Capital of a Company
Capital refers to the amount invested in the company so that it can
carry on its activities. In a company capital refers to "share capital".
The capital clause in Memorandum of Association must state the amount
of capital with which company is registered giving details of number of
shares and the type of shares of the company. A company cannot issue
share capital in excess of the limit specified in the Capital clause
without altering the capital clause of the MA.
The following different terms are used to denote different aspects of share capital: -
1. Nominal authorized or registered capital
Nominal authorized or registered capital means the sum mentioned in the
capital clause of Memorandum of Association. It is the maximum amount,
which the company raises by issuing the shares and on which the
registration fee is paid. This limit is cannot be exceeded unless the
Memorandum of Association is altered.
2. Issued capital
Issued capital means that part of the authorized capital, which has been
offered for subscription to members and includes shares allotted to
members for consideration in kind also.
3. Subscribed capital
Subscribed capital means that part of the issued capital at nominal or
face value which has been subscribed or taken up by purchaser of shares
in the company and which has been allotted.
4. Called-up capital
Called-up capital means the total amount of called up capital on the
shares issued and subscribed by the shareholders on capital account.
i.e. if the face value of a share is Rs.10/- but the company requires
only Rs.2/- at present, it may call only Rs.2/- now and the balance
Rs.8/- at a later date. Rs.2/- is the called up share capital and Rs.8/-
is the uncalled share capital.
5. Paid-up capital
Paid-up capital means the total amount of called up share capital, which is actually paid to the company by the members.
In India, there is the concept of par value of shares. Par value of
shares means the face value of the shares. A share under the Companies
act, can either of Rs.10/- or Rs.100/- or any other value which may be
the fixed by the Memorandum of Association of the company. When the
shares are issued at the price which is higher than the par value say,
for example Par value is Rs.10/- and it is issued at Rs.15/- then Rs.5/-
is the premium amount i.e., Rs.10/- is the par value of the shares and
Rs.5/- is the premium. Similarly when a share is issued at an amount
lower than the par value, say Rs.8/-, in that case Rs.2/- is discount on
shares and Rs.10/- will be par value.
Types of shares:
Shares in the company may be similar i.e. they may carry the same rights
and liabilities and confer on their holders the same rights,
liabilities and duties. There are two types of shares under Indian
Company Law: -
1.Equity shares means that part of the share capital of the company which are not preference shares.
2.Preference Shares means shares which fulfill the following 2
conditions. Therefore, a share which is does not fulfill both these
conditions is an equity share.
a) It carries Preferential rights in respect of Dividend at fixed amount
or at fixed rate i.e. dividend payable is payable on fixed figure or
percent and this dividend must paid before the holders of the equity
shares can be paid dividend.
b) It also carries preferential right in regard to payment of capital on
winding up or otherwise. It means the amount paid on preference share
must be paid back to preference shareholders before anything in paid to
the equity shareholders. In other words, preference share capital has
priority both in repayment of dividend as well as capital.
Types of Preference Shares
Cumulative or Non-cumulative
A non-cumulative or simple preference shares gives right to fixed
percentage dividend of profit of each year. In case no dividend thereon
is declared in any year because of absence of profit, the holders of
preference shares get nothing nor can they claim unpaid dividend in the
subsequent year or years in respect of 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 available for distribution. In this case dividends
which are not paid in any year are accumulated and are paid out when the
profits are available.
Redeemable and Non Redeemable
Redeemable Preference shares are preference shares, which have to be
repaid by the company after the term of which for which the preference
shares have been issued. Irredeemable Preference shares means 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 10
years from the date of issue. In other words the maximum tenure of
preference shares is 10 years. If a company is unable to redeem any
preference shares within the specified period, it may, with consent of
the Company Law Board, issue further redeemable preference shares equal
to redeem the old preference shares including dividend thereon. A
company can issue the preference shares which from the very beginning
are redeemable on a fixed date or after certain period of time not
exceeding 10 years provided it comprises of following conditions: -
It must be authorized by the articles of association to make such an issue.
The shares will be only redeemable if they are fully paid up.
