Share Capital

Urmila Itam
Capital of Company
• Joint Stock Company , Sole proprietorship and partnership
• The capital of the company is raised through public issue of
shares.
• A company can appeal to a large number of people to
contribute to the share capital and also different types of
shares can be issued (max 50 shares are issued in a private
company).
• A Public limited company can augment its funds through
issue of debentures.
• It can also accept public deposit
• Public financial institutions will finance public companies
by underwriting shares, by investing in securities and by
direct lending.
 Share Capital
• According to companies act “a share in the share capital of a
company, and includes stock except where a distinction between
stock and share is expressed or implied” (sec 2(46)).
• A company raises its capital through issue of shares.
• Share capital of a company consists of individual shares of fixed
denomination.
• The shares of the public limited companies are transferable.
• The shares capital of a company may be nominal, authorized or
registered share capital, issued capital, paid-up capital or reserve
capital.
 Features of Share Capital
Owned capital: Share capital is owned capital of the company. It is
actually the money of the shareholders and since the shareholders are
the owner of the company, so share capital is the owned capital.
Remains with the company: It remains with the company till its
liquidation.
Dependable sources: Share capital is the most dependable source of
finance for the joint stock companies.
Raises creditworthiness: It raised the credit worthiness of the company.
Substantial funds: It provides substantial funds to the company.
Available for: Share capital is easily available for expansion and
diversification of business activities.
Amendment: The amount of share capital can be raised by amending the
capital clause of the Memorandum of Association.
 Features of Share Capital
No charge: Share capital does not create any charge on the assets
of the company.

Opportunity to participate: Share capital give its shareholders

an opportunity to participate in the company's management with
normal rights of shareholders.

Benefit of bonus shares: It gives it shareholders the benefit of

bonus shares.

Benefit of limited liability: Share capital also gives its

shareholders the befit of limited liability as the liability of its
shareholders is limited up to the face value of each share.

Meaningful participation: Share capital enables its shareholders

to have a meaningful participation in the expansion of corporate
sector.
• Nominal/authorized/registered share capital:
 Amount of share capital which a company is incorporated with.
 As mentioned in MOA.
 Share capital which a company is authorized to issue.
• Issued capital:
 A portion of the authorized capital which a company decides to
issue for public subscription.
 This can be less than or equal to the nominal capital.
 Any company cannot issue the complete nominal capital for
public subscription.
• Subscribed capital:
 It is that amount of the nominal value of shares which have
actually been taken up by the public. It is that part of the nominal
capital which has actually been taken up by shareholders who
have agreed to give consideration in kind or in cash for shares
issued to them. Where shares issued for subscription are wholly
subscribed for, issued capital would mean the same thing as
‘subscribed capital’. That part of issued capital which is not
subscribed by the public is called ‘Unsubscribed Capital’.
Subscribed capital cannot be more than issued capital.
Example:
• A company was incorporated with capital f 9, 00,000 divided in to
Rs.90,000 equity shares of f Rs. 10 each. It issued, 70,000 shares to
the public.
The public subscribed for: (a) 50,000 shares b) 70,000 shares (c)
75,000 shares. Apart from the above 5,000 shares are issued to
vendor as fully paid. What will be amount of different capitals?
Solution: Authorized Capital Since the company is incorporated i.e.
registered with capital of Rs.9,00,000 divided into shares of Rs.10
each. Therefore, the authorized capital is Rs. 9,00,000 (90,000 shares
of Rs .10 each).

Issued Capital:
The company issued 70,000 shares of Rs. 10 each to public which
means Capital of Rs. 7, 00,000 (i.e. 70,000 shares x 10 each). It also
issued 5,000 shares of Rs. 10 each fully paid to vendor which means
capital of Rs .50, 000.
Total Issued capital = Rs. 7, 50,000
Unissued Capital:
It is that part of authorized capital which has not been issued. In this
case out of total authorized capital of Rs. 9, 00,000, Rs 7, 50,000
capital has been issued. The balance left Rs 1, 50,000 is unissued
capital.
Subscribed capital:
(a) Public has subscribed for 50,000 shares of Rs 10 each. Therefore,
subscribed capital is Rs. 5, 00,000.
Unsubscribed Capital:
In this case it will be the difference between the shares issued to the
public and shares subscribed by the public. This difference is Rs
2,00,000 i.e. Rs 7,00,000— Rs 5,00,000, it is unsubscribed capital.

