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“Share Capital : Exploring the backbone of Company Law”

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“Share Capital : Exploring the backbone of Company Law”

Author : Kirti Dubey*

Annotation
A joint stock company should have capital in order to finance its activities. It raises its capital by
issue of shares. The Memorandum of Association must state the amount of capital with which the
company is desired to be registered and the number of shares into which it is to be divided. When
total capital of a company is divided into shares, then it is called share capital. It constitutes the
basis of the capital structure of a company. In other words, the capital collected by a joint stock
company for its business operation is known as share capital. Share capital is the total amount of
capital collected from its shareholders for achieving the common goal of the company as stated in
Memorandum of Association.

Abstract
This paper examines the economic case for rules of company law which regulate the raising and
maintenance of share capital by companies. The enquiry has practical relevance because the
content of company law is currently under review, and the rules relating to share capital have been
singled out for particular attention. The existing rules apply to all companies and are commonly
rationalised as a means of protecting corporate creditors. The paper asks whether such rules can
be understood as an efficient response to failure(s) in markets for corporate credit. It argues that
whilst the current rules are unlikely to enhance the efficiency of the markets which they regulate,
a tentative case may be made for a framework in which companies 'opt in' to rules which restrict
dealings in share capital.

*Author is the student of BA.LLB.(Hons.), Alliance School of Law.

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Table of contents

Chapter 1

INTRODUCTION………………………………………………..................04
1.1 Research Methodology
1.2 Research Plan
1.3 Aim/ Objective
1.4 Rationale/ Significance
1.5 Operational Definition
1.6 Efficacy
1.7 Setting
1.8 Duration of Study
1.9 Sample Size
1.10 Study Design
1.11 Observation
Chapter 2…………………………………………………………………..07
2.1 Definition of capital
2.2 Definition of share capital
2.3 Nature and scope of share capital

Chapter 3
CLASSIFICATION OF CAPITAL............................................................11
3.1 Authorised Capital/ Registered Capital
3.2 Issued Capital
3.3 Subscribed Capital
3.4 Called up capital
3.5 Uncalled Capital
3.6 Paid up Capital
3.7 Reserve Capital
3.8 Unissued Capital
3.9 Circulating or Floating Capital
3.10 Working Capital
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Chapter 4
KINDS OF SHARE CAPITAL....................................................................18
4.1 Preference Share Capital
4.1.1 Cumulative Preference Shares
4.1.2 Non- Cumulative Preference Shares
4.1.3 Participating Preference Shares
4.1.4 Non-Participating Preference Shares
4.1.5 Redeemable Preference Shares
4.1.5 Non- Redeemable Preference Shares
4.1.6 Convertible Preference Shares
4.1.7 Non- Convertible Preference Shares
4.2 Equity Share Capital

Chapter 5
DIFFERENCE BETWEEN PREFERENCE AND EQUITY
SHARE CAPITAL........................................................................... ................24

Chapter 6
SHARE CERTIFICATE..................................................................................25

Chapter 7
ALTERATION OF SHARE CAPITAL........................................................22
Chapter 8
REDUCTION OF SHARE CAPITAL...........................................................24

Chapter 9
VOTING RIGHTS OF SHAREHOLDERS.................................................34

Chapter 10
CONCLUDING REMARKS...........................................................................36

Bibliography.......................................................................37
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CHAPTER - 1

Introduction

Every company limited by shares must have a share capital. Share capital of a company refers to
the amount invested in the company for it to carry out its operations. The share capital may be
altered or increased, subject to certain conditions. A company’s share capital may be divided into
small shares of different classes. The different classes of share capital and the rights attached to
these classes are different.

RESEARCH METHODOLOGY

The study has been carried out with a blend of Qualitative approach of research with
corporate constructivist paradigm in order to bring out the practically constructed nature of
reality added up with advocacy and participatory approach for giving this study a personal
touch of emancipation and different dimensions pertaining to the core issue. This project
has required consultation to an assorted range of books and websites that are a part of the
secondary sources. Some research papers and journals too have been referred to.

1.1 RESEARCH PLAN

1.2.1 Core concept ANALYSIS PROCEDURE :

 Plain reading of the concept of shares.

 Application of the current patterns of its usage on the concept of share capital.
 Observations of the procedure and reasoning of differentiating the share capitals
 Inferences drawn from the analysis
 Suggestive measures and the personal touch towards the reality check of the share
capitals as per the current company law mechanisms.

1.2.2 source collection TECHNIQUE :

 Reading of the original topic from a trusted research paper.

 Media coverage
 Expert opinions/ Fair comments
 Collection of authentic reports and research papers on share capitals.
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1.2 AIM/ OBJECTIVE (SPECIFIC)

To analyze the concept of share capital through the study of various eminent corporate works on
shares related to the said topic.

 To define and to understand the concept of share capital as an important aspect of company
law.
 To know about the evolution of the notion of this concept as an essential process, with
reference to India corporate law.
 To become aware of the changes which this process and concept has gone through in the era of
globalisation.
 Lastly, to analyse the project in totality and address the issues raised thereon.

1.3 rationale/ significance

The sole purpose of this study is to examine the concept and usage of share capitals at present, its
origin, need of inclusion and implementation of them in the corporate sector, various processes
regarding its alteration and reduction, the powers of shareholders regarding the share capitals and
the contemporary changes which are associated with the share capitals.

1.4 OPERATIONAL DEFINITION

A corporation's share capital (or capital stock in US English) is the portion of a

corporation's equity that has been obtained by the issue of shares in the corporation to a
shareholder, usually for cash.

1.5 EFFICACY
The effectiveness of this study is highly objective and thus partially relies on the judicial
interpretation and approach of their corporate legal reasoning towards this issue. This study is an
attempt to bring out the possible scenarios on the basis of which the vitality and effectiveness of
share capitals can be claimed.

