1. COMPANY LAW
•SHARES, &
•SHARECAPITAL

2. SHARES
DEFINITIONS
• The Companies Act defines a share as “Share in the Share
Capital of the company, and includes stock except where a
distinction between stock and share is expressed.”
• According to J.Farwell a share is “ the interest of a
shareholder in a company measured by the sum of money,
for the purpose of liability in the first place and of
interest in the second.”
• Thus, a share-(i) measures the right of a shareholder to
receive a certain proportion of the profits of the company
when it is a going concern and to contribute to assets of
the company when it is being wound up; and (ii) forms the
basis of the mutual covenants contained in the articles
binding the shareholders inter se.

3. NATURE OF A SHARE
• Shares in India, are both goods as well as chose – in – action. It
is bundle of rights, each one of which is a legal chose – in –
action. The legal title to the share is vested in the person
entitled to it, either by the company or by transfer from a
former holder.
TYPES OF SHARES
• Before passing Companies Act, 1956, shares used to be in three
types
Ordinary Shares
Preference Shares
Deferred Shares
• After Companies Act , companies issued only two types of
shares
Preference Shares
Equity Shares

4. Preference Shares- must satisfy 2
conditions:-
• It shall carry a preferential right as to the
payment of dividend at a fixed rate;
• In the event of winding up, there must be a
preferential right to the payment of the paid-
up capital.

5. Kinds of Preference Shares
• Cumulative and Non- cumulative preference
shares:- In the case of cumulative preference shares, if the
profits of the company in any year are not sufficient to pay
the fixed dividend on the preference shares, the deficiency
must be made out of the profits of subsequent years (i.e.,
right to claim the arrears of dividend)
In the case of non-cumulative
preference shares, the dividend is only payable out of the
profits of each year. If there are no profits for the year, the
arrears of dividend cannot be claimed in the subsequent year.

6. Participating and Non-participating
preference shares:-
• Participating preference shares are those
which are entitled to participate in the surplus
profits ( after they get a fixed rate of dividend
on their shares). They may also have the right
to share in the surplus assets of the company
on its winding up.
• Non- participating preference shares are
entitled only to a fixed rate of dividend. They
do not have the right to share in the surplus
profits and surplus assets of the company.

7. Convertible and Non-convertible
preference shares:-
• Convertible preference shares are those which
can be converted into equity shares within a
certain period.
• Non-convertible preference shares are those
which do not carry the right of conversion into
equity shares.

8. Redeemable and Irredeemable preference
shares:-
• Redeemable preference shares are those
which may be redeemed after a certain period
of time.
• Irredeemable preference shares are those
which cannot be redeemed, and the capital is
to be returned on the winding up of the
company.

9. Equity Shares
• All the shares which are not preference shares
are equity shares.
• Equity shareholders have a residual claim on
the income of the company. They may get
higher dividends if the company is prosperous
or may not get anything if the business flops.
• In the winding up, the equity shares are
entitled to the assets remaining after the
payment of the liabilities and the capital of
the company.

10. Deferred Shares
• These shares are held by the promoters and
directors of the company. These are also
called as founders’ shares. There shares carry
right to substantial dividends from the profit
left after paying off preference and equity
dividend.

11. ALLOTMENT OF SHARES
• Offers are made on application forms
supplied by the company. When an
application is accepted, it is an allotment.
“Allotment” is generally neither more nor
less than the acceptance by the company of
the offer to take shares.
• Allotment creates a binding contract
between the parties.
• A valid allotment has to comply with the
requirements of the Act and the principles
of the law of contract relating to
acceptance of offers.

12. STATUTORY RESTRICTIONS ON ALLOTMENT
These may be discussed under two heads:-
(i) When no public offer is made
(ii)When public offer is made:-
-- First allotment of shares
--Subsequent allotment of shares
--Allotment of debentures

13. STATUTORY RESTRICTIONS ON ALLOTMENT
• Minimum subscription and application money [s. 69]:
It means the amount which is, in the estimate of the directors,
enough to meet the needs like purchase price of any property
partly or wholly, preliminary expenses, and working capital.
• Statement of lieu of prospectus [s.70]: Where
prospectus has not been issued, no allotment shall be made
unless at least three days before a statement in lieu of
prospectus has been filled with the register.
• Opening of subscription list [s.72]:Shares can not be
allotted at once after the issue of the prospectus . No allotment
shall be done until the beginning of the 5th
day from the date of
the issue of the prospectus.

