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What is share capital?

Share capital denotes the amount of capital raised by the issue of shares, by a company. It is collected through the issue of shares and remains with the company till its liquidation. Share capital is owned capital of the company, since it is the money of the shareholder and 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. The amount of share capital a company reports on its balance sheet only accounts for the initial amount for which the original shareholders purchased the shares from the issuing company. Any price differences arising from price appreciation/depreciation as a result of transactions in the secondary market are not included. For example, suppose ABC Inc. raised $2 billion from its initial public offering. Over the next year, the total value of its shares increases to $5 billion. In this case, the value of the share capital is still only $2 billion because ABC Inc. had received only $2 billion from the sale of its securities to the investing public.

Features of Share Capital:

Owned capital: Share capital is owned capital of the company. It is actually the money of
the shareholders and since the shareholders are the owner of the company, so share capital is the owned capital.

Remains with the company: It remains with the company till its liquidation. Dependable sources: Share capital is the most dependable source of finance for the joint
stock companies.

Raises creditworthiness: It raised the credit worthiness of the company. Substantial funds: It provides substantial funds to the company. Available for: Share capital is easily available for expansion and diversification of
business activities.

Amendment: The amount of share capital can be raised by amending the capital clause of
the Memorandum of Association.

No charge: Share capital does not create any charge on the assets of the company. Opportunity to participate: Share capital give its shareholders an opportunity to
participate in the company's management with normal rights of shareholders.

Benefit of bonus shares: It gives it shareholders the benefit of bonus shares.

Benefit of limited liability: Share capital also gives its shareholders the befit of limited
liability as the liability of its shareholders is limited up to the face value of each share.

Meaningful participation: Share capital enables its shareholders to have a meaningful


participation in the expansion of corporate sector.

Types of Share Capital:

Authorized capital: It is the maximum amount of capital which a company can collect or
raise by selling it's shares to the general public. Authorized capital is known as nominal capital or registered capital. For example: A company wants to sell 100 shares of Rs. 10/- each, so the total amount collected by the company is Rs. 1000/- i.e. 100 shares x 10 each = 1000 The capital with which a company is registered is known as its authorized capital.

Issued capital: It is that part of the authorized capital which is actually issued to the
general public. For example: A company has issued 80 shares of Rs. 10/- each so the issued capital is Rs. 800/-

Unissued capital: It is that part of the authorized capital which is not being issued to the
general public.That is, company has not issued 20 shares of Rs. 10/- each, so the unissued capital is Rs. 200/-.

Subscribed capital: It is that part of the issued capital which is actually subscribed by the
general public. That is company has issued 80 shares out of which 70 shares are being bought by the general public, so the subscribed capital is Rs. 700/-. That is 70 shares of Rs. 10/- each.

Unsubscribed capital: It is that part of the issued capital which is not subscribed by the
general public. That is, if the the company has issued 80 shares out of which 70 are bought by the general public and 10 are not being bought by them, so the unsubscribed capital is 10 x Rs. 10 = Rs. 100. That is 10 shares of Rs. 10 each.

Called up capital: It is that part of the subscribed capital which is actually called up by
the company. For instance, if a company has asked its shareholders to pay Rs. 5/- per share so on 70 shares, they have to pay 70 shares x Rs. 5 each = Rs. 350/-. This is the called up capital.

Uncalled up capital: It is that part of the subscribed capital which is not being called up
by the company. It may be called up as and when the company need funds. That is out

of Rs. 10/- per share, Rs. 5/- per share is being called up by the company and Rs. 2 is being uncalled up and Rs. 3 is kept as reserve, that is yet to be called.

Reserve capital: Reserve capital is that part of the uncalled capital which is reserved to
be called up only at the time of winding up or liquidation of the company. It cannot be called during the life time of a company. It is to be used only for meeting extraordinary situation such as liquidation of the company. The purpose of reserve capital is to meet the interests of the creditors at the time of winding up of the company.

Paid up capital: It is that part of the called up capital which is actually paid up by the
shareholders. For example, out of 70 shares which were subscribed for 60 shareholders have paid up their call money, that is 60 x Rs. 5 = Rs. 300/- is called as the paid up capital of the company.