1.6 SETTING : The study has been carried out through the theoretical analysis of the facts
and the judgement by virtue of stagnant approach at Alliance School of Law, Alliance
University.

1.7 DURATION OF STUDY : 20 days.

1.8 SAMPLE SIZE :

 1 Principal/ base concept
 Substantiated with various other foreign and Indian case laws dealing with share capitals.
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1.9 STUDY DESIGN :

Concept
1st Stage analysis

Analytical Descriptive
2nd Stage (Theoretical)
(Application)

3rd Stage Observational Suggestive Qualitative

1.10 OBSERVATION

The applicability and usage of share capitals is an objective issue to a large extent which has been
codified at various publications but still its significance and way of inculcation in the corporate
sector consistently varies from case to case basis. It is very difficult to generalise its scope. But
still the judicial bodies try to bring out an equilibrium between the conflicting positions of
objectivity and subjectivity of such issues in order to deliver equitable justice and to set up,
although impliedly, the commendable precedents in such business legal setting.
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Chapter - 2

2.1 definition of capital

In accounting, capital means the amount invested in a business. In economic theory there are
several meanings. “Capital” may be used to mean capital goods, that is, the tools of production;
the money available for investment, or invested, the discounted value of the future income to be
received from an investment; the real or money value of total assets; money or property used for
the production and assets, used for the production of profits and wealth.

In Trevor v Whitworth1, the judgement consists the following explanation of capital. For a sole
trader, capital is a balancing item. It is excess of assets over liabilities. A sole trader can withdraw
the capital from his business. The withdrawal will not affect the creditors of the business, as they
can claim from his personal assets. The same principle applies in the case of partnership. But in
the case of company, the assets of the company are not the assets of the members as a company is
a legal entity distinct from the members. A creditor of a company can only look to the assets of
the company and not to the assets of the members as the assets of the members are not the assets
of the company. The capital cannot be returned to the shareholders in the guise of giving
dividends. Dividends should be paid only out of profits.

2.2 definition of share capital

A corporation's share capital (or capital stock in US English) is the portion of a

corporation's equity that has been obtained by the issue of shares in the corporation to a
shareholder, usually for cash.

Capita and share capital are synonymous. Share capital means the capital raised by the company
by the issue of shares. Share capital is not a necessary condition of incorporation of a company.
But, the memorandum states the amount of capital with which the company desired to be
registered and the number of shares into which it is to be divided. The share capital is different
from membership fee, even if the payment is symbolized by the issue of a share.

Companies limited by guarantee and unlimited companies may or may not have share capital. But
companies limited by shares must necessarily have share capital.

1
((1887) 12 A.C. 409)
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In a strict accounting sense, share capital is the nominal value of issued shares (that is, the sum of
their par values, as indicated on share certificates). If the allocation price of shares is greater than
their par value, e.g. as in a rights issue, the shares are said to be sold at a premium (variously
called share premium, additional paid-in capital or paid-in capital in excess of par). Commonly,
the share capital is the total of the aforementioned nominal share capital and the premium share
capital. Conversely, when shares are issued below par, they are said to be issued at a discount or
part-paid.

Sometimes shares are allocated in exchange for non-cash consideration, most commonly when
company A acquires company B for shares. Here the share capital is increased to the par value of
the new shares, and the merger reserve is increased to the balance of the price of company B.

Besides its meaning in accounting, described above, "share capital" may also describe the number
and types of shares that compose a company's share structure. For an example of the different
meanings: a company might have an "outstanding share capital" of 500,000 shares (the "structure"
usage); it has received for them a total of 2 million dollars, which in the balance sheet is the "share
capital" (the accounting usage).

The legal aspects of share capital are mostly dealt with in a jurisdiction's corporate law system. An
example of such an issue is that when a company allocates new shares, it must do so in a way that
does not inequitably dilute existing shareholders without their agreement.

Share capital (shareholder’s capital, equity capital, contributed capital or paid-in capital) is the
amount invested by a company’s shareholders for use in the business. When a company is created,
if it’s only asset is cash invested by the shareholder’s, the balance sheet is balanced on the right
side through share capital, an equity account.

Share capital is a major line item, but is sometimes broken out by some firms into the different
forms of equity issued. This can represent common stock and preferred stock, the latter including
the par value of the stock.

Share capital is separate from other equity generated by the business. As the the name “paid-in
capital” dictates, this equity account refers only to the amount paid-in by investors and
shareholders, as opposed to the amounts generated by the business itself which flows into

the retained earnings account.

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2.3 nature and scope of the share capital

A share is the interest of a member in a company. Section 2(84) of the Companies Act, 2013
(hereinafter referred to as Act) “share” means a share in the share capital of a company and
includes stock. It represents the interest of a shareholder in the company, measured for the
purposes of liability and dividend. It attaches various rights and liabilities. Share, debentures or
other interest of any member in a company shall be movable property. It shall be transferable in
any manner provided for in the articles of association of the company. A member may transfer
any “other interest” in the company in the manner provided in the articles. For example rights
attached to a member in a guarantee company such as membership interest, suspension of
membership or assignment of interest may be made transferable by making a provision in the
Articles of the company.

Share capital refers to the funds a company receives from selling ownership shares to the public.
A company that issues 1,000 shares of stock at $50 per share receives $50,000 in share capital.
Even if the value of the shares increases or decreases, the value of the share capital remains as
what the company received from the initial sale, or $50,000. The two types of share capital
are common stock and preferred stock.

Companies that issue ownership shares in exchange for capital are called joint stock companies.
A joint stock company can be a corporation, which is a separate legal entity from any person
involved with the company, or a limited liability company, which protects shareholders by
limiting their risk to the amount invested in the company.

