Shares & Share Capital

Shares are one of the four main investment types, along with cash, bonds and property. They carry risk, but they can offer the highest returns. Investing in shares means buying and keeping them for a while in order to make money. People usually invest in larger, long-established companies to get higher and lucrative returns as when a company grows and becomes more valuable, it simultaneously increases the worth of its share. Also, it is a general rule i.e., higher the market price of shares of a company, higher will be the dividend that will be provided to its shareholders.

“The most important quality for an investor is temperament, not intellect.”

Warren Buffett

A Company is an association of persons who generally contribute money for some common purpose. The money so contributed is known as the capital of the company. The total share capital is divided into a number of units known as ‘share’. The people who contribute such capital are its members and therefore called shareholders. The proportion of capital to which each member is entitled is his share in the company and thus, the capital of the company is known as share capital. The Indian Companies Act, 2013 provides the laws and rules regarding the raising of share capital and issuance of shares.

Meaning of Shares

Share as defined in Section 2(84) of the Companies Act, 2013 means a share in the share capital of a company and includes stock. A share is one unit into which the total share capital is divided. It is a fractional part of the share capital and forms the basis of ownership in the company. In other words, shares are divisions of the share capital of a company. For example, a company has a share capital of Rs 5,00,000 divided into 50,000 shares of Rs 10 each and if a person has taken 50 shares of that company then, he is said to have a share in the share capital of the company to the value of Rs 500. 

A share certificate is provided by a company to its shareholders in accordance with the number of shares they hold in that particular company. According to Section 46 of the Companies Act, 2013, Share Certificate is a document that certifies the fact that a person or an individual is owner of a certain number of shares. It is the prima facie evidence of title. It is issued under the company’s seal signed by two Directors, a Managing Director and a Company Secretary. It acts as estoppels to the title and estoppels as to the payment.

Meaning of Share Capital

The term capital usually means a particular amount of money with which a business is started. In Indian Companies Act, it has been used in different senses in various parts of the Act, but in general it means the money subscribed pursuant to Memorandum of Association of the Company.

The sum total of nominal value of shares of a company is known as its share capital. In case of companies, the terms ‘capital’ and ‘share capital’ have been held to be synonymous. It is mandatory for a company to state its capital in the Memorandum of Association and Articles of Association.

Stock Market

The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place. Such financial activities are conducted through institutionalized formal exchanges or Over-The-Counter (OTC) marketplaces which operate under a defined set of regulations. There can be multiple stock trading venues in a country or a region which allow transactions in stocks and other forms of securities.

Kinds of Share Capital

Section 43 of the Companies Act, 2013 mentions that the share capital of a company limited by shares shall be of two kinds:

Preference Share Capital

As the name suggests, preference sharesarethose which are given preference over equity shares. There are two exclusive preferential rights that are provided to preference shareholders over equity shareholders.

Further, preference shares can be divided into various categories. They can be classified as redeemable or irredeemable shares; participating (participate in further profits after a dividend is paid out) or non-participating; cumulative (arrears in demand will cumulate) or non-cumulative, etc.

Equity Share Capital

Equity shares are those which are simply not preference shares. Therefore, those shares which do not enjoy any preferential rights are known as equity shares as they only enjoy equity i.e., ownership in the company.

The dividend given to equity shareholders is not fixed, it is decided by the Board of Directors according to the financial performance of the company. Hence, if in a given financial year no dividend could be declared due to any financial problem in the company, in that case, such shareholders lose their right to receive a dividend of that particular year.

According to Section 47 of the Companies Act, 2013, every member that possesses equity share capital will have a right to vote on every resolution placed before and passed by the company. These voting rights are in proportion to the paid-up equity share possessed by a member out of the total share capital of a company.

Other types of Share Capital

1. Registered, Authorised or Nominal Capital

The Memorandum of Association of every company has to specify the amount of capital with which it wants to be registered. The capital so stated is called Registered, Authorized or Nominal Capital. The Registered Capital is the maximum amount of share capital which a company is authorised to issue and beyond which the company cannot raise by way of public subscription unless the capital clause in the Memorandum is altered and the authorised capital is increased.

2. Issued Capital

The company may not issue the entire authorised capital at once. It goes on raising the capital as and when the need for additional fund is felt. So, issued capital is that part of AuthorisedCapital which is actually offered to the public for subscription in the form of shares.

