granted.

• over-subscribed prospectus [s.73(2-A)] : where the permission of a stock exchange has been granted and, therefore , the allotment completed valid, the prospectus being over-subscribed portion of the money received must be sent back to the applications forthwith.

GENERAL PRINCIPLES

• ALLOTMENT BY PROPER AUTHORITY : An allotment must be made by a resolution of the board of directors “Allotment is a duty primarily falling upon directors” and this can be delegated except in accordance with the provisions of the articles.

• WITHIN RESONABLE TIME : Allotment must be done within a reasonable time, otherwise the application lapses. On the expiry of reasonable time section 6 of the Contract Act applies and the application must be deemed to have been revoked.

• MUST BE COMMUNICATED : The allotment must be communicated to the applicant. Posting of a properly addressed and stamped letter to allotment is communication even if the letter is delayed or lost in the course of post.

• ABSOLUTE AND UNCONDITIONAL :Allotment must be absolute accordance with the terms and conditions of the application, if any. The applicant must promptly reject the allotment when shares have been allotted to him without his conditions being fulfilled.

CERTIFICATE OF SHARES

• An allottee of shares is entitled to have from the company a document called share certificate, clarifying that he is the holder of the specified number of shares or debentures or debenture-stock is obliged to deliver to the allottee a certificate of shares within three months of allotment.

Transfer of shares• When joint stock companies were established, the

great object was that the shares should be capable of being transferred. Accordingly, by section 82 of the companies Act, it is provided that the shares of a member in a company shall be moveable property capable of being transferred in the manner provided by the articles of the company.

RESTRICTIONS ON THE TRANSFER OF SHARES• Is open to a company to restrict the right of its

members to transfer their shares. The article of a private company as against those of a public company contain more rigorous restrictions on its members to transfer their shares.

BROKERAGE• The Company Act, 1956, permits brokerage

to be paid as has been lawful for a company to pay. It has been recognized in Metropolitan Coal Consumers Assn vs. Scringeour that reasonable brokerage should always be allowed.

• Brokerage is different from underwriting commission. A broker does not undertake to subscribe for shares to the extent of public default.

• Brokers are professional men, such as “stock-brokers, bankers and the like, who exhibit prospectus and send them to their customers, and by whose mediation the customers are induced to subscribe.

ISSUE OF SHARES AT PREMIUM• If the market exists, a company

may issue its shares a price higher than their nominal value. There is no restriction on the sale of share at a premium.

• SEBI guidelines have to be observed as they indicate when an issue has to be at par and when premium is chargeable.

• Premium may be received in cash or kind. An amount received extra than the nominal value due to the premium should be carried to the share premium account.

SHARE CAPITAL• Share capital means the capital raised by a company

by the issue of shares.

kinds OF SHARE CAPITAL• The capital of the company may be two types:

Preference Share Capital : In case of a company limited by shares, that part of the capital of the company which carries a preferential right as to payment of dividend during the lifetime of the company and repayment of capital on winding up of the company is known as Preference Share Capital.

Equity Share Capital : All the share capital which is not preference share capital is known as equity share capital. Capital which does not carry any preferential rights.

TYPES OF CAPITAL:

• Authorized Capital• Issued Capital• Subscribed Capital• Called up Capital• Paid up Capital• Uncalled Capital• Reserved capital

ORDINARY SHAREHOLDER COMPARED WITH PREFERENCE SHAREHOLDER

PREFERENCE SHARES• These are more like

debentures than like shares. They are entitle to a fixed rate of interest. The company may choose them to pay them back.

• The right to vote restricted to resolutions which directly affect the rights attached to his preference shares, except when dividend has remained unpaid.

• Offers profitable and safe source of investment.

ORDINARY SHARES• Ordinary shareholders

cannot be paid back except under a scheme involving reduction of capital.

• Ordinary shareholder is entitled to vote on all matters affecting the company.

• Rate of income and risk involved is more.

VOTING RIGHTS• EQUITY SHAREHOLDERS RIGHTS[sec. 87 (1)] :

An equity shareholder of a company limited by shares has a right to vote on every resolution placed before it. His voting right on a poll is in proportion to his share of the paid-up equity capital of the company.

• Preference share capital[sec. 87 (2)] : A preference shareholder has the right to vote on those resolutions which directly affect his rights. Any resolution for winding up the company or for the repayment or reduction of its share capital is deemed to directly affect the rights of the preference share holder.

ALTERATION OF CAPITAL A limited company having a share capital

may, if so authorized by its Articles, alter its share capital as follows

• Increase nominal share capital by issuing new shares

• Consolidate and divide all or any part of its share capital into shares of larger amount

• Convert fully paid-up shares into stock or vice versa

• Sub-divide its shares, or any of them, into shares of smaller amount, and

• Cancel share which have not been taken up and diminish the amount of its authorized capital by the amount of the shares so cancelled.

Alteration of capital clause

Any of the above alterations may be affected by an ordinary resolution by the shareholders in general meeting.

Within 30 days of passing the resolution for alteration of share capital, a notice must be given to the Registrar who shall thereupon make necessary changed in the company’s memorandum or articles or both. On failure to give such a notice, fine may be imposed on the officers, of Rs. 500 or every day during which the fault continues.

REDUCTION OF CAPITAL Under sec 100, a company limited by shares

having a share capital may reduce its share capital. Subject to the confirmation by the court, in any of the following three ways:

• It may extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; or

• It may either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up capital which is loss, or is unrepresented by available assets, i.e., writing off lost or unwanted capital.

• It may, either with or without extinguishing or reducing liability on any of its shares , pay-off any paid-up share capital which is in excess of the wants of the company.

Procedure for reducing share capital:-

1. Special resolution2. Application to the Tribunal for sanction order

of the resolution3. Registration of the sanction order of Tribunal

with the Registrar.

FURTHER ISSUE OF CAPITAL Further issue of capital of a company may take place• By allotment of new shares [sec. 81(1) to (3)]:

A public company limited by shares may, at any time, increase its subscribed shares capital within the limit of authorized capital by issuing new shares. It is for the directors to decide whether an increase in the subscribed capital of the company is necessary or not.The existing shareholders are first offered the shares. This right of shareholders to be offered new shares to them before they are offered to the public is known as shareholders right of Pre-emption(or pre-emptive)

• by conversion of debentures or loans into shares [sec. 81(4) to(7)] : where a company has taken loan from the central government by issuing any debentures or otherwise, the government may, in the public interest , convert such debentures or loans into shares in the company.

Reorganization OF CAPITAL The reorganization of share

capital of a company may take place

• By the consolidation of shares of different classes; or

• By the division of shares of one class into shares of different classes; or

• By both these methods.

The reorganization of the share capital of a company may be proposed

• Between a company and its creditors or any of class of them; or

• Between a company and its members or any classes of them.