Joint stock companies raise share capital by selling ownership shares to the general public. The
most common type of ownership share in a company is common stock. The company's
memorandum of association defines the characteristics of its common stock, such as:

• Shareholders are allowed to form a board of directors and vote on company decisions.
• Shareholders may vote to determine a course of action in the event of a hostile takeover.
• If the company is liquidated, holders of common stock are entitled to their share of company
assets if there is money left after the company pays its creditors and preferred stock holders.

Companies also procure share capital from selling preferred stock. Like common stock, this type
of stock also allows members of the public to take ownership of a company. However, preferred
stock confers different benefits. Owners of preferred stock typically cannot vote on company
decisions or elect board members. However, they have a higher claim than common stock owners
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on company assets. They also receive fixed cash payments, known as dividends, at regular
intervals.
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Chapter – 3

Classification of share capital

The term ‘share capital’ denotes the amount of capital raised or to be raised by the issue of shares
by a company and is used in many expressions. The usual different expressions of share capital
found in the capital structure of a company are particularly known as “Classification of share
capital”, which are as follows :

a) Authorised Capital/ Registered Capital : It is the maximum amount of share capital

stated in a company’s memorandum which the company is, for the time being,
authorised to raise. As the memorandum is registered with the registrar, it is also called
the ‘Registered capital’. Again, as the actual issued capital of the company is usually
different (i.e., less) from the authorised capital, it is also known as ‘Nominal Capital’.
 P a g e | 12

b) Issued Capital : It means the nominal value of that part of the authorised capital which
is allotted for cash or for consideration other than cash and includes the shares
subscribed by the signatories to the memorandum.

c) Subscribed Capital : It means the paid up value of the part of the authorised capital
which is allotted for cash or for consideration other than cash and includes the shares
subscribed by the signatories to the memorandum. Thus, in a company where shares are
fully paid, the ‘Subscribed Capital’ would be equal to the ‘Issued Capital’.

d) Called up capital : It is that part of the allotted share capital which has been called up or
demanded by the company. Usually, the total amount due on the subscribed shares is not
demanded by the company at a time, but is called up in three or four instalments payable
on application, allotment, first call, final call, etc.

e) Uncalled Capital : It is the part of the allotted share capital which has not been
demanded or called by the company, but subscribers continue to remain liable for this
amount and have to pay the same whenever called upon.

f) Paid up Capital : It is equal to called up capital minus calls in arrears. Frequently, some
of the subscribers do not pay the full amount called up from them. That portion of the
total called up amount, which is actually paid by the subscribers, is called paid up
capital.

g) Reserve Capital : It is that part of uncalled capital which has been reserved by the
company to be called in the event of its winding up. Sometimes, a company may feel
that does not require the entire amount of subscribed capital, and instead of calling up
the whole amount of these shares, some part should be kept in reserve for meeting
contingencies arising at the time of winding up.

h) Unissued Capital : The balance of nominal capital remaining to be issued is called

unissued capital.

i) Circulating or Floating 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.
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j) Working Capital : Just as there are Floating or Current Assets of a company, there are
also corresponding liabilities of this nature, viz, bills payable, expenses payable, etc.
These are called floating or current liabilities. Working capital is represented by the
excess of current assets over current liabilities.
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Chapter – 4

kinds of share capital

The capital of a company is required to be divided into shares of a fixed amount. He shares may
be of one class or of different classes. The right attached to a particular class of shares is
determined either by the memorandum or articles.
The share capital of a company shall be of two kinds, namely ----
a) Equity share capital –
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 capital [Sec. 86 as substituted by the Companies (Amendment) Act
2013].

PREFERENCE SHARE CAPITAL

Section 85 defines ‘Preference share capital’. According to this section, ‘preference share
capital’ means that part of the share capital which fulfils both the following requirements :

i. That as respect dividends, it carries or will carry a preferential right to be paid a fixed
amount calculated at a fixed rate, and
ii. That part as respect capital, it carries on the winding up of the company, a preferential
right to be repaid the amount of capital paid upon such shares. In other words, on the
winding up, the amount paid up on the preference shares must be required to be paid back
before anything is paid to ordinary shareholders.

Thus, a preference share carries :

a. A right to be paid fixed amount of dividends or the amount of dividends calculated

at a fixed rate, and also
b. A right to be paid the amount of capital paid up on such shares in the event of
winding up of the company.
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A share to be a preference share must carry these two rights. However, in addition
to these two, a preference share may carry the following rights :

a) Right to recover arrears of dividends remaining due on such shares;

b) Right to take share in surplus profits;
c) On winding up of the company, a right to take share in the surplus assets;
d) Right to recover a fixed premium in accordance with the provisions of the
company’s memorandum; and
e) Right to vote in certain conditions.

It is to be noted that these rights are defined in the memorandum or articles

of the company.

Kinds Of Preference Shares

(a) With Reference to Dividend :

(i) Cumulative Preference shares : Cumulative preference shares are these preference shares, the
holders of which are entitled to receive arrears of dividend before any dividend is paid on equity
shares.
(ii) Non-cumulative Preference shares : Non-cumulative preference shares are those preference
share, the holders of which do not have the right to receive arrear of divided. If no dividend is
declared in any year due to any reason. Such shareholders get nothing, nor they can claim unpaid
dividend in any subsequent years.

(b) With Reference to Participation

(i) Participating preference shares : such shares, in addition to the fixed preference dividend,
carry a right to participate in the surplus profit, if any, after providing dividend at a stipulated rate
to equity shareholders.
(ii) Non-Participating preference shares : Such shares get only a fixed rate of dividend every
year and do not have a right to participate in the surplus profit.

