January 27, 2019

SHARE CAPITAL – A COMPREHENSIVE OVERVIEW

AUTHORED BY: SANAH SETHI

AMITY LAW SCHOOL (L.L.B 3 YEARS)

SHARE CAPITAL: MEANING AND KINDS

The words “capital” and “share capital” are synonymous. The word “capital” has several meanings. It means a particular amount, invested to start a business. Capital may be used to mean capital goods that are, the tools of production, the money available for investment or invested, the discounted value of the future income to be received from an investment, the real or money value of total assets, money or property used for the production of wealth, sum total of corporate stock. Capital is accumulated goods, possessions and assets, used for the production of profits and wealth.

Share Capital, on the other hand, means share capital in respect of a company limited by shares. Investment of capital in a public limited company is called share capital. It is raised by a company by issue of shares to the public. The Memorandum of Association of a company contains a capital clause providing for the amount of capital dividend into different shares, with which the company is to be registered. Share capital means the capital raised by a company by the issue of shares. The word capital in connection with a company is used in several senses, it may mean authorized, issued and subscribed or paid up or reserve capital of the company.

KINDS OF CAPITAL

The term “capital” is used in different senses namely-

Authorized or Nominal Capital– In case of a company limited by shares the memorandum has to mention the amount of share capital with which the company proposes to be registered and the division thereof into shares of a fixed amount (Sec 4). It is the maximum capital which the company will have during its lifetime unless it is increased. For instance, a company is authorized to issue 500000 shares of Rs. 100/- each. Its authorized capital is Rs. 5,00,00,000/-. It is the maximum limit beyond which the company cannot call for.
Issued Capital– Issued Capital is the nominal value of the shares which are offered to the public for subscription. A Company does not normally issue all its capital at once, so that issued capital in such a case is less than the authorized capital. The issued capital can never exceed the authorized capital; it can at the most be equal to the authorized capital which is the case when all the shares have been issued to the public. For instance, out of the authorized capital of Rs. 5,00,00,000/- the company may issue 25000 shares of Rs. 100/- i.e. Rs. 2,50,00,000/-.

Subscribed Capital– It is the nominal value of the shares, which have been subscribed. For instance, out of the issued capital Rs. 2,50,00,000/- if the capital worth Rs. 20,00,000/- is subscribed i.e. 20000 shares, the subscribed capital is Rs. 2,00,00,000/-.

Called-up Capital– This is that part of the issued capital, which has been called upon the shares. In the above example, out of the subscribed capital of Rs. 2,00,00,000/- if the subscribers are required to pay by the 1^st call, 2^nd call, it is called called-up capital.
Uncalled Capital- This is the remainder of the issued capital, which has not been called. The company may call this amount any time but this is subject to the terms of the issue of shares and the provisions of the Articles. Eg- A company is registered with a capital of Rs. 1,00,00,000/- divided into 1,00,000 shares of Rs. 100 each. The authorized capital of the company in such a case is Rs. 10,00,000/- The company offers 80,000 shares to the public which takes them up. The issued capital of the company is Rs. 8,00,000 The company calls up only Rs. 60/- per share. In such a case, the called up capital is Rs. 4,80,000/- and the uncalled capital is Rs. 32,000.
Paid-up Capital– The actual amount paid up or credited as paid up on the shares subscribed for and allotted is the paid-up capital. Suppose, the company called for payment of Rs 1,50,00,000/- and received payment of Rs. 1,20,00,000/- it is called paid-up capital.

Reserve Capital– This is the part of the uncalled capital which cannot be called except in the event and for the purpose of the winding up of the company. Reserve capital cannot be converted into ordinary capital except with the leave of the Court/Tribunal.
Fixed Capital– This is the property acquired by the company with the intention to retain it and employed in the business of the company permanently and not to resell it. Example- buildings and machinery.

Circulating Capital– This is the property acquired or produced by the company with the intention to resell it at a profit. Example-goods produced by the company for sale, ordinary merchandise etc.

KINDS OF SHARE CAPITAL

The capital of a company is divided into shares of a fixed amount. The shares may be of one class or kind or different kinds covering different rights and benefits as determined by the Memorandum or Articles of the company. The new Under Section 43 provides that the share capital of the company limited by shares shall be of two kinds only, namely-

Equity share capital-Equity Share Capital means all share capital which is not preference share capital.

Share capital with differential rights- It means a share that is issued with differential rights in accordance with the provisions of Sec. 43 of Companies Act,2013 and rules prescribed thereunder.

Preference share capital- Preference share capital means that part of the share capital which fulfills the following requirements namely-

During the continuance of the company, it will carry preferential right in respect of dividends and
In the event of winding up of the company, it will have a preferential right as to the repayment of the paid-up capital.

