Doctrine of Ultra Vires under

Company Law
Ultra-vires

 It is a Latin term made up of two words “ultra” which means beyond and
“vires” meaning power or authority. So we can say that anything which
is beyond the authority or power is called ultra-vires. In the context of the
company, we can say that anything which is done by the company or its
directors/officers which is beyond their legal authority or which was
outside the scope of the object of the company is ultra-vires
 Memorandum of association is considered to be the constitution of the
company. It sets out the internal and external scope and area of
company’s operation along with its objectives, powers, scope. A company
is authorized to do only that much which is within the scope of the powers
provided to it by the memorandum. A company can also do anything
which is incidental to the main objects provided by the memorandum.
Anything which is beyond the objects authorized by the memorandum is
an ultra-vires act.

Origin of the doctrine

The doctrine of ultra-vires first time originated in the classic case of Ashbury
Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7 H.L. 653, which was
decided by the House of Lords. In this case the company and M/s. Riche entered
into a contract where the company agreed to finance construction of a railway
line. Later on, directors repudiated the contract on the ground of its being ultra-
vires of the memorandum of the company. Riche filed a suit demanding
damages from the company. According to Riche, the words “general contracts”
in the objects clause of the company meant any kind of contract. Thus,
according to Riche, the company had all the powers and authority to enter and
perform such kind of contracts. Later, the majority of the shareholders of the
company ratified the contract. However, directors of the company still refused
to perform the contract as according to them the act was ultra-vires and the
shareholders of the company cannot ratify any ultra-vires act.

When the matter went to the House of Lords, it was held that the contract was
ultra-vires the memorandum of the company, and, thus, null and void. Term
“general contracts” was interpreted in connection with preceding words
mechanical engineers, and it was held that here this term only meant any such
contracts as related to mechanical engineers and not to include every kind of
contract. They also stated that even if every shareholder of the company would
have ratified this act, then also it had been null and void as it was ultra-vires
the memorandum of the company. Memorandum of the company cannot be
amended retrospectively, and any ultra-vires act cannot be ratified.

Need or purpose of the doctrine of ultra-vires

This doctrine assures the creditors and the shareholders of the company that
the funds of the company will be utilized only for the purpose specified in the
memorandum of the company. In this manner, investors of the company can
get assured that their money will not be utilized for a purpose which is not
specified at the time of investment. If the assets of the company are wrongfully
applied, then it may result into the insolvency of the company, which in turn
means that creditors of the company will not be paid. This doctrine helps to
prevent such kind of situation. This doctrine draws a clear line beyond which
directors of the company are not authorized to act. It puts a check on the
activities of the directors and prevents them from departing from the objective
of the company.

Difference between an Ultra-Vires and an Illegal act

An ultra-vires act is entirely different from an illegal act. People often
mistakenly use them as a synonym to each other, while they are not. Anything
which is beyond the objectives of the company as specified in the memorandum
of the company is ultra-vires. However, anything which is an offense or draws
civil liabilities or is prohibited by law is illegal. Anything which is ultra-vires, may
or may not be illegal, but both of such acts are void-ab-initio.

Basic principles regarding the doctrine

1. Shareholders cannot ratify an ultra-vires transaction or act even if they

wish to do so.
2. Where both the parties have entirely performed the contract, then it
cannot be attacked on the basis of this doctrine.
3. Any of the parties can raise the defense of ultra-vires.
4. If a contract has been partially performed but the performance was
insufficient to bring the doctrine of estoppel into the action, a suit can be
brought for the recovery of the benefits conferred.
5. If an agent of the company commits any default or tort within the scope
of his employment, the company cannot defend it from its consequences
by saying that the act was ultra-vires.