(b) Public has subscribed for 70,000 shares of Rs 10 each. Therefore,

subscribed capital is Rs 7, 00,000 since subscribed capital is equivalent
to issued capital, therefore, there is No unsubscribed capital.

(c) In this case public has subscribed for 75,000 shares of Rs 10 each. It
is important to note that subscribed capital cannot be more than the
issued capital. Hence, the subscribed capital in this case will be
equivalent to issued capital of Rs 7,00,000. There is no unsubscribed
capital in this case.
• Called up capital:
The amount due on the shares subscribed may be
collected from the shareholders in installments at different
intervals. Called up capital is that amount of the nominal value
of shares subscribed for which the company has asked its
shareholders to pay by means of calls or otherwise.
If 10,000 shares of Rs 100 each have been subscribed by
the public, and the company has asked the shareholders to pay
Rs 10 on application, Rs. 20 on allotment and Rs 30 on first call,
then the called up capital of the company would be Rs. 6, 00,000
(i.e. 10,000 x 60). The remaining amount i.e. Rs. 40 per share on
10,000 shares (i.e. Rs 4, 00,000) would be the uncalled capital
of the company.
• Paid up capital:
That part of the called up capital which is actually paid up by
the members is known as the paid up capital. In other words, paid
up capital represents the total payments made by the shareholders
to the company in response to the calls made by the company. Paid
up capital of the company is calculated by deducting the calls in
arrears from the called up capital.
• Paid up capital = Called up capital Less Calls-in-arrears:
If in the above example, out of 10,000 shares of Rs 100 each,
on which Rs 60 has been called by the company from the
shareholders, one shareholder, holding 100 shares, fails to pay the
first call of Rs 30 per share on his shares, the paid up capital of the
company would be Rs 6, 00,000— Rs 3,000 i.e. Rs 5, 97,000.
 Revision
• What is Share Capital?
Share Capital or Capital Stock refers to the portion of a
company’s equity that has been obtained by trading stock
to a shareholder for cash or an equivalent item of capital
value.
For example, a company can issue shares in exchange for
computer servers, instead of purchasing the servers with
cash.
Share Capital denotes the amount of Capital raised by the
issue of shares, by a company. It is collected through the
issue of shares and remains with the company till its
liquidation.
 Types of Shares
• Before the commencement of Companies Act, companies
used to issue three types of shares
Preference Share
Ordinary Share
Deferred Share

• Under the Companies Act, 1956 a company can issue two

types of shares
Preference Share
Equity Share
 Preference Shares
• Preference share are those which have a preferential right
for the payment of dividend during the lifetime of the
company. They have also a preferential right for the return of
capital when the company is wound up.
• Preference share holders enjoy more security in regard to
income and capital than other share holders.
• The dividend on Preference share is fixed by the Articles of
the company.
• The dividend on Preference share holders is Pre-determined
and therefore they will not get any benefit in times of large
profits.
• They do not enjoy normal voting rights. They can vote only
on the matters affecting their own interest.
• The dividend specified on preference share is not at all
guaranteed.
• No dividend will be paid if there is no profit.
• Preference share holders have priority only over the other
share holders, but not over the Creditors.
 Preference Shares
• Cumulative Preference Shares
• Non Cumulative Preference Shares
• Participating Preference Shares
• Non Participating Preference Shares
• Convertable Preference Shares
• Non Convertable Preference Shares
• Redeemable Preference Shares
• Irredeemable Preference Shares
 Cumulative Preference Shares
• The dividend payable on these shares goes on
accumulating till it is fully paid.
• If dividend is not paid in any year due to non
availability of profits, the right of the share holder for
dividend does not lapse. It will carried over to the
subsequent years.
• The accumulated dividend is paid to the Cumulative
Preference Share holders before any dividend paid to
other types of share holders.
• If the company goes into liquidation no arrears of
dividends are payable unless the Article contains
express provisions to this effect.
 Non-Cumulative Preference Shares
• These are the shares on which the dividend does not go
on accumulating.
• If there are no profit or there are inadequate profits in
any year, these shares get no dividend or a partial
dividend.
• These shares will be treated on the same footing as
other preference shareholders in the case of capital.
 Participating and Non-participating Preference Shares
• The preference shares which are entitled to a share in the
surplus profit of the company in addition to the fixed rate of
preference dividend are known as participating preference
shares.
• These shares are not only entitled to a fixed rate of dividend,
but also to a share in the surplus profits, which remain after
the claims of the equity share holders have been met.
• Thus participating preference shareholders obtain return on
their capital in two forms (i) fixed dividend (ii) share in
excess of profits.
• Those preference shares which do not carry the right of
share in excess profits are known as non-participating
preference shares.
• The Preference Shares are presumed to be Non-Participating
unless expressly provided in the memorandum or the
articles or the terms of issues.
 Convertable and Non-convertable Preference Shares

