Share and

Share
Capital
 To make the students aware about “what are the types of share
capital?
 To provide them knowledge about the different provisions
 To enable the students to understand about the provisions of
companies act, 2013
 To imbibe conceptual fundamentals and technical analysis in students
 To make them practitioner of corporate affairs with the ability to
raise , mobilize and deploy their own and organizations funds
optimally
 PowerPoint Presentations
 Current Affairs Coverage
 Information About Latest Employment
Opportunities
 Case Studies
 Pre-Requisites
For the conceptual grasp of types of share
capital, the students must possess the
following qualities or pre-requisites :-
1. What is company?
2. What are shares
After reading the course material , the students should
be able to :
 Explain the ‘concept of share capital’
 Tell about the types of share capital
 Analyze the difference between the types of share
capital
 STEPS, DOCUMENTS AND INFORMATION REQUIRED
FOR INCORPORATION OF A COMPANY UNDER THE
COMPANIES ACT, 2013

1. Reservation of Company Name:

First, the applicants are required to apply for a name in Form No. INC-1. The fee for seeking a
name approval is Rs.1000/- as prescribed and 60 days are allowed for incorporating the company.
The name should not be undesirable i.e.; identical, resembling, restricted or prohibited.

2. Provision for Entrenchment:

As per section 5(3) of The Companies Act, 2013, articles may contain provisions for entrenchment
to the effect that specific provisions of the articles may be altered only if conditions or procedures
more restrictive than as applicable in case of special resolution, are met or complied. Where the
articles contain the provisions for entrenchment, the company shall give notice to the Registrar of
such provisions in Form No. INC-2 for one person company (OPC) or Form No. INC-7, as the case
may be, along with the prescribed fee at the time of incorporation of the company or in case of
existing companies, the same shall be filed in Form No. MGT-14 within thirty days from the date
of entrenchment of the articles, as the case may be, along with the fee as prescribed.

3. Drafting of Memorandum and Articles of Association:

The memorandum (MoA) should be drafted keeping in mind the provisions of section 4 of The
Companies Act, 2013 and objects should not be contrary to those as per Form No. INC-1. The
Model MoA as prescribed in Table A to E of Schedule I of The Companies Act, 2013 can be
adopted as applicable.
 What are SHARES?
Definitions:

Sec 2(84) of THE COMPANIES ACT,2013:

“A share is a share in the share capital of a Company,
and includes stock except where there is a distinction
between stock and shares is expressed or implied.”
 KINDS OF SHARES?
Section 43 of the Companies Act, 2013 permits a
company limited by shares to issue two classes of
shares, namely:

(a) Equity share capital—

(i) with voting rights; or
(ii) with differential rights as to dividend, voting or
otherwise in accordance with such rules as may be
prescribed.

(b) Preference Share Capital.

Types of shares
Equity shares

Preference shares
Cumulative and non-
cumulative
participating and non-
participating
Redeemable and non-
redeemable
Convertible and non-
convertible
 Share capital
Meaning of Share Capital:
 Denotes the amount of capital raised by the issue
of shares, by a company.
 Collected through the issue of shares and remains
with the company till its liquidation.
Owned capital of the company
 The shareholder are the owners of the company.
 The total share capital is divided into small parts
and each part is called a share.
 Share is the smallest part of the total capital of a
company.
Authorized capital

Issued capital

Subscribe capital

Types of share capital

Called up capital

Reserve capital
 Equity shares
• Equity shares are those shares which are ordinary in
the course of company's business.

• They are also called as ordinary shares.

• According to section 85 (2),

“Equity share capital” means, with reference to any
such company, all share capital which is not preference
share capital.
 RIGHTS OF EQUITY
SHAREHOLDERS

•THE RIGHT TO RESIDUAL INCOME

•RIGHT OF CONTROL

•PRE-EMPTIVE RIGHT

•RESIDUAL CLAIMANTS OVER ASSETS

 Advanta Disadvanta
ges
 INCOME.  ges
UNCERTAINITY OF
 TRANSFEBILITY OF INCOME.
SHARES.  RISKY INVESTMENT.
 OWNERSHIP.  HARMFUL
 EASILY LIQUIDATED. SPECULATION.
 Preference shares
“Preference share capital” means, with reference to any
company limited by shares, whether formed before or after
the commencement of this Act, that part of the share capital
of the company which fulfils both the following requirements,
namely:—
(a) that as respects dividends, it carries or will carry a
preferential right to be paid a fixed amount or an amount
calculated at a fixed rate, which may be either free of or
subject to income-tax; and
(b) that as respects capital, it carries or will carry, on a winding
up or repayment of capital, a preferential right to be repaid
the amount of the capital paid up or deemed to have been
paid up, whether or not there is a preferential right to the
payment.
 Advantages
1. Raising long

