SHARE CAPITAL
The term ‘share capital' refers to the
amount of capital raised (or to be raised) by a company through the issue of
shares.
Features of share capital
The main features of share capitals are
1.
Share capital can be raised only by
companies limited by shares and registered with share capital
2.
Share capital can be raised by a company
either at the time of its formation for starting its operations or later on for
further expansion.
3.
Share capitals (except in the case of
redeemable preference share), one raised, cannot be returned by the company to
the shareholders as long as it continues to exist, It can be returned only at
time of the winding up of the company.
Types
or Kinds of Share Capital:
The various kinds or sub-divisions of
share capital are:
1. Authorised Capital, Registered Capital
or Nominal Capital:
Authorised
capital is the sum stated in the capital clause of the memorandum of
association as the capital of a company. It is the maximum amount of share
capital, which the company is authorized by its memorandum of association to
raise through the issue of shares. It is called authorized capital, because it
is the capital, which a company is authorized to raise from the public. It is
called registered capital, because it is the capital with which a company is
registered. It is also called nominal capital, because it is not the real or
actual capital of a company. A company has this capital only in name. Further,
it is the total nominal value of the shares, which a company can Issue.
2. Issued Capital:
A
company, usually, does not need the whole of the authorized capital in the
beginning. It needs only a part of the authorized capital. So, in the beginning,
it, usually, issues only a part of the authorized capital to the public for
subscription. That part of the authorized capital to the public for
subscription. The part of the authorized capital which is issued or offered,
for the time being, to the public for subscription is, usually, called the
issued capital.
3. Subscribed Capital:
There
is no guarantee that the entire capital issued by a company to the public for
subscription will be subscribed or taken up by the public. The public may
subscribe in full or in part. That part of the issued capital, which is
subscribed or taken up by the public, is called subscribed capital.
4. Called-up Capital:
Generally, a
company does not need the entire face value of the shares subscribed by the
public immediately. So, it calls or demands only a part of the nominal value of
the shares subscribed or taken up by the public immediately and collects the
balance later, as and when necessary, by making further calls. That part of the
subscribed capital, which has been called up or demanded by the company is
called called-up capital.
5. Paid -up Capital:
There is no
guarantee that all the subscribers pay the full amount called up or demanded
from them. In fact, in many cases, some of the subscribers do no pay the full
amount called up from them. That means, often, only a part of the called-up
capital may be paid by the subscribers or shareholders. That part of the
called-up capital, which has been actually paid, by the subscribers or
shareholders is called paid-up capital.
ALTERATION OF
CAPITAL
Section 61 of the Companies Act, 2013 provides that a company
limited by shares or guarantee and having a share capital may, if so authorised
by its articles, alter, by an ordinary resolution, its memorandum in the following
ways:
(a)
It may increase the authorised share capital by such
amount, as it thinks expedient;
(b)
It may consolidate and divide, all or any of its existing shares into a
larger denomination than of its existing shares e.g., by consolidating ten
shares of Rs. 10 each into one share of Rs. 100 each. Proviso to Section 61(1)
(b) states that no consolidation and division which results in changes in the
voting percentage of shareholders shall take effect unless it is approved by
the Tribunal on an application made in the prescribed manner;
(c)
It may convert all or any of its fully paid-up shares
into stock or reconvert that stock into fully paid-up shares of any
denomination.
(d)
It may sub-divide its existing shares or any of them into smaller
denomination than fixed by its Memorandum but it must keep the existing
proportion between the paid-up and unpaid amount e.g., one share of Rs 100
each, Rs 60 paid up and be sub-divided into ten shares of Rs 10 each, Rs 6
paid-up per share.
(e)
It may cancel
shares which have not been taken up or agreed to be taken by any person and
diminish the amount of the share capital by the amount of the shares so
cancelled. However, such cancellation of shares will not be deemed to be a
reduction of share capital, within the meaning of Section 66 of the Companies
Act, 2013. In other words, it is cancellation of unissued share capital not
being taken or agreed to be taken up by any person.
REDUCTION OF CAPITAL
Reduction of
share capital is governed by the provisions of section 66 of the Companies Act,
2013.