3. Subscribed Capital

It is that part of “issued capital” for which applications are received from the public. The subscribed capital is allotted to the respective subscribers as per resolution passed by the directors of the company.

4. Called-up Capital

It is that portion of the subscribed capital which the shareholders are called upon to pay on the shares allotted to them. A company does not necessarily require the full amount at once onthe shares subscribed and hence calls up only such amount as it needs. The balance then remaining is called as uncalled capital.

5. Paid-up Capital

It is that part of called-up capital against which payment has been received from the members on their respective shares in response to the calls made by the company. Paid up capital is equal to the called-up capital if all the shareholders have paid the amount called up by the company.

6. Reserve Capital

According to Section 99 of the Companies Act, 1956, Reserve Capital is that part of uncalled capital of a company which can be called only in the event of its winding-up. A limited company may, by special resolution, determine that any portion of its share capital which has not been called-up, shall be called up, except in the event of the company being wound-up, such capital is known as Reserve Capital. It is available only for the creditors on the winding-up of the company.

Bonus Shares

Bonus shares are additional shares given to the current shareholders without any additional cost, primarily based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Companies issue bonus shares to encourage retail participation and increase their equity base. When price per share of a company is high, it becomes troublesome for new investors to buy shares of that particular company. Increase in the number of shares reduces the price per share, however the overall capital remains the same even though bonus shares are declared.

Bonus shares can be issued if there is:

  • Authorisation by Articles of Association.
  • Board and shareholders’ approval.
  • No default in interest or principal on debt.
  • No default on dues to employees.
  • No partially paid-up shares.

Conclusion

Every business organization desires funds for its business activities and smooth functioning. It can raise funds either internally or through external sources. It canbe concluded that issuing shares and raising capital is an integral part of anycompany in which it asks people to invest, by providing them ownership of the company with lucrative benefits. It not only helps in obtaining investment from investors but also helps the company in re-investing in itself. It can be seen that when a company is in sound position it can take care of its employees, directors & shareholders and motivate them to do better. 

Frequently Asked Questions (FAQs)

  1. What are Shares?

Share as defined in Section 2(84) of the Companies Act, 2013 means a share in the share capital of a company and includes stock. A share is one unit into which the total share capital is divided. It is a fractional part of the share capital and forms the basis of ownership in the company. In other words, shares are divisions of the share capital of a company.

2. What is a Share Certificate?

According to Section 46 of the Companies Act, 2013, Share Certificate is a document that certifies the fact that a person or an individual is owner of a certain number of shares. It is the prima facie evidence of title. It is issued under the company’s seal signed by two Directors, a Managing Director and a Company Secretary. It acts as estoppels to the title and estoppels as to the payment.

3. What is the meaning of Share Capital?

The sum total of nominal value of shares of a company is known as its share capital. In case of companies, the terms ‘capital’ and ‘share capital’ have been held to be synonymous. It is mandatory for a company to state its capital in the Memorandum of Association and Articles of Association.

4. What is a Stock Market?

The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place.

5. What are the two preferential rights provided to preference shareholders over equity shareholders?

Preferential right with respect to the dividends declared by a company, such dividends can be provided to them at a fixed rate on the nominal value of the shares and also, such shareholders are preferred over equity shareholders when it comes to the payment of dividend.

Preferential right when it comes to repayment of capital in case of liquidation of the company. At the time of winding up of a company, such shareholders are preferred to get paid before equity shareholders, which eventually gives them an exclusive right over the other.

6. What are Bonus Shares?

Bonus shares are additional shares given to the current shareholders without any additional cost, primarily based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

References

  1. https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf
  2. https://legaldesk.com/business/all-about-shares-and-share-capital-companies-act-2013
  3. https://www.businessmanagementideas.com/company-management/share-capital-meaning-types-and-classes-company/8980
  4. https://www.icsi.edu/media/portals/0/SHARE%20CAPITAL%20AND%20DEBENTURES.pdf
  5. https://economictimes.indiatimes.com/definition/bonus-share
  6. http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/companies-act-2013-amended-private-company-exemptions-reinstated.html#:~:text=Section%2047%20of%20the%202013,prescribed%20under%20the%202013%20Act.

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