Shares in the share capital of a company and include stock except where a distinction between stock and share is expressed or implied. Shares signify the following;
- The interest of a shareholder in the company the right to receive the dividend, attend meetings, vote at the meeting and share in the surplus assets of the company, if any, in the event of the company, being wound up;
- The liability of the shareholder in the company to pay calls on shares until fully paid up;
- The right of the shareholder to transfer the shares subject to the articles of association.
- Binding covenants on the part of the company as well as the shareholder, as given in the Articles of the company.
Thus, a share of a company in the hands of a shareholder signifies a bundle of rights and obligations. A share is not a negotiable instrument.
Type of Shares
The most common types of shares are:
- Preference Shares,
- Equity or Ordinary Shares, and
- Deferred or Founders’ Shares.
A public company and a private company which is a subsidiary of a public company may not issue shares other than equity, preference, and cumulative convertible preference shares (CCPS).
A preference share is one that carries the following two rights over holders of equity shares;
- a preferential right in respect of dividends at a fixed amount or a fixed rate, and
- a preferential right regarding the repayment of capital on winding up.
The preference or priority of the preference shareholders is about the rights of equity shareholders.
Participating and Non-participating
If a preference share carries either one or both of the following rights, then it is known as participating share:
- To participate further in the profits either along with or after payment of a certain rate of dividend on equity shares,
- To participate in the surplus assets at the time of winding up.
Thus, if a preference share does not carry either of these rights, then it will be known as a non-participating share.
If a preference share carries the right for payment of arrears in dividends from future profits, then such a share is known as a cumulative preference share.
If a preference share does not carry the right to a dividend in arrears, then such a preference share is known as non- cumulative or simple.
The preference shares are always presumed to be cumulative unless expressly described as non-cumulative.
Redeemable and Irredeemable Preference Shares
Redeemable preference shares are those shares which are to be redeemed by the company either at a fixed date or after a certain period or at the option of the company.
The share must be an authority in the articles.
The shares can be redeemed only when they are fully paid up; it will only be redeemed;
- out of profits of the company which would otherwise be available for dividend, or
- out of the proceeds of a new issue of shares.
If there is a premium payable on redemption, it must have been provided out of profits or out of the securities premium account before the shares are redeemed.
Where the shares are redeemed out of profits, a sum equal to the nominal amount of the shares redeemed is to be transferred out of profits to the “Capital Redemption Reserve Account.”
Voting rights of preference shareholders
The preference shareholders will vote only on matters directly relating to preference shares;
- any resolution for winding up of the company,
- any resolution for the reduction or repayment of share capital,
- any resolution at any meeting, if dividend on cumulative preference shares remains unpaid for at least two years.
Equity share’ means a share, which is not a preference share. The rate of dividend is not fixed. The Board of Directors recommends the rate of dividend,s which is then declared by the members at the Annual General Meeting.
New issues of the share capital of a company limited by shares shall be of two kinds only, namely;
- equity share capital:
- with voting rights; or
- With differential rights as to dividend, voting or otherwise following such rules and subject to such conditions as may be prescribed;
- Preference share capital.
Before the Amendment to the Companies Act, public companies were not allowed to issue equity shares with differential rights.
Thus, companies are now allowed to issue nonvoting equity shares. The holders of equity shares carrying voting rights shall have voting rights in proportion to the paid-up equity capital of the company.
Cumulative Convertible Preference Shares (CCPs)
Such shares are issued as preference shares but are I convertible into equity shares within a period of 3 Years to 5 years, as may be decided by the company.
Deferred or Founders’ Shares
A pure private company can issue shares of a type other than those discussed above. Thus, it may issue what is known as deferred shares.
As deferred shares are normally held by promoters and directors of the company, they are usually called founders’ shares. They are usually of a smaller denomination, say one rupee each.
Share vs. Stock
The share capital of a company is divided into several indivisible units of a specified amount. Each such unit is called a ‘share.’
Stock The term ‘stock’ may be defined as the aggregate of fully paid-up shares of a member merged into one fund of equal value.
It is a set of shares put together in a bundle.
The ‘stock’ is expressed in terms of money and not as so many shares. Stock can be divided into 11 actions of any amount, and such fractions may be transferred like shares.
|A share has a nominal value.||A stock has no nominal value.|
|A share has a distinctive number that distinguishes it from other shares.||A stock bears no such number.|
|Share can be issued originally to the public.||A company cannot make an original issue of stock. Stock can be issued by an existing company by converting its fully paid-up shares.|
|A share may either be fully paid-up or partly paid-up.||A stock can never be partly paid-up; it is always fully paid-up.|
|A share cannot be transferred infractions. It is transferred as a whole.||A stock may be transferred in any fractions.|
|All the shares are of equal denomination.||Stock may be of different denominations.|
Mode of Share Issue
A company may issue shares at par, or a premium, or a discount.
