JAMIA MILLIA ISLAMIA

Faculty of law

Project

Share and Share Capital

Corporate Law - 1

Submitted to: Dr. Qazi Usman

Submitted by: (Arsalan Ahmad)

B.A.LL.B (Self-finance) 6th Semester

Batch: 2019 – 2020

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 Acknowledgement
In preparation of my assignment, I had to take the help and guidance of some respected persons,
who deserve my deepest gratitude. As the completion of this assignment gave me much pleasure,
I would like to show my gratitude Dr. Qazi Usman, our Administrative Law Professor at Faculty
of Law, Jamia Millia Islamia for giving me great guidelines for assignment throughout numerous
consultations. I would also like to expand my gratitude to all those who have directly and
indirectly guided me in writing this assignment. Many people, especially my classmates have
made valuable comment suggestions on my paper which gave me an inspiration to improve the
quality of the assignment.

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 Table of Content

Sr. No. Topic Pg. No.

1. Introduction 4

Types of Shares 5
2.
Share Capital 7
3.
Types of Share Capital 8
4.
Conclusion 14
5.

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 Introduction

Capital of a company is divided into units of small denomination and each such unit is called
‘Share’. According to Section 2 (84) of the Companies Act, 2013, “Share means share in the
capital of a company and includes stock.” In the case of Commissioner of Income Tax v.
Standard Vacuum Oil Company (1966)1, the Supreme Court defined share as follows:

“By a share in a company is meant not any sum of money but an interest measured by a sum of
diverse rights conferred on its holders by the articles of the company which constitute a contract
between him and the company.”

Share, debentures or other interest of any member in a company shall be movable property. It
shall be transferable in any manner provided for in the articles of association of the company. A
member may transfer any “other interest” in the company in the manner provided in the articles.
For example rights attached to a member in a guarantee company such as membership interest,
suspension of membership or assignment of interest may be made transferable by making a
provision in the Articles of the company.

1
1 Comp. L.J. 187 (SC).

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 Types of Shares

There are 2 kinds of share:

Equity Share

Equity shares or otherwise called as ordinary shares are the shares, that carry –

 Voting rights at the Annual General Meeting of the company. or

 Differential voting rights relating to dividend, voting etc.

Ordinary shareholders share profits of the firm, in the form of dividend declared by the company
and bonus shares. The dividend is paid to them at last, i.e. after paying off all the taxes, interest
and dividend to preference shareholders.

The rate of dividend is not fixed, i.e. whatever the company earns as a profit, a certain
percentage of it is declared as a dividend by the company to the equity shareholders.

Again, at the time of winding up of the company, equity shareholders are paid at last, i.e. after
settling the claims of creditors, debenture holders and preference shareholders.

Funds raised by issued equity shares brings permanent capital to the company. As the equity
shareholders undertake the highest risk, they are regarded as the true owners of the company.
The cost of these shares is usually high, as the shareholders expect a good return on their
investment, against the risk taken.

Equity shares are of several types, i.e. right shares, bonus shares, sweat equity shares, etc.

Preference Shares

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 Preference shares refer to the shares that carry preferential rightconcerning the dividend payment
(i.e. either certain amount, or at a certain rate) and repayment, at the time of winding up of the
company.

It is, in fact, a hybrid source of finance which contains the features of both equity capital as well
as debt capital. It is identical to equity capital because it carries dividend which is not tax
deductible, but at the same time, the dividend rate is fixed which makes it similar to debt capital
wherein the interest rate is certain.2

The shares get preference over the equity shares as to the distribution of dividend and surplus at
the time of winding up of the company. These shares are redeemable in nature, i.e. after a
specific period of time, these shares are redeemed by the company either at par, premium or
discount.

There are various types of preferences shares such as:

 Convertible preference shares

 Cumulative preference shares

 Non-cumulative preference shares

 Redeemable preference shares

 Participating preference shares

 Non-participating preference shares

Preference shares are usually cumulative as if the dividend is not paid for a year due to loss, then
that will be carried forward for the next year. And if it continues consecutively for two years,
then the preference shareholders get the right to vote at the AGM of the company.