The shares may be redeemed out of profits of the company which otherwise
would be available for dividends or out of proceeds of new issue of
shares made for the purpose of redeem shares.
If there is premium payable on redemption it must have provided out of
profits or out of shares premium account before the shares are redeemed.
When shares are redeemed out of profits a sum equal to nominal amount of
shares redeemed is to be transferred out of profits to the capital
redemption reserve account. This amount should then be utilized for the
purpose of redemption of redeemable preference shares. This reserve can
be used to issue of fully paid bonus shares to the members of the
Participating Preference Share or non-participating preference shares
Participating Preference shares are entitled to a preferential dividend
at a fixed rate with the right to participate further in the profits
either along with or after payment of certain rate of dividend on equity
shares. A non-participating share is one which does not such right to
participate in the profits of the company after the dividend and capital
have been paid to the preference shareholders.
Alternation of capital
A company limited by shares can alter the capital clause of its
Memorandum in any of the following ways provided that such alteration is
authorized by the articles of association of the company: -
1) Increase in share capital by such amount, as it thinks expedient by issuing new shares.
2) Consolidate and divide all or any of its share capital into shares of
larger amount than its existing shares. e.g., if the company has 100
shares of Rs.10/- each (aggregating to Rs. 1000/-) it may consolidate
those shares into 10 shares of Rs. 100/- each.
3) Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination.
4) Subdivide shares or any of shares into smaller amounts fixed by the
Memorandum so that in subdivision the proportion between the amount paid
and the amount if any unpaid on each reduced shares shall be same as it
was in case of from which the reduced share is derived.
5) Cancel shares which have been not been taken or agreed to be taken by
any person and diminish the amount of share capital by the amount of
the shares so cancelled.
The alteration of the capital of the company in any of the manner
specified above can be done by passing a resolution at the general
meeting of the company and does not require any confirmation by the
Reduction of the share capital can be effected only in the manners
specified in Section 100-104 of the Act or by way of buy back under
Section 77A and 77B of the Act. Notice of alteration to share capital is
required to be filed with the registrar of the company in Form no 5
within 30 days of the alteration of the capital clause of the MA. The
Registrar shall record the notice and make necessary alteration in
Memorandum and Articles of Association of the company. Any default in
giving notice to the registrar renders company and its officers in
default liable to punishment with fine which may extend to the Rs. 50/-
for each day of default.
Conversion of shares into stocks: Conversion of fully paid shares into
stock may likewise be affected by the ordinary resolution of the company
in the general meeting. Notice of the conversion must be given to the
Registrar within 30 days of the conversion, the stock may be converted
into fully paid shares following the same procedure and notice given to
the Registrar in Form no 5. In this connection, the following provisions
are important: -
1) Only fully paid shares can be converted into stocks
2) Direct issue of stock to members is not lawful and cannot be done.
3) The difference between shares and stock is that shares are
transferable only in complete units so that transfer of half or any
portion of share is not possible whereas stock is expressed in terms of
any amount money and is transferable in any money fractions.
4) Articles may give the Board of Directors authority to fix minimum amount of stock transferable.
5) Since stock is not divided into different units it is not required to be numbered. Shares on the other hand must be numbered.
Reduction of share capital with sanction of the Court
A company limited by the shares or a company limited by guarantee and
having share capital can if authorized by its articles, by special
resolution and subject to confirmation by the court on petition reduce
its share capital. It may effect reduction of its share capital in any
of following circumstances:
1.Where the company is overcapitalized: -
a) It may extinguish or reduce the liability of member in respect of
uncalled or unpaid capital. For example, where shares are of Rs.100/-
each with Rs.60/- paid up, the company may reduce them to Rs.60/- fully
paid and thus release the shareholder from the liability on uncalled
capital of Rs.40/-.
b) Pay off or return part of the unpaid capital not wanted for the
purpose of the company. For example, where the shares are fully paid of
Rs. 100/- they may be reduced Rs.40/- each and Rs.60/- may be paid back
to the shareholders.
c) Pay off part of the paid up share capital on the footing that it may
be called up again. If shares are of Rs.100/- each the company may pay
off Rs.25/- per share on condition that when desired the company may
call it again without extinguishing the liability of shareholders to pay
the uncalled share capital.
d) Reduce by a combination of the aforesaid methods
2.Where the company has suffered loss of capital, in such situation the
company can write off or cancel the share capital which has been lost or
is unrepresented by available assets.
