Unit iii

3(a). Share is an interest of shareholder in a company measured a sum of money for the
purpose of liability, in the first place, and of interest in the second……..

Explain the above statement while discussing the nature and concept of share.

Introduction

Share is an interest of shareholder in a company measured a sum of money for the purpose of
liability, in the first place, and of interest in the second……..

A share is a part or interest of a shareholder in a definite allocation of the capital. Shares

calculate rights of a shareholder to receive a certain amount of profit of the company while it is a
going concern, and to contribute to the assets of the company when it is going to be liquidated or
wound up.

A share is, therefore, the interest of a stakeholder in the company measured by a sum of money,
for the purpose of liability in the first place, and of interest in the second, but also consisting of a
series of several mutual covenants entered into by all shareholders of the company.

A share is not a sum of money, but an interest measured by a sum of money and made up of
various rights contained in the contract by all the shareholders.

A person who acquires a share in a company automatically becomes subject to the obligations
imposed by the Company’s Act, the company’s memorandum of association and the company’s
articles of association. He also becomes entitled to the rights similarly.

Sub-section 84 of Section 2 of the Companies Act 2013, defines “Shares” as, “Share” means a
share in the share capital of a company including stocks. Shares are considered as a type of
security. Securities is defined in the Sub-section 80 of Section 2 of the said Act, which refers to
the definition of the securities as defined in clause (h) of section 2 of the Securities Contracts
Act, 1956.
According to Section 44 of the said Act, the shares of any member in a company shall be
movable property. It is considered to be transferable in the manner provided by the articles of the
company. 1

According to Section 45 of the said Act, it mandates on all companies having a share capital to
ensure that the shares of the company shall be distinguished by a distinctive number. This
requirement does not apply where a share is held by a person whose name is entered as holder of
beneficial interest in the records of depository.

Principles of Allotment Of Shares

1. Allotment of shares by proper authority

Allotment is generally made by a resolution that consists of the Board of directors. But where the
articles so provided, an allotment made by secretaries and treasures was held to be regular.

2.Within the reasonable time

Allotment is basically made within a reasonable or specified period of time otherwise the
application shall lapse. The specified time frame of six months between application and
allotment is held to be not reasonable.

3. Shall be communicated

It is primary that there must be communication of the allotment to the applicant. Posting of a
properly addressed and stamped letter of allotment is considered as a sufficient communication
even if the letter were to be delayed or lost.5

4. Absolute and unconditional

As per the terms and conditions of the applicant the allotment must be absolute and
unconditional. Thus where a person applied for 400 shares on the condition that he would be
appointed cashier of a new branch of the company, the Bombay High Court held that he was not
bound by any allotment unless he was so appointed.
3(b). Classify the ‘share’ and ‘share capital’ of a company.

Section 2(46) of Companies Act, 1956 defines Share as follows:

Share is defined in Section 2(46) of the Companies Act, 1956 as, “‘share’ means share in the
share capital of a company, and includes stock except where a distinction between stock and
shares is expressed or implied.” Shares are considered as goods under S 2(7) of the Sale of
Goods Act, 1930, and are moveable property, but are transferable only in the manner provided
by the Articles of Association of the Company, as per Section 82 of the Companies Act, 1956.

A landmark case in which the meaning of share has been clearly postulated is CIT v. Standard
Vacuum Oil Co1. where the Supreme Court of India said that “by a share in a company is meant
not any sum of money but an interest measured by a sum of money and made up of diverse rights
conferred on its holders by the articles of the Company which constitute a contract between him
and the company.”

In another case, Bucha F. Guzdar v. Commissioner of Income Tax, Bombay,2 the Supreme Court
defined share as “the right to participate in the profits made by a company while it is a going
concern and declares a dividend, and in the assets of the company when it is wound up.”
Therefore, a share, or share capital, is not a sum of money, and not just the interest of the
shareholder in a company, but also represents a set of rights and liabilities.

Prior to the enactment of the Companies Act, 1956, there were three kinds of shares.

1. Ordinary Shares- An ordinary share basically represents the equity ownership of a

company, which would, simply put, entitle the shareholder to a certain portion of the
company’s profits. Other privileges include receiving quarterly accounts and annual reports,
and participating at Annual General Meetings, but such shareholders are at a more
disadvantageous position in case there is liquidation of the company or the company is
wound up, because they have the last call on the assets of the company, after all the other
liabilities of the company have been met.