Reduction of
share capital is required to be done by special resolution.
Reduction of
share capital may be done in the following manner:-
(a)
Extinguishing or reducing the liability of members in respect of the capital
not paid up
(b) Writing off
or cancelling any paid up capital which is in excess of the needs of the
company
(c) Paying off
any paid up share capital which is in excess of the needs of the company.
REDUCTION OF
SHARE CAPITAL UNDER COMPANIES ACT 1956
Reduction of
capital means reduction of issued, subscribed and paid-up capital of the
company. The share capital of a company may be reduced under section 100 of
Companies Act 1956, only if the articles of the company authorize so. If there
is no such clause in the articles, the articles must be amended by a special resolution
for giving the power of reducing the share capital.
As per Section
100 subject to confirmation by the court, a company limited by shares or a
company limited by guarantee and having a share capital may, if
authorized by its articles, by special resolution, reduce its share
capital in any way and in particular and without prejudice to the generality of
the forgoing power, may:
1. Reduce or extinguish the liability on any of its shares in respect of share capital not paid up e.g., where the shares are of Rs. 100 each with Rs. 75 paid-up reduce them to Rs. 75 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of Rs. 25 per share;
2. Either with or without extinguishing or reducing liability on any of its shares, cancels any paid up share capital which is lost, or is unrepresented by available assets or
3. Either with or without extinguishing or reducing liability on any of its shares, pay of any paid up share capital which is in excess of the wants of the company where the shares are fully paid-up, reduce them to Rs. 75 each and pay back, Rs. 25 per share.
Secretarial procedure for reduction of capital:
1. Reduce or extinguish the liability on any of its shares in respect of share capital not paid up e.g., where the shares are of Rs. 100 each with Rs. 75 paid-up reduce them to Rs. 75 fully paid-up shares and thus relieve the shareholders from liability on the uncalled capital of Rs. 25 per share;
2. Either with or without extinguishing or reducing liability on any of its shares, cancels any paid up share capital which is lost, or is unrepresented by available assets or
3. Either with or without extinguishing or reducing liability on any of its shares, pay of any paid up share capital which is in excess of the wants of the company where the shares are fully paid-up, reduce them to Rs. 75 each and pay back, Rs. 25 per share.
Section 66 of
Companies Act, 2013 provides the procedure for the reduction of share capital. This section corresponds to Sections 100 to
105 of the Companies Act, 1956. This
section came into effect from 15.12.2016.
The Central Government for the purposes of this Section makes ‘The
National Company Law Tribunal (Procedure for reduction of share capital of
Company) Rules, 2016 (‘Rules’ for short) which came into effect from
15.12.2016.
A company
limited by shares or limited by guarantee and having share capital may reduce
the share capital of the company in any manner by passing a special
resolution. The reduction of share
capital may-
·
extinguish or reduce the liability of any of its
shares in respect of the share capital not paid up; or
·
either with or without extinguishing or reducing the
liability on any of the shares-
Ă˜ cancel any paid up share capital which is lost or is unrepresented by
available assets; or
Ă˜ pay off any paid up share capital which is in excess of the wants of the
company,
Alter its
memorandum by reducing the amount of its share capital and of its shares
accordingly.
No such
reduction shall be made if the company is in arrears in the repayment of any
deposits accepted by it, either before or after the commencement of this Act,
or the interest payable thereon.
Filing
application before Tribunal
Rule
2(1) provides that an application to confirm a reduction of share capital
of a company, shall be filed before the National Company Law Tribunal in Form
No. RSC-1. The fee payable is ₹ 5,000/-.
The application
shall be accompanied with the following-
- the list of creditors duly certified by the
Managing Director of the Company; in his absence, the list shall be
certified by two directors as true and correct, which is made as on a date
not earlier than 15 days prior to the date of filing of an application
showing the details of the creditors of the company, class wise,
indicating their names, addresses and amounts owed to them;
- a certificate from the auditor of the company to
the effect that the list of creditors is correct as per the records of the
company verified by the auditor;
- a certificate by the auditor and declaration by a
director of the company that the company is not, as on the date of filing
of the application, in arrears in the repayment of the deposits or the
interest thereon; and
Copy of list of creditors
Rule 2(3)
provides that copies of the list of creditors shall be kept at the registered
office of the company. Any person
desirous of inspection the same may inspect and take extracts from the same at
any time during the ordinary hours of business of the company. A sum of ₹ 50/- is payable for inspection is
payable. A sum of ₹ 10/- is payable per
page for taking extracts of the list.
