Meaning of Shares
A part or portion of a larger amount that is divided among a
number of people, or to which a number of people contribute.
Definition of Shares
Share- Share is defined as “an interest having a money value and made up of
diverse rights specified under the articles of association”.
Classification of shares
Under the Companies Act, 1956 the shares are classified into two types-
Preference share capital is the sum total of preference
shares.These shares carry the following preferential rights
over equity shares:
As regards dividends, to be paid a fixed amount or an
amount calculated at a fixed rate;
On winding up of the company, to return of capital paid
There are four types of preference shares:
Cumulative preferred, for which dividends must be paid
including skipped dividends.
Non-cumulative preferred, for which skipped dividends
are not included.
Participating preferred, which give the holder
dividends plus extra earnings based on certain
Convertible preferred, which can be
exchanged for a specified number of shares of
Preference shares may further be classified as-
“Redeemable Preference Shares”
“ Irredeemable Preference Shares”
Equity shares are those shares which are ordinary in
the course of company's business.They are also called
as ordinary shares.These share holders do not enjoy
preference regarding payment of dividend and
repayment of capital. Equity shareholders are paid
dividend out of the profits made by a company. Higher
the profits, higher will be the dividend and lower the
profits, lower will be the dividend.
Share capital means the capital raised by the
company by issue of shares.
Types of Share Capital
Authorized Share Capital
This is the capital with which the company is
registered. It comprises of the total face value of
the shares in a company. It is also called ‘Total or
Nominal Capital’ of the company.
The entire authorized capital may not be required
to be raised by the company initially. The company
issues shares to the extent of its requirement.This is
called ‘Issued Capital’. Issued Capital is always less
than the Authorized or Nominal Capital, or equal to
That part of issued capital which is agreed to be
taken up by the public, is called the ‘Subscribed
The amount actually paid by the subscribers towards the
capital accepted by them is called ‘Paid-up Capital’.The entire
amount of the share money may not be paid up immediately.
Called up Capital
Called up capital is a part of subscribed capital which has been
called up by the company for payment.
For example- If 10,000 shares of Rs. 100 each have been subscribed by the
public and of which Rs. 50 per share has been called up.Then the subscribed
capital of the Company works out to Rs. 1,00,000 of which the called up
capital of the Company is Rs. 50,0000.
The may not require the full amount of the
subscribed capital and therefore, it may call up only a
part of the capital subscribed and that part which
has not been called up i.e., the remainder of the
subscribed capital is called ‘Un-called Capital’.
Allotment of Shares
The allotment of shares by the company shall be
made in accordance with Sections 69,70,72and 73 of
the companies Act.Application for shares is an offer
and allotment of shares by the company is an
acceptance of the offer. Allotment can be made on a
written or an oral application.
The following rules are to be observed:
1.A ‘prospectus’ or a ‘statement in lieu of prospectus’ shall be
filed with the Register.
2.No allotment of shares shall be made to public unless the
minimum subscription amount stated in the prospectus is
raised and received by the company.
3.Application for shares should be made to the company in the
prescribed from called “Application Form”.
4.No allotment shall be made until the beginning of the 5th
after a date on which the prospectus is issued or such later
time as may be specified in the prospectus.
5. The beginning of the 5th
day or such later time shall be called
“time of the opening of the subscription list”.
6. Every company intended to offer shares or debentures to the
public for subscription, before such issues shall make an
application to one or more recognized stock exchanges for
7. The amount payable on application on each share shall not be
less than 5% of the nominal amount of the share.
8. The whole of the application money should have been paid to
and received by the company in cash.
9. All money received from applicants for shares shall be deposited
and kept deposited in a scheduled been obtained, then until the
entire amount payable on application for shares in respect of the
minimum subscription has been received by the company.
Effect of Irregular Allotment
Within two months after the holding of the
statutory meeting of the company.
In any case where the company is not required to
hold a statutory meeting or where the allotment is
made after the holding of the statutory meeting,
within two months after the date of allotment, and
The allotment shall be a voidable even if the
company is in course being wound up.
Transfer of Shares
AOA (Articles of Association) provides for the procedure of
transfer of shares. It is a voluntary action of the shareholder.
It can be made even by a blank transfer –In such cases the
transferor only signs the transfer form without making any
In case it is a forged transfer, the transferor’s signature is
forged on the share transfer instrument.
The share of a company are freely transferable.The
share holder can transfer his share to any person
without the consent of other member.
Company can not impose absolute restrictions on the
rights of the members to transfer their shares.
Transmission of shares is by operation of law, e.g. by
death, insolvency of the shareholder etc.
WHAT IS PROSPECTUSWHAT IS PROSPECTUS??