Exceptions to the doctrine

1. Any act which is done irregularly, but otherwise it is intra-vires the

company, can be validated by the shareholders of the company by giving
their consent.
2. Any act which is outside the authority of the directors of the company but
otherwise it is intra-vires the company can be ratified by the shareholder
of the company.
3. If the company acquires property in a manner which is ultra-vires of the
contract, the right of the company over such property will still be secured.
4. Any incidental or consequential effect of the ultra-vires act will not be
invalid unless the Companies Act expressly prohibits it.
 5. If any act is deemed to be within the authority of the company by the
Company’s Act, then they will not be considered as ultra-vires even if they
are not expressly stated in the memorandum.
6. Articles of association can be altered with retrospective effect to validate
an act which is ultra-vires of articles.

Types of ultra-vires acts and ratification of an ultra-vires

act/contract

Acts which are ultra-vires to the Companies Act

Any act or contract which is entered by the company which is ultra-vires the
Companies Act, is void-ab-initio, even if memorandum or articles of the
company authorized it. Such act cannot be ratified in any situation. Similarly,
some acts are deemed to be intra-vires for the company even if they are not
mentioned in the memorandum or articles because the Companies Act
authorizes them.

Acts which are ultra-vires to the memorandum of the company

An act is called ultra-vires the memorandum of the company if, it is done

beyond the powers provided by the memorandum to the company. If a part of
the act or contract is within the authority provided by the memorandum and
remaining part is beyond the authority, and both the parts can be separated.
Then only that part which is beyond the powers is considered as ultra-vires, and
the part which is within the authority is considered as intra-vires. However, if
they cannot be separated then whole contract or act will be considered as ultra-
vires and hence, void. Such acts cannot be ratified even by shareholders as
they are void-ab-initio.

Acts which are ultra-vires to the Articles but intra-vires to the

memorandum
All the acts or contracts which are made or done beyond the powers provided
by the articles but are within the powers and authority given by the
memorandum are called ultra-vires the articles but intra-vires the
memorandum. Such acts and contracts can be ratified by the shareholders
(even retrospectively) by making alterations in the articles to that effect.

Acts which are ultra-vires to the directors/officers but intra-vires

to the company

All the acts or contracts which are made by the directors/officers beyond the
powers provided to them are called acts ultra-vires the directors but intra-vires
the company. The company can ratify such acts and then they will be binding.

Development of the doctrine

Eley v The Positive Government Security Life Assurance

Company, Limited, (1875-76) L.R. 1 Ex. D. 88

It was held that the articles are not a matter between the company and the
plaintiff. They may either bind the members or mandate the directors, but they
do not create any contract between plaintiff and the company.

In Shuttleworth v Cox Brothers and Company Limited, and

Others, [1927]

It was held that if a contract is subject to the statutory powers of alteration

contained in the articles and such alteration is made in good faith and for the
benefit of the company then it will not be considered as a breach of the contract
and will be valid.

In Re New British Iron Company, [1898]

It was held that in this particular case the directors will be ranked as ordinary
creditors in respect of their remuneration at the time of the winding-up of the
company. This was stated because generally articles are not considered as a
contract between the company and the directors but only between
shareholders. However, in this particular case, the directors were employed,
and they had accepted office on the footing of the articles of association. So at
the time of winding-up of the company they were considered as the creditors.

Rayfield v Hands and Others, [1957)

Field-Davis Ltd. was a private company carrying on business as builders and

contractors, the plaintiff, Frank Leslie Rayfield, was the registered holder of 725
of those shares, and the defendants, Gordon Wyndham Hands, Alfred William
Scales and Donald Davies were at all material times the sole directors of the
company. There was a provision in the Articles of association of the company
where it was required that if he wants to sell his shares, he will inform the
directors, who will buy them equally at a fair valuation. However, when he
informed the directors, they refused to buy them by saying that there is no such
liability imposed by the articles upon them.

The plaintiff claimed that fair value of the shares must be determined and
directors must be ordered to purchase them at a fair value. It was held that
articles of the company required the directors to buy the shares at a fair price,
but the relationship between them was not as a member and director but as a
member and a member.

