Company - Meaning

A joint stock company is a voluntary association of

persons with common capital, divisible into
transferrable shares, formed for the purpose of doing
some business to earn profit.
It posses corporate legal entity and a common seal.
It is a legal person created by a process of law and
only by the process of law.
It can act by its own through its agents.

The company functions through individuals selected to

manage the affairs who are known as Board of Directors.
The Board of Directors are appointed by the board,
manages the affairs of the company.

Company - Definition
According to section 3(1)(i) of the Companies Act 1956,
a company means a company formed and registered under
the companies act or an already existing company. A
company formed and registered under any of the previous
companies act is called an existing company.

Characteristics of a company
Company is an artificial person created by law.
It is a voluntary association of persons usually for profit.
The company has a legal entity with perpetual
succession.
Ownership of a company is separate from management.
i.e. separate legal entity
Company can buy and hold property on its name.
Company can sue and can be sued in its name.

Characteristics of a company
The common seal of the company is considered as the
official signature of the company.

The owners of the company is called shareholders.

The liability of shareholders is limited only to the extent
of the shares held by them.
Right to enter in to contracts.

Classification of companies
Companies under the Companies Act, 1956 may be classified on various
grounds as under:
1.Classification on the basis of
2.Classification on the basis of

formation

liability

3.Classification on the basis of public

investment

On the basis of formation companies

Chartered
companies

Statutory
companies

Registered
companies

On the basis of liability

Companies limited
by shares

Companies limited
by guarantee

On the basis of public investment

Private
Companies

Public Companies

Difference between Private co. and Public co.

Basis of Distinction

Private Company

Public Company

Minimum No. of
members

Two

Seven

Max. No. of numbers

Fifty

No restriction

Min. no. of Directors

Two

Three

Capital

Prospectus

It cannot invite the

It is free to invite the
public to buy shares or public to buy its shares
debentures of the
and debentures
company
It need not issue any
prospectus

It has to issue
prospectus

Basis of Distinction
Incorporation

Private Company
It is simple and quick

Public Company
It is quite complicated
and time consuming

Commencement of
business

It can commence
business soon after
incorporation. It does
not need any certificate
to commence business

Business cannot be
commenced after
incorporation. It can be
done only after the
receipt of the certificate
of commencement of
business

Statutory meeting

Need not to be held

Must be held and the

statutory report must be
filed with the registrar

Basis of Distinction
Name

Required quorum for

meetings

Private Company

Public Company

The words Private Ltd. The word Limited

Must be used as part of must be used as the part
the name
of the name
Three members

Five members

Top Private Sector Companies

Reliance Industries Limited
Tata Consultancy Services (TCS)
Infosys Technologies Ltd
Wipro Limited
Bharti Tele-Ventures Limited
ITC Limited
Hindustan Lever Limited
ICICI Bank Limited
Housing Development Finance
Corp. Ltd.
TATA Steel Limited
Ranbaxy Laboratories Limited
HDFC Bank Ltd

Tata Motors Limited

Larsen & Toubro Limited (L&T)
Satyam Computer Services Ltd.
Maruti Udyog Limited
Bajaj Auto Ltd.
HCL Technologies Ltd.
Hero Honda Motors Limited
Hindalco Industries Ltd
Reliance Energy Limited
Grasim Industries Limited
Jet Airways (India) Ltd.
Sun Pharmaceuticals Industries Ltd
Cipla Ltd.

Public Sector Companies

Air India air transport service ltd
Indian Oil Corporation limited (IOC)
Bharat Heavy Electricals limited (BHEL)
Hindustan Petroleum Corporation Ltd. (HPCL)
National fertilizers ltd
ONGC
United India Insurance company

Shares
Share may be defined as the capital of the company
can be divided into different units with definite value called
shares.
Stock
As per section 94(1) (c) of the companies Act 1956,
when all the shares of a company have been fully paid up,
they may be converted into stock if so authorized by the
articles of association.
Conversion of shares into stock is made because it is a
convenient method of denoting the capital of a company.

Statutory books are those which a limited company is under

statutory obligation to maintain at its registered office. The
main statutory books are
1.Register of Investment held and their names
2.Register of charges
3.Register of Members
4.Register of debentures holders
5.Annual returns
6.Minutes books
7.Register of contracts
8.Register of Directors
9.Register of shareholdings of the directors
10.Register of loans to companies under the same management
11.Register of Investment in the shares of other companies

Books of accounts
According to section 209 of the Companies Act, a company
must keep proper books of account to record the following:
1.All sales and purchases of goods by the company
2.The receipts and payments of the company
3.The assets and liabilities of the company
the books must be preserved for atleast 8 years and
have to be normally kept in the registered office of the
company.