Prospectus means any document
described or issued as a prospectus and
includes any notice, circular,
advertisement or other document inviting
deposits from the public or inviting offers
from the public for the subscription or
purchase of any shares in, or debentures
of a body corporate.´
The prospectus must include the following
1. Important information on the scheme
2. Definitions of the technical terms which are
used throughout the Prospectus
3. Principal features of regarding the company
and the scheme. The information contained in
this section should be read in conjunction with
the full prospectus. This include following
Structure of the Company;
Investment Objective, policies and restrictions
Manager, registrar and secretary
Custodian and Bankers
Base Currency of the fund
Applications for purchase of shares
Management and Custodian Fees
Accounting reference date
Stock exchange listing
4. Description of the company and its management
5. Investment objectives, policies and restrictions.
This includes a description of the scheme's
investment objectives, including its financial
objectives, investment policy, and an indication of
any techniques and instruments which may be
used for the purposes of efficient portfolio
management, and of any borrowing powers which
may be used in the management of the scheme.
6. The shares including a description of the shares
in each fund and of the founder shares.
7. Purchasing and Repurchasing of Shares. This
section would typically include the procedures
and conditions for the repurchase, redemption and
cancellation of shares and details of the
circumstances in which repurchase or redemption
may be suspended.
8. The manager, registrar and secretary i.e. name,
registered office and head office if this is different
from the registered office and status. The main
activity should also be included.
9. The custodian i.e. name, registered office and
head office if this is different from the registered
office and status. The main activity should also be
11. Conflicts of Interest. This includes a description of the
potention conflicts of interest which could arise between the
directors, the management company, or the Custodian and the
12. Taxation i.e. an indication of the tax provisions applicable to
the Scheme including details of whether deductions are made
at source from the income and capital gains paid by the
Scheme to holders of Units.
13. Accountants' report at the time the Company was formed
14. General Information
15. Determination of the Net Asset Value (NAV)
16. Suspension of the determination of the Net Asset Value
17. Allocation of assets and liabilities of Funds
18. Schedule of fees
19. Directory with contact details of the Scheme,
Manager, Registrar and secretary, custodian,
sponsoring stockbroker, auditors and legal advisers.
Procedure for issuing shares under a prospectus
The Prospectus together with an application form is
made available to the general public.
Receiving applications along with the application
money. Minimum subscription must be received
Allotment of shares at director’s discretion
Allotment advice is communicated to the applicant.
Allotment monies may be required at this stage.
Making calls for payment of balance money, if any.
The sharing of profits in the going concerns and the
distribution of the assets after the winding up can be
called as dividends
It will be distributed among the shares holders
The dividends can be declared and paid out of:
Monies provided by the government and the
depreciation as provided by the companies.
It can be paid after presenting the balance sheet and
profit and loss account in the AGM
Other than the equity shareholders, even the
preferential shareholders can get the dividends.
Rather they are the first ones to get the
Dividends are to be only in cash, if otherwise
specified in the AOA.
In exceptional cases, even the central
government may permit the payment of
interest to shareholders , even though there is
Free shares of stock given to current shareholders,
based upon the number of shares that
a shareholder owns. While this
stock action increases the number of shares owned,
it does not increase the total value.
This is due to the fact that since the total number of
shares increases, the ratio of number of
shares held to number of shares outstanding remains
A security giving stockholders entitlement to purchase
new shares issued by the corporation at a
predetermined price (normally less than the current
market price) in proportion to the number of shares
A rights issue is an issue of rights to buy
additional securities in a company made to the
company's existing security holders.
Rights are issued only for a short period of time, after
which they expire
As a shareholder, you essentially have three options
when considering what to do in response to the rights
1.Take up the rights to purchase in full
2. Ignore the rights issue
3 Sell your rights to other investors
Sweat Equity Share
“Sweat Equity Shares” means equity shares issued by
the company to employees or directors at a discount
or for consideration other than cash for providing
know how or making available rights in the nature of
intellectual property rights or value additions.
(Section 79A of the Companies Act, 1956 )
1. Such issue is authorised by a special resolution of
the company in the general meeting
2. Such resolution specifies the number of shares,
current market price, consideration, if any, and the
class or classes of the directors or employees to
whom such shares are to be issued.
3. Such issue is after an expiry of one year from the
date on which the company was entitled to
ESOP (Employee Stock Ownership Plan)ESOP (Employee Stock Ownership Plan)
An employee stock ownership plan (ESOP) is a defined
contribution plan that provides a company's workers
with an ownership interest in the company.
In an ESOP, companies provide their employees with
stock ownership, typically at no cost to the employees.
Shares are given to employees and are held in the ESOP
trust until the employee retires or leaves the company.
There are annual limits on the amount of deductible
contributions an employer can make to an ESOP. ESOPs
are governed by federal pension laws, called the
Employee Retirement Income Security Act, or
Forfeiture of Shares
The articles generally give powers to Board of Directors to
forfeit shares as under:
If a member fails to pay any call or installment of a call, and
Any other circumstance which the articles may provide.
The articles may also provide that the failure by a member to
fulfill any engagement with any other member would forfeit his
Power of forfeiture is not inherent in a company and therefore
this power exists only when it is given by the articles.
The total sweat equity shares issued during the
year should not exceed 15% of the total paid-up equity share
capital in a year or shares of the value of Rs.5 crores of
The shares shall be locked in for a period of 3
years from the date of allotment.
