It’s a good idea to start this read by first understanding the why’s and what’s of shares. Any company, at some point, will have the functional need for money or funding. One way to do this, and also what we’re focusing on today, is giving away part of the ownership of the company. This is what is subsequently known as a share. Having shares in any company means having some degree of ownership and control over a company. This, of course, varies according to the shareholders rights discussed and agreed upon. Another term, stock is often used.
A share is a stock of a company. Each share forms a unit of ownership and is offered for sale when more capital is required by the company. Only companies limited by shares have share capital.
The Companies Act, 1956
The Companies Act, 1956, defines shares and types of share capital. These remain the same except for certain changes with respect to issue of shares and the rights that accompany them. Businesses get funds in the form of investment from investors with the exchange of shares or stock in the company. Shares also dictate who has majority ownership, control and voting rights in a company. The Shares and Share Capital Companies Act, 2013 will give us a better insight on the government’s role in the recent changes that have been made to the Companies Act and its related consequences on businesses.
Changes In The Act
- The minimum paid-up share capital INR 100,000 for private companies and INR 500,000 for public companies has been removed. No minimum paid-up capital requirements exist for starting a business in India.
- Special Courts have been set up by the central government to try offences.
- Dividend cannot be Issued unless all losses or depreciation (if any) of previous years have been set off against profits of the company.
- No declaration required for commencement of business such as declaration of minimum paid up share capital and registered office verification.
- The use of a company’s common seal on all official documents has been made optional. Instead of a company seal, two director’s signatures will suffice instead of affixing the common seal.
- Limited public access of documents and resolutions held with the Registrar of Companies.
One Person Company (OPC), Private Limited Company And Public Limited Company
One Person Company
Private Limited Company
Public Limited Company
|Only one shareholder||Two or more shareholders up to a maximum of 200||7 or more shareholders, no upper limit.|
|Maximum 1 director||2-15 directors||3 or more directors|
|Cannot issue share to the public||Cannot issue share to the public||Can issue share l to the public|
|No transfer of shares||There is a restriction on transfer of shares and transferable in a manner as provided in the Articles of Association.||There is no such restriction on transfer of shares|
|Low statutory compliance||High statutory compliance||High statutory compliance|
- Authorised Share Capital – is the maximum amount of shares a company is allowed to issue to shareholders. The same is to be mentioned in the memorandum of association.
- Issued Capital – the capital a company issues from time to time that the public can subscribe for.
- Subscribed Share Capital – is that part of the authorised share capital which is for the time being, being subscribed by the members of the company.
- Called-up Share Capital – shares are issued to investors with an understanding of payment to be done on a later day. Shares are issued in this way to relieve the burden on the investor and increase the capital the company can obtain.
- Paid-up Share Capital – the actual amount of money a company receives from investors from those that have subscribed for shares.
The Two Kinds Of Share Capital (Sec 43)
Equity Share Capital – all share capital that is not a preference share. Equity shareholders are considered the real owners of the company. Equity shareholders share profits or losses incurred by the company. Equity shares are divided into:
- Equity shares with voting rights
- Equity share capital with differential voting rights(voting rights or dividend rights)
Preference Share Capital – shares issued by a company that carry preferences with regard to:
- Payment of dividend
- Repayment of amount of share capital
The differences between equity and preference shares are:
|Dividend||Dividend is paid after all liabilities have been cleared||Priority over equity shareholders|
|Capital||Capital is repaid after all other shareholders and debts are cleared.||Priority over equity shares|
|Rate of Dividend||Fluctuating||Fixed|
|Voting Rights||Equity shares carry voting rights||Normally do not carry voting rights|
|Arrears of Dividend||No rights on claim of previous years dividend||Generally dividend gets accumulated until paid except in the case of non-cumulative preference shares|
Debentures (Sec 44)
A debenture is long term security issued by a company that yields a fixed rate of interest. Debentures are secured against assets of a company. It is used by companies and governments to borrow money.
Numbering of Shares (Sec 45)
Every share of a company that has a share capital is distinguished by a distinctive number for that share.
Certificate of Shares (Sec 46)
The evidence that a person possesses shares in a company is determined by the certificate issued by the company to the shareholder. The certificate has to be issued under the seal of the company.
Duplicate Certification of Shares
A duplicate certificate of shares is issued when a certificate:
- Is mutilated, torn or defaced or has been surrendered to the company
- Is lost or destroyed
If a company issues shares with intent to defraud, the company is liable to pay a fine five times or more than the share value of the shares involved up to a limit of 10,00,00,000 whichever is higher.
Voting Rights (Sec 47)
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.
Preference Shares with voting rights
Preference shareholders with voting rights have the right to vote on:
- Resolution for winding up a company
- Resolution for reduction or repayment of its preference share capital or equity share capital
- Issues which directly affect the right attached to a preference share.
The voting right is in proportion to the preference share capital held in the company. If dividend has not been paid in the past 2 years, then such shareholders will have the right to vote on all resolutions placed before the company.
Variation of Shareholder’s Rights (Sec 48)
If a company has different classes of shareholders with different rights attached to each class, it means that there exists a variation in shareholders rights. The articles of association or the memorandum of a company should mention provisions to such variation. If it is not mentioned in the articles or memorandum of a company, then such variation will not be prohibited by terms of issue.
The consent of 3/4th of the members of a particular share class is required to attach rights to classes of shares. If variation by one class of shareholders affects another class of shareholders, then the consent of 3/4th of the affected class of shareholders is required.
Right of Dissenting a Shareholder
A variation can be cancelled by the shareholders that possess more than 10% of any share class by applying to the tribunal if they do not consent to such variation or vote in favour of a special resolution. Any application to the tribunal is to be done within 21 days after the resolution has been passed or consent has been given.
The decision made by the tribunal is binding and cannot be appealed. The company has 30 days to file a copy of the order with the registrar on the date of order of the tribunal.
Fines and Infringements for defaults on Shares
- If the company is found liable for defaulting or misappropriating shares, a minimum of INR 25,000 to INR 5,00,000 would have to be paid by the company.
- For every officer of the company liable, the same fine and/or imprisonment up to 6 months is considered.
A bonus share is a free share that is given to a current shareholder of a company. Issue of such shares does not increase the value of the company. Bonus shares can be issued if:
- authorisation by Articles of Association
- there is Board and shareholders’ approval
- there is no default in interest or principal on debt
- there is no default on dues to employees
- there are no partly paid-up shares
Further Issue of Additional Share Capital
- To existing shareholders on a proportional basis. An example is pro-rata allotment of shares.
- ESOPs to employees. Esops are employee stock options that employees have the option to convert to company stock at a future date at a predetermined price. Sweat equity is an example of esops.
Preferential Offer: offer of equity or equity convertibles such as PCD/FCD to selected people or group of people. Allotment be completed within 12 months from the date of SR. In case of convertible securities, the price of the share will be determined beforehand. Issue of capital on Preferential Basis:
- Special resolution is passed
- Price determined by registered valuer
Private Placement: is made through the issue of an offer letter to individuals.
- In a financial year, an offer can be made up to 50 people at any time and not more than 200 during the course of a financial year.
- The investment size is minimum INR 50,000 per person
- No cash payment can be made. Only through bank account
- Allotment must be completed within 60 days of share application.
- If an offer is made to more than 50 people, then the offer made will be deemed a public offer.
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