Shares and Share Capital of the Company

Introduction

A share in the firm includes stock until it has been officially distinguished between the two, either tacitly or explicitly, according to Section 2(47) of the Companies Act, 2013. According to the Sales of Goods Act of 1930, shares are regarded as goods and are subject to the restrictions of the company's bylaws. They are also regarded as movable property. Although the actual definition of capital is complicated, according to The Act, it refers to the value of the assets that shareholders who purchase the company's shares provide to it. Because assets will change over the course of business, value is the only factor that truly matters.

WHAT IS A SHARE CAPITAL?

The sum of money that a business earns from the selling of its shares is known as share capital. The business employs this sum of money as start-up capital in order to get off the ground and make money from its operations. Additionally, this capital is used to purchase both mobile and immovable things that are necessary for operating the business.

THE USAGE OF SHARE- CAPITAL UNDER THE COMPANIES ACT 2013

According to the Companies Act of 2013, a company limited by shares or by guarantee is required to indicate in its memorandum of association the amount of share-capital and the partition of that capital into shares of a fixed amount. It is used in articles of association when a business with unlimited liability and share capital is required to declare its authorised capital.

Lastly, it appears in prospectuses, the prospectus, statement in lieu of prospectus, and annual report of the firm must all provide information about the amount of capital and the number of shares in which the capital is dividend.

NATURE AND FORMS OF SHARE CAPITAL

• Authorized, Nominal or Registered capital

The amount of capital necessary for a corporation to be registered; this capital is known as permitted capital. This is the maximum number of shares that the corporation may offer for subscription.

• Issued Capital

It is authorised capital that is really offered for sale to the general public. In most cases, a corporation doesn't issue all of its authorised capital's worth of shares at once. Instead, it solicits contributions from the public for a portion of its capital and calls for subscriptions for the remaining capital as needed.

• Subscribed Capital

The portion of issued capital that is willingly and typically accepted by the public is known as subscribed capital. If the public approves the entire amount of issued capital, the issued capital must match the subscribed capital.

• Allotted Capital

The portion of the issued capital for which the public has subscribed and been allocated to the public is known as allotted capital, and it is the same as subscribed capital.

• Uncalled Capital

"Uncalled capital" refers to the portion of the assigned capital that has not yet been withdrawn by the company.

WHAT ARE SHARES?

Section 2 (84) of the Companies Act, 2013 defines Share.

"Share includes stock and refers to a share in a company's share capital. Shares are merely a subset of securities, it is also possible to argue."

Why is Shares Issued?

Companies give shares to investors who frequently make investments in order to raise capital. Companies use this money to further develop and expand their operations.

What is Stock?

A stock is a collection of shares from the same category that have the same value. It is a total of shares that have been fully paid up.

Kinds of Share Capital

Section 43 of the Companies Act, 2013 defines Kinds of Share Capital.

The share capital of a company limited by shares shall be of two kinds, namely:

Equity Share Capital

Any share capital that is not preference share capital is referred to as equity share capital when referring to a company limited by shares. It describes the portion of the company's funds that are raised in exchange for a stake in the business.

Every business needs a sizeable operating capital to maintain its operations. When a business is faced with financial challenges, this money is utilised to maintain daily operations. Companies are more likely to raise the necessary cash, also known as equity share capital, by selling equity shares. An equity share capital is a share capital that is not constrained by shares

Preference Share Capital

One of the unique types of share capital are preference shares, which have a fixed dividend rate and preferential rights over conventional equity shares when it comes to profit sharing and asset claims. When dividends are declared and money is distributed at the time of winding up, preferential share capital purchasers are given preference. Only when a decision directly or indirectly affects them do they have the right to vote.

Shares known as preference shares guarantee their owner a fixed payout, which is paid before dividends from regular shares. Preference share capital refers to funds raised through the issuance of preference shares. with preference Share capital is that portion of a company's capital that carries preferential rights to be paid a fixed amount and to be returned the capital paid up on a winding up or upon repayment of capital.

When referring to any corporation limited by shares, the term "preference share capital" refers to that portion of the issued share capital of the company that contains or would carry a preferential right with respect to:

1. Distribution of dividends, either in the form of a fixed sum or a sum calculated at a fixed rate, which may or may not be subject to income tax;

2. Return of the amount of the paid-up or deemed-paid-up share capital in the event of a winding-up or repayment of capital, regardless of whether there is a preferred right to the payment of any fixed premium or premium on any predetermined scale, as stipulated in the company's memorandum or articles.

RAISING OF CAPITAL

1. Private Placement: The company does not sell shares to the general public or to everyone. They make it available to a specific demographic or set of people. Private placements can be made by private companies. They have made an unlawful public issue. A financial year is limited to 200 invitations for private placement. After payment, the share must be assigned within 60 days. A corporation is not allowed to publish an advertisement in the press when making a private placement. They get in touch with potential shareholders directly.

2. Offer for Sale: It is a technique for raising money. In this case, the firm appoints an issuing house to issue the share on its behalf. In this case, the corporation, not the issuing house, allocates the capital to the issuing house (i.e. capital belongs to the company).

