CHAPTER -3

SHARES & SHARE CAPITAL

Capital means the particular amount of money with which a business is started and means the
money subscribed in pursuance to MoA.

The capital of the company is divided into a number of individual units of fixed amount called as
SHARES. U/s 2 (84) of the Co’s Act 2013 defines a shares as “ A share is a share in the share capital
of a company and includes stocks”.
STOCK is therefore the aggregate of fully paid up shares of a member merged into equal value. In
other words it is a set of shares put together in a bundle.

DIFFERENCE BETWEEN SHARES & STOCK

1. ISSUE - Shares can be issued directly
Stock cannot be issued directly as only fully paid up shares can be convered into
Stock.
2. NOMINAL VALUE - Share has a nominal value
Stock does not have such value
3. PAID UP - Shares may be fully or partly paid
Stock is always fully paid up
4. DISTINCTIVE NUMBER - Shares has a distinctive number
Stock does not have such number
5. TRANSFER MODE - Shares is transferred in multiples of one.
Stock can be transferred in fractions.
6. DENOMINATIONS - All shares are of equal denominations
Stocks may be of different denominations.

TYPES OF CAPITAL

Capital may be of the following types :-

1. REGISTERED / AUHORISED / NOMINAL CAPITAL - The capital with which a company is

registered and specified in the MoA is the Registered capital / Authorised / Nominal capital.
It is the maximum amount of share capital which a company can raise by way of public
subscription.
2. ISSUED CAPITAL - The company may not issue the entire authorised at once i.e. it will raise
the capital as and when the need arises. Hence Issued capital is that part of authorised
capital which is offered to the public for subscription in the form of shares. Thus the balance
is the unissued capial.
3. SUBSCRIBED CAPITAL – It is that part of issued capital for which application are received
from the public.
4. CALLED UP CAPITAL - It is that part of subscribed capital which has been called up by the
company. A company does not call at once the full amount on each shares. It will call up the
only amount as it needs. Hence the balance is uncalled capital.
5. PAID UP SHARE CAPITAL - It is that part of called up capital against which payment has been
received from the members on their respective share in response to the calls made by the
company.
6. RESERVE CAPITAL - It is that amount of capital which is not called by the company except in
the event of the company being would up. This reserve is created by means of a special
resolution passed by the company in its General Meeting.
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KINDS OF SHARE CAPITAL
A. EQUITY SHARE CAPITAL
 With Voting Rights OR
 With differential rights as to dividend, voting or otherwise.
B. PREFEREENCE SHARE CAPITAL

A. EQUITY SHARE CAPITAL - It means all share capital which is not Preference Share Capital.
In other words these are Ordinary Shares which do not carry any preferential right in respect
of dividend or repayment of capital. Dividend on such shares is paid only after the fixed rate
of dividend is paid to Preference Share. The rate of dividend is not fixed and varies in
accordance with the profit earned by the company. In case the company has no profit, then
equity shareholders will not get any dividend. Similarly at the time of winding up such
shareholders are paid last i.e. they will get balance if any after payment of all other liabilities.
Thus Equity shareholders are the ultimate owners of the company and risk bearers.

ADVANTAGES OF EQUITY SHARE CAPITAL :-

 From Company’s point of view :-
Permanent capital and hence can be used for long term purposes and furthermore no
liability for repayment
No obligation to pay dividend and increases the creditworthiness of the company.
Company is able to strengthen its financial base by issuing equity shares.
 From Shareholder’s point of view :-
Equity shareholders enjoy their sense of ownership and their liability is limited to the extent
of their capital contribution.
Reward for such capital can be very high.

B. PREFERENCE SHARE CAPITAL - These are shares which carry a preferential right to
dividend and repayment of capital at the time of winding up. In other words they are paid
dividend either as fixed amount or an amount calculated at a fixed rate and repayment of
capital on winding up.

