Shares in Company Act.

The capital of the company seldom comprises of a ‘single unit’, in fact, it comprises of numerous
indivisible units. These units are of a specific amount. Therefore, when a person purchases such a unit or
several units, he purchases a certain defined percentage of the share capital of the company.

In this case, he becomes one of the many shareholders of that company. The Companies Act has
provided an extremely vague and ambiguous definition to share and defines it as ‘a share is share in the
Share Capital of the company’.[i] Although there are various ways of looking at this, a share is not
merely a sum of money, but a clear depiction of interest a shareholder hold’s in a company.

Types of Shares as per Companies Act, 2013

As per Section 43 of the Companies Act, the share capital of a company limited by shares shall be of two
kinds i.e., equity share capital or preference share capital.

- Preference Shares

Preference shares are the shares where shareholders get a preferential dividend. The dividend may
consist of a fixed amount that is payable to preference shareholders. As the name suggests, the
preference shareholders get a ‘preference’ over the equity shareholders in receiving dividends. At times,
the equity shareholders may not even receive profits.

The dividend amount paid to them may be calculated at a fixed rate. The preference shareholders vote
only on such resolutions that directly affect their rights as preference shares and a resolution for the
winding-up of the company or for the repayment or reduction of its equity or preference share capital.

Nonetheless, where the preference dividend is not paid for two years or more, the preference
shareholders get voting right on every resolution placed before the company. Voting rights of a
preference shareholder, on a poll, shall be in proportion to his share in the paid-up preference share
capital of the company.

Furthermore, during the winding-up of the company the preference shareholders get a right to be paid,
i.e., amount paid up on preference shares must be paid back before anything is paid to the equity
shareholders.

Preference shares can be bifurcated into six kinds, namely, cumulative preference shares, non –
cumulative preference shares, participating preference shares, non – participating preference shares,
redeemable preference shares and non – redeemable preference sshares

Cumulative Preference Shares And Non Cumulative Preference Shares

There may be times when the company does not generate profits and therefore fails to give dividends.
Preference shareholders who own cumulative preference shares can be paid from the profits made in
the subsequent years for the current year’s dividends that are in arrears. Until it is fully paid, the fixed
dividend keeps on accumulating.

The non-cumulative preference share gives the right to its holder to a fixed amount or a fixed
percentage of dividend out of the profits of each year. If no profits are available in any year or no
dividend is declared, the preference shareholders get nothing, nor can they claim unpaid dividends in
the coming year.

Participating Preference Shares And Non-participating Preference Shares

The shares which are entitled to a fixed preferential dividend are known as Participating preference
shares. Additionally, they have a right to participate in the surplus profits along with equity shareholders
after dividend at a certain rate has been paid to equity shareholders. For example, after 20% dividend
has been paid to equity shareholders, the preference shareholders may share the surplus profits equally
with equity shareholders.

Reedeemable Preference Shares And Irredeemable Preference Shares

Although equity shares are not redeemable, as per section 55 of the Companies Act, preference shares
can either be redeemable or irredeemable. Redeemable preference shares refer to those shares where
the shareholders can be repaid after an estimated period of time. This act of repayment is referred to as
redemption of preference shares. Therefore, in cases where the shareholder is issued a redeemable
preference share, they are entitled to receive that amount after the completion of the stipulated period.
Where the amount cannot be redeemed even after the completion of the stipulated period, such shares
will be referred to as irredeemable preference shares.

- Equity Shares

The most common kind of shares that we hear about on a daily basis are equity shares. Equity shares are
defined as those shares that are not preference shares, this simply means that shares which do not
enjoy any preferential right in the matter of payment of dividend or repayment of capital, are known as
equity shares.

After the rights of preference shareholders are done, the equity shareholders get their share in the
remaining amount of distributable profits of the company. But there may be times when the company
may not accrue any profits as dividend to its equity shareholders even when it has distributable profits.