3. Rights Issue: (Same as discussed above).

4. Inviting the Public through Prospectus: It can be done only by a public company. There are two ways/mechanisms by which a company invites the public through the prospectus. The 2 ways are:

• Fixed Price: Here, the price of the share is already fixed from the beginning.

• Book Building/Price discovery: Here, Red Herring Prospectus is used.

A Red Herring Prospectus does not include important information about the security issuance, such as its price and the number of shares offered, but it does contain the majority of information about the company's operations and prospects. In this kind of IPO, the company works with a financial institution, which determines the share price range.

Kinds of Raising Capital

There are shares which are used to raise the capital of the company. Those shares are:

· Sweat Equity Shares;

· Employees Stock Option Scheme;

· Bonus Issue;

· Rights Issue.

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

These are the discounted shares that the corporation has given to its employees or directors (aside from independent directors) in order to motivate them to perform better.

It is issued for the purpose of:

· For the business's expertise.

· Improving the company's intellectual capacity.

· Increasing the value of the workforce.

· Compliances to be made by the company to issue those shares:

· Already-issued classes of shares.

· The Board of Directors has proposed issuing such shares, and a special resolution from the members is required.

· The class of shares, the number of shares, and the recipients of the shares.

· The Board of Directors would determine the price.

· The company must have been in operation for at least a year before issuing such shares.

· A maximum of 5 crore or 15% of the paid-up share capital, whichever is higher.

· Only shares of sweat equity may be issued.

· Prior to the issuance of sweat equity shares, shareholders will get notice.

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

Employees and company directors have access to these shares. They have the choice or right to buy these shares at a certain price. Directors and staff will benefit from this. These shares cannot be compared to compensation for employees or board members.

Requirements:

· Members' Special Resolution.

· Until one purchases these shares, one is not eligible for dividends or voting rights.

Bonus Issue: Section 63

This share capital has been paid in full. It consists of the extra shares that the existing shareholder received. The shareholders are not charged anything because they are receiving these shares as a bonus. It is issued by a firm when they want to capitalise their reserve and surplus cash since they have a large amount of accumulated profits. It is based on the debt-to-equity ratio, which should never be less than 2:1 because the debt should never exceed the company's assets. The corporation should have no liabilities. Bonus shares are viewed as a positive sign for the company because they enable it to maintain its net worth while serving a sizable shareholder base.

Conditions:

· If a bonus is not explicitly stated in the company's AOA (Articles of Association), it must be changed by a special majority and stated in the AOA (Articles of Association).

· The Board of Directors, managers, and high-level management vote on a special resolution to determine whether the company is making a profit. If there is a significant amount of accumulated earnings, the resolution is approved and bonuses are given to all shareholders.

· There shouldn't have been any prior missed dividend and interest payments to the holder of the debenture.

· There shouldn't be any outstanding employee pay, provident funds, etc.

Sources of Bonus Issue:

The accounts where the dividend is saved are known as "free reserves."

When the money from redeemable preference shares needs to be redeemed, it can be done so using Capital Reserve Redemption Accounts (CRRA) (the amount which is invested).

The premium for shares is put in a securities premium account (SPA), which is a type of account. (Premium amount—the greater sum at which the shares are issued)

There shouldn't be any outstanding employee pay, provident funds, etc.

Restriction on Issuing Bonus Share:

There is a class of shares, as was described in the sweat equity share. If a corporation has an outstanding completely or partially convertible debt instrument at the time of issuing bonus shares, it cannot issue bonus shares. Unless equity shares of the same class are reserved on the same conditions and in the same proportion to the convertible component in favour of such holders of convertible debt instruments.

At the time of conversion of the convertible debt instrument, the equity shares reserved for the holder of the fully or partially convertible debt instrument shall be issued on the same terms or in the same proportion as the bonus shares.

Rights Issue: Section 62(1)

When the business considers raising more capital, it issues these shares, giving precedence to existing shareholders first. The pre-emption power belongs to the current shareholders. It is not necessary to issue rights issues, despite the fact that it aids in capital raising.

Compliance of Rights Issue:

· The company's articles of association must make reference to it.

· Shareholders must be notified in regards to the same.

· The duration of this deal need to be 15 to 30 days.

· The current shareholders have the option to accept or reject this offer.

· The number of shares and their respective prices must be stated.

Nature of Shares:

· A portion of the equity.

· By the shareholder's exploitation (ownership of shares by shareholders).

· Specifies shares as the right to take part, i.e., in profits whilst the business is still operating and in assets when it is wound up.

SHARE CERTIFICATE AND WARRANT

Ø Share Certificate: Section 46

It is a document that attests to the fact that an individual owns a specific number of shares. It is signed by two directors, the managing director, and the company secretary and is provided with the company's seal. It serves as the initial proof of ownership. It serves as an estoppel with regard to both the title and the payment.

Ø Share Warrant

It is a bearer document that can be transferred via delivery. It is not covered in the 2013 Companies Act. It is only given to public corporations with the federal government's approval.

