Ch-12 Share capital

Introduction : Shares:

The capital of a company is divided into certain units of a fixed value called shares. A share is a right to specified amount in the share capital of a company. Meaning:-

Share is the portion of capital which each shareholder is entitled to. Ex. The capital of

the company is Rs. 5,00,000 and is divided into 50,000 units of Rs 10 each unit.

Kinds of shares :- There are three types of shares.

1) Preference shares: - Preference share is the share, which has two special rights.

The right to a fixed dividend out of the profits of each year before any dividend can be paid to equity share holders.
a)

The right to a return of the capital in priority to return of capital to the holders of equity shares in the event of the companys winding up.
b)

Types of preference shares.:Cumulative preference shares: - These are the shares in which a share holders has a right to get the fixed dividend annually. Such dividend is also payable out of profits if the current years profits are insufficient.
A.

Non Cumulative preference shares:- It is a share which carries the right to a fixed dividend but if in any year the directors fails to declare the dividend on such shares than it is not entitled to any dividend.
B.

Participating Preference share: - It is preference share which has not only right to fixed dividend but which also entitles its holder to share in the surplus profits if any after the equity share holder have received a dividend.
C.

Non Participating Preference share:- It is a Preference share which has only right to fixed dividend which is not entitle to participate in surplus profit.
D.

Convertible Preference share:- It is a preference share, which entitle to share holder to convert their share into equity within a certain period.
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Ch-12 Share capital

Non Convertible Preference share:- It is a preference share, which is not entitle to share holder to convert their share into equity within a certain period.
F.

Redeemable preference share:- It is a preference share, which a company may issue for certain period , if authorized to do so by its articles on the condition that it may be repaid at the option of the company after completion of period.
G.

The Company only repaid amount after certain period of following condition-

1) Mention in the articles. 2) The share should be fully paid.

Irredeemable preference share:- The Repayment of amount and period are not decided by company it is called Irredeemable preference share. Company cannot issued such type of share in India.
H.

2 ) Equity share:- Share which do not enjoy any preferential right as regard to payment of dividend or repayment of capital are known as equity shares.

A major portion of the authorized capital of companies is always in form of equity shares. Equity shares holder getting dividend after to preference share holder. It has no right to a fixed dividend and repayment of capital in winding up. The equity share holder may be receive a very high dividend in one year and perhaps no dividend in another year. They have also voting rights.

3 ) Deferred Shares:- A public company in India is not allowed to issued deferred share only independent private company can issue such types of shares.

It is also called founders shares.

They were issued under Companies Act 1913 they are usually allotted to the promoters of company in the considering service rendered by them. They could be issued to underwriters in consideration of the commission due to them from the company.

Difference between Equity/ordinary shares and preference shares. Equity/ordinary shares

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preference shares.
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1) 2)

Rate of dividend is not fixed. The ordinary shareholders enjoy voting

1) Rate of dividend is fixed. 2) They Do not have voting rights.

Rights on all matters at the General meeting Of share holders.

3)

E.Share Capital is a long term Finance.

3) P.Share Capital meets the medium term and long Term Finance requirement.

4)

E.Shares appeal to be risk bearing investors. 4) They appeal to the caution /carefulness investors.

5)

They are paid their capital back after the

5) They are paid their capital back before the ordinary Share holders.

Preference share holders.

E.share capital cannot be return during the which

6)

6) A company can issue the redeemable p.share Can be repaid during the life time of the company.

Life time of the company.

They Receive the dividend after a fixed dividend.

7)

7) They are given preference in the payment of

Dividend has been paid on preference shares.

8)

For Earning More Money investor invest in 8) For earning regular and certain amount investor invest in P.share.

E.Share.

Issues Of shares :-

A company issue shares to raise necessary capital for their operations. The company may issue shares by three ways: 1) By Private Placement of shares.
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2) By Offer for sales and 3) By inviting public through prospects.

1)

By Private Placement of shares. :- A broker or an underwriters finds the persons

who wish to buy shares. Shares may also be sold to friends and relatives of promoters. As per companies Act 2000, Private placement to more than 50 persons shall be treated as public issue.

