Shares under Company Law

Introduction: 

A share[1] is defined as the interest of the shareholder in the company measured by a specific amount of money, for the purpose of liability and interests. It also refers to a unit of ownership that represents an equal proportion of a company’s capital as a whole.

The word “capital” is also associated with the shares, which means that a specific amount of money with which the business of the company is started. The total amount that is received from the people holding shares which they issue is termed as “share capital”.

Section 4(1)(e) of the Companies Act 2013[2], it has defined the procedure of a company that has a share capital. The total amount of shares that a company has is to be registered and thus, the division into shares of a fixed amount and the number of shares with the person agrees to take which shall not be less than one share. The private limited company cannot exceed the powers that are prescribed in the association of the company.

The concept of shares has been continuously changing under changing Company Law. In 1844, for the first time, the Joint Stock Companies Act was passed. This Act provided for the registration of Companies with more than 25 members or with shares transferable without the consent of all the members. It begins from the Company Act,1956 which stated that a Share is a share in the share capital of the company. The Memorandum and Article of Association of the company provide the rights and obligations to the shareholders.

Section 2 (84) of the companies act 2013, defines a share as “Share in the share capital of a company and includes stock.” In accordance with company law, a share is considered to be a movable property which in practical use can be sold, mortgaged, and bequeathed[3].

Terms relating to Share Capital

The different terms[4] that relate to share capital are:

1. Nominal, Authorized, or Registered Capital: This means the maximum amount which the company raise by issuing the shares and on which the company receives a full registration fee. The limit of the amount cannot be exceeded unless it is altered by the Memorandum of Association.

2. Issued Capital: This is the authorized capital which is offered to the members who subscribe, and it also includes the share that is allotted to each and every member.

3. Subscribed Capital: This is considered to be a part of the issued capital at the nominal or the face value of the share purchased by the person in the company and which has been allotted to the purchaser.

4. Called-up Capital: It means the total amount of called up capital on the shares that are issued and have been subscribed by the shareholders on the capital amount. It is generally the amount from the share that is required by the company and the remaining amount of that share that is left is paid later.

5. Paid-up Capital: It is the total amount of the capital that is actually paid by the members to the company on buying a particular share.

According to Section 44 of the Company’s Act, 2013 it is provided that shares or debentures or other interests of any member in a company are movable properties. Also, they are transferrable under the company’s article association.  

Types of Share Capital

According to Section 43[5] of the Company’s Act 2013 (Section 86 of Companies Act 1956), there are two types of share capital for a company[6]:

(a) Preferential Share Capital: These types of shares are defined in section 85 (1) of the Companies Act 1956 (Section 43 of Companies Act 2013). It is the part of the issued share capital of the company carrying a preferential right for Dividend Payment i.e. a fixed amount or amount being calculated at a fixed rate can either be free of or subject to Income Tax and Repayment in the case of winding up or repaying the capital. These shares have the priority both in the repayment of dividends as well as capital. The amount of the preference shares needs to be paid back to the preference shareholders before any amount is being paid to the equity shareholders.

Furthermore, Preference shares[7] are also of various types:

1. Cumulative or Non-Cumulative: A non-cumulative preference shares or simple preference shares gives the right to a fixed percentage dividend of profit each year. In case of no dividend thereon or no profit claimed by the company, the holders of preference shares get nothing, nor they can claim unpaid dividends in that subsequent year. Cumulative preference shares give the right to shareholders to claim the unpaid dividend in any year or years with respect to that year.  This means that dividends are paid out when profits are available.
2. Redeemable or Non-Redeemable: Redeemable preference shares are the type of preference shares that have to be repaid by the company after the fixed term for which those preference shares were issued. Irredeemable preference shares are those preference shares which need not be repaid by the company except during the winding up of the company. But under the Companies Act of India, the company doesn’t have the right to issue irredeemable preference shares. If the company is limited by the number of preferential shares, then the company cannot issue the shares with a tenure of more than 10 years, i.e., for a company, the maximum tenure for the preference shares is 10 years. In case, if the company is not able to redeem the shares, then the company with the consent of the Company Law Board may issue another redeemable share that was equal to redeem the old preference shares which includes the dividend as well.
   The shares can only be redeemable if they are completely paid. The shares can also be redeemed out of profits of the company if they are available for dividends or for out of proceeds of the new issue of the shares that are made for the purpose of redeeming shares. If in case, there is a premium that is payable on redemption, it must be provided that the shares are out of profit or are out of the share premium account before those shares are redeemed.
3. Participating Preference Share or Non-Participating Preference Shares: Participating preference shares are those shares which are entitled to a preferential dividend at a fixed rate having the right to participate in the profits either along with the payment or after the payment of a certain rate of the dividend on equity shares. A non-participating share are these shares in which a shareholder does not have the right to participate in the profits of the company after the dividend and the capital has been paid to the preference shareholders.

