Share and Share capital

SHARE

THIS ARTICLE WAS WRITTEN BY SURIMA SINGH SRIVASTAVA, A STUDENT OF THE CHRIST ACADEMY INSTITUTE OF LAW, BANGALORE.

Introduction

The capital of a company is divided into a number of indivisible units, is known as ‘shares. Section 2(84) of Companies Act, 2013 defines share “share in share capital of a company and includes stock. In CIT v. Standard Vaccum Oil Co.[1] observed that by share court not only meant money but also interest measured by the sum of money.

In short, share represent an interest of a shareholder in company, it has certain rights and liabilities, thus it represents a ‘bundle of rights and obligations.

Nature of a share

In Borland’s Trustees v. Steel Bros & Co. Ltd.[2], it was held that a word ‘share ‘not just the sum of money in the company but it also includes interest of a shareholders in the company and it is measured in sum of money only and that is only for two purpose first one is  for the purpose of liability and second is for interest.

In India, according to section 2(7) of the Sale of Goods Act, 1930 share is regarded as ‘goods’ and ‘goods’ defines as any mean or any kind of movable property other than actionable claims and money and includes stock and share.

And, according to Sect 44 of the Companies Act, it recognised share as movable property, and it can be transferred only in the manner provided by the articles of the company.

In Vishwanathan v. East India Distilleries[3] , it was observed:

“a share is movable property but it is not same as we can move a bale of cloth or a bag of wheat, a share in a company is totally different category or property.

A share is not a negotiable instrument

CIT v. Associated Industrial Development Co,[4] a share is an expression of proprietary relationship between a shareholder and the company.

The statutory meaning of share covers the three phases of the share, if a share is a part of share capital it will remain exploited by the company; share when it is exploited by the company finding a shareholder and lastly, when the share is converted into stock.

Share v. Share Certificate

In a common language, ‘share’ and ‘share certificate’ believed to same and one thing. But it is very important to note the correct and exact definition between the two.

Section 44 of Companies Act, 2013 defines share as a movable property transferable in the manner provided by the articles of the company.

Section 46 of Companies Act, 2013 defines “certificate of share”, to mean a certificate, under the common seal of the company, specifying any shares held by any members. Section 46 further describe share certificate shall be prima facie evidence of the title of the members to such shares.

In Crickmer’s case, share certificate describes as an estoppel as to payment against a bona fide purchaser of the share from alleging that the amount stated as being paid on the shares has not been paid.

In Shree Gopal Paper Mills. Ltd. v. CIT,[5] court elaborately distinguished between ‘share’ and ‘certificate of shares’ was made.

Certificate of shares is not the shares or a share. Under section 46 a certificate specifying any share or stock held by any member shall be prima facie evidence of the title of the member to the share. It is, however, not a tangible property for it is not a share certificate.

Share v. Stock

Again, these two terms have to be understood, we already knew that, a share represent a unit into which the capital of a company is divided. Thus, if the share capital of the company is Rs.5 lakhs divided into 50,000 units of Rs. 10, each unit of Rs. 10 shall be called a share of the company.

Now, stock is defined as the aggregate of fully paid-up shares of a members merged into one fund of equal value. It is bundles of all share.

Kinds of Share

As per the Companies Act, there are only two types of shares can be issued in the company. Section 43 of the act provides the same namely:

1. Equity share capital
2. With voting rights, or
3. With differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed;
4. Preference share capital.

Besides, a company may also issue Global Depository Receipts (GDR) under section 41.

Preference Share or Preference Share Capital

Preference share capital means that share capital of the company which fulfils both the following requirements:

• The term ‘preferential dividend’ refers to a fixed amount (say, one lakh rupees) paid to preference shareholders before anything else is paid to the equity shareholders. The amount payable as preferential dividend may be calculated at a fixed rate, e.g., 10% of the nominal value of each share.
• On the winding-up of a company they must carry a preferential right to be paid, i.e. amount paid up on preference shares must be paid back before anything is paid to equity shareholders.

Types of Preference share

1. Participating and non-participating- Preference shares are shares which are entitled to a fixed preferential dividend and carry a right to participate in the surplus profits along with equity shareholders after dividend at a certain rate. In the event of a winding-up, participating preference shareholders get an additional share in the company’s surplus assets.
2. Commulative and non- commulative- As per section 55 of the Companies Act,
3. There may be no irredeemable preference shares issued by a business limited by shares.
4. A corporation limited by shares may issue preference shares that are redeemable within twenty years of the date of issuance provided its articles allow it.

Kinds of raising capital

There are some shares which are used to raise capital of the company, and they are mentioned below:

• Sweat Equity share
• Employee stock option scheme
• Bonus issue
• Right issue

Sweat Equity Shares: Section 2(88) & Section 54

This type of share issued to directors or employee of the company at discount for consideration other than cash in order to encourage them to work more efficiently in the company.

This type of share issued for the purpose of:

• For the know -how of the company
• Contribution to the corporate intellectual capital
• Value as a result of employee’s effort

Employees Stock Option Scheme: Section 2(37) & section 62 (1)(b)

These shares of the company are available to employee as well as to the directors of the company, only they have the option to purchase these shares at some predetermined price, and it is for the advantage of both employees and directors.

Purpose of this share:

• Special resolution by the members
• Not entitled to voting rights.

Bonus Issue: Section 63

This share capital is fully paid-up, it is the additional shares given to current shareholder. This share doesn’t charge any money from shareholders as these shares are provided as bonus. It is issued when company has lot accumulated profits.

Rights Issue: Section 62(1)

Whenever the company thinks of increasing the capital it issues their share which are offered to existing shareholders on priority.

Share Certificate and Warrant

Share Certificate: section 46

Share certificate certifies the fact that a person or an individual is owner of certain amount of shares. It will always issue the company’s seal signed by 2 directors, a managing director and a company secretary.

Share Warrant

It is a document and it is transferable by delivery, but it is not dealt in companies act 2013, it will only issue in public company.

Buy-Back: Section 67,69& 70

Whenever a company who issued the shares decides to take back its share from market and buys its own share by paying the shareholders the market value per share it is known buy-back.

Raising of Capital

1. Private Placement: Company doesn’t offer the share to everyone or to public. They offer it to particular group or particular people. The limit is 200 shares only. Share has to be allotted within 60 days of payment. Private company can only invite 200 people in a financial year for private placement.
2. Offer for Sale: It is one of the methods for raising capital, a company appoints an issuing house that issue the share on the behalf of the company.

• Inviting Public through Prospectus: only public company can do this.

Conclusion

The article gives us the basic need to issue share and how can we raise capital and its importance in a company, in every business we need some funds for its business activities, and funds can only raise either internal or through external sources. Further, it is concluded that issuing shares and raising capital these two are most integral part of the company/business, it always help in getting investment from investor/shareholder also it helps the company in re-investing in company.

[1] [1966] Comp. LJ 187

[2] [1901] 1 Ch 279

[3] [1957] 27 Comp. Cas. 175

[4] AIR 1972 SC 445

[5] 1967 37 CompCas 240 Cal