Share vs. Stock
A Share in the share capital of the company and includes stock
except where the difference b/w stock and shares is express &
implied (Sec 2(46))
A share is a fraction into which the total share capital of
company is divided.
Is not sum of money but the rights of the shareholder in the
company measured in terms of money.
A bundle of fully paid shares put together for convenience so
that it may be divided into any amount and transferred into
Stock vs. Share
Can be issued in original
May be fully or partly paid
Are of fixed denomination
Has a definite number
Transferred in its entirety
or in its multiples only.
6. Registration of share
capital is compulsory
Cannot be issued in original
Always be Fully paid
No such fixed denomination
No such number
Divisible into any amount
and even transferred into
Issued after passing OR if
Legal Nature of Share
1. Regarded as Goods (Sec 2(7) of Sale of Good
2. U/S 82 – Transferable(movable property)
3. U/S 83 – Must bear a distinctive number
4. Must have a nominal value
Not Applicable in case
shares are held with
•Amount of capital raised by the issue of shares
•Members are liable to pay difference between
reduced and nominal value.
KINDS OF SHARE
AUTHORISED ISSUED SUBSCRIBED CALLED UP UNCALLED
REDUCTION OF SHARE CAPITAL
• To ensure that the company’s assets are not freely distributed to
• It is done to:
Write off lost capital
To pay off surplus capital
Authority of articles must be secured
Petition to the Court
METHODS OF REDUCTION
According to Section 100 of the Companies Act:
1. Reduce liability of members on shares not
fully paid up
2. Write off lost capital
3. Pay off excess paid-up share capital
KINDS OF SHARES
With differential rights
as to dividend and
Provides Preferential rights
•As to Payment of dividend at a fixed rate during the life of the
•As to Return of capital on winding up of company
Voting rights on:
•Resolutions directly affecting preference shareholders
•Winding up of company
•Repayment or reduction of company’s share capital
•Entitled to vote on every resolution at any general meeting if
dividend or part thereof unpaid
•For cumulative shares a period of not less than 2 years
preceding the meeting date
• For non cumulative shares, either a period of 2 consecutive
years or for 3 years aggregate in the 6 years ending with the
expiry of financial year immediately preceding the meeting
Redemption-Paying back of capital
• Company limited by shares authorized to issue
redeemable preference shares
• Authorized by articles
• Only fully paid up shares to be redeemed
• Distributable profits from Capital redemption
reserve account ,’proceeds of a fresh issue of
shares’ to be used for redemption of shares
• Premium payable on redemption to be paid out
of company’s profits or securities premium
• Those shares which are not preference shares
• Carry the right to receive the whole of surplus profits after
the preference shares, if any, have received their fixed
• If no profits left after paying fixed preference dividends for
Kinds of Equity Shares •Equity shares with voting rights – The holders have normal
voting rights in the company.
•Equity shares with differential rights – The holders have
differential rights as to dividends, voting and otherwise in
accordance with rules prescribed by the Central Government.
The following are the “Companies Rule 2001”
• Every company limited by shares may issue equity shares with
differential rights to the extent of 25 percent of the total share
• The AOA must authorize the issue of such shares and the
approval of shareholders must be obtained in general meeting
by passing an ordinary resolution.
• The resolution referred above must inter-alia provide for (a) The
rate of voting right and (b) The rate of additional dividend.
• The company will not be allowed to convert its equity capital
with normal voting rights into equity share capital with
differential voting rights and vice-versa.
• The holders of equity shares with differential rights shall be
entitled to bonus shares and rights of the same class and shall
enjoy all rights as a member of the company except right to vote
as indicated above.
Issue of Securities at Premium
Sometimes company with good prospects issues securities at a
premium. No restriction upon the issue of securities at premium
and the company is free to make such an issue whenever it so
Certain restrictions upon the use of premium amount
The premium amount must be transferred to the Securities
Premium Account and this account is to be treated as share
capital for reduction purposes ,except when it is to be used for
the following –
• To issue fully paid bonus shares to members.
• To write off preliminary expenses of the company.
• To write off expenses of, or commission paid or discount
allowed on any issue of shares or debenture of the company
• To provide the premium payable on the redemption of
redeemable preference shares or debenture.
• For buyback of own securities under Section 77A.
Issue of Shares at a Discount
A company is permitted to issue shares at a discount
• The shares must be of a class already issued.
• At least 1 yr. must have elapsed since the company started
• The issue must be authorized by an ordinary resolution in the
general meeting which must state the max. rate of discount.
• The issue must be sanctioned by the Company Law Board. No
such issue shall be sanctioned by the Company Law Board if
the max. rate of discount specified in the resolution exceeds
10%, unless the board is of the opinion that higher percentage
of discount be allowed.
• The issue must be made within two months.
Issue of Sweat Equity Shares
Sweat equity shares means equity shares issued by the
company to employees or directors at a discount or for
consideration other than cash.
The company may issue Sweat equity shares if the
following conditions are fulfilled –
• The shares must be of a class already issued.
• At least 1 yr. must have elapsed since the company started
• The issue must be authorized by a special resolution passed by the
company in the general meeting.
• The resolution must specify the no. of shares, their current market
price, consideration, if any, and the class or classes of directors or
employees to whom they are issued.
• The shares must be issued in accordance with SEBI guidelines in
case of listed shares or Central Govt. in case of unlisted shares.
