Introduction
A share is the proportion of the amount paid to the total capital payable to the company. It can also be understood as a proportion of interest in a company’s assets. Through issuing shares the company raises money.
One of the landmark cases related to the concept and nature of a company’s share is provided in Borland’s Trustee vs Steel Brothers & Co. Ltd.[1] In, Indian context, the Supreme court case of CIT v. Standard Vacuum Oil Co[2] stated what all the definition of a share includes. Bacha F. Guzdar v. Commissioner of Income Tax, Bombay[3] also elaborated on the same in the Indian context.
Share capital, on the other hand is the amount the company raises by issue of shares. So basically, the entire share capital is divided into smaller units called shares. Hence, each shareholder is in a way a creditor of the company.
Share capital can of following types on the basis of the amount of money collected and when the company along with the modes of collection:
- Authorized or Nominal Capital: According to the MAO of the company, maximum share capital that the company is authorize to raise.
- Issued Capital: Capital issued by the company from time to time for the subscription.
- Subscribed Capital: Part of issued capital actually subscribed.
- Called Up Capital: Part of subscribed capital called for payment.
- Paid Up Capital: Part of issued capital already paid.
- Reserve Capital: Part of the capital reserve for future subscriptions.
The details of these are mentioned all over the Act. Section 2(84) of the Indian Companies Act, 2013 (the Act) defines “Share” in the Indian context. According to the Act, there are various types of shares. They can be in the nature of preferential share or equity share and each of them has many sub categorizations. Additionally, the MOA and AOA of the company which are the two primary instruments of a company include the rights and duties of shareholders along with the mode of prescription and many such details.
SEBI is the market regulator and governs the process of raising capital from the public in case of a public company in India. They draw their powers from the SEBI Act, 1992, and issues various guidelines, rules, and regulations to effectively govern the capital market.
Nature of Property
According to Section 44 of the Act, shares are movable property that can be transferred as in the manner prescribed by AOA of the company. Further, they are consider to be good under Section 2(7) of the Sale of Goods Act, 1930. Section 46 of the Act provides for having a share certificate issue to each shareholder as a proof to his title or ownership on certain quantities of shares. Share warrants are also such proof but they are only issue in the case of a public company by Central government.
Types of Shares
Under Section 43 of the Act provides for two main types of issue share or share capitals for companies which are limit by shares:
- Preferential Share Capital
- Equity Share Capital
It is important to understand that as the name suggests, preferential shareholders have some privileged benefits over equity shareholders. They enjoy privilege in the distribution of dividends by the company and during liquidation also they are preferred over the equity shareholders. Thus, they are two mutually exclusive terms.
Preferential Share Capital
They have a priority over the equity shareholders. They receive preferred status at dividends distribution and repayment if the company goes in liquidation. Also they have a fixed amount of payment of dividends from the company. They also have voting rights in matters that impact them.
The following are the sub categorizations of Preferential Shares:
- Participating or Non-Participating shares
- Cumulative and Non-Cumulative shares
- Redeemable and Irredeemable shares
- Cumulative Convertible shares
Equity Share Capital
Their simple definition is all those shares that do not preference shares are equity shares. The equity shareholders are the owners of the company.
They are of 2 major types having voting rights and those having differential rights. These are governed by the rules prescribe in AOA of the company.
Alteration and Reduction of Capital
The company at any time can alter its share capital by alteration of its MOA and AOA in accordance with the Act.[4] However, if the company wishes to reduce the capital then they must take the approval of the court for doing the same.[5]
Other Ways of Raising Capital
Other alternatives to raise capital of the company can be through issuing Sweat Equity Shares; Employees Stock Option Scheme; Bonus Issue; Rights Issue etc.
References:
[1] [1901] 1 Ch 279.
[2] AIR 1966 SC 1393.
[3] AIR 1955 SC 74.
[4] Section 64, Indian Companies Act, 2013.
[5] Section 66, Indian Companies Act, 2013.
0 Comments