TYPES OF PREFERENCE SHARE CAPITAL

The important categories of preference shares are :-
1. CUMULATIVE PREFERENCE SHARES - In this type of shares, the fixed rate of dividend is
guaranteed i.e. if the company has no profits or inadequate profits in any year to declare
dividend, the arrears would accumulate and become payable out of the future profits before
anything is given to other classes of shareholders.
2. NON CUMULATIVE PREFERENCE SHARES - In this case the dividend though at a fixed rate
should be paid in each year itself. If It is not paid in a particular year, it is lost and the arrears
of dividend cannot be carried forward nor accumulated.
3. PARTICIPATING PREFERENCE SHARES - The holders of these shares get in addition to the
fixed % of dividend, a right to participate in the surplus profits of the company after paying
dividend to equity shareholders.
4. NON PARTICIPATING PREFERENCE SHARES - The holders of these shares are entitled only
to a fixed rate of dividend and do not have right to participate in the surplus profits of the
company along with the equity shareholders.
5. CONVERTIBLE PREFERENCE SHARES - Preference shareholders who have the right to
convert their shares to equity within a specified period is called as Convertible Preference
Shares.
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6. NON CONVERTIBLE PREFERENCE SHARES - Holders of these shares do not have the right to
convert their shares into equity shares later on are called so.
7. REDEEMABLE PREFERENCE SHARES - If authorised by AoA, a company limited by shares can
issue such preference shares which can be redeemed within a period not exceed 20 years
from date of issue under conditions that this redemption can be only out of profits available
for dividend and not from fresh issue of shares, such shares must be fully paid, if premium is
payable on redemption it should be paid out of profits and when such shares are redeemed,
an amount equal to the nominal amount is to be transferred out of profit to “Capital
Redemption Reserve Account”.
8. IRREDEEMABLE PREFERENCE SHARES - These are the preference shares which are not
redeemable.

ADVANTAGES OF PREFERENCE SHARE CAPITAL :-

Preference shares are beneficial to the company as well as to equity shareholders mainly because :-
 Preference shares do not have voting power. Hence equity shareholders will not lose the
management and controlling power on the company.
 Payment of dividend is not a legal obligation as the company can postpone the payment
and enjoy financial flexibility.
 Such shares enhances the credit worthiness of the firm.
 Pref. Shareholders do not benefit from the excess profits as it is for the equity shareholders.
 These shareholders earn a stable dividend rate.

DISADVANTAGES OF PREFERENCE SHARE CAPITAL:-

These shares has certain demerits too which are :-
 Pref Shares in India are cumulative in nature. Hence dividend should be paid in arrears
which will affect the financial flexibility of the company.
 Rate of dividend paid to such shareholders are much higher than the interest paid on
Debentures.
 Such shares lack liquidity in market whereby the holders are not getting chance to make
capital profit.
 Pref. Shareholders have right to vote on matters affecting their rights hence cannot
represent in the management of the company.

DIFFERENCES BETWEEN EQUITY SHARES AND PREFERENCE SHARES

POINTS OF DIFFERENCES PREFERENCE SHARES EQUITY SHARES

Rate of dividend Remains fixed from year to It vary from year to year
year
Rate of Dividend in high profits Gets lesser dividend when Gets higher rate of dividend
compared to Equity shares than Preference shares
Priority on payment of Have priority over equity Get only after Preference
dividend shares share are paid
Participation in management Have only limited participation Have full participation
Repayment of capital at Have priority over holders of Will get back capital only after
winding up equity shares Pref. shares are settled
Voting Rights Have lesser voting right Enjoy wider voting rights
Arrears of dividend Cumulative preference shares Equity share holders are not
are entitled to arrears of eligible to get arrears of
dividend dividend.
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DEBENTURES
This is the most popular mode of borrowing by companies. The term Debenture is derived from
Latin word “Debere” which means to owe. It is an acknowledgement of a debt given under the
seal of the company and contain a contract for the repayment of the principal sum at a specified
date and for the payment of interest at a fixed %.
A Debenture is a certificate of loan or a loan bond evidencing the fact that the company is liable to
pay a specified amount with interest. It is always issued under the common seal of the company.
When debentures are issued by a company, it shall create a debenture redemption reserve account
of the profits of the company available for the payment of dividend and the amount credited shall
not be utilised except for the redemption of Debentures.