ALTERATION OF CAPITAL (SECTION 61)

Section 61 of the Companies Act, 2013 provides for the alteration of share capital. It reads as follows-

A limited company having a share capital may if so authorized by its articles, after its memorandum in its general meeting to:

Increase its sanctioned share capital by such amount as it thinks expedient;
Consolidate and distribute all or any of its share capital into shares of a larger amount than its existing shares:

Provided that no consolidation and division which results in differences in the voting percentage of shareholders shall take effect unless it is approved by the Tribunal on a demand made in the prescribed manner;

2) The cancellation of shares under subsection 1) shall not be deemed to be a reduction of share capital.

If a company is so authorized by its articles it may alter its share capital in the following ways:

Develop its share capital by issuing new shares.
Consolidate and divide all or any of its share capital of larger amount than its existing ones.

ISSUE OF SHARES AT PREMIUM (Section 52)

Section 52 of the Companies Act, 2013 provides for the issue of shares at a premium. It runs as follows-

Application of premiums received on issue of shares-

Where a company issues shares at a premium, whether for cash or oppositely, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a” securities premium account” and the provisions of this Act relating to the reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.
Notwithstanding anything contained in subsection (1), the securities premium account may be applied by the company:

Towards the issue of unissued shares of the company to the members of the company as fully paid bonus shares;
In writing off the preliminary expenses of the company;
In writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company.

The securities premium account may, notwithstanding anything contained in sub-sections (1) and (2), be applied by such class of companies, as may be prescribed and whose financial statement comply with the accounting standards prescribed for such class of companies under section 133:

In paying up unissued equity shares of the company to be issued to members of the company as fully paid bonus shares; or
In writing off the expenses of or the commission paid or discount allowed on any issue of equity shares of the company; or
For the purchase of its own shares or other securities under section 68.

The expression “ premium” is not described in the Companies Act, 2013. It means the value of any advantage measurable in terms of money which is bestowed on the company and which is over and above the cash payment on the shares issued by the company. The power of the company to issue shares at a premium need not be taken in the Articles of the company. A company may issue its shares at a premium, i.e. more than its nominal value. For example- when the nominal value of the share is Rs 10/- a company may issue the same as the premium of Rs. 20/- i.e. it may take the payment of Rs.30/- per share. Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to an aggregate amount of the premium has to be transferred to an account to be called as “ the share premium account”.

The share premium account can be employed by the company for the following purposes:

For issuing bonus shares to its members.
For writing off the preliminary expenses of the company.

For writing off the expenses of, or the commission paid or discount allowed on any issue of shares or debentures of the company.

In Income Tax v. Standard Vaccum Oil Co., [AIR (1966) SC 1393] the right of a company to charge varying premium in honor of blocks of shares having the same rights issued under different resolutions is not denied and on principle there is no problem to the charging of varying rates of premium for shares issued under a single resolution, if all the parties concerned agree.

PROHIBITION ON ISSUE OF SHARES AT DISCOUNT (Sec. 53)

In case there is no demand for the shares issued by a company, the company may resort to employing underwriters by offering extra commission or the company may issue the shares at the discount i.e. at less than the nominal value. Section 53 of the Companies Act, 2013 which came into force on 1^st April 2014 prohibits the issue of shares at discount. Section 53 reads as follows-

Except as provided in section 54, a company shall not issue shares at a discount.
Any share issued by a company at a discounted price shall be void.
Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees or with both.

ISSUE OF SWEAT EQUITY SHARES (Section 54)

Section 54 of the Companies Act, 2013 provides for the issue of “ Sweat Equity shares”. The identical section of the Old Act i.e. the Companies Act, 1956 is 79.A, which was inserted in the Companies Act, 1956 by the Companies (Amendment) Ordinance, 1998. It allows the issue of sweat equity to directors and employees. Section 54 reads as follows-

Notwithstanding anything contained in section 53, a company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled, namely:
The issue is authorized by a special resolution passed by the company;
The resolution specifies the number of shares, the current market price, consideration if any and the class or classes of directors or employees to whom such equity shares are to be issued;
Not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business.
The rights, limitations, restrictions, and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued under this section and the holders of such shares shall rank pari passu with other equity shareholders.

“Sweat equity shares” means, “ shares issued at a discount or for consideration another than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

A company may circulate sweat equity shares of a class of shares already issued subject to the following conditions:

The issue of sweat equity shares should be allowed by a resolution passed by the company in the general meeting.
The resolution should specify the number of shares, their value and the class or classes of directors or employees to whom such equity shares are to be issued.
Not less than one year has at the date elapsed since the date on which the company was entitled to commence business;
The sweat equity shares are issued in accordance with the regulations made by the S.E.B.I. in this behalf.

The sweat equity shares shall be subject to all the limitations, restrictions and provisions relating to equity shares.