2. No need to mortgage property

3. Repayment of capital.

4. Rate of return is guaranteed.

 Disadvantages

1. Permanent burden
2. Not advantageous to investors

3. Cost of raising the preference share capital is

higher.
 Types of preference shares
1. Cumulative preference shares:
Carry the right to fixed to a fixed amount of
dividend at a fixed rate. Dividend is payable even out of
future profit, if current profit is not sufficient for this
purpose.

2. Non-cumulative preference shares:

carry the right to a fixed amount of dividend, in
case no dividend is declared in a year due to any
reason, the right to receive such dividend for that year
expires.
3. Participating preference shares:
addition to right a fixed dividend, the
shareholders have the right to participate in the
surplus profits, after payment of equity dividend at a
stipulated rate.

4. Non-participating preference shares:

are the shares on which only a fixed rate of
dividend is paid every year, without any additional
rights in profits and surplus in case of winding up of
the company.
5. Redeemable preference shares:
under section 80, this shares are issued on condition
that company will repay after a fixed period of time.

6. Non-redeemable preference shares:

not carry the agreement regarding redemption of at
a certain period. Section 80 (5A) provides irredeemable
preference shares.

7. Convertible preference shares:

which converted into equity shares at their option.

8. Non-convertible preference shares:

which cannot converted into equity shares at their
option.
Distinguish between equity shares and preference
shares:

1. Participation in management
2. Sequence of dividend
3. Sequence of refund of capital
4. Refund of capital during life time
5. Permanency of dividend
6. Compulsion
7. Cumulative nature
 Difference between preference shares and equity share