Where the company has passed the resolution for reducing the share
capital, it must, by petition, apply to the court in the prescribed form
to the court for an order confirming the reduction. Where the proposed
reduction of share capital involves the either diminution of liabilities
in respect of unpaid share capital or the payment to any shareholder of
any paid-up share capital or in any other case if the court so directs
the following provisions shall have effect: -
1.Every creditor of the company who on the date fixed by the court is
entitled to debt from or any claim against the company shall be entitled
to object to the reduction.
2.The Court shall settle a list of creditors so entitled to object and
for that purpose shall ascertain as far as possible without requiring an
application from any of the creditors, the names of creditors and the
nature and amount of debt or claims and publish notices fixing the day
or days within which creditors not entered in the list are to be entered
if they so desire.
3.Where a creditor entered on the list whose debt or claim is not
discharged or has not been determined does not consent to the reduction,
the court may, if it thinks fit, dispense with the consent of the
creditors if the company secures payment of this debt or claim by
appropriating the following amounts as the court may direct: -
a) The company admits the full amount claim or debt or though not
admitting it is willing to provide for it, then the full amount of debt
b) If the company does not admit and is not willing to provide for the
full amount of debt or claim or if the amount is contingent or not
ascertained, then amount fixed by the court after due enquiry.
4.Where the proposed reduction of share capital involves either
diminution of any liability in respect of the unpaid share capital or
payment of any shareholder of any paid share capital, the Court may,
having regard to any special circumstances of the case as it thinks
proper so to do, direct that the above provisions shall not apply to any
class or classes of creditors.
5 If the court is satisfied with respect to every creditor of the
company entitled to object to reduction that either his consent to the
reduction has been obtained or his that debt or claim has been
discharged or has been determined or has been secured, make an order
confirming the reduction on such terms and conditions as it thinks fit.
6.Where the court makes such an order, it may, if for any special
reasons thinks fit and proper to do so, make an order directing that the
company shall during such period commencing on and any time after the
date of the order as is specified in the order add to its name as the
last words the words "& Reduced" and make an order requiring the
company to publish the same along with the reasons for the reduction or
such other information in regard thereto as the court may think
expedient with view to giving proper information to the public and if
the court thinks fit the causes which led to reduction.
7.Where the company is ordered to add to its name the words "&
Reduced" those words shall until the expiry of period specified in the
order shall be deemed to be part of the name of the company.
8.The registrar, on the production to him, of an order of the court
confirming the reduction of the share capital of the company and on
delivering to him the certified copy of the order and of minutes
approved by the court showing with respect to the share capital of the
company as altered by the order register the reduction of share capital.
On registration of order and minutes, the reduction of share capital
shall take effect.
9.Notice of the registration shall be published in such manner as the court may direct.
Reduction of capital without the sanction of the court
Reduction of capital can take place without the sanction of the court in the following cases
1) Buy back of shares in accordance to the provisions of Section 77A and 77B
2) Forfeiture of shares - A company may if authorized by its articles
forfeit shares for non-payment of calls by the shareholders. Such
proceedings amount to reduction of capital but the act does not require
court sanction for this purpose.
3) Valid surrender of the shares - A company may accept the surrender of shares
4) Cancellation of capital - A company may cancel the shares, which has
not been taken up or agreed to be taken by the person and diminish the
amount of its share capital.
5) Purchase of shares of member by the company under Section 402B. The
Company Law Board may, on application made under Section 397 or Section
398, order the purchase of shares or interest of any member of the
company by the company. These provisions come in force when a prescribed
number of members make a complaint to the CLB for mis-management or
oppression of the minority shareholders in the company.
6) Redemption of redeemable preference shares. Where redeemable
preference shares are redeemed, it actually amounts to reduction of the
capital. However, this does not require the sanction of the court.