Effects of ultra vires Transactions

1. Void ab initio: The ultra vires acts are null and void ab initio. These acts
are not binding on the company. Neither the company can sue, nor it can
be sued for such acts. [Ashbury Railway Carriage and Iron Company v.
Riche].
2. Estoppel or ratification cannot convert an ultra-vires act into an intra-vires
act.
3. Injunction: when there is a possibility that company has taken or is
about to undertake an ultra-vires act, the members can restrain it from
doing so by getting an injunction from the court.
4. Personal liability of Directors: The directors have a duty to ensure that
all corporate capital of the company is used for a legitimate purpose only.
If such funds are diverted for a purpose which is not authorized by the
memorandum of the company, it will attract a personal liability for the
directors. A shareholder can maintain an action against the directors to
compel them to restore to the company the funds of the company that
have by them been employed in transactions that they have no authority
to enter into, without making the company a party to the suit.

5. The doctrine of ultra-vires in Companies Act, 2063

Section 4 (1)(c) of the Companies Act, 2013, states that all the objects
for which incorporation of the company is proposed any other matter
which is considered necessary in its furtherance should be stated in the
memorandum of the company.
Whereas Section 245 (1) (b) of the Act provides to the members and
depositors a right to file a application before the tribunal if they have
reason to believe that the conduct of the affairs of the company is
conducted in a manner which is prejudicial to the interest of the company
or its members or depositors, to restrain the company from committing
anything which can be considered as a breach of the provisions of the
company’s memorandum or articles.

 Quorum and special voting rights;

 Minority shareholder’s protection;
 Sale and transfer of shares (e.g. first refusal and first offer
rights);
  Additional transfer rights (e.g. tag-along and drag-along
rights);
 Confidentiality;
 Resolution of deadlock;
 Termination and exit clauses (e.g. fair value transfers and
call/put options);
FORMALITIES

Shareholders’ agreements governed by Nepalese law need to

fulfil general formalities for execution of written contracts set out in
the Muluki Civil Code. It can be signed by hand and does not
require thumb print execution. Rubber stamps are required to be
affixed in agreements signed by companies.

Section 187 of the Act requires the shareholders entering into

shareholders’ agreement to submit two copies of the agreement
to the company within 15 days of execution and for the company
to submit the agreement to the Office of the Company Registrar
within 15 days of receipt from shareholders. A pre-incorporation
consensus agreement is required to be submitted to the Office of
the Company Registrar together with the application to register a
company.
LIMITATIONS

Shareholders’ agreements have the following limitations:

 provisions that may be prejudicial to the interests of the

company or the minority shareholders are not enforceable;
 shareholders’ agreement that are not consensus agreement
will only be enforceable against the parties and not against
the company or other shareholders;
 provisions in the shareholders’ agreement may not
contradict mandatory provision of the Act; and
  certain provision of the shareholders’ agreement may be
considered as unlawful interference on the statutory powers
of the company.
In certain circumstances, it may be better to ensure that certain
provisions of the shareholders’ agreement are entrenched in the
memorandum or articles to ensure enforceability.

Section 187. Validity of agreement between shareholders:

(1) An agreement entered into between the

shareholders of a company in respect of the

management, operation of the company and the use

of voting right conferred to them shall be binding on

them.

Provided, however, that if any provision of such

agreement is prejudicial to the interest of the

company or its minority shareholders, such provision

shall ipso facto be invalid to the extent.

 (2) The concerned shareholder shall submit two copies

of the agreement entered into under Sub-section (1) to

the company within fifteen days after the date on which

such agreement was entered into. The company shall

submit a copy of the agreement so received from the

shareholder to the Office within fifteen days after the

receipt of the same.

