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Sec 2(46) of THE COMPANIES ACT,1956: “A share is a share in the share capital of a Company.” Boreland Trustees v/s Steel Bros. & Co. Ltd.: “A share represents the interest of a share holder in the capital of the Company & this interest is measured by the number of shares he is holding & the amount paid by him to the Company on shares.” Shares represent ownership of a company. When an individual buys shares in your company, they become one of its owners. Shareholders choose who runs a company and are involved in making key decisions, such as whether a business should be sold. Selling shares in your company is one way of raising long-term finance for your business. This is also known as equity finance. The advantage of equity finance is that you don't always have to repay the finance or pay interest, as you would with an overdraft or bank loan. Thus, the amount of capital to be raised by a Company is always divided into small parts or units of equal value & these units are called SHARES.
According to The Companies (Amendment) Act.e. But if the preference shares are cumulative . Preference as to repayment of capital during liquidation of the Company. i. dividends on preference shares may not be paid for that year.2 TYPES OF SHARES: The different types of shares which can be raised by Companies are : PREFERENCE SHARES EQUITY SHARES DEFERRED SHARES PREFERANCE SHARES: Preference shares are those shares which carry with them preferential rights for their holders. Generally preference shareholders do not have voting rights. preferential right as to fixed rate of dividend & as to repayment of capital at the time of winding up of the Company. the preference shares are redeemable & the maximum period for which they can be issued is 10 years. 1988. Priority as to payment of dividend. Characteristics : Fixed rate of dividend. KINDS OF PREFERANCE SHARES: On the basis of cumulation of dividend: (a) Cumulative Preference Share If the company does no earn adequate profit in any year.
Thus a cumulative preference shareholder is sure to receive dividend on his shares for all the years our of the earnings of the company. The balance may be shared both by equity shareholders at a particular rate. These shares will be treated on the same footing as other preference shareholders as regards payment of capital in concerned. in subsequent years. On the basis of participation (a) Participating Preference Shares The preference shares which are entitled to a share in the surplus profit of the company in addition to the fixed rate of preference dividend are known as participating preference shares. Thus participating preference shareholders obtain return on their capital in two forms (i) fixed dividend (ii) share in excess of profits. (b) Non Participating Preference Shares Those preference shares which do not carry the right of share in excess profits are known as non-participating preference shares. any dividend can be paid to the holder of quality shares. . Dividend at fixed rate is given. the non-cumulative preference shareholders. (b) Non-cumulative Preference Shares The holders of non-cumulative preference shares no doubt will get a preferential right in getting a fixed dividend it is distributed to quality shareholders. it cannot be carried forward. Only after such arrears have been paid off. If it is not paid. will not get any dividend for that year and they cannot claim it in the next year during which period there might be profits. The fixed dividend is to be paid only out of the divisible profits but if in a particular year there is no profit as to distribute it among the shareholders.3 such unpaid dividends on these shares go on accumulating and become payable out of the profits of the company. These shares are not entitled to participate in surplus profit. After the payment of the dividend a part of surplus is distributed as dividend among the quality shareholders at a particulate rate. The balance may be shared both by equity and participating preference shares.
is not to be repaid to the shareholders (except buy back of shares in certain conditions) but capital raised through the issue of redeemable preference shares is to be paid back by the raised thought the issue of redeemable preference shares is to be paid back to the company to such shareholders after the expiry of a stipulated period. It means a company can issue redeemable preference share which are redeemable within 10 years from the date of their issue. (b) Non-convertible preference shares: The owners of these shares do not have any right of converting their shares into equity shares.4 On the basis of redemption (a) Redeemable Preference Shares: Capital raised by issuing shares. a company after the commencement of the Companies (Amendment) Act. . As per section (80) 5a. (b) Non-Redeemable Preference Shares: These are not to be purchased back by the company during its lifetime On the basis of conversion (a) Convertible preference shares The owners of these shares have the option to convert their preference shares into equity shares as per the terms of issue. whether the company is wound up or not. 1988 cannot issue any preference shares which are irredeemable or redeemable after the expiry of a period of 10 years from the date of its issue.
Non redeemable. it may even be more than the rate attached to preference shares. At the time of liquidation. capital on equity is paid after preference shares have been paid back in full. It depends upon the availability of profits the discretion of the Board of the Directors. no public company can issue deferred shares. Characteristics: No fixed rate of dividend.5 EQUITY SHARES: The equity shares or ordinary shares are those shares on which the dividend is paid after the dividend on fixed rate has been paid on preference shares. & . control the working of the Company. Equity shareholders are the virtual owners of the Company. Such shareholders may go without any dividend if no profit is made. This rate of dividend is determined by directors and in case of larger profits. Dividend is paid after dividend at a fixed rate is paid on preference shares. There will be no fixed rate of dividend to be paid to the equity shareholders and this rate may vary form year to year. Characteristics: Rate of dividend is not fixed.1956. Equity shareholders have voting rights & thus. Equity shares will get dividend and repayment of capital after meeting the claims of preference shareholders. As per the provisions of the COMPANIES ACT. DEFERRED SHARES: Deferred shares are those shares on which the payment of dividend and capital (at the time of winding up of a company) is made after money is paid in full on preference shares and equity shares.
ISSUE OF SHARES: A Company may issue shares at • • • Par Premium Discount Issue at Par One who are buying the shares are required to pay only the amount equivalent to the face value of issued share. allotment or with calls. the shares are said to have been issued at Premium. If a company issues its shares at a price more than its face value. cannot be treated as profit. capital on these shares is returned after capital is repaid on both preference & equity shares. A company issues its shares at premium only when its financial position is very sound. The money received as premium is transferred to Securities Premium a/c. The difference between the issue price and face value or nominal value is called „Premium‟. Issue at Premium: One who are buying the shares are required to pay more than the face value of the share. It is a capital gain to the company. The Premium money may be demanded by the company with application. At the time of liquidation.6 Dividend is paid after payment of dividend on equity & preference shares. . 1. But they have imposed conditions on utilization of the amount of premium collected on shares. Characteristics: But there no particular conditions or restrictions regarding the issue of shares at premium.
When the issue price of share is less than the face value. · Discount should not be more than 10% of the face value of the share and if the company wants to give discount more than 10%. These conditions are as follows: · At least one year must have elapsed from the date of commencement of business. cannot be treated as free reserves. amount can be used only for the purposes listed in s.7 2. · The company has sanctioned such issue by passing a resolution in its General meeting and the approval of the court is obtained. . Section 79 of Companies Act 1956 has laid down certain conditions subject to which a company can issue its shares at a discount. it will have to obtain the sanction of the Central Government.78(2). · Such shares are of the same class as had already been issued. the amount should be kept in a separate bank account 3. 4. Issue at Discount: One who is buying shares is required to pay less than the face value of share. shares are said to have been issued at discount.
Section 81 i.8 RIGHT SHARES: Right shares are the shares which are offered by the company to the existing shareholders. it is proposed to increase the subscribed capital of the company by allotment of further shares .e Further issue of capital of companies act 1956 deals with this and it states that where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation. Simply stated the existing shareholders have a right to subscribe for the shares which are offered by the company after initial allotment until some special right is reserved for any other person by special resolution in this respect. whichever is earlier.
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