1. Rate Of Dividend
The rate of dividend on equity shares may vary
from year to year depending upon
the availability of profit. Preference share
holders are paid dividend at a fixed rate.
2. Arrears Of Dividend
Equity shareholders can not get the arrears of
past dividend. Cumulative preference share
holders can get the arrears of past dividend.
3. Redemption
Equity shares can not be redeemed except, under a
scheme involving reduction of capital. Preference
shares can be redeemed as provided by the articles
and terms of issue.
4. Voting
Equity shareholders enjoy voting rights. Preference
shareholders do not have the right to participatein
the management of the company.
5. Payment Of Dividend
Payment of dividend to equity share is made only
after paying to preference shares. Preference shares
have a preferential right to receive dividend
before equity shares.
Modes of Raising Capital or issuing shares
 Public issue
When a company raises funds by selling (issuing) its
shares (or debenture / bonds) to the public through
issue of offer document (prospectus), it is called a
public issue.
Initial Public Offer (IPO): When a (unlisted) company
makes a public issue for the first time and gets its
shares listed on stock exchange, the public issue is
called as initial public offer (IPO).
Further public offer (FPO): When a listed company
makes another public issue to raise capital, it is called
follow-on offer/further public offering (FPO).
 Offer for Sale
Institutional investors like venture funds, private
equity funds etc., invest in unlisted company when
it is very small or at an early stage. Subsequently,
when the company becomes large, these investors
sell their shares to the public, through issue of offer
document and the company’s shares are listed in
stock exchange. This is called as offer for sale. The
proceeds of this issue go to the existing investors
and not to the company.
 Private Placement
The sale of securities to a relatively small
number of selected investors for raising
capital. Investors involved in private
placements are usually large banks, mutual
funds, insurance companies and pension
funds. Private placement is the opposite of a
public issue, in which securities are made
available for sale in the open market.
 Rights issue (RI):
When a company raises funds from its existing
shareholders by selling (issuing) them new
shares / debentures, it is called as rights issue.
The offer document for a rights issue is called
as the Letter of Offer and the issue is kept
open for 30-60 days. Existing shareholders are
entitled to apply for new shares in proportion
to the number of shares already held.
 Bonus Issue
The company issues new shares to its existing
shareholders. As the new shares are issued
out of the company’s reserves (accumulated
profits), shareholders need not pay any money
to the company for receiving the new shares.
ALLOTMENT
OF
SHARES
 Meaning of allotment
Allotment means the act of appropriation by the Board of directors
of the company of a certain number of securities to persons who
have made applications for securities.
• The allotment should be made by proper authority, within a
reasonable time, should be absolute and unconditional, must be
communicated, should be against application only and should not
be in contravention of any other law.
• If the allotment is made without complying with the conditions as
discussed above, allotment is said to be irregular and it will result
to the consequences depending upon the nature of irregularity.
• After allotment of securities, a return of allotment in the Form PAS-
3 is required to be filed with Registrar of Companies within 30 days
of allotment of securities.
 GENERAL PRINCIPLES REGARDING
ALLOTMENT
• “Allotment” of shares means the act of
appropriation by the Board of directors of the
company out of the previously un-appropriated
capital of a company of a certain number of
shares to persons who have made applications for
shares
• It is on allotment that shares come into existence.
The following general principles should be observed
with regard to allotment of securities:
• 1. The allotment should be made by proper
authority, i.e. the Board Directors of the company,
or a committee authorised to allot securities on
behalf of the Board.
• 2. Allotment of securities must be made within a
reasonable time (As per Section 6 of the Indian
Contract Act, 1872, an offer must be accepted
within a reasonable time). What is a reasonable
time is a question of fact in each case. An applicant
may refuse to take securities if the allotment is
made after a long time.
(3) The allotment should be absolute and
unconditional. Securities must be allotted on same
terms on which they were applied for and as they
are stated in the application for securities.
Allotment of securities subject to certain conditions
is also not valid. Similarly, if the number of
securities alloted is less than those applied for, it
cannot be termed as absolute allotment.
(4) The allotment must be communicated. As
mentioned earlier posting of letter of allotment or
allotment advice will be taken as a valid
communication even if the letter is lost in transit.
(5) Allotment against application only — No
valid allotment can be made on an oral
request. Section 2(55) of the Act requires that
a person should agree in writing to become a
member.
(6) Allotment should not be in contravention of
any other law — If securities are allotted on
an application of a minor, the allotment will
be void.
 SHARE CERTIFICATE
• A share certificate is a certificate issued to the
members by the company under its common seal
specifying the number of shares held by him and
the amount paid on each share.
• According to Section 45 of the Companies Act, 2013
each share of the share capital of the company shall
be distinguished with a distinct number for its
individual identification.
• In terms of Section 46(1) of the Act, a certificate
under the common seal of the company is prima
facie evidence of the title of the person to the
shares specified therein. The certificate is the only
documentary evidence of title in the possession of
the shareholder. But it is not a warranty of title by
the company issuing it.
 When can a company issue Duplicate
Share Certificate?
• Section 46 (2) states that a duplicate
certificate of shares may be issued, if such
certificate —
(a) is proved to have been lost or destroyed; or
(b) has been defaced, mutilated or torn and is
surrendered to the company
Purpose and Form of Share Certificate
• With the help of a share certificate a member of a
company may deal with his shares in the market whether
it is one of sale, mortgage or pledge by showing a good
prima facie marketable title to the shares.
• A share certificate is a documentary evidence of title to
shares in the possession of the shareholder. It is a prima
facie evidence of his title to the shares.
• Section 46(4) provides that where a share is held in
depository form, the record of the depository is the
prima facie evidence of the interest of the beneficial
owner.
• Every certificate of share or shares shall be in Form No.
 Share warrant
• ‘Share Warrant’ is an instrument, which
signifies that the holder of the instrument is
entitled to the shares mentioned in it.
 Difference between share certificate and
share warrant
Basis of comparison Share certificate Share warrant
Meaning A legal document that indicates the A document which indicates
possession of the shareholder on the that the bearer of the share
specified number of shares is known as warrant is entitled to the
share certificate. specified number of shares is
share warrant.

Compulsory yes no

Issued by All the companies limited by shares Only public limited companies
irrespective of public or private. have the right to issue share
warrant.

Negotiable No Yes
Instrument

Transfer The transfer of share certificate can be The transfer of share warrant
done by executing a valid transfer deed. can be done by mere hand
delivery.
 Difference between share certificate and
share warrant
Basis of comparison Share certificate Share warrant
Amount paid Issued against fully or partly paid up Issued only against fully paid
share. up shares

Approval of Central Not Required at all Prior approval of Central

Government for Government is required for
issue issuing Share Warrant.
Time Horizon for Within 3 months of the allotment of No time limit prescribed.
issue shares.