FEATURES OF DEBENTURES
The following are the important features :-
1. It is an acknowledgement of indebtedness by the company under the common seal to its
holder for the amount stated in it.
2. It provides for a fixed rate of interest which is payable even if there is loss until the amount
is paid back.
3. It generally provides for repayment of money at a fixed date and are generally secured.
4. Debenture has no voting rights as its holders are creditors of the company.
5. Interest paid on Debenture is a charge against profit and hence a deductible expenditure.

KINDS OF DEBENTURES
The various kinds of debentures are :-

1. SECURED DEBENTURES - These debentures are issued by creating a charge or mortgage on

the property or assets – movable or immovable of the company whereby the value of the
asset is sufficient for the due repayment of the amount of debentures and interest therein.
The redemption of such debentures shall not exceed 10 years from the date of issue and for
those company engaged in setting of infrastructure projects the period is between 10 to a
maximum of 30 years.
2. UNSECURED OR NAKED OR SIMPLE DEBENTURES - These debentures do not give any
particular security to its holders and at times of winding up, they are considered as ordinary
creditors.
3. REGISTERED DEBENTURES - These debenture is one which is registered in the books of the
company and can be transferred only by getting it registered in the books of the company
which means it cannot be transferred by simple delivery. The name of the transferee will be
recorded in the books of the company.
4. BEARER DEBENTURES - They are debentures which are payable to bearer i.e. transferrable
by simple delivery which will be a valid transfer. Thus as it transferred from person to
person the company has no way of knowing who are the owners at the time of paying
interest. Hence an interest coupon are attached to these debentures which enable the
holder to get interest by producing it to the company or through a bank.
5. REDEEMABLE DEBENTURES - Such a debenture will be repaid on or after a certain date and
the amount required for its redemption is paid from a Reserve Fund called as Debenture
Redemption Fund or from the proceeds of a fresh issue of debentures.
6. IRREDEEMABLE OR PERPETUAL DEBENTURES - The time limit for redemption of such
debentures is not fixed i.e. the company may redeem them at any time and in most cases it
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 is on the winding up of the company or on a serious default on part of the company like non
payment of interest.
7. CONVERTIBLE DEBENTURES - When a company require heavy initial capital outlay and will
be able to earn profits only after a certain period of time, it will issue such debentures which
can be converted into equity shares after a specified term. Such debentures are called as
Convertible Debentures. Hence the investors can earn a fixed rate of interest during the
initial stage and when the company comes to profitability, they can convert it into shares.
These debentures may be either fully or partly convertible debentures.
8. NON-CONVERTIBLE DEBENTURES - These are debentures which are not convertible to
equity shares of the company after the expiry of a certain period.

DIFFERENCES BETWEEN SHAREHOLDER AND DEBENTURE HOLDER

SHARE HOLDER DEBENTURE HOLDER
They are owners of the company They are the creditors of the company
They have voting right, right to attend meeting & The do not have voting rights
participate in management of the company
They get dividend which is not certain & not They get interest at a fixed rate which is certain
compulsory and compulsorily to be paid by the company.
Shareholder gets his money only on winding up Debenture holders get their money after a
of the company certain period.
Issue of share increases the credit worthiness It reduces the credit worthiness of the company
On liquidation share holders are paid last Debenture holders get a preference in the
payment of their money
Shares are the capital of the company Debentures are the loan for a company.