Unpaid up capital: It is that part of the called up capital which is not being paid by the
shareholders. For example: out of 70 shareholders, 60 shareholders have paid up their call money and 10 shareholders have not paid their call money, so 10 x Rs. 5 = Rs. 50/is called as unpaid up capital. Unpaid up capital is also known as Calls in Arrears

Changes in share capital A limited company having a share capital may alter its share capital in the following ways provided it is authorised by its articles. a) Increase Nominal Share Capital b) Consolidate or divide all or any part of its share capital into shares of larger amount that its existing shares. c) Convert Fully paid up shares into stocks or vice versa d) Subdivide its shares ; or any of them into shares of smaller amount. e) Diminution of share capital i.e. cancel shares which have not been taken up and diminish the amount of its authorised capital by the amount of shares so cancelled.

Procedure for Alteration : Under the companies act, 1956 provisions with respect to alteration of share capital are as follows: a) Company can alter the share capital by passing ordinary resolution in the general meeting b) Confirmation of the court is not required of alteration c) Cancellation of shares in pursuance of this section does not mean reduction

d) Within 30 days of this alteration, notice must be given to the Registrar of Companies. e) Registrar shall make ncessary alteration, in the Memorandum of Association and Articles of Association of the company. f) If the company a fails to inform the Registrar, Then every Officer shall be punishable with fine which may extend to Rs 5000 for every day during which his defualt continues. g) In the case of conversion of shares in to stock, all the provisions of the companies which are applicable only to shares, will not apply to stock. Consolidation and subdivision of shares : Consolidation is the process of combiningshares of smaller denomination. Eg- 10 shares of Rs. 10 each may be consolidated into one share of Rs. 100 Sub Division of shares means one share of RS. 100 each may be divided into 10 shares of Rs 10 each. Consolidation and subdivision can take place only if a resolution has been passed. A copy of the resolution should be filed within 30 days with the Registrar of Companies. Conversion OF Shares into stock: Section 94 empowers the company to convert its fully paid up shares into stock by passing a resolution in the general meeting. A notice should be filed with the registrar within 30 days of passing of the resolution specifying the shares so converted. Diminution of share Capital : Many a times shares are issued, but are not subscribed by the public and therefore not alloted. The company can cancel such shares which have not been taken or agreed to have been taken by any person and thereby diminish the amount of share capital by the amount of shares cancelled. This is cannled Diminution of Share cApital and is different from Reduction of Shares.

Reduction of Share capital : Reduction of capital means reduction of issued, subscribed and paid up capital of a company. Conservation and preservation of the share capital os one of the main objects of the company law. Therefore provisions with respect to reduction of the share capital are strict and can take place only if it is sanctioned by the company law. Therefore provisions with respect to reduction of the share capital are strict and can take place only if it is sanctioned by Company Law. Who can reduce? The power to reduce the share capital is given under section 100 of the act. The power can be exercised by

a) Company limited by shares OR b) Company limited by guarantee and having share capital

Ways of reducing share capital Section 100 (1) Ways Of Reduction Of Share Capital

Extinguishing or reducing Liability on any of its shares Capital not paid up

Cancelling paid up capital

Paying of any paid up shares capital which is excess of the wants of the company.

a) It may exstinguish or reduce the liability on any of its shares in respect of the share capital no paid up or uncalled capital Eg ABC company limited has a share capital consisting of shares of Rs. 10 each out of which Rs 5 per share is paid up. The directors felt the company would not require the uncalled amount of Rs 5 per share. The company may extinguish the remaining liability of uncalled share capital at the rate of Rs 5 per share. In this wya share holder is relieved from the liability of uncalled amount. b) It may either with or without extinguishing or reducing liability on any of its shares, cancels any paid up share capital, which is lost or is uprepresented. A share of Rs 10 fully paid up is represented by Rs 8 worth or assets. In such a situation Rs 2 is written off. The asset side of balance sheet may unclude useless assets, fictious goodwillm prelimanary expenses etc.. these assets are either cancelled or reduced to extent they have become useless. Correspondingly share capital on the liability is also reduced.if the comapany wants to extinguish the liability on these shares, then Rs 10 share will become shares of Rs 8 each fully paid up. If the company does not extinguish the liability on these shares, then rs 10 shares will continue to be share of rs 10 each, rs 8 per share paid up. c) It may pay off any paid up share capital which is in excess of the needs of the company. This can be done either with or without extinguishing or reducing liability on any of its shares. ABC Company limited has equity share capital of rs 10 per share , fully paid up. The capital is in excess of the requirements of the company. The company returns Rs 4 per share , Rs 10 shares will become share o Rs 6 each fully paid up.

