Share Capital

What you should know?

1 What is share capital?
2 Kinds of shares.
3 Rights shares and Bonus Shares
4 New types of Shares – Recently
introduced
5 Share Certificate and Share Warrant
6 Reduction of Share Capital

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What is share capital?
In modern company law, the word capital is
used to cover:
1. Share capital—the funds subscribed by
members;
2. Loan capital –the fund provided by
commercial finance providers and investors
holding debentures or giving fixed deposits.
3. All funds whether provided by member,
creditors or by retention of profits; and
4. The assets in which all the funds have
been invested. 2
Types of capital

equity share capital

preference share capital

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The term capital is used in the following
senses in the Company Law:

1. Nominal or authorised or registered

capital:
2. Issued capital:
3 Subscribed capital:
4. Called up capital:
5. Paid up capital:
6. Reserve capital

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 Share Capital
• 1. Nominal or authorised or registered capital : It is the
sum stated in the memorandum as the capital of the
company with which it is to be registered . it is the maximum
amount which it is authorised to raise by issuing shares .

• 2. Issued capital; It is that part of authorised capital which

is offered by the company for subscription. It is obligatory to
disclose issued capital in balance sheet - Part I of Schedule
VI.
For e.g. A company may have total authorised share capital
of Rs. 10 lacs dividend into 1 lac shares of Rs. 10 each. It
may decide to issue 80,000 shares of Rs. 10 each. In that
case the issued capital shall be Rs. 8,00,000.
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•3 Subscribed capital: It is the nominal amount of
shares taken up by the public. Out of the 80,000 shares
issued by the company, if applications are received for
only 70,000 shares of Rs. 10 each, the subscribed capital
will be Rs. 7,00,000.

• 4 Called up capital: It is that part of the subscribed

capital, which has been called up or demanded by the
company. A company may call the amount due on shares
in two or three installments. In the above example if the
company has called up Rs. 5 per share, then its called up
capital shall be 70,000x5=3.5 lacs.

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• 5 Paid up capital: It is the total amount actually paid up
on shares by the subscribers. Sometimes a few
subscribers fail to pay the full amount called up. Thus paid
up capital is equal to called - up capital less calls in
arrears. In the example given above, if only Rs. 3,00,000 is
actually received by the company, then the paid up capital
shall be to Rs. 3,00,000.

• 6 Reserve capital: It is that parts of the uncalled capital

of the company which can be called up only in the event of
winding up.
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2 Kinds of Shares.
a) Shares:

The capital of a company is divided into a number of

units of a fixed amount. These units are known as
‘shares’.

According to section 2(46) of the Companies Act, “ a

share is a share in the share capital of a company, and
includes stocks except where a distinction between
stock and share is expressed or implied.”

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b) Stock:

A share should be distinguished from a similar term

“stock” A stock may be defined as the aggregate of
fully paid -up shares of a member merged into one
fund of equal value.

The stock is expressed in terms of money. Stock has

the convenience of being divided into fractions of
any amount.

Authorised by articles

Resolution in General Meeting

Conversion of fully paid-up shares 9

c) Equity Shares:

Equity Shares, with reference to any company limited by

shares, are those, which are not preferences shares
[Section 85(2) of 1956 Act].

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d) Preference Shares:

A preference share is defined to mean a share which

fulfils the following two requirements:

- During the life of the company it must be paid

preferential dividend either of fixed amount or at a
fixed rate;

- On the winding up of the company it must carry a

preferential right to be repaid the capital in preference
to the equity shareholders

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Kinds of Preference Shares:

1. Cumulative preference shares:

2. Participating preference shares
3. Convertible preference shares
4. Redeemable preference shares
(section 80)

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3 Rights shares and Bonus Shares

Rights shares:

Rights shares are the shares offered to the existing

members in proportion to there existing shareholding.

According to section 81, the directors of the company

are under obligation to make offer of the new shares
(known as right shares) to the existing members of the
company in proportion to their shareholding.

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Sec 81 grants the existing shareholders the
right of pre-emption, namely , the right to be
first offered the share before they are offered
to the general public.

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Bonus shares:

A company may, if its articles so provide, capitalize

profits by issuing fully paid shares to the members.
Such shares are known as bonus shares.

* The articles of association must authorise

capitalization of reserves.
* The company must pass resolution first at the Board
meeting and there after at company’s General Meeting
for bonus issue.
* Management’s intention regarding the rate of
dividend to be declared in the year immediately after
the bonus issue should be indicated in that resolution.

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4 New types of Shares – Recently
introduced
- Sweat equity (introduced by Companies
(Amendment) Act, 1999).

Sweat equity shares refers to equity shares used 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 if intellectual property rights or value
additions, by whatever name called.

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- Equity Shares with discriminating rights
(introduced by Companies (Amendment) Act,
2000).

According to section 86 a company can issue equity

shares with differential rights as to -
a. dividend
b. voting or
c. otherwise in accordance with such rules and
subject to such conditions as may be
prescribed.
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5 Share Certificate and Share
Warrant
Share certificate

A share certificate is a document of title issued

by the company declaring that the person
named therein is the owner of a specified
number of shares in the capital of the
company.

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5a Share warrant ( s.114, 115)
A share is a bearer document of title to shares
specified therein and is issued by the company against
fully paid shares.

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6 Alteration of Share Capital
Sec. 94 deals with alteration of share capital. While
sections 100 to 103 lay down the procedure for
reduction of share capital. A company can alter its
share capital, If authorised by its articles, by an
ordinary resolution, in 5 ways:

* Increase the share capital by issuing new shares

* Consolidate its existing shares into larger
denomination

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* Sub-divide its existing shares into smaller

denomination

* Convert fully paid up shares into stock

* Cancel shares, which have not been taken up and

diminish the amount of the share capital by the

number of shares so cancelled. Such cancellation is not

deemed as reduction of share capital.

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