Skip to main content

CAPITAL FORMATION

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:
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
a certificate by the company’s auditor to the effect that the accounting treatment  proposed by the company for the reduction of share capital is in conformity with the accounting standards specified in Section 133 or any other provisions of the Act.

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.
  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.





Comments

Popular posts from this blog

COMPANY ADMINISTRATION

Key Managerial Personnel Companies Act, 2013 (Act) has introduced many new concepts and Key Managerial Personnel is one of them. While the Companies Act, 1956 recognised only Managing Director, Whole Time Director and Manager as the Managerial Personnel, the Companies Act, 2013 has brought in the concept of Key Managerial Personnel which not only covers the traditional roles of managing director and whole time director but also includes some functional figure heads like Chief Financial Officer and Chief Executive Officer etc. These inclusions are in line with the global trends. “Company Secretary” has also been brought within the ambit of Key Managerial Personnel giving them the long deserved recognition of a Key Managerial Personnel of the Company. Another noteworthy feature of this concept is that it combines the important management roles as a team or a cluster rather than as independent individuals performing their duties in isolation to others. The definition of the term ...

Corporate Meetings

 “Meeting may be defined as gathering or assembling or getting together of a number of persons for transacting any lawful business.” ·          There must be at least two persons to constitute a meeting. ·          The business of the meeting is conducted in the form of resolutions proposed or passed. Types of Company Meetings Broadly, meetings in a company are of the following types: A. Statutory Meeting: A public company limited by shares or a guarantee company having share capital is required to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i.e. it obtains certificate of commencement of business. In a statutory meeting, the following matters only can be discusse...

Formation of Company

Formation of Company In the formation of a public limited company having share capital, mainly four stages are involved namely: Promotion Incorporation Capital Subscriptions, and Commencement of business or trading certificate. In the case of the formation of a private company, only the first two stages are involved, because, a private company can commence its business immediately after securing the certificate of incorporation from the Registrar of companies. But in the case of formation of a public company, having share capital, there is need for the promoters to secure from the Registrar, the certificate to commence business in addition to the certificate o~ incorporation. 1.       Promotion of Company The person or persons who undertake responsibility of bring the company into existence are called' Promoters . In other words, the work of promotion is done by a person called "Promoter" or group of persons called "Promoters". Pro...