Shares

UNIT 3
 • Section 2(84): Definition
A share is the interest of a shareholder in a
company, represents the ownership of the
shareholders in the company.
The capital of a company is divided into certain
indivisible units of a fixed amount (known as
Nominal/face value)
Introduction Ex: share capital of ABC(pvt) ltd= 20,000
shares(indivisible units) x Rs. 10/- each(fixed
amt which nominal/face value)
These units are called Shares
Commissioner of Income Tax v. Standard Vacuum
Oil co. Ltd (AIR 1966)
Vishwanath v. East India Distilleries (1957)
Continued…
• Nature of Shares:
Manekji Pestonji Bharucha v. Wadilal Sarabhai & co.
Vishwanath v. East India Distilleries (1957)

• Certificate of Shares: Section 46

• What is Stock?
Aggregate of fully paid-up shares, consolidated and divided for the purpose of
convenient holding into different parts. It may be split up into fractions of any
amount, without regard to the original face value of the shares. It denotes:
a. A co. has recognized the fact of complete payment of the shares.
b. They can be split into fragments and then transferred
Distinction between stock and shares
1. Stock symbolizes the complete payment of shares of the company. That is stock
must be fully paid up whereas shares may or may not be fully paid up
2. A share has a nominal value, whereas stock has no nominal value
3. Shares are described as indivisible units i.e. shares can’t be divided into
fractions. Stocks on the other hand can be divided into as many fractions as the
company deems fit
4. All shares are of equal denomination (i.e. face value). Stock may be of unequal
denominations
5. Shares are distinctively numbered, but there is no necessity of numbering stock
when the stock is of different denominations
6. Shares can be directly issued to the public whereas stocks cannot be directly
issued to the public. Only fully paid up shares can be converted into stock.
Classification of Share Capital
 Kinds of share
capital

Equity Share Preference

Capital Share Capital

Non-
Uniform voting Differential Cumulative or Redeemable or
participating or
rights Voting Rights non-cumulative irredeemable
participating
Kinds of shares: Section 43

Preference Share Capital: Sec 43(ii)

• Characteristics (TWO)
• Preferential right to be paid dividend during the lifetime of the company.
• Fixed amount (eg. Rs. 50,000/- in 1 year)
• At a fixed rate (eg. 5% of the nominal value of each shares. Suppose X is holding
500 shares @ 100/- per share= 50,000/-. Then what is to be paid to X?)

- Preferential right as to repayment of the paid up share capital in

winding up.
Continued…
KINDS of Preference Share
• Cumulative: arrears of dividends
• Non-cumulative: No arrears of dividends
• Participating: surplus profit
• Non-participating: only fixed rate of dividend
• Convertible and non-convertible
• Redeemable Preference: Section 55
 Sec 55 Redeemable preference Shares
• Issue: Special resolution/SEBI/ No default in redemption of any PS and dividend payment on any PS
• Redemption of PS: Irredeemable PS+ prohibited
- Term: 20 years/if>20= Infra Co./10% redeem 21st year
- AOA for issue=YES; for redemption=NO
- Fully paid up PS
- Source: out of Past profit or Fresh Issue
• ON PREMIUM: Redemption is allowed
- Source: Past profit or Security Premium Account (SPA)
- CRR(Capital Redemption Reserve Account)= Nominal value of PS redeemed out of profits
- CRR utilization: Only for fully paid bonus shares
- Notice to ROC for redemption of PS in 30 days
 Equity Share Capital: Sec 43(i)

- No right to any fixed dividend resolution passed in general meeting

- More risk factor 3. Max DVR= 26% of the total post issue paid-up ESC
- No right in winding up 4. Track record of distributing profit: 3 years
- Voting right on all matters 5. No default in FS/AR: 3years
- UNIFORM and DIFFERENTIAL voting rights 6. No default: dividend/loan
7. Not penalized in 3 years by: RBI/SEBI/ FEMA etc
8. No conversion for existing shareholders
- Differential voting rights(DVrs): as to voting or
dividend or otherwise 9. Disclosure- Register of members/Board Report
- Rule 4 of Companies (Share Capital and Debentures)
Rules, 2014
1. The AOA must permit
2. Approval of shareholders through ordinary
Issue of sweat equity shares: Sec 54
 Application & Allotment of Shares
For an effective allotment to take place the following rules are important to be complied with:
1. Allotment by proper authority: BOD
2. Within reasonable time: question of fact,
- Ramsgate Victoria hotel co. V Montefiore (1866)
3. Must be communicated:
- Household Fire & carriage Accident Insurance Co. v. Grant (1879)
4. Absolute and unconditional :
- Ramanbhai v. Ghasi Ram: Applied for 400 shares provided he is made the branch manager
TRANSFER AND TRANSMISSION OF SECURITIES
TRANSFER AND TRANSMISSION OF SECURITIES
Continued…
Difference
 DIVIDEND : Sec 2(35)

• What is Dividend?: Distribution or Apportionment of profit

• BY: A company
• To: Share Holders
• When: Yearly or whenever declared
• Why Dividend: To protect interest of shareholders

Profit after tax BOD remuneration Dividend Reserves

 Some Basics of Dividend
• Who will declare: BOD
• Approval: By Share holders
• Where: In General Meeting
• By: Ordinary Resolution
• Which profit: PAT i.e. Profit after tax
• Dividend is paid out of the paid up capital of the company
• Declaration of Dividend: Section 123
• Punishment for failure to distribute dividend: Sec 127
Timeline of Dividend
 Sec 2(30) and Sec 71

Characteristics of a debenture:
• Issued by a company, a certificate,
acknowledgement of indebtedness
DEBENTUR • Issued under the company’s seal.
E (Section • It one of a series/single debenture
71) • Specifies a particular period or date as the date of
repayment. Payment of both principal and interest.
Company can also issue perpetual debentures.
• It may or may not create a charge on the
undertaking of the company or some part of it.
• No right to vote in the company meeting.
Kinds of debenture

Registered debentures:
payable to registered holders
Bearer or unregistered (one whose name appears
Secured debentures Unsecured debentures
debentures both on debenture certificate
and in the company’s register
of debentures.

Redeemable debentures:
debentures can be redeemed
after a certain period and
Perpetual debentures Convertible debentures Non-convertible debentures
they may be re-issued after
redemption in accordance
with the provision of Sec 121