Essential steps
for issuing fresh share capital:
1.All applications should be submitted to the Controller of Capital Issues in the prescribed form duly accompanied by a Treasury Challan for fees payable under the Act,
2.The applications should be accompanied
by a true copy of the Industrial License, wherever necessary, or registration
with the Director General, Technical Development, for the project.
3. A realistic estimate of the project cost
will be furnished together with the precise scheme of finance. In respect of
financial assistance from the financial institutions, copies of their letters
indicating their participation in the financing of the capital cost should be
forwarded.
4.Where issue of substantial amount is
proposed to be made or where listing is a requirement of the financial
institutions providing assistance, the company should have the shares issued to
the public and listed in one or more recognized Stock Exchanges except in case
of listed company where it is proposed to issue as “Right Shares.”
5.Where the issue of equity capital
involves an offer for subscription by the public for the first time, the value
of equity capital subscribed privately by the promoters, directors and their
friends shall not be less than fifteen per cent of the total issued equity
capital, if it does not exceed one crore of rupees, twelve-and-a half per cent,
if it does not exceed two crores of rupees and ten per cent, if it is in excess
of two crores of rupees.
6.Ordinarily issue of shares for
consideration other than cash is not permitted. In exceptional cases where the
parties desire that shares should be allowed in lieu of the assets transferred,
detailed information in regard to the valuation of such assets together with
the copies of necessary valuation reports be furnished.
7. In case of companies registered under
the M.R.T.P. Act, they are advised to ensure that the requisite approval under
the M.R.T.P. Act has been obtained before making an application to the
Controller of Capital Issues.
8. To finance the capital cost of the
project, the capital structure should be such that an equity debt ratio of 1: 2
is considered fair and reasonable. In case of capital intensive industries, a
higher equity debt ratio can be considered on merits of such case.
9.An equity preference ratio of 3: 1 is
normally permitted.
10. The
rate of dividend on preference shares should be within the ceiling as notified
by the Controller of Capital issues from time to time.”
11. No
premium is allowed in respect of a new company making its first issue of
shares.
12. There
should be satisfactory underwriting arrangements in respect of new issues and
the names of underwriters together with the amounts underwritten should be
indicated in the application, except it case of “Right Shares”
13. No
company is expected to make an allotment of shares to nonresidents except with
the prior approval in writing of the Government of India or of the Reserve Bank
of India and a copy of such approval should be attached to the application if
the shares are proposed to be allotted to non-residents.
14.
If any firm allotment is intended to be
given in favour of the public financial institutions, the particulars thereof
should be furnished in the application.
15. Any arrangement reached by the company or commitment made prior to the issue of the capital which has a significant impact on the capital, cost estimate or the capital structure of the company, the same may be disclosed along with the application.
15. Any arrangement reached by the company or commitment made prior to the issue of the capital which has a significant impact on the capital, cost estimate or the capital structure of the company, the same may be disclosed along with the application.
16. A certificate duly signed by the
Secretary and/or Director of the company stating that the information furnished
is complete and correct, be annexed to the application. Similarly a certificate
from the Auditors of the company stating that the information in the
application has been verified by them and is found to be true and correct to
the best of their knowledge and information, be furnished.
17. Before making an application to the
Controller of Capital Issues for issue of fresh share capital as ‘rights
shares’, companies are further required to give in a letter addressed to the
existing shareholders information in sufficient details as to how they propose
to utilize the additional moneys that are being raised by the ‘rights issue’
and give some broad ideas of the future earnings after the investment of such
additional capital.
Buy -Back of shares:
Buy Back of
Shares means the purchase by the Company of its own shares. Buy Back of equity
shares is an imperative mode of capital restructuring. It is a corporate
financial strategy which involves capital restructuring and is prevalent
globally with the underlying objectives of increasing Earnings per Share,
averting hostile takeovers, improving returns to the stakeholders and
realigning the capital structure. Buy back is an alternative way of Reduction
of Capital.