(c) With Reference to Convertibility

(i) Convertible preference shares : are those preference shares which have the right/option to be
converted into equity shares.
(ii) Non-convertible preference shares : are those preference shares which do not have the
right/option to be converted into Equity shares.
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(d) With Reference to Redemption

(i) Redeemable preference shares : are those preference shares the amount of which can be
redeemed by the company at the time specified for their repayment or earlier.
(ii) Irredeemable preference shares : are those preference shares the amount of which cannot be
refunded by the company unless the company is wound up. Now a company cannot issue
irredeemable preference shares.

CUMULATIVE AND NON- CUMULATIVE PREFERENCE SHARES

When the dividends on the preference shares are not paid in any year on account of no profit in
that year and the arrears of such dividends are accumulated, carried forward and paid out of the
profits of subsequent years, the preference shares are called cumulative preference shares. The
holders of the ordinary shares are not paid any dividends until arrears of dividend have been paid
to cumulative preference shareholders. Unless the articles specifically state to the contrary,
preference shares are presumed to be cumulative. Where the articles of the company provide that
dividends on preference shares will not accumulate and in case there is no profit in a year to pay
the dividends due on the preference shares, the holders of such shares will lose their right to the
dividend, such preference shares are known as non-cumulative preference shares. In such kind of
preference shares payment of arrears of dividend out of the profits of the subsequent years are
prevented by a clear provision of the memorandum or articles of the company.

PARTICIPATING AND NON-PARTICIPATING PREFERENCE SHARES

A preference share will be called participating share if (in addition to a right to be paid fixed
amount of dividends or the amount of dividends calculated at a fixed rate and a right to be paid the
amount of capital paid – up on such shares in the event of winding up of the company) it carries
either of both of the following rights :

a) Where after the payment of fixed amount of dividends to both the preference and ordinary
shareholders, a surplus of profits is found and the surplus is proposed to be distributed
among the shareholders, the question arises whether the preference shareholders can
participate in the distribution of surplus profits. The answer to the question depends on the
provisions of the memorandum or articles of the company confer on the holders of profits,
they can take share in the distribution of the surplus profits. When the holders of the
preference shares are given such a right by the memorandum or articles of the company,
the preference shares are called ‘participating preference shares’.
 P a g e | 17

b) On the winding up of the company if the holders of preference shares are entitled, on the
strength of a clear provision in the memorandum or articles of the company to share in the
surplus assets found after replaying all kinds of capital, the preference shares will be called
‘participating shares’.

The holder of a preference share has no right to participate in the distribution of surplus profits or
surplus assets unless they have been given such a right by a clear provision in the memorandum or
articles of the company. A right to participate in surplus profits conferred on the holders of
preference shares by the memorandum or articles of the company does not entitle them to
participate in the distribution of the surplus assets in the event of the winding up of the company.

REDEEMABLE AND NON-REDEEMABLE PREFERENCE SHARES (Sec. 80)

As a general rule, a company is not allowed to pay back the capital subscribed by its shareholders
except with the sanction of the court. However, if the articles so provide, the company can issue
preference shares on the terms that they may be redeemed out of the profits of the company or out
of the proceeds of the fresh issue of shares made for the purposes of the redemption. Such
preference shares are called ‘redeemable preference shares’. The option to redeem such shares lies
with the company.
It is to be noted that no such shares can be redeemed unless they are fully paid. If any premium is
payable on redemption, or must be paid out of the profits or out of the company’s share premium
account. If the shares are so redeemed out of the profits, a sum equal to the amount paid on
redemption (i.e., a sum equal to the nominal value of the shares redeemed) will be transferred to a
reserve fund called,”the capital redemption reserve account.” The capital redemption reserve
account may be paid applied by the company, in paying up unissued shares of the company, as
fully paid bonus shares.
The redemption of preference shares under this section by a company shall not be taken as
reducing the amount of its authorised share capital.
After redeeming the preference shares a company may issue shares up to the nominal amount of
the shares redeemed as if those shares had never been issued. It has been made clear that no
company limited by shares shall, after the commencement of the Companies (Amendment) Act,
1996 issues any preference share which is irredeemable or is redeemable after the expiry of a
period of 20 years from the date of its issue.
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EQUITY SHARE CAPITAL

“Equity Share Capital” means all share capital which is not preference share capital.
As S. 86 substituted by the Companies (Amendment) Act, 2000 provides that equity share capital
may be with voting rights or otherwise in accordance with such rules and subject to such
conditions as may be prescribed.

As per section 43 (a) :

Equity share capital may be divided on the basis of voting rights and differential rights (DVR) as
to dividend, voting rights or otherwise according to the rules. A DVR share is like an ordinary
equity share, but it provides fewer voting rights to the shareholder. The difference in voting rights
can be achieved by reducing the degree of voting power. It is ideal for long term investors,
typically small investors who seek higher dividend and are not necessarily interested in taking a
voting position. The Companies (Share Capital and Debentures) Rules, 2014 (hereinafter referred
to as Rules) provide that no company whether it is unlisted, listed or a public company limited by
shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless
it complies with the following conditions:

(a) the articles of association of the company authorizes the issue of shares with differential rights;
(b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the
shareholders: Provided that where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
(c) the shares with differential rights shall not exceed twenty six percent of the total post-issue
paid up equity share capital including equity shares with differential rights issued at any point of
time;
(d) the company having consistent track record of distributable profits for the last three years;
(e) the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue such
shares;
(f) the company has no subsisting default in the payment of a Share Capital and Debentures.

Section 47 of the Act provides that every member of a company limited by shares and holding
equity share capital therein, shall have a right to vote on every resolution placed before the
company; and his voting right on a poll shall be in proportion to his share in the paid-up equity
share capital of the company.
 P a g e | 19

In case of member of a company limited by shares and holding preference share capital, shall have
a right to vote only on :-

• resolutions placed before the company which directly affect the rights attached to his preference
shares and,

• any resolution for the winding up of the company or

• for the repayment or reduction of its share capital.