2.5 Unanimous (Shareholder) Agreement

(section 2(z4), 145)
 Managing a successful company requires quick decision-making,
delicate balancing of competing priorities, and detailed
organizational planning. While sometimes overlooked – especially
when a business grows quite quickly – organizational planning is the
glue that keeps the company together no matter what comes your
way.
 A solid understanding of rights and obligations as a shareholder is
an important step in ensuring the long-term viability and success of
the business. With this in mind, it may want to consider whether or
not company could benefit from a Unanimous Shareholder
Agreement (USA).
 (z4) “Consensus agreement” means an agreement made
unanimously by all the shareholders of a private company
existing for the time being in respect of the operation of the
company.
  Unanimous Shareholder Agreement, where a startup company
has a small group of shareholders, it is common to require all of
the shareholders to be become parties to the shareholder
agreement (commonly referred to as a unanimous shareholder
agreement).
 A unanimous shareholder agreement (“USA”) is, in some
respects, a creature of statute which the statute allows to be
employed to restrict “in whole or in part, the powers of the
directors to manage, or supervise the management of, the
business and affairs of the company”.
 The legal status of a USA is that of “a corporate law hybrid, part
contractual and part constitutional in nature” – it forms part of
the contacting documents for certain purposes.
 USA provisions expressly recognize the ability of shareholders to
contract out of certain statutory requirements, for example: by
requiring a greater number of votes of directors or shareholders
than that required by the Act to effect any action, by limiting the
directors’ discretion to, among other things: issue shares; make,
amend or repeal by-laws, appoint officers; fix the remuneration
of directors, officers and employees; or borrow money, give
guarantees or grant security interests in the corporation’s
property.
 A unanimous shareholder agreement has special legal status in
that it can be used to restrict the powers of the directors (under
the common law, directors cannot rely on a non-unanimous

shareholder’s agreement to delegate or reduce their discretion).

Unanimous Shareholder Agreement (USA)

According to the Canada Business Corporations Act (CBCA), “a unanimous
shareholder agreement (USA) is an agreement that is among all the
shareholders of a company and that restricts the powers of directors to
manage, or supervise the management of, the business and affairs of the
company.” All shareholders must agree to enter into a USA.

Benefits of a USA
The main advantage of a USA is that it typically contains provisions in two
main areas: decision making and share transfers, which are particularly
helpful in the case of deadlocks or an unexpected shift in share ownership
as a result, for example, of the bankruptcy or death of a shareholder. A
USA is generally recommended whenever there are two or more
shareholders in a closely held corporation. The process of establishing a
USA can also be incredibly beneficial, particularly during the initial stages
of organizing the company, as it defines expectations and creates
provisions which will ideally prevent lengthy, expensive, and potentially
damaging disputes in the future.

Disadvantages
Providing a mechanism by which the shareholders, through a unanimous
agreement, [can] strip the directors of some or all of their managerial
powers as desired by the shareholders. Rather than removing the directors
from their positions, a USA simply relieves them of their powers, rights,
duties, and associated responsibilities. This may be accomplished without
specific formality… What is in effect created is an “incorporated
partnership” with statutory force.