2)

By an offer for sale:- The company allots the shares or debentures at a price to the

financial institution sale to public. They issue a prospectus an offer of sales with an application form attached, offering to the public shares or debenture for sale.

3)

By inviting public through prospects.:- It is a very common method for raising capital from the public. The company invites offers from public for subscription of shares or debentures in prescribed application form. When any existing company wants to raise further capital by issue of right shares, the existing shareholders are first offers shares in proportion to their original share holding.
1)

Pricing of issue of shares:-

Issue of shares at par.:- where a company issues its shares for subscription at an amount equivalent to their face value, it is known as issue at par.

Issue of shares at premium:- Where a company issue its shares for subscription at an amount higher than its face value , the share is said to have been issued at premium.
2)

Ex. If a company issues shares of a nominal value Rs10 each for Rs 15 in a market, The excess amount of Rs 5 over its nominal value is the premium. A share premium amount must be transferred to the share premium A/c. Issue of shares at discount :- The issue of shares at an amount less than their face value is called issue of shares at discount. The company can issue shares at discount up to 10% or such higher rate as the central Govt. may permit in any special case.
3)

Raising Capital:-

For raising capital from the public by issue of shares of debentures, a public company has to act according to the provision of companies Act.

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Ch-12 Share capital

After various legal provisions, Prospectus is issued by the company inviting public for subscription of shares. An investors who after studying prospectus intends to buy shares and apply with prescribed form along with application money.

Allotment of shares:- Allotment means the appropriation to a person a certain

number of shares out of unissued capital of a company. Generally, allotment is neither more nor less than the acceptance by the company of the offer to take shares.

A)

Provision regarding allotment of shares:Proper Authority: - The allotment must be made by proper authority in accordance

with the provision of the articles of the company. In other words it must be made by the board of directors of company or authorized by committee.
B)

Communication: - The allotment must be communication to the person making the Absolute and Unconditional:- The allotment must be absolute and unconditional.

application so that it is legally complete. It may be postal communication by latter of allotment.

C)

Where an application for shares is condition and condition is not fulfilled the applicant is not bound to take shares.
D)

Registration and issue of prospectus:- According to company Act, No

prospects of a company can be issued to the public until a copy of it has been field for registration with the registrar. No allotment can be made of any share of a company until the beginning of the fifth day since the prospectus is issued. Minimum Subscription :- The amount stated in the prospectus as the minimum amount has been subscribed. The sum payable on application for the amount received by the company weather in cash or by a cheque.
E)

Application money:- The amount payable on application on each share shall not be less than 5% of the nominal amount of the share.
F)

Money to be deposited in a scheduled bank :- All the money received from application for shares are required to be deposited in a scheduled bank until the certificate to commerce business is obtained.
G)

Statement in lieu of prospects:- A company having a share capital which does not issue any prospectus shall not allot ay of its shares unless a statement lieu of prospectus has been
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field with the registrar at least 3 days before the first allotment of shares. This provision is not applicable to the private company. I) Permission of the stock exchange:- Where the prospectus states that the application has been made for permission for the shares offered for subscription to be deal with one or more recognized stock exchanges like BSE (Bombay Stock Exchange), NSE (National Stock Exchange), ASE (Ahmedabad Stock Exchange) . Prospectus shall state the name of the stock exchanges to whom the applications are made. It may be noted that this permission is not applicable to the private company. Call :- A Call Means Demand by the company on its shareholders to pay whole or part of the balance, remaining unpaid on each share made at a time, during the continuance of the business of the company.
-

The call must be made in accordance with the provision of the articles of the company. If the articles are silent then regulation 13-17 table A of shall apply. According to regulations a call must not exceed 25% of the nominal value of the share. The minimum interval between two calls must be at least one month. The directors have the judgment to postpone a call. There must be at least 14 days notice given to each member.