Voting right of holder of preference share capital shall be in proportion to his share in the paid-up
preference share capital of the company. The proportion of the voting rights of equity
shareholders to the voting rights of the preference shareholders shall be in the same proportion as
the paid-up capital in respect of the equity shares bears to the paid-up capital in respect of the
preference shares. Preference shareholders are entitled to vote on every resolution placed before
the company at any meeting, if the dividend due on such class of preference shares are in arrears
for a period of two years or more.
 P a g e | 20

Chapter – 5

difference between preference share capital

&
equity share capital

The main differences between equity shares and preference shares are as follows:

1. Rate Of Dividend
The rate of dividend on equity shares may vary from year to year depending upon the
availability of profit. Preference share holders are paid dividend at a fixed rate.

2. Arrears Of Dividend
Equity shareholders can not get the arrears of past dividend. Cumulative preference share
holders can get the arrears of past dividend.

3. Redemption
Equity shares can not be redeemed except, under a scheme involving reduction of capital.
Preference shares can be redeemed as provided by the articles and terms of issue.

4. Voting
Equity shareholders enjoy voting rights. Preference shareholders do not have the right to
participate in the management of the company.

5. Payment of Dividend
Payment of dividend to equity share is made only after paying to preference shares. Preference
shares have a preferential right to receive dividend before equity shares.
 P a g e | 21

Chapter – 6

SHARE CERTIFICATE
Every share in a company having share capital shall be distinguished by distinctive number. This
section does not apply to shares held by a person as a beneficial owner in depository. Section 46 of the
Act declares that a certificate, issued by the company under the common seal of the company shall be
prima facie evidence of the title of the person to such shares. Such certificate shall specify the shares
held by any person. Where the shares are held in dematerialised form the record of the depository is
the prima facie evidence of the interest of the beneficial owner.

Section 56 sub clause 4 provides that every company shall, unless prohibited by any provision of law
or any order of Court, Tribunal or other authority, deliver the certificates of all securities allotted—

(a) within a period of two months from the date of incorporation, in the case of subscribers to the
memorandum;

(b) within a period of two months from the date of allotment, in the case of any allotment of any of its
shares.
 P a g e | 22

Chapter – 7

ALTERATION OF SHARE CAPITAL

Power of limited company to alter its share capital (Section 61) :

1. A limited company having a share capital may, if so authorised by its articles, alter its
memorandum in its general meeting to—
a. increase its authorised share capital by such amount as it thinks expedient;
b. consolidate and divide all or any of its share capital into shares of a larger amount than its
existing shares:
Provided 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 Rule 71 of NCLT Rules, 2016;
c. convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully
paid-up shares of any denomination;
d. sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so, however, that in the sub-division the proportion between the amount
paid and the amount, if any, unpaid on each reduced share shall be the same as it was in
the case of the share from which the reduced share is derived;
e. cancel shares which, at the date of the passing of the resolution in that behalf, 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 cancelled.
2. The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of share
capital.

Application under proviso to clause (b) of sub-section (1) of section 61 -Rule 71

of NCLT Rules, 2016

1. An application shall be filed in Form No. NCLT. 1.

2. The application shall, inter alia, set forth the following:-
a. provision of articles authorising such consolidation or division;
b. existing capital structure of the company;
c. new capital structure of the company after the consolidation or division;
d. class of shares being consolidated or divided;
 P a g e | 23

e. face value of shares pre and post consolidation or division;

f. justification for such consolidation or division;
3. The company shall at least 14 days before the date of hearing
a. advertise the petition in accordance with rule 35; and
b. serve by registered post with acknowledgement due, a notice together with the copy of the
application to the Central Government, ROC and to the SEBI, in the case of listed
companies and to the regulatory body, if the company is regulated under any other Act.
4. Where any objection of any person whose interest is likely to be affected by the proposed
application has been received by the applicant company, it shall serve a copy thereof to the
Central Government, ROC and the SEBI, in the case of listed companies and to any regulator,
if the company is regulated under any other Act on or before the date of hearing.
5. Upon hearing the application or any adjourned hearing thereof, the Tribunal may pass such
order, subject to such terms and conditions, as it thinks fit.

Notice to be given to Registrar for alteration of share capital (Section 64)

1. Where—
a. a company alters its share capital in any manner specified in section 61(1);
b. an order made by the Government under section 62(4) has the effect of increasing
authorised capital of a company; or
c. a company redeems any redeemable preference shares, the company shall file a notice in
the Form No. SH. 7 with the Registrar within a period of 30 days of such alteration or
increase or redemption, as the case may be, along with an altered memorandum.
2. If a company and any officer of the company who is in default contravenes the provisions of
sub-section (1), it or he shall be punishable with fine which may extend to 1000 rupees for
each day during which such default continues, or lakh rupees, whichever is less.
 P a g e | 24

Chapter – 8

REDUCTION OF SHARE CAPITAL

Section 66 of Companies Act, 2013 deals with reduction of Share Capital. But Section 66 is not
effective yet. Therefore, with respect to reduction of share capital, till date provisions of
Companies Act, 1956 are applicable.

Section 66 of Companies Act, 2013 (‘Act’ for short) 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-

 cancel any paid up share capital which is lost or is unrepresented by available assets; or
 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 (‘Tribunal’ for short) in Form No. RSC-1.
The fee payable is Rs. 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
 P a g e | 25

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.