Provisions usually included in a USA

Share Transfer
Most USAs require, as a primary rule, that share transfers are contingent
on the receiver becoming a party to the USA. Additional provisions under
this rule may include:
 Right of First Refusal: Existing shareholders get first crack at the chance
to match a bona fide offer that a shareholder receives from a third party
to purchase his or her shares thus, potentially, preventing a third-party
purchaser from becoming a shareholder if it is deemed not in the best
interests of the company.
 “Shot Gun” Provision: This provision is especially useful in the event that
relationships between shareholders deteriorate and one party wishes to
exit. It allows a shareholder to establish the terms and price under which
he or she is prepared to either sell his or her own shares or purchase
shares from another shareholder. Based on the terms and conditions
presented, the other shareholders decide whether or not to buy the
offered shares or sell their own shares, depending on the situation.
 “Piggyback” or “Tag-along” Provision. In the event that a shareholder
chooses (and is able) to sell shares to third-party, this provision gives
other shareholders the opportunity to include their shares in the
agreement with the third-party buyer, essentially allowing those additional
shareholders the opportunity to ‘tag along’ and exit the corporation.
“Drag-along” Provision. This provision prevents minority shareholders from
blocking a potential sale of the company should a majority shareholder
wish to exit the corporation. Essentially it ensures that if a majority
shareholder decides to sell his or her shares, minority shareholders will be
required to sell their shares to the buyer as well.
Capital Requirements: At different stages of a company’s existence,
access to funding will be important. A USA can establish how capital is
obtained and prescribe penalties should shareholders fail to contribute the
requisite amount based on their interests in the company. A USA can also
determine how liability will be shared and how guarantees will be signed
should the need for debt financing ever arise.
 Dispute Resolution: This is an important aspect to include in your
USA. Potential resolution measures may include mediation or the
assignment of a tiebreaking vote or veto to an individual shareholder over
certain actions.
Company Act, (section 2(z4), 145)
Section. 2 (z4) “Consensus agreement” means an agreement made
unanimously by all the shareholders of a private company existing for
the time being in respect of the operation of the company.
Section. 145 Consensus agreement:
(1) Except as otherwise provided in this Act, the following matters may
be provided for in a consensus agreement of a private company:
(a) Management, business and transaction of the company;
(b) Restriction, if any, on the transfer of shares;
 (c) Power of one or more shareholders to liquidate the company owing
to any specific or incidental event or voluntarily;
(d) Division or use of voting right;
(e) Terms of appointment of officers, employees, workers of the
company,
(f) Matter as to who will be the directors, officers, or the persons
bearing the ultimate responsibility or the chief executive, of the
company;
(g) Mode of payment or distribution of dividends;
(h) Matter that there shall be no board of directors;
(i) Matter that, if there shall be no board of directors, who shall
perform such functions as required to be performed by the board of
directors under this Act;
(j) If the annual general meeting is not required to be held, provisions
pertaining thereto;
(k) Types of shares and the provision of shares with different right, if
any.
(2) The consensus agreement may be amended with the consent in
writing of all parties to the agreement.
(3) The shareholders who, after the conclusion of a consensus
agreement, have obtained the shares as follows shall be deemed to
have consented to the agreement and become party thereof: (a) where
the shares have been obtained by way of donation or gift; (b) Where
the shares have been obtained in any other manner, with the
knowledge of the existence of such agreement at the time of obtaining
the shares.

2.6 Amendment to Memorandum of association

and Article of association (Section 21)
  Memorandum of Association is a legal document of the company
prepared at the time of incorporation of the company with an option
to carry out alteration of memorandum of association as and when
required to define the various clauses as per the Companies Act.

 It is a document which consists of various clause related to the

company and it defines the scope of business activities of the
company. Any change in terms of memorandum of association such
as change in authorized capital, change in object, change in name of
the company, etc. can be done via an amendment in MOA. A
company may have to undertake alteration of memorandum of
association from time to time. Alteration of object clause in the MOA
can also take place based on the changing business landscape and
the needs of the company.

Procedural for Amendment of

MOA/AOA

Types of
amendment
Identification of the amendment
required to be made.

Hold board
meeting (BM)

The BM is required to be convened to approve

the amendment and fix date time and place for holding General Meeting.

Holding General
meeting
 In order to get approval from shareholders for amending the
MOA/AOA, the EGM is required to be convened by circulating 21
days clear notice or such shorter period after consent of the requisite

Filing of the
required form
Amendment is required to be filed to
Company Registrar Office within 30 days of passing special
resolution

Section 21. Amendment to Memorandum of

Association & Article of Association
1) The general meeting of a company may, subject to
Section 6, amend the memorandum of association or
articles of association, by adopting a special resolution to
that effect.

