Share capital

CORPORATE
LAWS
Share Capital
CA (Dr) Prithvi Ranjan Parhi
1© CA (Dr) Prithvi Ranjan Parhi

Corporate Law & Tax Compliances
E-MBA ,DDCE
Unit- 1 INCORPATION OF COMPANY-I
Introduction to Companies act 2013- Important Definitions and Concepts- Formation of company-
Memorandum- articles- Incorporation of Company Government Company- Key Managerial Personnel-
Member- Net Worth- Officer- One Person Company- Private Company- Promoter- Prospectus.
Unit-2 INCORPATION OF COMPANY-II
Public Company-Small Company- Subsidiary Company- Unlimited Company.
Appointment of Directors, Director and Nominee Director- Disqualifications For Appointment- Number of
Directorships- Duties of Directors, Register of Members, Annual General Meetings, Notice of meeting,
Quorum for meetings, Chairman of meetings, Minutes of Meetings
Unit -3 SHARE CAPITAL,AND WINDING UP
Kinds of Share Capital- Voting Rights- Variation of Shareholders. Corporate Social Responsibility,
Circumstances of Winding Up, Legal Aspects of Accounts and Audit
Unit-4 Tax Planning and tax management
Tax evasion-Tax avoidance- Tax Planning- Tax Management- Need for Tax Planning-
Limitations of Tax Planning- Tax Planning for Employees- Tax Planning relating to income from house
property- Tax planning relating to income from business- Tax planning relating to Capital gains –Tax
planning relating to income from other sources.
Unit-5
Introduction to TDS, Introduction to Corporate Returns Introduction of GST and Applications

Unit-3
E-MBA ,DDCE
Unit -3 SHARE CAPITAL,AND WINDING UP
Kinds of Share Capital-
Voting Rights-
Variation of Shareholders.
Corporate Social Responsibility,
Circumstances of Winding Up,
Legal Aspects of Accounts and Audit

Types of Share Capital

43. Kinds of share capital
• The share capital of a company limited by shares shall be
of two kinds, namely:—
• (a) equity share capital—
– (i) with voting rights; or
– (ii) with differential rights as to dividend, voting or otherwise in
accordance with such rules as may be prescribed; and
• (b) preference share capital:
• Provided that nothing contained in this Act shall affect the
rights of the preference shareholders who are entitled to
participate in the proceeds of winding up before the
commencement of this Act.

Equity & Preference
• Explanation.—For the purposes of this section,—
• (i) equity share capital‘‘, with reference to any
company limited by shares, means all share
capital which is not preference share capital;

Equity & Preference
• (ii) preference share capital‘‘, with reference to any
company limited by shares, means that part of the
issued share capital of the company which carries or
would carry a preferential right with respect to—
– (a) payment of dividend, either as a fixed amount or an
amount calculated at a fixed rate, which may either be
free of or subject to income-tax; and
– (b) repayment, in the case of a winding up or repayment
of capital, 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;

Deemed to be preference capital
• (iii) capital shall be deemed to be preference capital,
notwithstanding that it is entitled to either or both of the
following rights, namely:—
– (a) that in respect of dividends, in addition to the preferential
rights to the amounts specified in sub-clause (a) of clause (ii),
it has a right to participate, whether fully or to a limited
extent, with capital not entitled to the preferential right
aforesaid;
– (b) that in respect of capital, in addition to the preferential
right to the repayment, on a winding up, of the amounts
specified in sub-clause (b) of clause (ii), it has a right to
participate, whether fully or to a limited extent, with capital
not entitled to that preferential right in any surplus which may
remain after the entire capital has been repaid.

Shares
Preference
• Cumulative & Noncumulative
• Redeemable & Irredeemable
• Participating & non Participating
• Convertible & nonconvertible
Equity
• With Voting right
• With differential rights as to voting & dividend
• Sweat Equity, ESOP, Bonus, Right shares
© CA (Dr) Prithvi Ranjan Parhi 10

Preference Shares

1. Cumulative Preference Shares
• A preference share is called cumulative when the outstanding
payment of a dividend is cumulative.
• If a company does not have the financial capability to pay a
dividend to the owners of its preference shares at any point of
time, then it will not pay a dividend to its common shareholders,
as long as the preference shareholders are not paid.
• The dividend amount gets carried on to the next year.
• For Example,
• Suppose a company X has 10,000 preference shares @ 8% of ₹100
each. But the dividends for 2018 and 2019 have not been paid
to the owners of its preference shares so far.
• So now the directors before they can pay a dividend to the
common shareholders for the year 2020, must pay the preference
shareholders an amount of ₹2,40,000 i.e. for the year 2018, 2019
and 2020 before making any payment to the common
shareholders for the year 2020.