(b) Equity Share Capital: The equity shares are also called ordinary shares. They are defined in section 85 (2) of the companies Act 1956 (section 83 of Companies Act, 2013) which tells that equity share capital with reference to any such company, all the share capital is not preference share capital. It is further divided into 2 types[8]:

• With voting rights
• With differential rights in accordance with the rules

Mostly these shares get more dividends as compared to ordinary shares and due to the difference in the voting rights, they are traded at a discount[9].

Case Laws

There are few case laws that refer to the shares and the Companies Act is applied to it.

Viswanathan vs East India Distillers[10]

In this case, the court held that a share is a movable property without any doubt, but at the same time, it is not a movable property in which a bag of wheat or cotton is movable property. These types of commodities cannot be brought to existence by legislation but a share of a company which is also a property is considered to be of a different type of property. Although it is a property, but it consists of a bundle and a collection of various rights and obligations which has to be agreed upon by the one who takes the share of that particular company.

Shree Gopal Paper Mills Ltd. vs Commissioner of Income-Tax[11]

This case was an appeal by the certificate under section 66A (2) of the Indian Income Tax Act, 1922 that was issued by the High Court of Calcutta. In this case, the appellant was a company that was established under the Indian Companies Act and carried on a business of manufacturing paper. The company issued some shares in full payment of ordinary shares and thereby the holders could not participate in the dividend if it ended on or before December 31, 1954. Thus, it was held that there was no dispute in regard to the validity of the resolution, and was passed in accordance with the articles of the association of the company.

Shiv Kumar Jatia v. State of NCT of Delhi[12]

In this case, the Supreme Court canceled the criminal proceedings that were initiated on the grounds that the accused, who was the managing director of the company. Further, the court also referred to the Companies Act, 2013, which said that under the Companies Act, the “officers in default” are held liable for the violations. The “officers in default” include the whole-time directors of the company, advisory board, the key managerial person of the company, the director with whose consent the default or the wrongdoings took place. Thus, in this case, being a criminal case, the court held that there was an absence of vicarious liability in the statute, and the individual who acted on the behalf of the company can be accused along with the company which is sufficient for a criminal intent. Hence, the final conclusion that was provided for vicarious liabilities included the companies act, 2013.

Shares to Stock Conversion

The shares held upon by a shareholder can also be converted into stocks, which are fully paid. The notice for the conversion must be given to the Registrar within 30 days of the conversion, but only those shares could be converted to stock which are fully paid. There is a procedure that must be followed by the person. Direct issuing of the stocks to the members is unlawful and generally cannot be done.

The main difference between the shares and the stocks is that the shares are transferable only incomplete units, thus, the transfer of half or quarter portion of the shares is not possible whereas the stock is expressed in terms of the amount of money that is required and hence can also be done in fractions, unlike the shares. Also, since stock is an entire bundle of shares, they cannot be numbered, whereas the shares are limited and so can be easily numbered.

Share Certificate

It is a document that is being issued by the company that states the person’s name who is registered with a specified number of shares of a particular class and those are paid to a specified amount mentioned in the certificate. The share certificate must have a common seal of the company along with the valid stamp of the company under a relevant stamp act and also with the signatures of the directors. It holds all the details: name, occupation, number of shares, a unique number, and the amount paid.