SHARES WITH DIFFERENTIAL VOTING RIGHTS

Earlier only Indian Private Limited Co’s could issue equity shares with differential voting rights. But
as per the Co’s Amendment Act of 2001, even Indian Public co’s can issue such shares. This criteria is
later on has been followed by the Amendment Act 2013 and the conditions for the same are :-
 Articles should authorise such issue after which it should be passed at a General Meeting
through a resolution subject to such shares must be listed in a recognised stock exchange.
 The value of such shares should not exceed 26% of the total paid up equity share capital.
 The company has not defaulted in filing financial statements and annual returns for three
years immediately preceeding the year of such issue and must be having consistent track
record of distributable profits.
 Should not have defaulted in declaring dividend on shares, interest on dividend, and
repayment of any term loan from a public financial institution.
 Company must not have been convicted for any offence as put up by RBI, SEBI etc.
 The total number and details of differential shares and the reason or justification for the
issue of such shares.
 The price of such shares and the basis on which such price has been arrived at.
The holders of such shares shall enjoy all other rights such as Bonus Shares, Rights Shares etc. A
Register of Members showing the full details of the shares and shareholders be maintained by the
company.
The Board of Directors while issuing such shares must disclose the following in their report placed in
their meeting :-
Total number, price and details of such shares issued, % of such shares to equity share capital,
details of promoters, directors or key managerial personnel who is allotted such shares, Earnings Per
Share (EPS) etc..
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RAISING OF CAPITAL / ISSUE OF SHARES
Companies ltd by Shares can raise necessary capital in three ways :
A. By Private Placement of Shares
B. By allotting entire share to Issue House who in turn offer shares for sale to public
C. By inviting the public to subscribe for shares through a prospectus.

A. By Private Placement of Shares - It means offer of securities to a selected group of persons

by a company through offer letter instead of giving to the public. It must be made to such
number or persons not exceeding 50 or such higher number as may be prescribed. All
monies through such issue be paid through cheque or demand draft or any other banking
channel but not by cash. Company should allot the securities within 60 days from the date of
receipt of application money. The money so received should be kept in a separate bank
account.
Co’s making such offers should not release any public advertisements or utilise any media,
marketing or distribution channels to inform the public. When such an allotment is made it
shall file with the Registrar a return of allotment giving the full details of the security holers.
If the above mentioned is not adhered to by the company, its promoters, directors, officers
etc shall be liable for a penalty which may extend to the amount involved or Rs. 2 crores
whichever is higher and on being imposed the penalty, the company shall refund all monies
to subscribers within a period of 30 days of the order.
B. By Allotment to Issue House - Under this arrangement, the company allots or agree to allot
shares or debentures at a price to a financial institution or an issue house for sale to the
public. These issue house publish a document called an Offer for Sale which is the
prospectus along with an application form.
C. Public issue of Shares - This means the selling or marketing of shares to the public by issue
of prospectus for which the company has to comply with provisions of Co’s Act, SEBI etc. In
public issue, the company has to interact with underwriters, brokers, solicitors, legal
advisors and get its shares listed in a stock exchange for which they have to get the
permission from the Board of Stock Exchange.

PROCEDURE FOR PUBLIC ISSUE OF SHARES

1. APPROVAL & FILING OF PROSPECTUS - A draft copy of prospectus approved by the directors
who have signed and put the date must be filed with ROC before issuing to the public.
2. PUBLICITY & ISSUE OF PROSPECTUS - Within 90 days of delivery of prospectus to ROC, be
issued to the public. Copy of Prospectus must be given to the Co’s bankers and an
advertisement regarding the same be given to press or media from which date the
subscription is open
3. RECEIVING OF APPLICATION - The investors will then send their application duly filled in
along with application money which shall not be less than 5 % of the nominal amount or any
other % as specified by SEBI. The amount collected shall be credited to a special account
called “Share or Debenture Application Account”.
4. SCRUTIMY OF APPLICATION - Examining the application form is another step to ensure
that there is no irregular and incomplete form which has to be rejected.
5. SORTING OF APPLICATIONS - Applications may be re-arranged in alphabetical order of the
names or on the basis of number of shares applied for.
6. CLOSURE OF APPLICATION LIST - The application list will be closed at the predetermined
time or when the issue is sufficiently over subscribed and a notice in this regard to given to
the press & Stock Exchange.