The liability of the shareholders is limited to the face value of the shares, wherein the face value
refers to the denominated value. Further, the shares are movable in nature, in the sense that it can
be transferable in a way specified in the Articles of Association of the Company.3

2
Avtar Singh: Company Law, Eastern Book Company, Lucknow.
3
ibid

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Share Capital

Share capital is the money a company raises by issuing common or preferred stock. The amount
of share capital or equity financing a company has can change over time with additional public
offerings.

The term share capital can mean slightly different things depending on the context. Accountants
have a much narrower definition and their definition rules on the balance sheets of public
companies. It means the total amount raised by the company in sales of shares.

Share capital is reported by a company on its balance sheet in the shareholder's equity section.
The information may be listed in separate line items depending on the source of the funds. These
usually include a line for common stock, another for preferred stock, and a third for additional
paid-in capital.4

Common stock and preferred stock shares are reported at their par value at the time of sale. In
modern business, the "par" or face value is a nominal figure. The actual amount received by a
company in excess of par the amount of share capital reported by a company includes only
payments for purchases made directly from the company. The later sales and purchases of those
shares and the rise or fall of their prices on the open market have no effect on the company's
share capital.

A company may opt to have more than one public offering after its initial public offering (IPO).
The proceeds of those later sales would increase the share capital on its balance sheet value is
reported as "additional paid-in capital."

4
ibid

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Types of Share Capital

There are Two types of Share Capital

A. Equity Share Capital Section 43 of the Act provides that the share capital of a company
limited by shares shall be of two kinds:

(a) equity share capital—

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as
may be prescribed; and

(b) preference share capital:

‘‘Equity share capital’’, with reference to any company limited by shares, means all share capital
which is not preference share capital. As per section 43 (a) equity share capital may be divided
on the basis of voting rights and differential rights(DVR) as to dividend, voting rights or
otherwise according to the rules. 5

A DVR share is like an ordinary equity share, but it provides fewer voting rights to the
shareholder. The difference in voting rights can be achieved by reducing the degree of voting
power. It is ideal for long term investors, typically small investors who seek higher dividend and
are not necessarily interested in taking a voting position. 6

The Companies (Share Capital and Debentures) Rules, 2014 (hereinafter referred to as Rules)
provide that no company whether it is unlisted, listed or a public company limited by shares shall

5
J. P. Sharma, Corporate Laws, Ane Books Pvt. Ltd., New Delhi.
6
ibid

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issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies
with the following conditions:

(a) the articles of association of the company authorizes the issue of shares with differential
rights;

(b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the
shareholders: Provided that where the equity shares of a company are listed on a recognized
stock exchange, the issue of such shares shall be approved by the shareholders through postal
ballot ;

(c) the shares with differential rights shall not exceed twentysix percent of the total post-issue
paid up equity share capital including equity shares with differential rights issued at any point of
time;

(d) the company having consistent track record of distributable profits for the last three years;

(e) the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue such
shares;

(f) the company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference shares or
debentures that have become due for redemption or payment of interest on such deposits or
debentures or payment of dividend;

(g) the company has not defaulted in payment of the dividend on preference shares or repayment
of any term loan from a public financial institution or State level financial institution or
scheduled Bank that has become repayable or interest payable thereon or dues with respect to
statutory payments relating to its employees to any authority or default in crediting the amount in
Investor Education and Protection Fund to the Central Government;

(h) the company has not been penalized by Court or Tribunal during the last three years of any
offence under the Reserve Bank of India Act, 1934 , the Securities and Exchange Board of India

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Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management
Act, 1999 or any other special Act, under which such companies being regulated by sectoral
regulators.