Variation of shareholders rights
The rights, duties and liabilities of all shareholders are clearly
defined at the time of issue of the shares. Once the rights of
shareholders are fixed, they cannot be altered unless the provisions of
the Companies Act for this purpose are complied with. The rights
attached to the shares of any class can be varied only with the consent
in writing of shareholders holding not less than 75 % of the issued
shares of that class or with the sanction of special resolution passed
at a separate meeting of the holders of issued shares of that class.
However, the following conditions also must be complied with: -
1.The variation of rights are allowed by the Memorandum or Articles of Association of the Company.
2.In absence of such provision in the Memorandum or Articles of company,
such variation must not be prohibited by the terms of issue of shares
of that class.
Rights of Dissenting Shareholders:
The rights of the shareholders who did not consent to or vote for
variation of their rights are protected by the Companies Act. If the
rights of any class of the shareholders are varied, the holders of not
less than 10 per cent of the shares of that class, being persons who did
not consent to or vote in favor of resolution for variation of their
rights can apply to the court to have the variation cancelled. Where
such application is made to the court, such variation will not be given
effect unless and until it is confirmed by the court.
Voting Rights of the Members
Every member of a public company limited by shares holding equity shares
will have votes in proportion to his share in paid up equity capital of
Generally, preference shareholders do not have any voting rights.
However, they can vote on matters directly relating to the rights
attached to the preference share capital. Any resolution for winding up
of the company or for the reduction or repayment of the share capital
shall be deemed to affect directly the rights attached to preference
shares. Where the preference shares are cumulative (in respect of
dividend) and the dividend thereon has remained unpaid for an aggregate
period of two years before date of any meeting of the company, the
preference shareholders will have right to vote on any resolution. In
case of non-cumulative preference shares, preference shareholders have
right to vote on every resolution if dividend due on their capital
remains unpaid, either in respect of period of not less than two years
ending with the expiry of the financial year immediately preceding the
commencement of the meeting or in respect of aggregate period of not
less than three years comprised in six years ending with the expiry of
concerned financial year.
Every equity shareholder has a right to vote at a general meeting. No
company can prohibit any member from exercising his voting right any
ground including the ground that he has not held his shares for a
minimum period before he becomes eligible to vote. However, a member’s
voting rights can be revoked if that member does not make payment of
calls or other sums due against him or where the company has exercised
the right of lien on his shares.
Traditionally, Preference Shares have been seen as one of the principal
methods of financing companies. However, their use in recent years has
become soemwhat limited.
Preference Shares are shares that have several features, namely:
1. they carry a fixed percentage dividend
2. they are normally "cumulative", i.e. if the dividend can not be
paid in one year, it carries forward to the following year, where it
becomes a priority item
3. they do not carry voting rights or any other rights to participation in the running or policy of the company
4. they do not participate, in any way, in any growth in the company or improvement in the company's profitability or value
5. in terms of priority of payment of dividend and, in the event of
corporate failure, repayment of capital, they rank ahead of ordinary
shares, but behind loan notes and debentures.
Preference Shares now have very little use in the financing of
companies, although there remain a few, very specialist, uses for them.
They are, at best, seen as being a "halfway house" between ordinary
shares (at one end of the financing spectrum) and long-term loans (at
the other end of the spectrum) and they are seen to enjoy the advantages
and privileges of neither ordinary shares or long-term loans.
The general view is that, if you want a fixed interest rate, priority on
payment of interest and repayment of capital (in the event of corporate
failure), no participation in the growing profits and value of the
company and no participation in the company's organisation and policy
and would like the security to be repaid by the company (i.e. a safe
investment with very limited growth potential), buy a loan note /
If, on the other hand, you want a variable dividend, which (hopefully)
rises with the growing profits and value of the company, with
participation in the organisation and policy making, accept that the
security will never be repaid by the company and you are prepared to
take some degree of risk (i.e. you are prepared to be a limited risk
taker, but one who seeks some return for the acceptance of that risk)
then buy the company's ordinary shares.
In neither case should you consider Preference Shares, as they offer the
advantages of neither ordinary shares nor long-term loans.
Preference Shares are valued on the Stock Market as less secure fixed-interest long-term loans.