The benefits for the company include increased cash
flow, tax savings, and increased productivity from
highly motivated workers.
MEMORANDUM OF ASSOCIATIONMEMORANDUM OF ASSOCIATION
“Memorandum means the memorandum of association of a
company as originally framed or as altered from time to time
in pursuance of any previous companies law or of this act.” –
According to Section 2(28) of the Companies act.
The Memorandum of Association is a document which
contains the fundamental rules regarding the construction and
activities of a company. It is the basic document which lays
down how the company is to be constituted and what work it
shall undertake. The purpose of the memorandum is to enable
the members of the company, its creditors, and the public to
know what its powers are and what is the range of its
activities. The memorandum contains rules regarding the
capital structure, the liability of the members, the objects of
the company, and all other important matters relating to the
company. The memorandum is altered only after certain
formalities are observed.
THE FORM AND CONTENTS OFTHE MEMORANDUM
Section 13 : The Act lays down that the memorandum of a association of every
company shall contain the following particulars :
1. Name Clause
The name of the company with the word “limited” at the end of the name of a
public company and the words “private Limited” at the end of the name of a
2. Situation Clause
The name of the State in which the registered office of the is to be situated.
3. Objects Clause
4. Liability of the members
5. Details of share capital of the company
6. Subscription or Association clause
THE NAME CLAUSE(Sec. 20)THE NAME CLAUSE(Sec. 20)
A company being a separate legal entity must have
a name. A company may select any name which
does not resemble the name of any other company
and it should not contain the words like king, queen,
emperor, government bodies and the names of world
bodies like UNO, WHO, World Bank etc.
REGISTERED OFFICE CLAUSE(Sec. 146)REGISTERED OFFICE CLAUSE(Sec. 146)
Every company should have a registered office, the address of which
should be communicated to the Registrar of Companies. This helps
the Registrar to have correspondence with the company. The place of
registered office can be intimated to the Registrar within 30 days of
incorporation or commencement of business, whichever is earlier.
OBJECT CLAUSE(Sec. 13& 149)OBJECT CLAUSE(Sec. 13& 149)
This is one of the important clauses of the
Memorandum of Association. It determines the
rights and powers of the company and also defines
its sphere of activities.
LIABILITY CLAUSE(Sec. 13)LIABILITY CLAUSE(Sec. 13)
This clause states that the liability of the members
is limited to the value of shares held by them. It
means that the memes will be liable to pay only the
unpaid balance of their shares.The liability of the
members may be limited by guarantee. It also states
the amount which every member will undertake to
contribute to the assets of the company in the
event of its winding up.
CAPITAL CLAUSE(Sec. 13)CAPITAL CLAUSE(Sec. 13)
The clause states the total capital of the proposed
company. The division of capital into equity share
capital and preference share capital should also be
mentioned. The number of shares in each category
and their value should be given. If some special
rights and privileges are conferred on any type of
shareholders, mention may also be made in the
clause to enable the public to know the exact nature
of capital structure of the company.
SUBSCRIPTION OR ASSOCIATION CLAUSE(Sec.13)SUBSCRIPTION OR ASSOCIATION CLAUSE(Sec.13)
This clause contains the names of signatories to the
memorandum of association. The memorandum
must be singed by at least seven persons in the
cause of public limited company and by at least two
persons in the case of private limited company. Each
subscriber must take at least one share in the
company. The subscribers declare that they agree to
incorporate the company and agree to take the
shares stated against their names. The signatures of
subscriber are attested by at least one witness each.
The full addresses and occupations of subscribers
and the witnesses are also given.
ARTICLE OF ASSOCIATIONARTICLE OF ASSOCIATION
Section 2(2) of the Companies Act defines Articles
as the Articles of Association of a company as originally
framed or as altered from time to time in pursuance of
any previous companies law or of this Act. But it is not
clearly defined what is an Article of Association.
Basically Article of Association contains the rules and
regulations relating to the management of companies
internal affairs. It is similar to as a partnership deed in a
Memorandum defines the area or business of the
company. A company cannot operate beyond the limits
of its memorandum. At the same time an Article
contains the rules and regulations of the business of the
company. Therefore, Article is subordinate to, and
controlled by the Memorandum.
IMPORATANCE OF ARTICLE OF ASSOCIATIONIMPORATANCE OF ARTICLE OF ASSOCIATION
Under sec 36, the memorandum and the articles
when registered, shall bind the company andits
members to the same extent as if it had been signed
by them and had contained a covenant ontheir part
that the memorandum and the articles shall be
observed. With respect to the above section, the
importance of articles of association can be summed
up as follows:
Campus OverviewCampus Overview
Infinity Benchmark, 10th
Floor, Plot G1,
Block EP & GP,
Sector V, Salt-Lake,
Kolkata – 700091.
Goldline Business Centre
Next to Chincholi Fire
Brigade, Malad (West),
Mumbai – 400 064.