The Rules as aforesaid clearly state that the company shall issue DVR shares only after approval
from shareholder by passing a ordinary resolution. It further provides that a listed company
where the equity shares of a company are listed on a recognized stock exchange, the issue of
such shares shall be approved by the shareholders through postal ballot.7

The explanatory statement to be annexed to the notice of the general meeting to be convened
pursuant to section 102 or of a postal ballot pursuant to section 110 shall contain the following
particulars:

(a) the total number of shares to be issued with differential rights;

(b) the details of the differential rights;

(c) the percentage of the shares with differential rights to the total post issue paid up equity share
capital including equity shares with differential rights issued at any point of time;

(d) the reasons or justification for the issue;

(e) the price at which such shares are proposed to be issued either at par or at premium;

(f) the basis on which the price has been arrived at;

(g) (i) in case of private placement or preferential issue –

(a) details of total number of shares proposed to be allotted to promoters, directors and key
managerial personnel;

(b) details of total number of shares proposed to be allotted to persons other than promoters,
directors and key managerial personnel and their relationship if any with any promoter, director
or key managerial personnel;
7
Avtar Singh: Company Law, Eastern Book Company, Lucknow

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(ii) in case of public issue - reservation, if any, for different classes of applicants including
promoters, directors or key managerial personnel;

(h) the percentage of voting right which the equity share capital with differential voting right
shall carry to the total voting right of the aggregate equity share capital;

(i) the scale or proportion in which the voting rights of such class or type of shares shall vary;

(j) the change in control, if any, in the company that may occur consequent to the issue of equity
shares with differential voting rights;

(k) the diluted Earning Per Share pursuant to the issue of such shares, calculated in accordance
with the applicable accounting standards;

(l) the pre and post issue shareholding pattern along with voting rights as per clause 35 of the
listing agreement issued by Security Exchange Board of India from time to time.

The Rules further provide that the company shall not convert its existing equity share capital
with voting rights into equity share capital carrying differential voting rights and vice–versa.

According to the Rules the Board’s Report for the financial year in which the issue of equity
shares with differential rights was completed shall include the following details with respect to
DVR shares:

(a) total number of shares allotted with differential rights;

(b) details of the differential rights relating to voting rights and dividends;

(c) the percentage of the shares with differential rights to the total post issue equity share capital
with differential rights issued at any point of time and percentage of voting rights which the
equity share capital with differential voting right shall carry to the total voting right of the
aggregate equity share capital;

(d) price at which such shares have been issued;

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(e) particulars of promoters, directors or key managerial personnel to whom such shares are
issued;

(f) change in control, if any, in the company consequent to the issue of equity shares with
differential voting rights;

(g) diluted Earning Per Share pursuant to the issue of such each class of shares, calculated in
accordance with the applicable accounting standards;

(h) pre and post issue shareholding pattern along with voting rights in the same specified format
as given in explanatory statement.

The rules provide that the holders of the equity shares with differential rights shall enjoy all other
rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to,
subject to the differential rights with which such shares have been issued.

The company issuing equity shares with differential rights, shall ensure that the Register of
Members contains all the relevant particulars of the shares so issued along-with details of the
shareholders.

B. Preference Share Capital

The other type of share capital is the “Preference share capital”. According to section 55 of the
Act, a company limited by shares cannot issue any preference shares which are irredeemable.
However a company limited by shares may, if so authorised by its articles, issue preference
shares which are liable to be redeemed within a period not exceeding twenty years from the date
of their issue.

With reference to any company limited by shares, Preference share capital means that part of the
issued share capital of the company which carries or would carry a preferential right with respect
to—

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which
may either be free of or subject to income-tax; and

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(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the
payment of any fixed premium or premium on any fixed scale, specified in the memorandum or
articles of the company;

Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or

(a) that in respect of dividends, in addition to the preferential rights to the amounts with respect
to dividend, it has a right to participate, whether fully or to a limited extent, with capital not
entitled to the preferential right aforesaid;

(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding
up, of the amounts aforesaid, it has a right to participate, whether fully or to a limited extent,
with capital not entitled to that preferential right in any surplus which may remain after the entire
capital has been repaid.

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 Conclusion

Share and Share Capital is most important thing for a company to function. A share ina company
signifies a definite portion of the capital of the company but shareholder are not part owners of
the company as a company is different from totality of shareholders. Share is a movable
property. It is transferable in the manner provided by the articles of the company. It is
incorporated in its nature and it consists merely of bundle of rights and obligations. These rights
and obligations are created by a statute which also define their extent and scope.

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