Capital refers to the amount invested in the company so that it

can carry on its activities. In a company capital refers to "share
capital".
The capital clause in Memorandum of Association must
state the amount of capital with which company is registered
giving details of number of shares and the type of shares of
the company.
A company cannot issue share capital in excess of the limit
specified in the Capital clause without altering the capital
clause of the MA.

Nominal, authorised or registered capital means the sum

mentioned in the capital clause of Memorandum of Association.
It is the maximum amount which the company raise by issuing
the shares and on which the registration fee is paid. This limit is
cannot be exceeded unless the Memorandum of Association is
altered.
Issued capital means that part of the authorized capital which
has been offered for subscription to members and includes shares
allotted to members for consideration in kind also.

Subscribed capital means that part of the issued

capital at nominal or face value which has been
subscribed or taken up by purchaser of shares in the
company and which has been allotted.
Called-up capital means the total amount of called
up capital on the shares issued and subscribed by the
shareholders on capital account. i.e if the face value
of a share is Rs. 10/- but the company requires only
Rs. 2/- at present, it may call only Rs. 2/- now and the
balance Rs.8/- at a later date. Rs. 2/- is the called up
share capital and Rs. 8/- is the uncalled share capital.

Paid-up capital means the total amount of called up

share capital which is actually paid to the company by
the members

Conversion of shares into stocks : Conversion of fully paid shares into

stock may likewise be affected by the ordinary resolution of the company
in the general meeting. Notice of the conversion must be given to the
Registrar within 30 days of the conversion, the stock may be converted
into fully paid shares following the same procedure and notice given to
the Registrar in Form no 5.
1.Only fully paid shares can be converted into stocks
2.Direct issue of stock to members is not lawful and cannot be done.
3.The difference between shares and stock is that shares are transferable
only in complete units so that transfer of half or any portion of share is not
possible whereas stock is expressed in terms of any amount money and is
transferable in any money fractions.
4.Articles may be give the Board of Directors authority to fix minimum
amount of stock transferable.
5.Since stock is not divided into different units it is not required to be
numbered. Shares on the other hand must be numbered.

Basis of distinction

Shares

Stock

Nominal value

A share has a nominal

value or face value

Stock does not have a

face value or nominal
value

Issue

Shares can be directly

issued to the public.

Stock cannot be issued

directly.

Payment

Shares may be fully paid Only full paid up

up or partly paid up.
shares are converted
into stocks

Numbering

Shares
are
numbered

serially Stock are not numbered

Shares - Types
1.Preference shares

A preference share is one which enjoys certain

preferential rights. 1. Fixed dividend is guaranteed before any
payment of dividend made to equity shares. 2. P.share holder are
paid back their capital while winding up of the company.

Cumulative preference shares

Non-cumulative preference shares
Participating preference shares
Redeemable preference shares
Guaranteed preference shares by bank, financial institutions

2. Equity Shares
Carries no special rights in respect of annual dividends and
return of capital after the company goes into liquidation.
Rate of dividend is not fixed

ESOP: Employee Stock Option plan

It is recognized that

Man works best when he works for

himself"
An Employee Stock Option Plan is when the company offers its
shares to the employees.
An ESOP is nothing but an option to the employee to buy the
company's share at a certain price.
Either be at the market price (price of the share currently listed on
the stock exchange), or
At a preferential price (price lower than the current market price).

BUY BACK OF SHARES

The re-purchase of shares by a company in order to reduce
the number of shares in the market. Companies will buy back
shares to increase the value of shares still available (reducing
supply). i.e. reduction of share capital
A company may purchase its own shares or other specified
securities out of :its free reserves; or
the securities premium account; or
the proceeds of any shares or other specified securities:

Conditions for buy back of shares

1.The buy-back is authorized by its articles;
2.A special resolution has been passed in general meeting of
the company authorizing the buy-back;
3.The buy-back is of less than 25% of the total paid-up capital
and free reserves of the company:
4.the ratio of the debt owned by the company is not more than
twice the capital and its free reserves after such buy-back.
5.All the shares or other specified securities for buy-back are
fully paid-up;

5. the buy-back of the shares or other specified securities listed

on any recognized stock exchange is in accordance with the
regulations made by the SEBI (Securities and Exchange Board
of India) in this behalf;

The buy-back may be :1. From the existing security holders on a proportionate
basis;
2. From the open market or
3. From odd lots
4. By purchasing the securities issued to employees of
the company pursuant to a scheme of stock option or
sweat equity.

Pro rata actually means 'in proportion'. Pro - rata allotment of

shares is opted by the Company when there is an oversubscription.

Sweat Equity Shares

Definition/Meaning
Sweat Equity Shares means equity shares issued by the
company to employees or directors at a discount or for consideration
other than cash for providing know how or making available rights in
the nature of intellectual property rights or value additions, by
whatever name called.
In India, the concept of SWEAT EQUITY SHARES was started by
Infosys.
Sweat Equity Shares are given to the employees at a discounted rate
of market value.