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 7. RECORDING OF APPLICATION - Entries of application should be made in the application and
allotment sheet wherein the subscribers to the MoA will be entered first. All entries on the
sheet must be finally checked with the application forms and with the Bank Pass Book or
Bankers list.

SEBI Guidelines for Public Issue

SEBI is the regulator for the securities market in India originally set by the Government of India
in 1988 but it acquired statutory form in 1992 and is the apex body to develop and regulate the
stock market in India.
The main objective of SEBI is to protect the interest of investors and regulate the securities
market and offer efficient services to brokers, merchant bankers and other intermediaries in the
stock market.
The guidelines for public issue given by SEBI are :-
1. Prospectus must highlight the risk factors and the objective of the issue, cost of the project
etc should be mentioned in the prospectus which should be attached with every
application.
2. Public issue prospectus must be filed with ROC after 21 days of filing draft prospectus with
SEBI.
3. Co’s management, past history and present business, particulars of other company under
the same management who had issued shares for the past 3 years must be included in the
prospectus.
4. If issue is at premium, reason for the same and the application money should never be
collected in cash.
5. Public issue open for subscription must be disclosed in prospectus viz 3 to 10 working days
and a co doing infrastructure business can extend upto 21 working days.
6. The quantum of issue should not exceed the amount specified in prospectus and no
allotment will be made by the co., until the minimum subscription is obtained. In case if
minimum subscription is not received within the specified time then the application money
should be repaid within a period of 15 days from the closure of the issue.
7. The amount on application shall not be less than 5 % of the nominal amount of the security.
8. If the minimum subscription has been obtained and the company makes allotment of
securities, it shall file with the Registrar a return of allotment within 30 days along with the
prescribed fees.
9. Before making public offer, the company should obtain the permission from one or more
recognised stock exchange and details of the exchange should be highlighted in prospectus.
10. Money received on account of application should be kept in separate bank account and
underwriting is mandatory.

EMPLOYEES STOCK OPTION PLAN (ESOP)

This option means the directors, officers or employees of a company or its holding or subsidiary
company the right or benefit to purchase or subscribe the shares of the company at a future date
and at a predetermined price.
This option is used by many company’s to compensate or retain or attract employees whereby a
contract is formed between the company and its employees giving them the right to buy a specific
number of company’s share at a fixed price within a certain time period. The price so fixed is often
called as the Grant Price or Exercise Price.

TERMS USED IN ESOP

1. GRANT DATE – Date on which the company grant an option to its employee

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 2. OPTION PRICE / STRIKE PRICE / GRANT PRICE – Price at which such shares in a scheme are
offered would be below the market value of the share.
3. VESTING DATE - ESOP will provide a date on which the option is vested with employees
which is called as Vesting Period or Date.
4. EXERCISE PERIOD - The employees are given a time period within which they are required
to exercise the option.

WAYS IN WHICH A COMPANY CAN SET ESOP

The two ways available are :-

1. CREATE A TRUST (SPECIAL PURPOSE VEHICLE) - On the basis of the number of option given
to employees, the company will issue shares or options to the trust who need funds to buy
these shares. For this either the company give soft loan to the trust from its own fund or the
trust itself can raise loans through other sources in which case the company will act as a
guarantee to the lenders. With this fund the trust will acquire the shares / options and will
repay its loan as and when the employees purchase the options offered.
2. GIVE OPTIONS DIRECTLY TO EMPLOYEES - For this the company selects the employees
based on their performance, annual performance appraisal, minimum period of service,
present and potential contribution of employees and such other factors. Number of options
per employee can be determined by considering the grade, level, years of service, salary etc.

DIFFERENT TYPES OF ESOPs

ESOP can be one time plan or an ongoing scheme depending upon the objective the company wants
to achieve. The different types of ESOP’s are :-
1.