14. • SHARES TO BE DEALT IN ON
STOCK EXCHANGE [S.73] :
Every company intending to offer
shares to the public by the issue of a
prospectus has to make an
application before the issue to any
one or more of the Stock Exchanges
for permission for the shares to be
dealt with at Stock Exchange. An
allotment shall be void if the
permission has not been granted.
• over-subscribed prospectus
[s.73(2-A)] : where the permission of
a stock exchange has been granted
and, therefore , the allotment
completed valid, the prospectus
being over-subscribed portion of the
money received must be sent back to
the applications forthwith.

15. GENERAL PRINCIPLES
• ALLOTMENT BY PROPER AUTHORITY : An
allotment must be made by a resolution of the board
of directors “Allotment is a duty primarily falling
upon directors” and this can be delegated except in
accordance with the provisions of the articles.
• WITHIN RESONABLE TIME : Allotment must be
done within a reasonable time, otherwise the
application lapses. On the expiry of reasonable time
section 6 of the Contract Act applies and the
application must be deemed to have been revoked.

16. • MUST BE COMMUNICATED : The
allotment must be communicated to the
applicant. Posting of a properly
addressed and stamped letter to
allotment is communication even if the
letter is delayed or lost in the course
of post.
• ABSOLUTE AND
UNCONDITIONAL :Allotment must
be absolute accordance with the terms
and conditions of the application, if any.
The applicant must promptly reject the
allotment when shares have been
allotted to him without his conditions
being fulfilled.

17. CERTIFICATE OF SHARES
• An allottee of shares is entitled to
have from the company a document
called share certificate, clarifying that
he is the holder of the specified
number of shares or debentures or
debenture-stock is obliged to deliver to
the allottee a certificate of shares
within three months of allotment.

18. SHARE CERTIFICATE

19. Transfer of shares
• When joint stock companies were established, the
great object was that the shares should be capable
of being transferred. Accordingly, by section 82 of
the companies Act, it is provided that the shares of a
member in a company shall be moveable property
capable of being transferred in the manner provided
by the articles of the company.
RESTRICTIONS ON THE TRANSFER OF SHARES
• Is open to a company to restrict the right of its
members to transfer their shares. The article of a
private company as against those of a public company
contain more rigorous restrictions on its members to
transfer their shares.

20. BROKERAGE
• The Company Act, 1956, permits brokerage to
be paid as has been lawful for a company to pay.
It has been recognized in Metropolitan Coal
Consumers Assn vs. Scringeour that reasonable
brokerage should always be allowed.
• Brokerage is different from underwriting
commission. A broker does not undertake to
subscribe for shares to the extent of public
default.
• Brokers are professional men, such as “stock-
brokers, bankers and the like, who exhibit
prospectus and send them to their customers,
and by whose mediation the customers are
induced to subscribe.

21. ISSUE OF SHARES AT PREMIUM
• If the market exists, a company
may issue its shares a price higher
than their nominal value. There is
no restriction on the sale of share
at a premium.
• SEBI guidelines have to be
observed as they indicate when an
issue has to be at par and when
premium is chargeable.
• Premium may be received in cash or
kind. An amount received extra
than the nominal value due to the
premium should be carried to the
share premium account.

22. SHARE CAPITAL
• Share capital means the capital raised by a company by the
issue of shares.
kinds OF SHARE CAPITAL
• The capital of the company may be two types:
Preference Share Capital : In case of a
company limited by shares, that part of the capital of the
company which carries a preferential right as to payment
of dividend during the lifetime of the company and
repayment of capital on winding up of the company is
known as Preference Share Capital.
Equity Share Capital : All the share capital
which is not preference share capital is known as equity
share capital. Capital which does not carry any preferential
rights.