BUY-BACK (Sections 67, 69, and 70)

The term "buy-back" refers to the decision made by the company that issued the shares to withdraw those shares from the market and purchase their own shares (i.e., the firm purchases its own shares) by paying the shareholders the market price per share. A firm can reinvest in itself by buying its own stock. When a firm engages in the buy-back procedure, its liability is reduced. When a firm has extra cash on hand, it typically buys back its own shares; alternatively, it may invest it in a new business initiative.

Objectives of Buy-Back

1. Accountability for surplus funds: Directors are responsible to shareholders for their use of surplus cash. The underlying principle is that cash should continue to flow; an abundance of surplus cash on the balance sheet is not a positive sign. Investments should be made, and cash should continue to flow.

2. An increase in the company's current share price.

3. Increased earnings per share.

4. Suppress the unwanted takeover offers.

Buy-Back Takes Place Out of

1. Free reserve;

2. Securities premium account;

3. Proceeds of any issue.

Conditions

1. The articles of association must permit it.

2. The maximum buyback is limited to 25% of the free reserve and paid-up share capital.

3. Shareholders must approve a special resolution.

4. A solvency declaration must be signed by two directors. 1 of them must be the managing director. They must certify in writing that their business is in good standing, will not be adversely affected by the buyback, and will maintain its sound financial standing for a period of one year without experiencing insolvency.

5. Only existing shareholders may fund buybacks.

Prohibition of Buy-Back

1. A company is not permitted to buy-back shares through a subsidiary, investment bankers, or investment company.

2. No purchase may be made if there is a dividend, loan, or repayment default of any type.

3. There shouldn't be any liability on the corporation since buy-backs by themselves simply allow for the use of excess funds, thus there shouldn't be any.

Failure to Comply

1. Fine up to 1-3 hundred thousand on Company.

2. Fine up to 1-3 hundred thousand for every independent officer.

3. Imprisonment up to 3 years.

ALTERATION OF THE SHARE-CAPITAL.

The 2013 Companies Act's Section 61 addresses the alteration of share capital. A capital provision that specifies the permitted or nominal capital of the company and its split into shares of the stipulated value must be included in the memorandum of association of a company limited by shares or by guarantee that has a share capital.

By adopting an ordinary resolution, a business can change the share capital without notifying the Company Law Tribunal. All provisions of the Act that are applicable shall cease to apply to the share capital converted into stock if the company has a share capital and has converted any of its shares into stock and has notified the registrar of the conversion. The following are some approaches to modify:

It may increase its share Capital by such amount as it thinks expedient by issuing new shares.

Ø It has the option to combine and divide all or a portion of its share capital into shares with higher par values than its current shares.

Ø It has the right to revoke reservations that have been made but not taken or accepted by anyone.

REDUCTION OF SHARE CAPITAL

The 2013 Companies Act's Section 66 addresses the lowering of share capital. Any reduction in the share capital for a corporation limited by shares or guarantee may be made by special resolution. By approving a special resolution and possessing share capital, the decrease can be done. A special resolution must be passed by the corporation in order to decrease its share capital. After adopting the decision, it may also submit an application for confirmation to the National Company Law Tribunal.

Many factors contribute to reduction. If a business has experienced a loss, the corporation may attempt to repair its reputation by lowering its capital and recording the loss in its final reports.

Overcapitalization is detrimental to business. If a business has more money than is necessary for operating, it can lower share capital for best use. Last but not least, when a company's fixed assets have been overvalued, a reduction in the capital of the company might be used to value them appropriately.

CONCLUSION

This article's researcher wanted to discuss the idea of "Share-capital under Companies Act." This brief article seeks to introduce readers to a fundamental idea by helping them comprehend the terms "Share" and "Capital," before going on to describe Share Capital and its relevant rules under the 2013 Companies Act. The article discussed categories, sorts, notions of reduction and alteration to provide a thorough explanation of the idea of share capital.

The sum of money a firm obtains from the selling of its shares is known as share capital. It is employed in the prospectus, the memorandum of association, the articles of association, and for goods, moveable property, among other things.

Authorized capital, Issued, Subscribed, Allotted, and Uncalled are some of the different types of share capital that have been devolved. There are two types of share capital. Share capital that is not restricted by shares is called equity share capital. The capital of the preference share that has preferential privileges.

By adhering to the guidelines in Section 61 of the act, share capital can be changed through regular procedure without notifying the National Company Law Tribunal. Those shares of capital may also be decreased. But as stated in Section 66 of the 2013 Companies Act, this calls for a unique process and approval by the National Company Law Tribunal.

The fundamental requirement for issuing shares, obtaining capital, and its significance in a corporation are summarised in this article. Every corporate organisation needs money to conduct its operations. It has the ability to raise money both internally and from outside sources. It follows that generating funds and issuing stock are essential components of any business or organisation. It aids the organisation in reinvested in itself as well as in obtaining investment from shareholders and investors. It is evident that a firm that is in a strong position can care for its staff, directors, and shareholders and inspire them to work harder.

~Authored by Kajol Manoj Kamat

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