Issue of notice

Section 66(2) read with Rule 3 provide that the Tribunal shall, within 15 days of submission of the
application, give notice, or direct that notice to be given to-

 the Central Government, Registrar of Companies, in all cases, in Form No. RSC – 2;
 the Securities and Exchange Board of India, in the case of listed companies in Form No.
RSC-2;
 the creditors of the company in all cases in Form No. RSC -3

seeking their representations and objections, if any.

The notice to the creditors shall be sent, within 7 days of the direction given by the Tribunal or
such other period as may be directed by the Tribunal to each creditor, whose name is entered in
the list of creditors submitted by the company. The notice shall state about the presentation of the
application and the amount of the proposed reduction of share capital and the amount or estimated
value or the debt or the contingent debt or claim or both for which such creditor’s name is entered
in the said list and the time within which the creditor may send his representations and objections.
 P a g e | 26

Advertisement

Rule 3(3) provides that the Tribunal shall give directions for the notice to be published in Form
No. RSC-4 within 7 days from the date on which the directions are given. The advertisement
shall be given in English language in a leading English newspaper and a leading vernacular
language newspaper both having wide circulation in the State in which the registered office of the
company is situated or such newspapers as may be directed by the Tribunal and for uploading on
the website of the company, if any, seeking objections from the creditors and intimating about the
date of hearing.

Rule 3(4) provides that the notice shall state the amount of the proposed reduction of share capital
and the places where the list of creditors may be inspected and the time fixed by the Tribunal
within which the creditors of the company may send their objections.

Rule 3(5) provides that the company or the person who was directed to issue notice and the
publication in the newspaper shall, as soon as may be, but not later than 7 days from the date of
issue of such notices, file an affidavit in Form RSC – 5 confirming the dispatch and publication of
the notice.

Dispensing with the notice

Rule 3(6) provides that where the Tribunal is satisfied that the debt or claim of every creditor has
been discharged or determined or has been secured or his consent is obtained, it may dispense
with the requirement of giving of notice to creditors or publication of notice under this rule or
both.

Objections by authorities or creditors

Rule 4 provides that if the authorities or the creditors of the company desire to make any
representation, the same shall be sent to the Tribunal within 3 months from the date of receipt of
notice. The copy of such representation shall simultaneously be sent to the company. In case no
representation has been received from the Central Government, Registrar, SEBI or the creditors,
by the Tribunal, within the said period it shall be presumed that they have no objection to the
reduction.

Company to represent

Rule 5 provides that the company shall submit to the Tribunal, within seven days of expiry of
period up to which representations or objections were sought, the representations or objections so
 P a g e | 27

received along with the responses of the company thereto. The Tribunal may give such directors
with respect to holding of any enquiry or adjudication or claims or for hearing the objection or
otherwise.

At the hearing of the application, the Tribunal may give such directions as may deem proper with
reference to securing the debts or claims of creditors who do not consent to the proposed
reduction, and the further hearing of the petitioner maybe adjourned to enable the company to
comply with such directions.

Order of the Tribunal

According to Section 66 (3) read with Rule 6(1) the Tribunal may, if it is satisfied that the debt or
claim of every creditor of the company has been discharged or determined or has been secured or
his consent is obtained, make an order confirming the reduction of share capital on such terms and
conditions as he thinks fit.

The order confirming the reduction of share capital and approving the minute shall be in Form No.
RSC-6 on such terms and conditions as may be deemed it.

The Tribunal shall not sanction an application for reduction of share capital unless the accounting
treatment, proposed by the company for such reduction is in conformity with the accounting
standards specified in Section 133 or any other provisions of the Act and a certificate to that effect
by the company’s auditor has been filed with the Tribunal.

Filing the order with Registrar

Section 66(5) provides that the company shall deliver a certified copy of the order of the Tribunal
and of a minute approved by the Tribunal, showing-

 the amount of share capital;

 the number of shares into which it is to be divided;
 the amount of each share; and
 the amount, if any, at the date of registration deemed to be paid up on each share,

to the Registrar within 30 days of the receipt of the copy of the order, who shall register the same
and issue a certificate in Form No. RSC – 7 to that effect.
 P a g e | 28

Non applicability

Section 66 shall not apply to a buyback of its own securities by a company under Section 68.

Liability of member

Section 66(7) provides that a member of the company, past or present, shall not be liable to any
call or contribution in respect of any share held by him exceeding the amount of difference, if any,
between the amount paid on the share, or reduced amount, if any, which is to be deemed to have
been paid thereon, as the case may be, and the amount of the share as fixed by the order of
reduction.

Section 66(8) provides that where the name of any creditor entitled to object to the reduction of
share capital is, by reason of his ignorance of the proceedings for reduction or of their nature and
effect with respect to his debt or claim, not entered on the list of creditors and after such
reduction, the company is unable to pay the amount of his debt or claim-

 every person, who was a member of the company on the date of registration of the order
for reduction by the Registrar shall be liable to contribute to the payment of that debt or
claim, an amount not exceeding the amount which he would have been liable to contribute
if the company had commenced winding up on the day immediately before the said date;
and
 if the company is wound up, the Tribunal may, on the application of any such creditor and
proof of his ignorance, if it thins fit, settle a list of persons so liable to contribute and make
and enforce calls and orders on the contributories settled on the list, as if they were
ordinary contributories in a winding up.

Penalty

Section 66(10) provides that if any officer of the company-

 knowingly conceals the name of any creditor entitled to object to the reduction;
 knowingly misrepresents the nature or amount of the debt or claim of any creditor; or
 abets or is privy to any such concealment or misrepresentation as aforesaid,

he shall be liable under Section 447.

Section 447 provides punishment for fraud. The said section provides that without prejudice to
any liability including repayment of any debt under the Act or any other law for the time being in
 P a g e | 29

force, any person who is found to be guilty of fraud, shall be punishable with imprisonment for a
term which shall not be less than six months but which may extend to 10 years and shall also be
liable to fine which shall not be less than the amount involved in the fraud, but which may extend
to three times the amount involved in the fraud. Where the fraud in question involves, the term of
imprisonment shall not be less than three years.