Buy-back helps a
company by giving a better use for its funds than reinvesting these funds in
the same business at below average rates or going in for unnecessary
diversification or buying growth through costly acquisitions.
Reasons for Buy-Back of shares:
1.
To improve shareholder value, since buy-back provides
a means for utilizing the companies surplus funds which have unattractive
alternative investment options, and since a reduction in the capital base
arising from buy-back would generally results in higher earnings per share
(EPS).
2.
It is used as a defence mechanism, in an environment
where the threat of corporate takeovers has become real. Buy-back provides a
safeguard against hostile take-over by increasing promoter’s holdings.
3.
It would enable corporate to shrink their equity base
thereby injecting much needed flexibility.
4.
It improves the intrinsic value of the shares by
virtue of the reduced level of floating stock.
5.
It would enable corporate to make use of the buy-back
shares for subsequent use in the process of mergers and acquisitions without
enlarging their capital base.
Benefits of Buy Back:
1.
Firms whose profitability was below their industry
average enjoy greater share price growth after shares are repurchased than
firms whose profitability was above their industry average.
2.
Firms whose sales growth was below their industry
average enjoy greater share price growth after shares are repurchased than
firms whose sales growth was above their industry average.
3.
Profitable and growth firms that repurchase shares
provide a clear indication to the investors about the strengths of the company.
1.
Repurchasing firms with debt ratios below but sales
growth rates above their industry average experience substantially higher share
price growth after repurchasing than firms with debt ratios above but sales growth
below their industry average.
2.
Repurchasing firms with profitability and debt ratios
below their industry average demonstrate higher share price growth after
repurchasing than firms with profitability and debt ratios above their industry
average.
Role of company secretary in connection with issue of
shares:
One of the
foremost duties of a Company Secretary is to handle the affairs related to
shares.
Allotment:
There are three
different situations under which allotment takes place and the Company Secretary
has to act accordingly.
(I) when a new
company is promoted and shares are issued or offered for sale then as and when
applications together with application money are coming in, the Company
Secretary has to do the following:
(a) To make a
chronological (i.e., date and time-wise) record of the applications and sending
the money to a scheduled bank.
(b) To help the
Board of Directors in the act of allotment. If applications for shares are
received less than the number of shares offered for sale then there is no
problem and all the applicants will get shares allotted to them. But problem
arises when more applications have come.
Then the Secretary will do, on behalf of the Board of Directors,
allotment which may take place under any of the following three methods as to
be mentioned in the Articles of Association of the company: They are:
(i) Priority
Basis:
Shares will be
allotted to those applicants who have applied for shares first, according to
chronological order as recorded,
(ii) Pro-Rata
Basis:
It i s not
always justifiable that shares should be allotted on priority basis. And so
allotment is made on pro rata basis. Suppose, applications have been received
for twice the number of the shares offered for sale. Then each applicant will
get half of the shares applied by him accepted and shares are allotted
accordingly and the remaining half rejected.
(iii) Lottery
Basis:
Applications are
drawn at random out of the total number of applications thoroughly mixed up
such drawings will continue until all the available shares are allotted and the
remaining applications will be rejected. Out of the three systems, the second
one is the best.
Differences between Members and Shareholders
The following
are the differences between members and shareholders:
1.
A member is a person who subscribed the memorandum of
the company. A shareholder is a person who owns the shares of the company.
2.
The term member is defined under section 2 (27) of the
Indian Companies Act, 1956. Conversely, the term shareholder is not defined in
the Indian Companies Act, 1956.
3.
The bearer of a share warrant is not a member, but the
bearer of a share warrant can be a shareholder.
4.
All shareholders whose name are entered in the
register of members are the members. On the other hand, all members may not be
the shareholders.
In the case of a public company, there must be a
minimum of 7 members. There is no 1.
such cap on the maximum number of members. Similarly,
a private company can have a minimum of 2 and maximum of 50 members. As opposed
to shareholders, there is no minimum or maximum limit, in the case of a public
company.
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