1
(1966) 1 CompLJ 187 SC.
2
LR 617 (SC).
2. Preference Shares- “A preference share is a share which entitles a holder to an annual
dividend, of a fixed amount per share (usually expressed as a percentage of the nominal value
of the share), paid in priority to any dividend payments to other members.”
3. Deferred Shares- These shares generally came with a condition that no dividends can be
paid to the shareholder for a period of time, generally one financial year, unless the ordinary
shareholders have been paid a certain amount in that year; and these are generally issued to
founders of the company and thus also called ‘founders’ shares.’

But with the enactment of the Companies Act, 1956, under Section 86 of the Act, only two kinds
of shares are now recognized and can be issued by a company limited by shares.

Section 86 states:

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

(a) Equity Share -

(i) With voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules and
subject to such conditions as may be prescribed;

(b) Preference Share -

With regard to issuing shares with differential voting rights, certain rules and regulations which
have been specified by the Department of Company Affairs have to be followed while issuing
such shares. These Rules, among other things, provide that only 25 percent of the total issued
share capital, including non-voting shares, can be shares with differential voting rights
(hereinafter DVR unless otherwise specified), and it can only be issued by a company which has
distributable profits in the last three years immediate to such issuance. Neither Equity shares
with regular voting rights will be allowed to be converted to DVR nor will the latter be allowed
to be converted to the former, and a shareholders’ resolution by the general body will have to
approve the issue of such shares.

Preference Share has been defined and explained elaborately in Section 85 of the Companies
Act, which states that preferential share capital is that capital which fulfils the two conditions,
first, there has to be guaranteed dividend during the life of the company, which may or may not
be a fixed amount, or a fixed rate, to be paid to preferential shareholders before anything is paid
to equity shareholders, and secondly, if the company is wound up, the preferential dividends
must be paid to the preferential shareholders before paying to the equity shareholders.

Nature and Concept of Share Capital

Capital can be broadly categorized into fixed capital and working capital. Capital which is
required for procuring assets of fixed and permanent nature is called fixed capital and capital
required for running the operation of the business such as purchase of raw materials, payment to
workers, meeting various other' current expenses, allowing credit to customers etc are called
working capital. Estimation of working capital depends on a number of variable factors such as
potential market of the product; credit to be allowed to customers to push up the product in the
market, the time for which raw materials to be kept in stock, period of production process,
availability of credit from the suppliers etc. The promoters have to work out and decide how
much and in what proportion the fixed and working capital will be required

The share capital of company may be of the following types:3

1. Registered, Authorized or Nominal Capital:

The Memorandum of Association of every company has to specifically mention the amount of
capital with which it wants to be registered. The capital so stated is called Registered, Authorized
or Nominal Capital. The Registered Capital is the maximum amount of share capital which a
company can raise through public subscription.

2. Issued Capital:

The company may not issue the whole authorized capital at once. It goes on raising the capital as
and when the need for additional fund is felt. So, issued capital is that part of
Authorized/Registered or Nominal Capital which is offered to the public for subscription in the
form of shares.

3. Subscribed Capital:

3
Company Law, Dr. N.V. Paranjape, 9th Edition, Central Law Agency, (2018).
It is that part of “issued capital” for which applications are received from the public. The
subscribed capital is allotted to the respective subscribers as per resolution and rules passed by
the directors of the company.

4. Unissued Capital:

The balance of nominal capital which is left to be issued is called Unissued Capital.

5. Called up Capital:

It is that part of subscribed capital which has been called up by the company itself. A company
does not call at once the full amount on each of the shares it has allotted and therefore, calls up
only such amount as it needs.

6. Uncalled up Capital:

It is the uncalled portion of the allotted capital and represents contingent liability of the
stakeholders on the shares.

7. Paid up Capital:

It is that part of called up capital against which payment has been received from the members on
their respective shares in response to the calls made by the company.

8. Reserve Capital or Reserve Liability:

By Reserve Capital we mean that amount which is not callable by the company except in the
event of the company being wound up. The company cannot demand the payment of money on
the shares to that extent during its life time. Reserve capital may be created by means of a special
resolution passed by the company in its General Meeting by three-fourths majority of those
voting on it.

9. Fixed Capital:

The fixed capital of a company is what the company retains in the shape of fixed assets such as
land and buildings, plant and machinery, furniture, etc.

10. Circulating Capital:

The circulating capital is a part of subscribed capital which is circulated in business in the form
of using goods or other assets such as book debts, bill receivables, cash, bank balance, etc.