If the company fails to comply with the provisions of Section 66(4), it shall be punishable with
fine which shall not be less than Rs. 5 lakhs which may extend to Rs. 25 lakhs.

Reduction of share capital (Section 100 to 104 of Companies Act, 1956)

Special resolution for reduction of share capital (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,
o if so authorised by its articles,
o by special resolution, reduce its share capital in any way.

A company may reduce its share capital in following ways

a. extinguish or reduce the liability on any of its shares in respect of share capital not paid up;
b. cancel any paid-up share capital which is lost, or unrepresented by available assets; or
c. pay off any paid-up share capital which is in excess of the wants of the company,

Note:

 While giving the confirmation, court must consider the interest of creditors, shareholders and
public.
 This section is not applicable to unlimited companies. Therefore such company may reduce its
capital in the way specified in its MOA & AOA.
 Company should reduce or cancel same amount on all the shares of same kind.
 A selective reduction is permissible within the frame work of law for any company limited by
shares.

Note:

 The Court must ensure that the reduction is fair and equitable. The Court shall consider the
following, while sanctioning the reduction:
 P a g e | 30

i. The interests of creditors must be safeguarded;

ii. The interests of shareholders must be considered; and
iii. Lastly, the public interest must be considered as well.

Procedure for reduction of share capital

Application to Court for confirming order, objections by creditors, and settlement of list of
objecting creditors (Section 101)

Subsection 1
Where a company has passed a resolution for reducing share capital, it may apply, by petition, to
the court for an order confirming, the reduction.

Subsection 2
Where the proposed reduction of share capital involves

 the diminution of liability in respect of unpaid share capital or

 the payment to any shareholder of any paid-up share capital,
a. every creditor of the company
o who at the date fixed by the court is entitled to any debt or claim which, if that date
were the commencement of the winding up of the company, would be admissible in
proof against the company,
shall be entitled to object to the reduction;
b. the court shall settle a list of creditors so entitled to object, and shall ascertain
o the names of those creditors and
o the nature and amount of their debts or claims,
and may publish notices fixing a day or days within which creditors not entered on the
list are to claim to be so entered or are to be excluded from the right of objecting to the
reduction;
c. where a creditor entered on the list whose debt or claim is not discharged or has not
determined does not consent to the reduction,
o the court may dispense with the consent of that creditor, on the company securing
payment of his debt or claim by appropriating the amount, as the court may direct.

Subsection 3

Where a proposed reduction of share capital involves

 the diminution of any liability in respect of unpaid share capital or

 P a g e | 31

 the payment to any shareholder of any paid-up share capital,

the court may direct that the provisions of sub-section (2) shall not apply as regards any class or
any classes of creditors.

Order confirming reduction and powers of Court on making such order (Section 102)

Subsection 1

The Court,

 if satisfied with respect to every creditor of the company who under section 101 is entitled to
object to the reduction,
o that either his consent to the reduction has been obtained or his debt or claim has been
discharged, or has determined, or has been secured,

may make an order confirming the reduction on such terms and conditions as it thinks fit.

Subsection 2

Where the Court makes any such order, it may—

a. make an order directing that the company shall add to its name as the last words thereof the
words “and reduced”; and
b. make an order requiring the company to publish the reasons for reduction

Registration of order of court and minute of reduction (Section 103)

The Registrar (ROC)—

a. on production to him of an order of the court confirming the reduction of the share capital of a
company; and
b. on the delivery to him of a certified copy of the order of court and of a minute approved by the
Court in this regard,

shall register the order and minute.

The resolution for reducing share capital as confirmed by the order shall take effect only on the
registration of the order and minute with ROC, and not before.
 P a g e | 32

Certificate of ROC as conclusive evidence of reduction

The Registrar shall certify under his hand the registration of the order and minute, and his
certificate shall be conclusive evidence that all the requirements of this Act with respect to
reduction of share capital have been complied with, and that the share capital of the company is
such as is stated in the minute.

Cases where diminution of share capital shall not be considered as reduction of share capital and
no approval of court is required

 cancellation of shares of company which have not been taken or agreed to be taken by any
person
 redemption of preference shares
 forfeiture of shares for non-payment of calls
 buy back of shares
 surrender of shares by the shareholders
 In any scheme of compromise and arrangement

Difference in Alteration of share capital and reduction of share

capital

Alteration of share capital Reduction of share capital

Reduction of share capital is governed

Alteration of share capital is governed
by the provisions of Section 66 of
Applicable Sections by the provisions of section 61 of the
Companies Act, 2013 (section 100 of
Companies Act, 2013.
the Companies Act, 1956).

Alteration of share capital is required Reduction of share capital is required

Kind of resolution
to be done by ordinary resolution. to be done by special resolution.

confirmed by the
Alteration of share capital is not Reduction of share capital is to be
court
required to be confirmed by the confirmed by the tribunal (court as per
 P a g e | 33

tribunal (court as per CA, 1956). CA, 1956).

Alteration of share capital may be done

in the following manner
Reduction of share capital may be
1. Increasing its nominal capital by done in the following manner
issuing new shares
2. Consolidating and dividing all or 1. Extinguishing or reducing the
any of its share capital into shares liability of members in respect of
of large denomination the capital not paid up
Kind/Type
3. Converting fully paid up shares 2. Writing off or canceling any paid
into stock or vice versa up capital which is in excess of
4. Sub dividing its shares or any of the needs of the company
them into shares of smaller amount 3. Paying off any paid up share
5. Cancelling shares which have not capital which is in excess of the
been taken up and diminishing the needs of the company
amount of share capital by the
amount of the shares so cancelled.
 P a g e | 34

Chapter – 9

voting rights of shareholders

Voting Rights (Section 47):

Voting rights are subject to provision of section 43 r egarding differential rights and Section
50 regarding denying voting rights on uncalled capital.