2. Non-Cumulative Preference Shares
• A non-cumulative preference shareholder is only payable from
each year’s net profit. A non-cumulative preference
shareholder will not be paid from future profits.
• So, if a company undergoes a loss in that year, then the
outstanding payment of dividend cannot be claimed in
subsequent years like in the case of cumulative preference
shares.
• For Example,
• A company Y normally issues a ₹70 quarterly dividend to its
preferred shareholders. But the directors feel that there is not
sufficient cash flow in the third quarter to pay a dividend.
• As this is a non-cumulative stock, the company has no
obligation to pay the missing dividend, and the holders of
these shares have no claim against the company Y.

3. Redeemable Preference Shares
• Preference shares which can be redeemed after a
fixed period or after giving a certain notice are
called a redeemable preference shares.
• A redeemable preference share is good for the
company.
• These act as a hedge against future inflation and
when the monetary rate declines in the country.

4. Irredeemable Preference Shares
• Irredeemable preference shares are a
perpetual liability, which cannot be redeemed
during the lifetime of the company.
• According to the Companies Amendment Act,
1988, no company can issue any preference
share which is irredeemable or redeemable
after 20 years from the date of the issue.

Redeemable Preference Shares : Section 55:
• Company to issue redeemable preference shares: No company limited
by shares shall issue any preference shares which are irredeemable;
• Period for redeem of preference shares: A company limited by shares
may, if so authorised by its articles, issue preference shares which are
liable to be redeemed within a period not exceeding twenty years from
the date of their issue subject to such conditions as prescribed under
Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014.
• Exceptions: A company may issue preference shares for a period
exceeding twenty years (but not exceeding thirty years) for
infrastructure projects (specified in schedule VI), subject to the
redemption of 10 % of shares beginning 21st year at the option of such
preferential shareholders;
• Shares to be redeemed out of the profits only: No such shares shall be
redeemed except out of the profits of the company which would
otherwise be available for dividend or out of the proceeds of a fresh
issue of shares made for the purposes of such redemption;
• Redeemed shares to be: no such shares shall be redeemed unless they
are fully paid;

5. Participating Preference Shares
• Participating preference share is where the
issuing company is required to pay an increased
dividend to the owners, in addition to preference
dividend at a fixed rate,
• Also, the holders of participating preference
shares may have the right to share the surplus
asset of the company, when it’s winding up.

6. Non-Participating Preference Shares
• The holders of non-participating preference shares
are entitled only to a fixed rate of dividend and do
not have any share in the surplus profit.
• The surplus profit of the company will thus go to
the common shareholders.
• Preference shares are non-participating in nature
unless and until expressly provided in the
memorandum of the article.

7. Convertible Preference Shares
• Convertible preference shares are the type of preference shares
where the holder has the option to convert into the common/equity
share of the company.
• This kind of preference share is useful for the investors who want to
receive a preferred share dividend and also participate in any kind of
upward change in the price of the issuer’s common shares.
• So, an investor has the benefit and security of a fixed return along with
a chance to earn a higher return on his/her investment.
• But the convertible preference shareholders can convert into common
shares within a certain period as agreed in the memorandum.

8. Non-Convertible Preference Shares
• Non-convertible preference shares do not
carry the right of conversion into the
company’s common shares.

9. Preference Shares with a Callable Option
• This is an innovative type of preference share
available in the Indian capital market.
• For the preference shareholders with a
callable option, the issuing company has the
option to buy back the share at a prefixed
price on or before a pre-determined date.

10. Adjustable-Rate Preference Shares
• For adjustable-rate preference shareholders,
the rate of dividend is not fixed and depends
on current interest rates in the market.

Equity Shares

1. Sweat Equity Shares
• As per Section 2(88)―sweat equity shares
means such equity shares as are issued by a
company to its directors or employees at a
discount or for consideration, other than
cash, for providing their know-how or making
available rights in the nature of intellectual
property rights or value additions, by
whatever name called;

2. Employees’ Stock Option
• As per Section 2(37)―employees’ stock option
means the option given to the directors,
officers or employees of a company or of its
holding company or subsidiary company or
companies, if any, which gives such directors,
officers or employees, the benefit or right to
purchase, or to subscribe for, the shares of the
company at a future date at a pre-determined
price;

3. Bonus Shares [Section 63]
• Bonus shares are shares issued proportionately
by a company to its current shareholders as fully
paid shares free of any cost to them.
• Example: 1:3 bonus issue means an existing
shareholder will get one extra free share for
every three shares already held by him/her.

4. Rights issue
• A rights issue is an invitation to existing shareholders to
purchase additional new shares in the company.
• This type of issue gives existing shareholders securities
called rights. With the rights, the shareholder can
purchase new shares at a discount to the market price
on a stated future date.
• The company is giving shareholders a chance to increase
their exposure to the stock at a discount price.
• In a rights offering, each shareholder receives
the right to purchase a pro-rata allocation of
additional shares at a specific price and within a specific
period (usually 16 to 30 days).
• Shareholders are not obligated to exercise this right.

Equity Share Capital

Rights and Variation of Rights
[Section 47 & 48]

47. Voting rights
• 1) Subject to the provisions of section 43 and
sub-section (2) of section 50,—
• (a) 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; and
• (b) his voting right on a poll shall be in proportion
to his share in the paid-up equity share capital of
the company.