• The holder of these shares have a right to convert them

into equity share with in a certain period.
• This exchange may occur at any time in maturity period
the investor chooses, regardless of the market price of
the common stock.
• It is a one-way deal; one cannot convert the common
stock back to preferred stock.
• The preference share without a right of conversion into
equity shares are called Non-Convertible Preference
Shares
 Redeemable and Irredeemable Preference Shares
• Normally capital that is raised by the issue of shares can be
returned by the company only on its winding up.
• But a company limited by shares, if authorized by its article
can issue Preference Shares which are to be redeemed.
• The capital received on such shares can be returned after the
expiry of a stipulated period or when ever the company
wants as per the terms of issue and after proper notice.
• The redeemable shares are redeemed within the life time of
the company or before the company closes down or to say
that these shares have a maturity period
• Note : According to Section 100 of the Companies Act, 1956 :
If a company collects the money through redeemable
preference shares, this money must be returned on its
maturity whether company is liquidated or not.
 Redeemable and Irredeemable Preference Shares

• Those preference shares, which can not be redeemed

during the life time of the company, are known as
Irredeemable preference shares.
• The amount of such shares is paid at the time of
liquidation of the company.
• No companies limited by shares shall issue any
Preference Share which is irredeemable or redeemable
after the expiry of a period of ten years from the date of
its issue.(Amendment 1988, Sec 80A)
 Conditions for redeemable preference Shares
• Section 80 of the Companies Act, 1956 deals with the redemption
of preference shares.
• There should be provision in the Article authorizing a company to
issue such shares.
• The Premium if any, payable on redemption must be provided for
out of the profits of the company or out of the company’s share
premium account before the shares are redeemed.
• Where redemption is made out of profits, a sum equivalent to the
nominal value of the shares redeemed must be transferred to the
‘Capital Redemption Reserve Account’. This amount shall be
treated as capital of the company.
• The capital redemption account may be applied by the company in
paying up fully paid bonus shares.
• The balance sheet of the company which has issued such shares
shall state the terms of redemption or conversion and the date of
redemption or conversion.
• The redemption of shares shall not to be taken to be reduction in
the capital of the company and the company shall have the powers
to issue shares up to the nominal amount of the shares redeemed.
 Advantages & Disadvantages
• These yield fixed rate of returns
• Preference is given compared to equity share holders
while distributing the dividends and once the company
is dissolved.
• It’s a hybrid instrument having some of the
characteristics of debentures and equity shares.
• They do not provide the investor with any of the voting
rights.
• If the company gets huge profits then they won’t get
any extra bonus
 Equity Shares
• Equity shares, with reference to any company limited by
shares, are those which are not Preference Shares
[Sec.85(2)]
• The holder of these shares are entitled to dividend after the
fixed dividend of Preference Shares has been paid.
• If no profit is left after paying dividend of Preference shares,
the Equity Shares get no dividend.
• Similarly at the time of winding up of the company Equity
shareholder will get back their capital only after the capital
has been returned to Preference Share holders.
• The rate of dividend is not fixed on the Equity Shares.
• These share holders generally stand to receive relatively
high rate of returns in years of prosperity.
• This rate of dividend is determined by directors and in case
of larger profits, it may even be more than the rate attached
to preference shares.
 Advantages
• Equity shares give greater returns if the company
makes profits.
• There is a tremendous amount of capital appreciation if
the shares are of a good performing company.
• The equity shares are easily transferable.
• The equity shares are traded at the stock exchanges so
they can be bought and sold easily. These can be easily
liquidated.