Every company that makes the allotment of the shares must deliver a share certificate of all the shareholders within three months of allotment made. Copy of letter of allotment that is issued by the company serves as evidence for the allotment of the shares. Once the share certificate is issued by the company, the holder of the certificate becomes a registered shareholder. So, if the certificate shows that the amount for the share is paid up, no one can deny that the amount is not paid.

Recent Issues regarding Shares

• Recently SEBI (Securities and Exchange Board of India) has introduced a new indicator to “Risk-o-meter[13]” to depict high risk for mutual funds products, wherein the indicator “Risk-o-meter” will investigate the investors and tell them the risk level: Low risk, Low to Moderate risk, Moderate Risk, High Risk, and Very High Risk.
• SEBI has issued a framework for the issuance, listing, and trading of perpetual non-cumulative preference shares[14] and this framework included all the methods and the ways in which a share can be issued, the allotment size required, the investors, the size of the trading lot and many other such requirements.
• NCLT[15] has directed the companies to transfer the shares to the transferee as no complaint of loss of certificate was filed as in the companies act it is mentioned that if the father has purchased the shares of the defendant company from the original shareholders and the defendant refuses to transfer the physical shares in name of plaintiff on grounds that the signature of transferor mismatch but notice is sent to original shareholders could not be served and no complaint for the loss of share certificate is filed, the defendant was to be directed to transfer shares in favor of the plaintiff.

Conclusion

The shares under the Company Act are defined in Section 4(1)(e) of the Companies Act 2013[16], which tells a procedure which a company needs to follow if in case, they have their shares. The concept and the usages of shares increased a lot in the pandemic “COVID-19”, where most of the people’s main source of income was through the share market. There are several types of shares, and depending upon which share a person issues, it falls under that category. Thus, the issuing of the shares is being increasing day by day, as the people get the amount increased and then can sell them as mentioned in the Companies Act. Therefore, making the share market, one of the main sources of income for several people, as through this, they tend to save money for future expenditures and thereby, make it a type of savings for them.

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References:

[1] https://www.companylawclub.co.uk/shares-an-introduction

[2] Section 4(1)(e), Companies Act, 2013

[3] https://www.srdlawnotes.com/2019/01/shares-meaning-and-kinds-of-shares.html

[4] http://www.legalserviceindia.com/company%20law/com_2.htm

[5] Section 43, Companies Act, 2013

[6] https://www.karvyonline.com/knowledge-center/beginner/share-meaning-and-types-of-shares

[7] http://www.legalserviceindia.com/company%20law/com_2.htm.

[8] https://www.srdlawnotes.com/2019/01/share-capital-what-are-different-kinds.html

[9] https://www.toppr.com/guides/business-laws/companies-act-2013/types-of-shares/#:~:text=A%20share%20in%20the%20share,of%20the%20Companies%20Act%2C%202013.&text=Section%2044%20of%20the%20Companies,a%20company%20are%20movable%20properties.

[10] AIR 1957 Mad.H.C.341 (India)

[11] AIR 1967 Cal 560 (India)

[12] http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/director-liability-supreme-court-quashes-case-against-managing-director.html?no_cache=1&cHash=288f9b4bc811ef2963cb9a436c3fbc02&utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration

[13] https://companylaw.taxmann.com/topstories/104010000000068674/sebi-introduces-a-new-indicator-to-%E2%80%9Crisk-o-meter%E2%80%9D-to-depict-high-risk-for-mutual-fund-products.pdf

[14] https://companylaw.taxmann.com/topstories/104010000000068667/sebi-issues-framework-for-issuance-listing-and-trading-of-perpetual-non-cumulative-preference-shares.pdf

[15] https://companylaw.taxmann.com/topstories/101010000000192199/nclt-directs-co-to-transfer-shares-to-transferee-as-no-complaint-of-loss-of-share-certificate-was-filed.aspx

[16] Id. At 1