Conditions
1. Such issue is authorised by a special resolution of the company in the general
meeting.
2. Such resolution specifies the number of shares, current market price, consideration,
if any, and the class or classes of the directors or employees to whom such shares are
to be issued.
3. Such issue is after an expiry of one year from the date on which the company was
entitled to commence business.
Price of sweat equity share
The price of sweat equity shares shall be at a fair price calculated by an independent
valuer.
Ceiling Limit
The total sweat equity shares issued during the year should not exceed 15% of the
total paid-up equity share capital in a year or shares of the value of Rs.5 crores of
rupees.
Lock-in period
The shares shall be locked in for a period of 3 years from the date of allotment.

Difference between ESOP and Sweat equity

1. Sweat Equity is grant of shares at discount or without monetary
considerations whereas Employee Stock Option Plan (ESOP) / is grant
of option to purchase share at predetermined price given to
employees.
2. Sweat Equity can be issued to the promoters of the Company
whereas ESOS/ESOP cannot be issued to the promoters or promoter
group.
3.Minimum lock in period of 3 years for Sweat Equity whereas no
such lock in period for ESOP and lock in period of 1 year for Employee
stock purchase scheme (ESPS).

Contents :
What are SHARES.
Kinds of Shares :

Equity Shares
Preference Shares
Deferred Shares

Kinds of Preference Shares

What are SHARES?

Definitions:
Sec 2(46) of THE COMPANIES ACT,1956:
A share is a share in the share capital of a Company.
Boreland Trustees v/s Steel Bros. & Co. Ltd.:
A share represents the interest of a share holder in the
capital of the Company & this interest is measured by the
number of shares he is holding & the amount paid by him to
the Company on shares.
Thus, the amount of capital to be raised by a Company is
always divided into small parts or units of equal value &
these units are called SHARES

Kinds Of Shares :
The different kinds of shares which can be
raised by Companies are :
EQUITY SHARES
PREFERENCE SHARES
DEFERRED SHARES

Equity Shares :

The equity shares or ordinary shares are those shares on

which the dividend is paid after the dividend on fixed rate has
been paid on preference shares.

Characteristics:
No fixed rate of dividend.

Dividend is paid after dividend at a fixed rate is paid on

preference shares.
At the time of liquidation, capital on equity is paid after
preference shares have been paid back in full.
Non redeemable.
Equity shareholders have voting rights & thus, control the
working of the Company.
Equity shareholders are the virtual owners of the Company.

Preference shares :
Preference shares are those shares which carry with them
preferential rights for their holders, i.e, preferential right as
to fixed rate of dividend & as to repayment of capital at the
time of winding up of the Company.

Characteristics :
Fixed rate of dividend.
Priority as to payment of dividend.
Preference as to repayment of capital during liquidation of the
Company.
Generally preference shareholders do not have voting rights.
According to The Companies (Amendment) Act, 1988, the
preference shares are redeemable & the maximum period for
which they can be issued is 10 years.

Kinds of Preference
Shares
:
On the basis of cumulation of dividend :
Cumulative Preference Shares:
They are those shares on which the dividend at a fixed
rate goes on cumulating till it is all paid.
Non Cumulative Preference Shares:
These are those shares on which the dividend does not
cumulate.

On the basis of participation :

Participating Preference shares:
This type of shares are allowed to participate in surplus
profits during the lifetime of the company & surplus
assets during winding up.
Non Participating Shares:
These shares are not entitled to participate in surplus
profit. Dividend at fixed rate is given.

Kinds of preference
shares
:

On the basis of conversion :

Convertible preference shares:

The owners of these shares have the option to convert
their preference shares into equity shares as per the
terms of issue.
Non-convertible preference shares:
The owners of these shares do not have any right of
converting their shares into equity shares.

On the basis of redemption:

Redeemable preference shares:

These are to be purchased back by the company after a
certain period as per the terms of issue.
Irredeemable preference shares:
These are not to be purchased back by the company during
its lifetime.

Status of Preference
Shares, if Articles of
Association are silent :
Preference shares will be presumed to be:
Cumulative
Non-Participating
Irredeemable and
Non-Convertible.

Deferred Shares :
Deferred shares are those shares on which the payment of
dividend and capital (at the time of winding up of a company) is
made after money is paid in full on preference shares and
equity shares.
As per the provisions of the COMPANIES ACT,1956, no public
company can issue deferred shares.
Characteristics:
Rate of dividend is not fixed. It depends upon the availability
of profits & the discretion of the Board of the Directors.
Dividend is paid after payment of dividend on equity &
preference shares.
At the time of liquidation, capital on these shares is returned
after capital is repaid on both preference & equity shares.