The dividend on equity shares is not fixed and may differ every year depending on the profits available.
Equity shareholders of a company limited by shares get a right to vote on every resolution placed before
the company and their voting rights on a poll are in proportion to the share in the paid-up equity share
capital of the company.

2) Clause 49 in listing agreement

The Securities Exchange Board of India (SEBI) added Clause 49 to the Listing Agreement in 2000.

Clause 49 was added to the Listing Agreement on the recommendations of the Kumaramangalam Birla
Committee on Corporate Governance instituted by SEBI. The clause initially recommended basic
corporate governance practice for Indian companies and made key changes in the areas of governance
and disclosures. It made the following requirements mandatory:

- Minimum number of Independent Directors on their boards

Institution of Audit, Shareholder’ Grievance Committees and so on

 - Annual reports to include Management’ Discussion and Analysis (MD&A) section and Corporate
Governance report
- Fees paid to non-executive directors to be disclosed
- Limited the number of committees on which a director could serve

Provisions

- Following are the highlights of Clause 49’s provisions:

-
Company Board of Directors
The clause defines an Independent Directors as a non-executive director of the company who:
 Receives only director’s remuneration and should have no other pecuniary relationships or
transactions with the company or its promoter.

 Has not been an executive of the company in the immediately preceding three
financial years

 Has had no associations in three preceding years with audit firms, legal or
consulting firms associated with the company

 Does not hold substantial shares in the company

The compensation paid to non-executive directors including independent directors will

be fixed by the board and should have prior approval of shareholders.

The Board should meet at least four times a year, with a maximum time gap of three
months between any two meetings.

A Board director should not be a member of more than 10 committees or act as

Chairman of more than five committees across all companies of which he is a director.

Code of Conduct:
The board should lay down a code of conduct for all its members and senior
management of the company. All the members and senior management personnel
have to affirm compliance with the code every year. The annual report of the company
should contain a declaration stating this signed by the CEO.

Audit Committees
The audit committee should comprise:

 A minimum of three directors as members

 Two thirds of the members should be independent directors

 All members have to be financially literate

 At least one member should have accounting or related financial management
expertise.
The committee should meet at least four times in a year. The gap between each
meeting should not exceed four months.

3)What Is Winding Up?

 Winding up is the process of liquidating a company. While winding up, a

company ceases to do business as usual. Its sole purpose is to sell off stock, pay
off creditors, and distribute any remaining assets to partners or shareholders.
The term is synonymous with liquidation, which is the process of converting
assets to cash.

 Winding up a business is a legal process regulated by corporate laws as well as a

company’s articles of association or partnership agreement. Winding up can be
compulsory or voluntary and can apply to publicly and privately held companies.

 Compulsory Winding Up

 A company can be legally forced to wind up by a court order. In such cases, the
company is ordered to appoint a liquidator to manage the sale of assets and
distribution of the proceeds to creditors.

 The court order is often triggered by a suit brought by the company’s creditors.
They are often the first to realize that a company is insolvent because their bills
have remained unpaid.

 In other cases, the winding-up is the final conclusion of a bankruptcy

proceeding, which can involve creditors trying to recoup money owed by the
company.

 In any case, a company may not have sufficient assets to satisfy all of its debtors
entirely, and the creditors will face an economic loss.

 Voluntary Winding Up

 A company’s shareholders or partners may trigger a voluntary winding up,

usually by the passage of a resolution. If the company is insolvent, the
shareholders may trigger a winding-up to avoid bankruptcy and, in some cases,
personal liability for the company’s debts.

 Even if it is solvent, the shareholders may feel their objectives have been met,
and it is time to cease operations and distribute company assets.

 In other cases, market situations may paint a bleak outlook for the business. If
the stakeholders decide the company will face insurmountable challenges, they
may call for a resolution to wind up the business.
 A subsidiary also may be wound up, usually because of its diminishing
prospects or its inadequate contribution to the parent company’s bottom line or
profit.