23. TYPES OF CAPITAL:
• Authorized Capital
• Issued Capital
• Subscribed Capital
• Called up Capital
• Paid up Capital
• Uncalled Capital
• Reserved capital

24. ORDINARY SHAREHOLDER
COMPARED WITH PREFERENCE
SHAREHOLDER
PREFERENCE SHARES
• These are more like
debentures than like shares.
They are entitle to a fixed
rate of interest. The company
may choose them to pay them
back.
• The right to vote restricted
to resolutions which directly
affect the rights attached to
his preference shares, except
when dividend has remained
unpaid.
• Offers profitable and safe
source of investment.
ORDINARY SHARES
• Ordinary shareholders cannot
be paid back except under a
scheme involving reduction of
capital.
• Ordinary shareholder is
entitled to vote on all matters
affecting the company.
• Rate of income and risk
involved is more.

25. VOTING RIGHTS
• EQUITY SHAREHOLDERS RIGHTS[sec. 87
(1)] : An equity shareholder of a company limited
by shares has a right to vote on every resolution
placed before it. His voting right on a poll is in
proportion to his share of the paid-up equity
capital of the company.
• Preference share capital[sec. 87 (2)] : A
preference shareholder has the right to vote on
those resolutions which directly affect his
rights. Any resolution for winding up the company
or for the repayment or reduction of its share
capital is deemed to directly affect the rights of
the preference share holder.

26. ALTERATION OF CAPITAL
A limited company having a share capital may,
if so authorized by its Articles, alter its
share capital as follows
• Increase nominal share capital by issuing
new shares
• Consolidate and divide all or any part of its
share capital into shares of larger amount
• Convert fully paid-up shares into stock or
vice versa
• Sub-divide its shares, or any of them, into
shares of smaller amount, and
• Cancel share which have not been taken up
and diminish the amount of its authorized
capital by the amount of the shares so
cancelled.

27. Alteration of capital clause
Any of the above alterations may be affected
by an ordinary resolution by the shareholders
in general meeting.
Within 30 days of passing the resolution for
alteration of share capital, a notice must be
given to the Registrar who shall thereupon
make necessary changed in the company’s
memorandum or articles or both. On failure to
give such a notice, fine may be imposed on the
officers, of Rs. 500 or every day during which
the fault continues.

28. REDUCTION OF CAPITAL
Under sec 100, a company limited by shares having a
share capital may reduce its share capital. Subject to
the confirmation by the court, in any of the following
three ways:
• It may extinguish or reduce the liability on any of its
shares in respect of share capital not paid-up; or
• It may either with or without extinguishing or
reducing liability on any of its shares, cancel any paid-
up capital which is loss, or is unrepresented by
available assets, i.e., writing off lost or unwanted
capital.
• It may, either with or without extinguishing or
reducing liability on any of its shares , pay-off any
paid-up share capital which is in excess of the wants
of the company.

29. Procedure for reducing share capital:-
1. Special resolution
2. Application to the Tribunal for sanction order
of the resolution
3. Registration of the sanction order of Tribunal
with the Registrar.

30. FURTHER ISSUE OF CAPITAL
Further issue of capital of a company may take place
• By allotment of new shares [sec. 81(1) to (3)]:
A public company limited by shares may,
at any time, increase its subscribed shares capital within
the limit of authorized capital by issuing new shares. It is
for the directors to decide whether an increase in the
subscribed capital of the company is necessary or not.
The existing shareholders are first
offered the shares. This right of shareholders to be
offered new shares to them before they are offered to the
public is known as shareholders right of Pre-emption(or
pre-emptive)
• by conversion of debentures or loans into
shares [sec. 81(4) to(7)] :
where a company has taken loan from the
central government by issuing any debentures or otherwise,
the government may, in the public interest , convert such
debentures or loans into shares in the company.

31. Reorganization OF CAPITAL
The reorganization of share capital
of a company may take place
• By the consolidation of shares of
different classes; or
• By the division of shares of one
class into shares of different
classes; or
• By both these methods.
The reorganization of the share
capital of a company may be
proposed
• Between a company and its
creditors or any of class of them;
or
• Between a company and its
members or any classes of them.