Share Capital of the Company

Share Capital of the Company
24 July 2020

Share Capital of the Company

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

A share is the interest of a member in a company. According to Section 2(84) of the Companies Act, 2013, “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 reasons of dividend and liability. It attaches several rights and liabilities. Debentures, share 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 given in the articles.

Classification of Share Capital

The typical but different expressions of share capital found in the capital structure of a company are called as “Classification of share capital”, which are the following as under:

  1. Authorized Capital/ Registered Capital: Authorised Capital is the highest amount of share capital stated in a company’s memorandum which the company is, for the time being, authorized to increase. As the memorandum is registered with the registrar, it is also known as the ‘Registered capital’. As the actually issued capital of the company is generally different i.e. less from the authorized capital, it is also called ‘Nominal Capital’.
  2. Issued Capital: Issued Capital means the nominal value of that part of the authorized capital which is assigned for cash or for consideration other than cash and involves the shares subscribed by the signatories to the memorandum.
  3. Subscribed Capital: Subscribed Capital means the paid-up value of the part of the authorised capital which is issued for cash or for consideration other than cash and involves 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’.
  4. Called up Capital: Called Up Capital is that part of the assigned share capital which has been demanded or called up by the company. Generally, 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 installments payable on application, allotment, first call, final call, etc.
  5. Uncalled Capital: Uncalled Capital is that segment of the issued share capital which has not been called or demanded by the company, but subscribers continue to remain liable for this amount and have to pay the same whenever called upon.
  6. Paid-up Capital: Paid Up Capital is equivalent to called up capital minus calls in arrears. Mostly, some of the subscribers do not pay the complete amount called up from them. That portion of the total called up amount, which is actually paid by the subscribers, is known as paid-up capital.
  7. Reserve Capital: Reserve Capital is that portion 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 it does not need the entire amount of subscribed capital, and instead of calling up the whole amount of these shares, some portion should be kept in reserve for meeting contingencies arising at the time of winding up.
Kinds of Share Capital

The capital of a company is required to be classified into shares of a fixed amount. Section 43 of the Companies Act, 2013 defines Kinds of Share Capital. The share capital of a company is of two kinds which are the following as below:

  1. Equity share capital: Equity share capital with regards to any company limited by shares, means all share capital which is not preference share capital. The Equity share capital-
    1. with voting rights;
    2. with differential rights as to dividend, voting or otherwise in accordance with such regulations as may be prescribed.
  2. Preference share capital: Preference share capital with regard to any company limited by shares, means that portion of the issued share capital of the company which carries or would carry a preferential right with respect to:
    1. Payment of dividend, either as an amount calculated at a fixed rate or as a fixed amount, which may either be free of or subject to income-tax;
    2. Repayment, in the case of repayment of capital or winding up, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.
Types of Preference Share Capital 

There are two types of Preference Share which are the following as below:

  1. Cumulative or Non-Cumulative: A simple or non-cumulative preference shares gives the right to a fixed percentage dividend of profit each year. In case no dividend thereon is announced in any year because of the absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividends in the subsequent year or years regarding that year. Cumulative preference shares however give the right to the preference shareholders to demand the unpaid dividend in any year during the subsequent year or years when the profits are accessible for distribution.
  2. Redeemable and Non-Redeemable: Redeemable Preference shares are preference shares that have to be repaid by the company after the period for which the preference shares have been issued. Irredeemable Preference shares mean preference shares need not repaid by the company except on winding up of the company. However, under the Indian Companies Act, a company cannot issue irredeemable preference shares. In fact, a company limited by shares cannot issue preference shares which are redeemable after more than ten years from the date of issue. This means that the maximum tenure of preference shares is ten years. If a company is not able to redeem any preference shares within the defined period, it may, with the consent of the Company Law Board, furnish further redeemable preference shares equal to redeem the old preference shares involving dividend thereon.
Share Certificate

Every share in a company having a share capital shall be distinguished by a distinctive number. This section is not applicable to shares held by a person as a beneficial owner in the 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 dematerialized form the record of the depository is the prima facie evidence of the interest of the beneficial owner.

Section 56 (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.

Punishment for Fraud under Share Certificate 

If a company with an intention to defraud issues a duplicate share certificate, the company shall be punishable with fine which shall not be less than five times the face value of the shares included in the issue of the duplicate certificate but which may extend to ten times the face value of such shares or ten crores rupees whichever is higher and every officer of the company who is in default shall be liable for action under section 447.

Voting Rights

Voting rights are subject to provision of section 43 in regard to differential rights and Section 50 in regard to 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.

Conclusion

It can be concluded that the primary function of the authorized capital of a company is to safeguard the existing shareholders against possible dilution of their equity interests by the issuing of shares beyond the required limit. Therefore, the authority given to companies to acquire their own shares has given companies the flexibility to decide on matters directly in regard to the share capital of the company.