Calls in advance :-A shareholder can pay unpaid amount on shares held by him even through the amount may not have been called up by the company. Under section 92 a company may if authorized by the articles accept from a member the unpaid amount of any share though not called up. The company may pay interest at such rate as may be agreed upon between the board and members paying the amount in advance. Forfeiture of share:- The share held by a member can be forfeited by the directors of a company, if the member has failed to pay the amount called on shares held by him, provided the articles of the company contains provisions to that effect. When the shares of a member are forfeited, his name is removed from the registrar of members and he losses all the rights of a member. For forfeiture of share , a proper notice to that effect must have been served. The shareholder is given an opportunity to pay call money with interest by such a notice. In the event of non payment of shares shall be liable to be forfeited. A company can reissue the forfeited shares on any condition provided the amount changed on reissue is not less than unpaid amount.
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Surrender of shares:Surrender of shares means voluntary return of shares by share holder to the company for cancellation. Surrender shares may be reissued in the same way as forfeited shares. - Difference between surrender share and forfeiture share. Surrender share and forfeiture share have almost the same effects like termination of membership of shareholder , the basic difference between to in the followings: Surrender is at the initiative of shareholder and is a voluntary action, while forfeiture is at the initiative of the company and is a compulsory action. B) Surrender is effected with the agree of the shareholder, while forfeiture share ,shareholder might be disagree.
Stock:- Stock means the collection of fully paid up shares of small part. It is a set of shares put

together in a bundle.
When the share of a company are fully paid up. they can be converted into stock. This can be done

only when the articles of the company permit for the same. As per the provision in the articles , the company by passing an ordinary resolution at a general meeting may converted the fully paid up share into stock. Share certificate :- share certificate is a document of title issued by a company specifying there in the number of shares held by a member an the amount paid against each share under its common seal.
- Every person whose name is enter in the registrar of members shall be entitled to receive, the share

certificate in the his name for all his shares. - A certificate must contain following information . 1) 2) 3) 4) 5) 6) Name and address of shareholders. Number of shares held by him. Serial number of share certificate. Nominal value of each share. Amount paid on each share etc.. Signature of two directors and the secretary.

- If share certificate is lost or destroyed, it may be renewed. Joint holder of share are not entitled to

separate certificate.
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Share warrants :- A share warrants is the bearer certificate of ownership of share issued by the public company duly stamped and fixed by the common seal in exchange for its fully paid up shares.
- It is alike negotiable instrument. The advantage of issuing share warrant is that transfer of warrant

become very easy. - The bearer of share - Condition of issue :- Only public company can issue share warrant.
- Share warrant cannot be issued originally.

- On the issue, name of share holder is removed from the registrar of member.
- Prior approval of the central government is require to issue of share warrant.

Difference between share certificate and share warrant - Transfer and termination of share :- Transfer of share means the voluntary convenience of the right and duties of member from share holder to another share holder. - According to companies Act gives power to every share holder of company to transfer its share in the manner provider by the articles of the company. - If company has no articles of its own, the resolution in table A of schedule I will apply.
- The ownership of share in the company its transfer from one person to another by the document

between the seller and buyer. This document is expressed as a transfer instrument. - In a blank transfer the seller fills in his name and signs it . - In blank transfer on instrument of transfer signed by the transferor in which the name of the transferee and date of the transfer are not filled it. Transmission of shares :- When share pass by operation of law from one person to another, it is called transmission of share .. Transmission of share take place ..
- When the registered of share holder dies, insolvent.. - In joint holder, the survivor shall be only person recognized by the company as having any title to

interest.
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- A person becoming entitle to share on death of a member on production of satisfactory proof as to his

title.
- A person becoming entitled to a share on transmission shall have the same right as to dividend and

other advantages and privileges, as if he was a original share holder. Debenture:- The companies raise long term capital through shares and borrowings. - They can borrow from financial institution and banks or could raise directly from capital market through debenture. - The issue of debenture is a very popular mode of borrowings by the companies. - When the companies wish to borrow a sum of money by issuing debentures, they invite the public through prospectus. - Debenture means A document given by a company, as an proof of debt to the holder usually arising out of loan and most commonly secured by a charge. - The purchaser of debenture is called debenture holder and debenture holders are creditors of a company.

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