• The equity share holders have got the right to vote in
the annual general meeting.
• Only the equity share holders have the right to choose
the board of directors.
• Equity share holders have the right to oppose any of the
decisions taken by the board of directors.
 Disadvantages
• No doubt equity shares have attractive and better
returns but in case the firm has not performed well or
is going for diversification or is investing in some
venture then the profits carried forward will be more
and the dividends paid will be less.
• In worst cases if the company goes bankrupt then it is
dissolved.
• No doubt equity shares have both advantages and
disadvantages but the fact is that equity shares are the
most sought financial instruments for both investment
or for speculation.
 Deferred and Bonus Shares
• Manager’s Share or Founder’s Share
• These are shares often issued to the Promoters or Founders
of the company in consideration of the service rendered by
them in forming the company
• The holders of deferred shared carries a right to dividend
after the rate of dividend was paid to the Preference and
Equity Share holders.
• The issue of these shares is prohibited on the Public
Companies after passing the Companies Act of 1956.
• However an independent Private company is still entitled to
issue Deferred Shares.
• Bonus shares implies the payment of dividend in the form of
shares.
• The advantage to the company is that its issued capital
increases and while its asset remain intact.
• The share holders get a few more fully paid up shares
instead of getting the dividend in cash.
• Issue of Bonus Share has been for this reason known as
“Capitalization Of undistributed Profits”
 Nomination of Shares
• Sec 109 A of Companies Amendment Act 1999, confers
a right on the shareholders of a company to nominate
at any time in the prescribed manner a person to whom
their shares or debentures in the company shall vest in
the event of their death.
• The nominee can be either an individual or a company.
• Minor can be a nominee.
• If the shares are held by more than one person jointly
the joint holders may together nominate a person
 Share Certificate
• A share certificate is a registered evidence of title to the
shares, issued by the company under its common seal, duly
stamped and signed by one or more directors and
countersigned by the secretary of the company, as per
Articles.
• In case shares are held by more than one person jointly with
others, company shall issue only one share certificate to the
holder .
• Contents of the Certificate :
• Name of the company and the amount and division of authorized
capital.
• Serial number of the certificate.
• Name of the shareholder.
• Number and class of shares held by him and their distinctive
number.
• Amount paid on each share.
• Provision for endorsement of transfer.
• Signature of two Directors and Secretary.
• Common seal of the company
Share Warrant
• A share warrant is a document issued by the company
under its seal specifying that its bearer is entitled to
the shares specified therein.
• Share warrant is just like a negotiable instrument.
• A share warrant can be issued only when the shares
are fully paid up
Share Warrant Vs Share Certificate
• A share warrant can be issued only when the shares are
fully paid up whereas a share certificate can be issued at any
stage without the shares being fully paid up.
• A share warrant is a negotiable instrument but a share
certificate is not.
• A share certificate is a document showing prima facie title
to the shares represented thereby but a share warrant is the
share security itself capable of easy transfer.
• A share certificate can be issued both by a public and a
private company but a share warrant is issued only by a
public company.
Transfer and Transmission of Shares
• AOA provides for the procedure of transfer of shares. It is a
voluntary action of the shareholder.
• It can be made even by a blank transfer –In such cases the
transferor only signs the transfer form without making any
other entries.
• In case it is a forged transfer, the transferor’s signature is
forged on the share transfer instrument.
• Board can refuse the transfer of share:
• Defect in instrument of transfer.
• Unpaid or partly paid shares.
• Shares transferred may be refused.
• Transmission of shares is by operation of law, e.g. by death,
insolvency of the shareholder etc.