Concept of Share Capital

By | August 31, 2019
Concept of Share Capital

The share capital which gets authorised by the memorandum of association of any company as the maximum limit for the share capital which it can possess. Such a share capital is known as the nominal capital or authorised share capital.

Introduction

There are a lot of companies who get themselves registered only when they have an appropriate quantity of share capital although it is not a necessary condition to have a certain amount of share capital for getting any company incorporated. If any company wants to prescribe a certain amount of share capital for getting registered as a mandatory requirement, it has to specify the same in the Memorandum of Association. In addition to it, it also has to specify the total number of shares in which the share capital can be decided.[1]

The share capital which gets authorised by the memorandum of association of any company as the maximum limit for the share capital which it can possess. Such a share capital is known as the nominal capital or authorised share capital.[2]

The Kerala High Court had explained the meaning of the share capital in the matter of re SNDP Yogam, Quilon.[3] The court came to the conclusion that the words “capital” and “share capital” are synonymous to each other.

To substantiate this observation, it took the support of the quotes that are cited in Buckley on The Companies Act as well as the Company Law of Palmer. If a company wishes to have the share capital, it is important for it to have the provision stating the amount of the share capital and its division in the memorandum. But there is a huge difference between share capital and the fee paid for membership, even if the issue of shares symbolises the payment of membership fee.

The amount that is stated in the memorandum is termed as the authorised capital of the company and it may be issued in parts or whole of it. For instance, if half of the share capital gets issued, then it will be known as the issued share capital of the company.[4] There might be a possibility that when the offer of issuing the capital is made to the public at large, the whole of the issued capital may not be taken up.

The amount of the issued share capital which gets allotted to the public is then termed as the subscribed capital. It is not necessary that the company has to call up for the entire amount immediately. That part of the capital which has been called by the company for getting the payment done is termed as the called- up capital.[5] While the actual amount that has been received by the company is known as the paid-up capital.

The company has the option to convert the capital which was not called by it into the reserve capital. With the help of passing a special resolution, it may be declared by the company that either the whole or a part of the uncalled capital of the company shall not be called. The exception to this rule can be observed only in the case when the company starts to wind up its business.[6] Such capital can neither be converted except with the leave of the court nor can the directors charge it.

Henceforth, the cases where the company proposes to issue debentures charging the undertaking of the company including the uncalled capital of the company, it was observed by the court that the charge is not in operation on the reverse capital.[7]

Kinds of Share Capital

It is a requirement to get the share capital divided into shares of a fixed amount. All the shares can belong either to one class or can be divided into two different classes of securities. For these purposes, securities have to be construed as those which are defined in Sec 2(h) of the Securities Contracts (Regulation) Act, 1956,[8] which is as follows:

Security is a financial method to represent ownership in a stock or publicly traded Corporation, a Corporation bond or a relationship of a creditor with a government body or ownership right as depicted by an option. Security can also be defined as a document of settled requisites or forms, which mirrors the related property rights that may self- refer to the market and be the object of buying and selling and various transactions exchanges, is the type of money capital.

The Act allows for only two types of securities which can be issued. They are as following:

  • Equity Share Capital, which is an ordinary type of share
  • Preference Share, that comprises preference share capital.

All those share capital which cannot be a part of the preference share capital are known equity share capital or ordinary share capital as per the provisions of the Companies Act. The share capital of a company that gets limited by the shares can be of two types only viz.,

  • Equity share capital which can be either with voting rights or with differential rights as to voting, dividend as otherwise in accordance with such rules and which are subject to such condition as may be prescribed
  • Preference share capital[9]

There was an introduction of some more categories of shares by virtue of the Companies Act, 2000:

Derivative: that has been provided with the same meaning as in Sec 2 of the Securities Contracts (Regulations) Act, 1956.[10]

Hybrid: it prescribes for those securities that have the characteristics of more than one type of security, including their derivatives.

Preference Share Capital

There are some requirements which have to be fulfilled for any share capital to qualify as the preference share capital of a company.[11] These conditions are as follows:

  • The company must be assured of the preferential dividend during the continuance of the ordinary course of its business. There is a fixed amount of the preferential dividend that is payable to the preferential shareholders. This amount has to be paid to these shareholders before any amount is paid to the ordinary shareholders. Further, the amount that is payable in the form of the preferential dividend has to be computed at the fixed rate, for instance, 10 per cent of the nominal value possessed by each of the shares.
  • When the company gets winded up, it must possess a preferential right to get paid. This also mandated that the amount paid upon the preference shares has to be paid back to the preferential shareholders even when anything is given back to those shareholders who possess ordinary shares. Such a preference is in the presence only for the amount which is either deemed to have been paid up or paid up on the shares. However, there is an exception to this kind of preference, that is, the existence of any contract on the contrary.

Preference Shares compared with Ordinary Shares

Preference shares, more particularly redeemable preference shares, are more of debenture in characteristic instead of being like shares. They are able to earn dividend at a fixed rate. This characteristic is similar to that of the debentures, which earn interest at the fixed rate. It is upon the discretion of the company to pay them back.[12]

But when it comes to the payment to the ordinary shareholders, there exist some other rules. They cannot be paid back except under the provisions of a scheme that involves the reduction of share capital.[13]

Further, a shareholder with ordinary shares is vested with the power to vote on all the matters that affect the company. However, the preference shareholder has been empowered to vote on the matters that are restricted to those resolutions which are capable to directly affect the rights that are attached to his preference shares. But there is an exception to this rule.

This provision is not applicable only when the dividends have remained unpaid, he is entitled to vote on any of the resolutions that were passed in respect of preference share capital.[14]

Moreover, the investment done in the preferential shares is one of the safest and most profitable modes of investments. Even though there is a guarantee of a fixed rate of income, the risk involved in it is very less when compared to the risks that are undertaken by the ordinary shareholders.


[1] S 4(1)(e) of the Companies Act. 2013. S 44 of the Companies Act. 2013 provides that the debenture or share or any other interest of any member of the company shall be in the form of the moveable property which can be transferred in the manner as is specified in the articles of the company.

[2] S 2(8) of the Companies Act. 2013

[3] (1970) 40 Comp Cas 60: ILR 1969 Ker 516: (!970) 1 Comp LJ 85

[4] S 2(50) of the Companies Act. 2013.

[5] S 2(15) of the Companies Act. 2013

[6] S 65 of the Companies Act. 2013.

[7] Mayfair Property Ltd., re, (1898) 2 Ch 28: (1895- 99) All ER Rep 738

[8] S 2(81) of the Companies Act. 2013

[9] S 43 of the Companies Act, 2013

[10] S 2(33) of the Companies Act, 2013

[11] S 43 (explanation) of the Companies Act, 2013

[12] S 55 of the Companies Act, 2013. See also, Lalchand Surana v Hyderabad Vanaspati Ltd., (1990) 69 Comp Cas 415 (AP).

[13] S 66 of the Companies Act, 2013.

[14] S 47(2) (Provisos) of the Companies Act, 2013

Also read:

Depositories- Meaning & Its Types(Opens in a new browser tab)

Dividends – Meaning and its Types(Opens in a new browser tab)

Akriti Gupta
Author: Akriti Gupta

Akriti Gupta is a fourth-year learner of BBA LLB programme in Symbiosis Law School, NOIDA. She has done moots and has various publications in her name. Mooting and research papers have helped her a lot to enhance her researching and drafting abilities.

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