47. Voting rights
• (2) Every member of a company limited by shares
and holding any preference share capital therein
shall, in respect of such capital, have a right to vote
only on
– resolutions placed before the company which directly
affect the rights attached to his preference shares and,
– any resolution for the winding up of the company or for
the repayment or reduction of its equity or preference
share capital and
• his voting right on a poll shall be in proportion to his
share in the paid-up preference share capital of the
company:

Voting rights
• Provided that the proportion of the voting rights
of equity shareholders to the voting rights of the
preference shareholders shall be in the same
proportion as the paid-up capital in respect of
the equity shares bears to the paid-up capital in
respect of the preference shares:

Voting rights
• Provided further that where the dividend in
respect of a class of preference shares has not
been paid for a period of two years or more,
such class of preference shareholders shall have
a right to vote on all the resolutions placed
before the company.

Variations of Shareholders’ Rights
[Section 48]

Variations of shareholders’ rights [Section 48]
• Where share capital of a company is divided
into different classes of shares, it may
sometimes be necessary for it to amend the
rights attached to one or more classes of
shares.

Example
Extract of MoA

Class A Shares vs. Class B Shares:
• Class A shareholders usually have more voting
rights than owners of other classes of stock.
• The difference is relevant only to shareholders
who want an active role in the company.
• When more than one class of stock is offered,
companies traditionally designate them as
Class A and Class B.

Variation in rights of shareholders with consent:
Where a share capital of the company is divided into different
classes of shares, the rights attached to the shares of any class
may be varied
-with the consent in writing of the holders of not less than
three-fourths of the issued shares of that class or
-by means of a special resolution passed at a separate meeting
of the holders of the issued shares of that class,—
a) if provision with respect to such variation is contained in the
memorandum or articles of the company; or
b) in the absence of any such provision in the memorandum or
articles,
if such variation is not prohibited by the terms of issue of
the shares of that class:

Variation in rights of shareholders with consent:
• Provided that if variation by one class of
shareholders affects the rights of any other class
of shareholders,
– the consent of three-fourths of such other class of
shareholders shall also be obtained and the
provisions of this section shall apply to such
variation.

No consent for variation:
Where the holders of not less than ten per cent of the
issued shares of a class did not
- consent to such variation or
- vote in favour of the special resolution for the
variation,
they may apply to the Tribunal to have the variation
cancelled,
and where any such application is made, the variation
shall not have effect unless and until it is confirmed by
the Tribunal:

No consent for variation:
• Provided that an application under this section shall be
made within twenty-one days after the date on which
the consent was given or the resolution was passed, as
the case may be, and may be made on behalf of the
shareholders entitled to make the application by such
one or more of their number as they may appoint in
writing for the purpose. [Sub – section (2)]

3. Binding decision of tribunal: The decision of the Tribunal on any
application under sub-section (2) shall be binding on the
shareholders.
4. Filing copy of order with the Registrar: The Company shall, within
thirty days of the date of the order of the Tribunal, file a copy
thereof with the Registrar.
5. Default in compliance with the provision: Where any default is
made in complying with the provisions of this section, the
company shall be punishable with fine which shall not be less
than twenty-five thousand rupees but which may extend to five
lakh rupees and
every officer of the company who is in default shall be punishable
with imprisonment for a term which may extend to six months or
with fine which shall not be less than twenty-five thousand rupees
but which may extend to five lakh rupees, or with both.

Issue of Shares
• At par
• At Premium
• At Discount
• Oversubscription-prorata basis
• IPO, FPO, Private Placement...
• Thro’ book building process

Book Building:
• Book building is a process of price discovery. It is a
mechanism where, during the period for which the IPO is
open, bids are collected from investors at various prices,
which are above or equal to the floor price. The
offer price is determined after the bid closing date.
The issuer of the initial public offer (IPO) discloses a price
band or floor price at least two working days before the
opening of the IPO.
The applicants bid for the shares quoting the price and
the quantity that they would like to bid at. After the
bidding process is complete, the cut-off price is arrived at
based on the demand for securities.

Forfeiture of Shares
• Default in payment of calls
• Notice precedent to forfeiture
• Resolution of forfeiture
• Bona fide
• Consequence of forfeiture.

45. Numbering of shares
• Every share in a company having a share capital
shall be distinguished by its distinctive number:
• Provided that nothing in this section shall apply
to a share held by a person whose name is
entered as holder of beneficial interest in such
share in the records of a depository.

46. Certificate of shares
• 1) A certificate, [issued under the common seal,
if any, of the company or signed by two directors
or by a director and the Company Secretary,
wherever the company has appointed a
Company Secretary], specifying the shares held
by any person, shall be prima facie evidence of
the title of the person to such shares.

53
Thank you
CA. Dr. Prithvi Ranjan Parhi
prithvi.baps@gmail.com
Email is the best way to get in touch with me
Office hours : Online (Zoom) and by appointment only
© CA (Dr) Prithvi Ranjan Parhi

Share capital

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