Law lecture 3

Share capital The money required by the co. for its business activities is raised by the co. from the public. The money so raised is called the capital of the co. capital must b divided into shares of a fixed amt. The Supreme Court has defined the share as a right participate in the profits made by the company while it is a going concern and in the assets of the company when it is wound up A share is an existing bundle of rights and liabilities The share capital of a company limited by shares shall be of two kinds onlya. Equity share capital 1. With voting rights or 2. With deferential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed

The company s amendment act of 1999 now provides that the company may also issue sweat equity shares. The expression means the equity shares issued by the companies to employees or directors at a discount or for consideration other than cash These shares are issued to then for providing know how to the company or for making available to the company the rights in the nature of Intellectual properties rights (TPCDTrade mark, patent, copyright, design) or value addition by whatever name called The act defines the ordinary or equity share capital as all share capital which is not preference share capital b. It is preference shares capital There are discintive marks of preference shares. Pref shares enjoy some priority over the equity shares 1. Preferece with regard to dividend over ordinary share holders :- during the continuance of the company, the pref. Shares holder must getsome dividend. The preference dividend may consist of fixed amount say 50000 rupees in one year payable to pref. share holders before anything is pad to the equity share holder Or preference share dividend may be calculated at fixed rate for eg 5% of the nominal value of each share 2. Preference share right as to return of capital in the event of winding up :In the event of winding up of the company, the amount paid on preference shares must b paid back before anything is paid to the equity share holders. 3. The supreme court has added the third charecteristc the preference shares presupposed the existence of equity shares Preference shares may be either

a. Cumulative or non- cumulative preference shares If there are no profits in one year and the arrears of dividends are to b carried forward and paid out of the profits of subsequent yrs, the preference shares are said to be cumulative. Thus the unpaid dividend goes on accumulating and it is said when there are sufficient profits in the subsequent yrs it may noted that when there are profits in a yr, the arrears of dividend are paid to the pref. Shares holders before anything is paid to the equity share holders The non cumulative pref shares are those which do not any dividend if in a particular there are no profits to pay, the pref share dividends their dividend do not accumulate in other words if there are no profits , the un paid dividend lapses then preference shares are said to be non cumulative Whether they are cumulative or non cumulative will depend upon 1. The terms of issue of pref shares and 2. The provision in the company articles of association But in absence of any clear provision to the contrary, pref. Shares are always presumed to be cumulative And they become non cumulative only if there is a clear provision in the articles stating that they are non cumulative b. Participating or non- participating preference shares Te participating pref are those which in addition to the pref dividend, are also entitled to participate in the surplus profit or surplus assets Te non perf shares are those which are not so entitled to participate in the surplus profits or surplus assts. they are entitled only to a fixed rate of dividend That is if after paying the fixed amount of dividend to pref shares holders and some amount by way of dividend to the equity share shareholders, there may b surplus profits, which are proposed to b distributed among the share holders, the question is whether the pref. Shares holders are also entitled to take part in the distribution of surplus profits In the winding up of the company if after paying back both the pref and equity share holders , there is a surplus, the question ay will be whether pref share holders are also entitled to a share in the distribution of the surplus assets If they are so entitle to participate then they will be know as participating pref shares The general prcinciple is that pref shares are presumed to be not participating unless there is clear provision in the 1. In the MOA or 2. The articles of the company or 3. The terms of issue of pref shares confer upon them the right of participation If the right to participate in the surplus is not specified in the terms of the issue of pref shares then pref are presumed to be not participating

Sometime the AOA provides that the pref shares are entitled to participate in the surplus profits. In such cases they do not become entitled to participate in the surplus assets. There must be clear position to that effect where each right is specifically given to them.

Different Kinds of Capitals 1. Authorized capital This capital is the amount with which the company intend to b registered this amount will b the maximum the company is allowed to raise for carrying on the business. Authorized capital is divided into shares of fixed amount . The max limit of authorized capital depends upon the business requirement of each company and there is no legal restriction upon its max limit 2. Issued capital It is that part of the authorized capital which is actually offered, that is issued to the public for subscription It is not obligatory to the company to issue whole of its authorized capital. The company may issue whole or any part of it and the balance for further requirements However the issued capital cannot exceed the authorized capital. It can at the most be equal to the authorized capital which is case with all the shares have been issued to the public. 3. Subscribed capital It is that part of the issued capital which is actually subscribed, that is taken up by the public. In the other words it is the capital for which application are received from the public and the shares have been allotted to the public The sub capital depends upon the response from the investing public which is received on the basis of issued capital 4. The Called up capital It is that part of the sub capital which is actually demanded by the company to be paid. The company may not be in need of the entire amount of the capital, subscribed by the public. the company may call such amount from the subscribers as is required by it 5. Paid up capital This is that part of the issued capital which has been paid up by the share holders or which is credited as paid up on the shares(payment in kind) so what is actually paid is the paid up capital of the company In other words the total money received by the company on shares is the paid up capital. Amendment Act of 2000 the public company must have the minimum capital of 5 lacs rupees or such higher amount as may be prescribed. A private company is required to have a minimum paid paid up capital of 1 lasc rupees or such higher amount as may be prescribed by its articles

6. Un called Capital The part of the sub capital which is not called by the company is known as un called capital. It may be called by the company at any time according to its requirement but this is subject to the terms to the issue of shares and the provisions of article of association 7. Reserve Capital This is that part of the uncalled capital of a company which can be called only in the event of its winding up A company by passing special resolution may determine that a portion or whole of its uncalled capital shall not be called at all except in case of winding up of company and such capital is known as Reserve capital It may be noted that the reserve capital cannot be converted into ordinary uncalled capital without the permission of the court. The reserve capital is available only to the creditors on winding up of the co. A company cannot create a charge on the reserve capital and company cannot cancel it in the reduction of capital. For eg. In case MAY FAIR property limited the company issued debenture charging its undertaking including its reserve capital the court held that the charge was not operative on the reserve o the reserve capital