Payment of Underwriting Commission
• It is an agreement entered into before the shares are
brought before the public.
• Kind of insurance against risk.
• It is the reward or commission paid to a sort of middle
• Lawful brokerage.
• Payable brokerage is to be disclosed in the prospectus.
• SECTION 76
• provides for the payment of commission to the
underwriters, broker’s and public.
• Shares are offered to the public first.
• Authorized by articles of association.
• Rate of commission should not exceed 5% in case of
shares and 2.5% in case of debentures.
• Rate of commission agreed should be disclosed in
• A copy of contract should be delivered to the registrar.
• The commission is paid to the first mention person.
Restriction on Purchase by a
Company of its Own Shares
• Public or private ltd. – no company can buy its
• CONDITIONS UNDER WHICH COMPANY CAN
BUY ITS OWN SHARES• Section 100-104
• Special sanction of court is needed for reduction
of share of capital.
• Section 402
• Buy its shares from certain oppressed members.
• Unlimited companies are free from such
• Sub section(2) – no public co. can give any
financial assistance to buy its own shares.
• EXCEPT• When loan is made by banking company.
• When provision of money is under scheme.
• When loan are made by company to employers
other than director.
Buyback of own securities
• Companies (Amendment) Act, 1999 permits the companies to
buyback their shares
– Repurchase of shares reduces the number of shares outstanding and
thus improves EPS – increases market price of share
– Buyback maybe used to prevent a hostile takeover
– A means of investment
• Funds out of which buyback may be financed [Sec. 77A(1)]
– Free reserves
– Securities premium account
– Proceeds of any shares or other specified securities
• Transfer of certain sum to “Capital Redemption Reserve
Account” [Sec. 77 AA]
– When co. purchases its own shares out of ‘free reserves’, then a sum
equal to the nominal value of shares so purchased must be transferred
to CRR a/c
• Conditions to be fulfilled before resorting to buyback [Sec.
77A(2),(3) & (4)]
– There should be a provision in AoA authorizing buyback
– Special resolution must be passed in the general meeting of co.
authorizing buyback, notice for convening the meeting should be
accompanied by explanatory statement disclosing all material facts of
– Amount of buyback should not exceed 25% of total paid up capital
and free reserves of the co., in case of buyback of equity shares,
amount should not exceed 25% of co.’s total paid up equity capital
– After buyback, ratio of debt to capital and free reserves should not be
more than 2:1
– Shares or securities sought to be bought back must be fully paid up
– Buyback should be in accordance with SEBI guidelines in case of listed
securities or in accordance with guidelines prescribed by Central govt.
in case of unlisted securities
– Buyback operations must be completed within 12 months from date of
passing special resolution
• Methods of buyback [Sec. 77A(5)]
From the existing security holders on a proportionate basis
From the open market
From odd lots i.e. Securities of listed public co.
By purchasing the securities issued to employees
• Declaration of solvency[Sec. 77A(6)]
– To be filed with Registrar of Co. and SEBI
• Physical destruction of securities [Sec. 77A(7)]
– Within 7 days of completion of buyback
• Further issue after buyback [Sec. 77A(8)]
– Co. is free to issue other types of securities other than the type bought
– Same kind cannot be issued before 6 months
• Register of bought back securities [Sec. 77A(9)]
– Register has to be maintained with all particulars of securities bought
• Return of buyback [Sec. 77A(10)]
– After completion of buyback a return is to be filed with Registrar of Co.
and SEBI within 30 days
• Penalty [Sec. 77A(11)]
– Imprisonment up to 2 years and fine up to Rs. 50000 in case of noncompliance with the above provisions
• Buyback methods
– Tender method
• Co. fixes and announces a price at which it intends to buyback
• If no. of shares offered for buyback is more than what is
sought, they are bought back proportionately
– Open market purchases
• Stock exchange purchase method
• Dutch auction method
FURTHER ISSUE OF SHARE
Additional funds for expanding business
Further issue of shares
Under two conditions:
1.Shared Capital already issued < Authorized Capital
2.Shared Capital already issued = Authorized Capital
Need authorization by its Articles + Board of Directors’ resolution for cond. 1
Need authorization by its Articles + Board of Directors’ resolution + a sanction of
Shareholders by means of ordinary/special resolution for cond. 2
Manner of allotment of further issue
Equitable distribution of shares without disturbing the established equilibrium
of shareholding in the company.
A public company proposes to increase its subscribed capital (whichever is
After the expiry of 2 years from incorporation of the company
After the expiry of 1 year from the first allotment of shares
Following conditions must be fulfilled:
Offers must be made to present equity shareholders on a pro-rata basis
(i.e., in proportion to their present shareholdings)
Pro-rata offer is to be made by giving a notice specifying no. of shares
Offer must be made kept open for a period of at least 15 days.
Members have the right of renunciation of the offer in favour of hid nominee.
On expiry of notice period or receipt of earlier declination ,the board of
directors may dispose of them in most beneficial manner.
Right of Pre-emption to Shareholders or Issue of Right Shares
Further shares aforesaid may be offered to outsiders, in following two cases:
1. If a special resolution is passed
2. If an ordinary resolution is passed + Approval of Central Govt. is obtained
Above restrictions do not apply
To private companies
To public companies , in case increase in subscribed capital is due to
use of convertible debentures or loans and the terms of issue are
given by central govt. or by a special resolution