2) The company shall give information of any amendment

made to the memorandum of association or articles of
association pursuant to Sub-section (12) to the Office within
thirty days; and the Office shall record the same and give
information thereof to the concerned company, within seven
days after the receipt of such information.
3) Notwithstanding anything contained in Sub-section (2),if any
company has to amend its name, it shall adopt a special
resolution to that effect at its general meeting and make an
application, accompanied by the fees as prescribed, for prior
approval of the Office: and if the Office gives approval to
amend the names as per the application so received, the name
of that company shall be amended.
4) If a shareholder of a public company who is not satisfied
with an amendment made to the objectives of the company
may, on fulfilling the following requirements, file a petition,
setting out the reasons therefore, in the court to have that
amendment declared null and void:
a) A shareholder or shareholders holding at least five percent
shares of the paid-up capital of the company, except the
shareholders who consent to or vote for the amendment or
alteration, has to make a petition,
b) A petition has to be filed within twenty-one days after the
adoption of the resolution to amend the objectives of the
company,
c) Where any one is to file a petition on behalf of one or more
than one shareholder entitled to make petition, the petition has
to be filed by a person who is authorized in writing for that
purpose.
5) Unless and until the court is satisfied that the information
about the contents, date, time and venue of a petition made
under Subsection (4) has also been given to the company, the
petition shall not be heard.
Provided, however, that if it appears from the documents
submitted to the court that the concerned company has refused
to acknowledge the notice, nothing shall prevent the court from
hearing the petition.
6) Where a petition is filed in the court pursuant to Subsection
(4), the amendment made to the objectives of the company shall
not be effective pending the final decision or order by the court
in that matter.
7) On a petition as referred to in sub- section (4), the court may
issue an appropriate order, specifying the following terms and
conditions:
a) Declaring the amendment made to the objectives of the
company to be fully or partly valid or void,
b) Requiring the company to subscribe for a reasonable value,
the shares and other rights held by the shareholders making a
petition under Subsection (4),upon being disagreed with the
making of alteration in the main objectives of the company,
c) The shares have to be subscribed under Clause (b) from the
moneys as referred to in Sub-section(2) of Section 61; and in
the case of a company which has no such moneys, issuing an
order to decrease the capital of the company as if the share
capital were decreased to the extent of such subscription by
adopting a special resolution by the company; and where such
order is issued, the company shall amend its memorandum of
association and articles of association, subject to the provisions
of this Act.
8) Notwithstanding anything contained elsewhere in this Act,
where an order is issued by the court to fully or partly void the
decision made by the company to amend its objectives, the
company shall not be entitled to amend its memorandum of
association or articles of association in that matter without
permission of the court or in a manner contrary to the order of
the court.
9) Where the memorandum of association or articles of
association of a company is altered by an order of the court or
the amendment made by the company is fully or partly
endorsed by the court, such alteration or endorsement shall be
enforced as if such alteration or endorsement were made by the
general meeting of the company on its own.

Unit 3. Share capital of

company (Share & capital chapter-4)
3.1 Meaning and nature of share
3.2 share capital its importance and types of
share capital.
3.3 Share and stocks, kinds of shares;
preference shares, Equity shares, Right
shares, Sweat equity shares, Bonus shares.
3.4 Powers/ rights of equity shareholders
3.5 Issue if shares; Private placement of shares,
Buy and offer for sale by inviting public
through prospectus and issue of shares to
the existing shareholders.
3.6 Share certificate; Transfer of shares and
forfeiture of shares and reduction of share
capital

3.1 Meaning and nature of share

Meaning (Legal, business, accounting)
 ‘Share’ means the divided portion of the share
capital of a company. (Company Act, section 2(n)
 Share capital simply means the capital generated by
distributing shares.
 Each shares represent a fractional interest in the
total property possessed by the company.
 Share does not confer right to possess of physical
thing but only a bundle of rights to the members.
 Farewell J said in one case, “A share is the interest
of shareholders in a company measured by a sum of
 money for the purpose of liability in the first place
and of dividend in the second”. (Borlands Trustee v.
steel, 1901,)
 “An interest measured by a sum of money and made
up of diverse rights conferred by articles.” Supreme
Court of India)
 A share is right to participate in the profits made by
a company, while it is a going concern and declares
dividend, and in the assets when it is wound up.
 Share refers to the interest or stake a person has
in a company. This stakes or interest is in the form
of rights, privileges, restrictions, liabilities and
obligations as well as risks. A person's interest or
stake in a company has monetary value.

Nature of Shares

 Share is the most popular mode and long term

financing for the company.
 The shares of company are movable property and
commodity for exchange and are transferable (sold,
mortgage, bequeathed) in the manner provided in the
Articles of Association.
 Shares are not brought in to existence by legislation
but a share in a company belongs to a totally different
category of property.
  It is incorporeal in nature and it consists merely of a
bundle of rights and obligations.
 Share is a property which one does not have
immediate possession but has a right to it, which can
be enforced by a legal action.
 The shares may be only one class or may be divided
into different classes of securities.
 Rights and liabilities as regulated by articles are of the
very essence of shares.
 A share is a symbol of ‘passive property’, the ‘active
property’ is under the control of the corporate
director/officer.