Every member of a company limited by shares and holding equity share capital therein, shall
have a right to vote on every resolution placed before the company.

This voting right on a poll shall be in proportion to member’s share in the paid-up equity share
capital of the company.

Limited Voting Rights to Preference Shareholder

A preference shareholder shall also be a member of the company. Preference Shareholder

shall have a right to vote on resolution :

(a) Which directly affect the right attached to his preference shares;
(b) Resolution for winding up of the company; and
(c) Resolution for repayment or reduction of its equity or preference share capital.

In these cases, his voting right on a poll shall be in proportion to his share in the paid- up
preference share capital of the company.
Where the dividend in respect of a class of preference shares has not been paid for a period
of two years or more, such class of preference shareholders shall have a right to vote on all
the resolutions placed before the company.
The proportion of the voting rights of equity shareholders to the voting rights of the
preference shareholders shall be in the same proportion as the paid-up capital in respect of
the equity shares bears to the paid up capital in respect of the preference shares.

Variation of Shareholder’s Rights (Section 48) :

Where share capital of the company is divided into different classes and the company want
to vary the rights attached to shares of that class this section apply. There must be a
provision with respect to such variation is contained in the memorandum or articles of the
company. In absence of any such provision in the memorandum or articles, such variation
should not be prohibited by the terms by the terms of issue of the shares of that class.

Any variation in the right attached to a particular class of share may be varied with the
written consent of holders of not less than three-fourth of the issued shares of that class.
 P a g e | 35

Alternatively, this consent may be through a special resolution passed at a separate

meeting of the holders of that particular class.
If variation by one class of shareholders affects the rights of any other class of
shareholders, the consent of three-fourth of such other class of shareholders shall also be
obtained in the same manner.

Right of Dissenting Shareholder :

Where the holders of not less than 10% of issued shares of a class did not consent to such
variation or vote in favour of the special resolution for the variation, they may apply to the
tribunal to have the variation cancelled. Where such application is made before tribunal,
the variation shall have no effect unless and until it is confirmed by the tribunal.

The application before tribunal under this section shall be made within twenty – one days
after the date on which the consent was given or the resolution was passed. This
application may be made by any one or more person as these shareholders may appoint in
writing for this purpose.
The decision of the tribunal shall be binding on the shareholders. Is it means, there will be
no appeal against such decision of the tribunal except a special leave petition.
The company shall within thirty days of the date of the order of the tribunal, file a copy of
the order with the registrar.
 P a g e | 36

Chapter – 10

Concluding remarks

Before beginning any business, an entrepreneur will need to raise resources, or capital, as
investment, and the amount of capital will depend on the size of the project or business, and
since it may become cumbersome to provide the money by himself or herself, or procure it
even from friends and relatives, it has been recognized that money needs to be raised from the
public, and SEBI has fixed guidelines to this end, which, if abided by, allows money to be
raised from the public legally, and this environment from which financial requirements are
raised, is known as the capital market. The capital market is divided into two types- the
primary market, where shares, bonds or debentures are offered to the public for the purpose of
raising the required capital, and this is what the paper will work around while discussing share
capital and its denominations, while the secondary market refers to the trading avenue where
pre-existing securities are traded among investors.

With the provisions relating to issue of securities in the Act, the regulators have tried to
rationalise the activities of the unlisted companies in comparison to the listed companies. Most
of the provisions in the Chapter remain the same with strong enforcement tool i.e. stricter penal
provision. In this chapter we see lot of consolidation of the sections with a rationalised
approach.
The main function of the authorized capital of a company is to protect the existing shareholders
against possible dilution of their equity interests by the issuing of shares beyond the stipulated
limit. The authority therefore given to companies to purchase their own shares has given
companies the flexibility to decide on matters directly relating to the share capital of the
company.
To conclude, the paper has discussed with the help of various definitions, concepts and theories
of share capital within the framework of the primary market by reviewing both terms separately
and then collectively, and then proceeded to analyse the evolution of the types of share capital,
pre-enactment and post-enactment of the Companies Act. The paper then briefly discusses
alteration and reduction of share capital as part of securities in primary market, and proceeded
to finish by talking about various instruments of shares, and investment like share certificate,
share bonus and share warrants, and GRDs and ADRs. The paper is divided into two parts for
conceptual clarity and convenience of the reader, the first part dealt with nature, meaning and
the different types and sub-types of share capital, and was thus more expansive. The second
part consisted of the various other instruments which are necessary to holistically comprehend
the concept of share capital.
 P a g e | 37

Bibliography

1. Companies Act, 2013

2. Dr. Avtar Singh, “Company Law”, 7th Edition (2016), Eastern Book
Company Publications.
3. N. D. Kapoor, “Elements of Company Law”, 30 th Edition(2016),
Sultan Chand & Sons. Publications.
4. C.R. Dutta, “Company Law”, 7 th Edition (2016), Lexis Nexis
Publications.
5. The Institute of Company Secretaries of India, “Share Capital and
Debentures”, (2014), article available at
https://www.icsi.edu/portals/0/SHARE/CAPITAL/AND/DEBENTU
RES.pdf
6. Companies Ordinance, “Share Capital”, (2012), Ordinance No. 28,
Part IV, Division 1.
7. Satvir Kaur, “Share Capital”, (2015), International Journal of
Business and Management Invention, Volume 4, Issue 1, available
at http://www.ijbmi.org/
8. “Capital of a Company”, (2016), available at
http://www.legalserviceindia.com/company%20law/com_2.htm

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