Issue at Par
Shares are deemed to have been issued at par when subscribers are required to pay only the amount equivalent to the nominal or face value of the shares issued.
Par Value of Shares
‘Par value’ is the notional face value of the shares which a company issues to its investors.
The issue at a Premium
If the buyer is required to pay more than the face value of the share, then the share is said to be issued or sold at a premium. The premium cannot be treated as profit and, therefore, cannot be distributed as dividends.
The amount of premium received in cash and the equivalent of it received in-kind must be kept in a separate bank account known as the ‘Securities Premium Account.’
As per SEBI guidelines, 2000, every company entitled to make a public issue can offer its shares at par or premium.
The issue at a Discount
If the buyer of shares is required to pay less than the face value of the share, then the share is said to be issued or sold at a discount. Certain conditions subject to which shares can be issued at a discount:
Is authorized by a resolution-
- The issue must be of a class of shares already issued
- The maximum rate of discount must not exceed 10 percent
- Not less than one year has, at the date of issue, elapsed since the date on which the company was entitled to commence business.
- Issued within two months of the sanction by the Company Law Board.
- Every prospectus must mention particulars of the discount allowed on the issue of shares.
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 each. ‘Sweat equity shares’ may be issued for providing know-how or making available intellectual property rights (say, patents) or value additions, by whatever name called. Conditions;
- Must be of a class of shares already issued.
- Authorized by a special resolution.
- The resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued.
- Not less than one year has, at the date of the issue, elapsed since the date on which the company was entitled to commence business.
- Are issued by the regulations made by the Securities and Exchange Board of Bangladesh.
A company may, if the articles so provide, capitalize profits by issuing fully paid-up shares to the members, thereby transferring the sums capitalized from the profit and loss account or Reserve Account to the Share Capital.
Such shares are known as bonus shares and are issued to the existing members of the company free of charge. The issue of bonus shares is regulated not only by the Companies Act but also by the guidelines issued by SEBI in this regard.
The existing members of the company have a right to be offered shares when the company wants to increase its subscribed capital. Such shares are known as “right shares,” but they are not issued free of charge.
Raising of Capital/Issue of Shares
Issue of shares may be made in 3 ways:
- By private placement of shares;
- By allotting entire shares to an issue-house, which in turn, offers the shares for sale to the public; and
- By inviting the public to subscribe for shares in the company through a prospectus.
Let’s take a look at how a company can sell its shares.
Private Placement of Shares
Shares are issued privately to a small number of persons known to the promoters or related In them by family connections.
By an Offer for sale
The Issue-house publishes a document called an offer for sale, with an application form attached, offering to the public shares or debentures for sale at a price higher than what is paid by it or at par.
This document is deemed to be a prospectus.
By inviting the public through prospectus
The company invites offers from members of the public to subscribe from the shares or debentures through the prospectus.
Issue of shares to existing shareholders
The capital is also raised by the issue of rights shares’ to the existing shareholders. In this case, the shares are allotted to the existing equity shareholders in proportion to their original shareholding.
Public issue of Shares
Public issue of shares means the selling or marketing of shares for subscription by the public by issue of prospectus.
Allotment of Shares
It means and implies a division of the share capital into defined shares of a particular value or of different classes and assignment of such shares to different persons.
The share certificate states the name, address, occupation of the holder, together with the number of shares and their distinctive number and the amount paid-up.
It must bear the common seal of the company, must be stamped, and bear the signature of one or more directors.
A share warrant is a negotiable instrument. It entitles the bearer to the shares specified in it, and he can transfer the ownership of shares by merely delivering the share warrant to the transferee.
Membership and Share Capital
Membership can be in the following ways:
- The subscribers of the memorandum
- Every other person who agrees in writing to become a member
- Every person holding equity share capital of a company
Member and Shareholder
In the case of an unlimited company or a company limited by guarantee, a member may not be a shareholder.
Modes of Acquiring Membership:
By subscribing to the memorandum of association.
- By agreement and registration.
- By agreeing to purchase qualification shares.
Calls on Shares: The company may ask for some payment at the time of application for shares (but money not less than 5 percent of the nominal value) and another sum at the allotment. The balance may be payable as and when called for.
Forfeiture of Shares: Forfeiture of shares means taking the theme away from the member. This is absolutely a serious step for not only does it deprive the shareholder of his property but also, unless the shares are re-issued, it involves a reduction of capital.