Procedure of Reduction of Share capital ( Section 100 to 105) 1) Articles Of association : share capital can be reduced only if it is authorized by the articles of association of the company 2) Special resoultion : if a compan, intends to reduce its share capital , it shall first pass a special resolution in the general meetings of the company. 3) Application to the company law tribunal : the company shall then apply by a petition to the company law tribunal for an order confirming the reduction of share capital.

Company Law Tribunal Fulfils its duty in the following manner: A) Interest Of Creditors : 1) Creditors of the company can object to the reduction of share capital, if it involves reduction of liability on any shares or payment to any shareholder of any paid up share capital. 2) Notice of proposed reduction must be given to all the creditors of the company. The lost of creditors is settled by the court. 3) Company must publish a notice fixing a day or days within which creditors whose name is not in the list may claim to be so entered. 4) If the creditors do not claim to be entered, they are excluded or debarred from the right of objecting to reduction. 5) When the creditors entered on the list do not consent to reductionand his debt is not discharged or determined by the company, the company law tribunal has following two options: A) Company Law Tribunal may have his interest Secured OR B) If company law tribunal is convinced that creditors are not in any way affected , it can dispense with the consent of such dissenting creditor 6) The company law tribunal may pass an order confirming reduction if it is satisfied with respect to every creditor of the company who is entitled to object to the reduction that either his consent to the reduction has been obtained or his debt or claim has been discharged. 7) The company law tribunal may ask the company to add to its name as last words, the words and reduced for a specified time. Words and reduced gives tonice to the public of the financial position of the company. 8) Company Law Tribunal may also direct the company to publish reasons for the reduction of capital for public information

B ) Interest of shareholders : Company law tribunal should also consider interest of different class of shareholders. It should take into account whether reduction is fair and equitable between different class of share holders.

Registration of Order OF Company Law Tribunal Section 103 The reduction of share capital takes effect only on registration of the Courts( Now Tribunal) order with the Registrar and not before. For the registration of the order of the Company Law Tribunal following documents must be filed with the register. a) Certified copy of the order and b) Minutes approved by the company law tribunal, showing the following, with respect to the share capital of the company as altered by the order. 1) The amount of share capital 2) The number of shares into which it is to be divided. 3) The amount of each share, and 4) The amount, if any at the date of the registration deemed to be paid on each share.

The registrar ( registrar of companies) shall certify under his hand the registration of the order and minutes. His certificate is the conclusive evidence that all the requirements of the Act with regard to reduction of share capital have been complied with.

Reduction Of Share Capital Without The Sanction of the Company Law tribunal The reduction of share capital of a company, without the sanction of the of the comapany Law Tribunal, can take place by : a) b) c) d) e) f) Forfeiture of shares Surrender of shares Cancellation of shares Purchase of shares Redemption of redeemable preference shares Buy back of shares

Liability of members in respect of reduced shares Section 104 A member shall be liable to pay difference between paid-up value of the share and the reduced calue of the shares. Eg a share of Rs 10 of which Rs 2 is paid up is reduced to Rs 8. The liability of the member holding such a share shall not exceed Rs 6 as thet is the difference between reduced value and paid up value

Penalty Section 105 An officer of the company shall be punishable with improsinment for a term which may extend to one year or with fine or with both if he :

a) Knowingly conceals the name of any creditor entitled to object to the reduction b) Knowingly misrepresents the nature or amount of the debt or claim of any creditor or c) Abets ( assits) ir is privy to any such concealment or misrepresentation as aforesaid.