Share capital means the capital raised by a company by the issue of shares. The capital of a company may be of two kinds-
1. Equity share capital–
- (i) with voting rights
- (ii) with differential rights as to dividend, voting, or otherwise in accordance with such rules and subject to such conditions as may be prescribed.
Shares with differential rights– it means a share that is issued with differential rights in accordance with the provisions of Section 86.
2. Preference share capital-it means, in the case of a company limited by shares, that part of the capital of the company which carries a preferential right as to-
- (a) payment of dividends during the lifetime of the company
- (b) repayment of capital on winding up
Equity share capital means, with reference to a company limited by shares, all share capital which is not preference share capital. In other words, it is capital that does not carry preferential rights as to-
- (a) payment of dividend
- (b) repayment of capital on winding up.
3. Called-up capital-this is that part of the issued capital which has been called up on the shares.
4. Paid-up capital-this is that part of the issued capital that has been paid up by the shareholders or which is credited as paid-up on the shares
5. Uncalled capital-this is the remainder of the issued capital that has not yet been called.
6. Reserve capital-this is that part of the uncalled capital of a company that can be called only in the event of its winding up.
7. Authorized or nominal capital-This is the nominal value of the shares which a company is authorized to issue by its Memorandum of Association.
8. Issued or subscribed capital-issued capital is the nominal value of the shares which are offered to the public for subscription.
Bonus shares
‘Bonus’ is something given in addition to what is usually or strictly due”. It comes to shareholders in addition to what they get in the form of dividends. It may also be paid-
- 1) in case the company has surplus cash and has no use for it, or
- 2) by making partly paid shares as fully paid. Normally bonus is paid to the shareholders in the form of fully paid shares free of cost. This augments the resources and earning capacity of the company.
A company may be following a conservative policy of not disturbing all the profits every year to accumulate large reserves over time. If the Articles so permit, it may convert a part of these reverses into share capital by issuing fully paid bonus shares to the existing shareholders. This is called the capitalization of profits.
Issue of bonus shares results in the capitalization of profits and reserves of the company.
Allotment of Shares
The capital of the company is divided into certain indivisible units of a fixed amount. These units are called shares. ‘Share’ means share in the share capital of a company.
A share has been defined as “an interest having a money value and made up of diverse rights specified under the Articles of Association”- Commr of Income Tax v Standard Vaccum Oil Co. Ltd
A share is evidenced by a share certificate. A share certificate is issued by a company under its common seal.
Each share is to be distinguished by an appropriate number (Section 83). Each share in a company having share capital is distinguished by its appropriate number.
General principles
An effective allotment has to comply with the requirements of the law of contract relating to the acceptance of an offer.
- Allotment by proper authority-an allotment must be made by a resolution of the board of directors. “Allotment is a duty primarily falling upon the directors.”, and this duty cannot be delegated except in accordance with the provisions of the articles.
- Within reasonable time-allotment must be made within a reasonable period of time, otherwise the application lapses. What is reasonable time must remain a question of fact in each case. The interval of about six months between application and allotment has been held to be reasonable. On the expiry of reasonable time Section, 6 of the Contract Act applies and the application must be deemed to have been revoked.
- Must be communicated-the allotment must be communicated to the applicant. Posting a properly addressed and stamped letter of allotment is sufficient communication even if the letter is delayed or lost in the course of the post. Household Fire & Carriage Accident Insurance Co. v Grant is the leading authority.
- Absolute and unconditional-allotment must be absolute and in accordance with the terms and conditions of the applicant, if any. Thus where a person applied for 400 shares on the condition that he would be appointed cashier of a new branch of the company. He was not bound by any allotment unless he was so appointed.
A condition that is to operate subsequently to allotment will not affect its validity. An applicant to whom shares were allotted on the condition that he would pay for them only when the company paid dividends was held to be bound even though the company had gone into liquidation before paying any dividend.
The applicant must promptly reject the allotment when shares have been allotted to him without his condition being fulfilled. An acquiescence on his part would amount to a waiver of the condition.
Reduction of Capital
The law regards the capital of a country as something sacred. The general principle of law founded on principles of public policy and rigidly enforced by Courts is that no action resulting in a reduction of capital of a company should be permitted unless the reduction is effected-
- (a) under statutory authority or by forfeiture.
- (b) in strict accordance with the procedure, if any, laid down on that behalf in the Articles of Association. Any reduction of capital contrary to this principle is illegal and ultra vires.
Reduction of capital with the consent of the court
- It may extinguish or reduce the liability on any of its shares in respect of share capital not paid-up
- It may, either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost or is unrepresented by available assets.
- It may, either with or without extinguishing or reducing liability on any of its shares, pay off any paid-up share capital which is in excess of the wants of the company.
Procedure for reduction of share capital
- Special resolution-Section 100– a company shall first pass a special resolution for reduction of capital. The power to reduce capital must be granted in the Articles of the company. If the Articles do not grant such power, they may be altered by a special resolution giving such power.
- Application to the Court-Section 101-the company shall then apply to the Court by petition for an order confirming the reduction.
- Registration of order of Court with Registrar-Section 103– the order of the Court confirming the reduction shall be produced before the Registrar and a certified copy thereof shall be filed with him for registration. With such a copy shall also be filed a minute, showing with respect to the share capital of the company as altered by the order.
Reduction of capital without the sanction of the Court
- Forfeiture of the shares-the company may, if authorized by its Articles, forfeit shares for non-payment of calls. This results in a reduction of capital if the forfeited shares are not re-issued
- Surrender of the shares-the company may accept a surrender of partly paid shares to save it from going through the formalities of forfeiture.
- Cancellation of shares-the company may, if so authorized by its Articles, cancel shares that have not been taken or agreed to be taken by any person and diminish the amount of its share capital by the amount of the shares so canceled.
- Purchase of the shares by the company under Section 402(b)-the Court may order the purchase of the shares of any members of the company by the company.
- Redemption of redeemable shares-the company may redeem redeemable preference shares in accordance with the provisions of Section 80
- Buy-back of shares-a company may purchase its own shares, subject to fulfillment of conditions laid down in Section 79-A (2), purchase its own shares.
Keywords: Kinds of Share Capital, Kinds of Share Capital in India, Kinds of Share Capital under Companies Act, Kinds of Share Capital, Bonus Shares, Share Capital.
Click here to read the Bare Act of Companies Act 2013