3.2 Share capital its importance and types of

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 Importance for (1) Shareholder (2) Company

 high liquidity in nature to individual

 limited risk
 Company do not have repayment requirement so it
is given more flexibility over its finances.
 Company is more freedom to use it share capital
whereas in case of loans and bonds, creditor can
 limit the use of the funds they will lend to the
company.
 Raising capital is very flexible. Company can have
decided how may share is desired to issue, the types
of share, rights attached, it can also repurchase
issued shares if desired.
 Lower risk to company because shareholders cannot
force a company into bankruptcy.

 One of the attractions of raising capital via the sale of

shares is that the company does not have repayment
requirements for the initial investment or for interest
payments. This can make it more appealing than
other forms, such as bank loans and bonds, that are
debts of the company. Debts require the company to
make payments at regular intervals in relation to
interest, as well as eventually repaying the initial
amount that was borrowed. Any shares sold can
require a distribution of profits as a dividend but
these can be halted if necessary. Therefore, the
business is given more flexibility over its finances.
 Any money raised through the sale of shares can be
used by the company however it wants. There are no
stipulations or requirements attached to the funds. In
 comparison a creditor can limit the use of the funds
they will lend to the company, which will restrict
how the company can use them.
 Raising equity via share sales is also very flexible.
The business has full control over how many shares
to issue, what to initially charge for them and when it
wishes to issue them. It can also issue further shares
in the future if it wishes to raise more money. The
company can also decide on the type of shares it
issues and what rights these give the shareholders,
and it can also repurchase issued shares if desired.
 Another advantage is that there is a much lower risk
that the business will become bankrupt. Shareholders
cannot force a company into bankruptcy if it fails to
make payments (unlike creditors if the company fails
to repay interest).
Shareholders want the business to succeed and can
bring in skills and experience and assist with business
decisions.
The stock market is one of the most important
sources for companies to raise money. This allows
business to be publicly traded, or raise additional
capital for expansion by selling shares of ownership
of the company in a public market.
 Investing in share provides high liquidity in nature to
individual.
  Stock market enables individual to increase personal
wealth via dividend received from investment or
proceed from selling of share.
 Raise capital through stock market give advantage in
term of low cost of capital. (Abstains from a number
of the intermediation expenses apparent in the other
forms of capital rising)
 Stock market provides the opportunity for companies
to access to a widespread shareholder/investor. (both
local and international)

Types of share capital

1. Registered, Authorized or Nominal Capital:
(Rs. 1,00,00,000)
The Memorandum of Association of every company has to specify
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 by way of public subscription.
2. Issued Capital: Rs. 50,00,000 (1,00,00,000
authorized capitals -50,00,000 issued
capital= 50,00,000 unissued capital)
The company may not issue the entire 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. Unissued Capital: (1,00,00,000 authorized
capitals -50,00,000 issued capital=
50,00,000 unissued capital)
The balance of nominal capital remaining to be issued is called
Unissued Capital.
4. Subscribed Capital: Rs. 30,00,000
(50,000,00-30,00,000=20,00,000)
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 passed by the directors of the
company.
5. Called up Capital: Rs. 20,00,000
(30,00,000-20,00,000 = 10,00,000)
It is that part of subscribed capital which has been called up by the
company. 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: Rs. 10,00,000
(30,0,000-20,00,000)
It is the uncalled portion of the allotted capital and represents
contingent liability of the shareholders on the shares.
7. Paid up Capital: Rs. 15,00,000
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 it means 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.
When once the Reserve Capital has been so created the company
cannot alter its Articles of Association so as to make the reserve
liability available at any time. The Reserve Capital cannot be
charged as security for loans by the directors. It cannot be turned
into ordinary capital without the order of the court. It cannot be
cancelled at the time of reduction of capital.
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