Star Institute Of Commerce

Class Notes for chapter Share capital

Topic 1: Introduction
1. Company A joint stock company is an artificial person, created by law,
having separate entity distinct from its members with a perpetual
succession and a common seal.
2. Characteristics or Features of a Company
(i) Artificial person (ii) Voluntary association (iii) Created by law
(iv) Capital divisible into transferable shares (v) Limited liability
(vi) Perpetual succession (vii) Common seal
(viii) Separate legal entity from its members (ix) May sue or be sued (x)
Seprate ownership and management.
3. Kinds of Companies
(i) Private companies According to Section 2 (68) of the Companies Act,
2013, it is a company with minimum paid-up share capital of ^ 1,00,000 or
such higher amount as may be prescribed in the Companies Act, 2013 and
which by its Articles of Association. Due to amendment in companies
act, it need not have any minimum paid up share capital.
(a) Restricts the right to transfer its shares, if any.
(b) Except in one person company, limits the number of its members
excluding its present and past employee members to 200; if the past or
present employee acquired the shares while in employment and continue
to hold them. If any share is held jointly by two or more persons, they shall
be treated as a single member.
(c) Prohibits any invitation to the public to subscribe for any securities of the
company.
The minimum number of members required to form a private company is
two. The name of a private company ends with the words, ‘Private Limited’.
(ii) Public company As per Section 2 (7) of Companies Act, 2013, public
company is a company which
(a) is not a private company.
(b) has minimum capital of Rs 5 lakh or such higher paid-up capital as may
be prescribed. Due to amendment in companies act, public company
need not have any minimum paid up share capital.
(c) is a private company, which is a subsidiary of a public company.
Minimum requirement of a public company is seven persons.
(iii) One person company is a company which has only one person as a
member. It is a company incorporated as a private company which has only
one member. Rule 3 of the Companies (Incorporation) Rules, 2014
provides that:
(a) Only a natural person being an Indian citizen and resident in India can
form one person company or can be nominee for the sole member of one
person company.
(b) One person can form only one ‘one person company’ or become
nominee of one such company.
(c) It cannot be formed for charitable purpose.
(d) It cannot carry out non-banking financial investment activities including
investment in securities of any body corporate.
(e) Its paid-up share capital is not more than Rs 50 lakhs.
(f) Its average annual turnover should not exceed Rs 2 crores.
4. Share According to Section 2 (84) of the Companies Act, 2013, share
means a share in the share capital of a company and includes stock. The
capital of company is divided into a number of equal units. Each unit is
called a share. A company may divide its capital into share of Rs 100, Rs
50, Rs 10, Rs 5 or even Rs 1 each.

Share Capital
(i) Every company limited by shares must have a share capital.
(ii) Share capital of a company refers to the amount invested in the
company for it to carry out its operations.
(iii) The share capital may be altered or increased, subject to certain
conditions.
(iv) A company’s share capital may be divided into small share of different
classes.
(v) The different classes of share capital and the right attached to these
classes are different.

Kinds of share
(i) Preference shares According to Section 43 (b) of the Companies Act,
2013, preference shares are the shares which carry the following two
preferential rights:
(a) Preferential right of dividend to be paid as fixed amount or an amount
calculated at a fixed rate, which may either be free of or subject to income
tax. It means, if dividend is paid to equity shareholders, dividend should
also be paid to preference shareholders; and
(b) Right to receive repayment of capital on the winding up of the company
before that of equity shares. Holders of preference shares are called
preference shareholders.
(ii) Equity shares According to Section 43(a) of the Companies Act 2013,
equity share is that share which is not a preference share. Equity shares
are the most commonly issued class of shares which carry the maximum
‘risks and rewards’ of the business. The risks being losing part or all of the
value of shares if the business incurs losses, the rewards being payment of
higher dividends and appreciation in the market value.
6. Share Capital It is that part of the capital of a company, which is
represented by the total nominal value of shares, which it has issued.

Kinds of Share Capital

(i) Authorised share capital According to Section 2(8) of Companies Act,

2013, ‘authorised capital’ or ‘nominal capital’ means such capital as is
authorised by the memorandum of a company to be the maximum amount
of share capital of a company.
(ii) Issued capital According to Section 2(50) of the Companies Act, 2013,
issued capital means such capital as the company issues from time to time
for subscription.
Subscribed capital According to Section 2(86) of the Companies Act, 2013,
‘subscribed capital’ means such part of the capital which is for the time
being subscribed by the members of a company.
(a) Subscribed and fully paid-up Shares are said to be ‘subscribed and fully
paid-up’ when the entire nominal (face) value is called and also paid-up by
the shareholders.
(b) Subscribed but not fully paid-up Shares are said to be ‘subscribed but
not fully paid-up’ when
• the company has called-up the entire nominal (face) value of the share
but has not received it.
• the company has not called-up the entire nominal (face) value of share.
A reference has been made two terms
• Called-up capital According to Section 2(15) of the Companies Act, 2013,
‘called-up capital’ means such part of the capital, which has been called for
payment. Thus, it means the amount of nominal (face) value called-up by
the company to be paid by the shareholders towards the share capital.
• Paid-up share capital According to Section 2(64) of the Companies Act,
2013, ‘paid-up share capital’ or ‘share capital paid-up’ means the amount
that the shareholder has paid and the company has received against the
amount ‘called up’ against the shares towards share capital.
8. Reserve Capital It is that portion of uncalled share capital which shall not
be capable of being called up except in the event and for the purpose of the
company being wound up.
9. Capital Reserve ‘Capital reserve’ is the reserve which is not free for
distribution as dividend. It is mandatory to create capital reserve in case of
capital profits earned by the company. Reserves which are created out of
capital profits are not readily available for distribution as dividend among
the shareholders, e.g. premium on issue of shares of debentures, profits on
re-issue of shares, profits prior to incorporation, premium on redemption of
debentures.

Prospectus
A public company issues a document called ‘prospectus’ in whuch terms
and condition of the issue are stated along with the purpose for which the
proceeds of the issue of securities shall be used.
According to sec 2(70)
 Prospectus means any document described or issued as a
prospectus and
 Includes a Shelf prospectus; or
  Red herring prospectus; or
 Any notice, circular, advertisement, or other document inviting offers
from the public for the subscription or purchase of any securities of a
body corporate.

Minimum Subscription [Sec- 39(1) of

companies act 2013]

Minimum subscription is the amount stated in the prospectus that must be

subscribed and the amount payable on application for the amount stated as
minimum subscription have been received by the company
SEBI, the regularity authority for listed companies, prescribes that a
company must receive minimum subscription of 90% of the share issued
for subscription before it allots the shares.
1) No allotment of any securities of a company offered to the public for
subscription shall be made unless the amount stated in the prospectus as
the minimum amount has been subscribed and the sums payable on
application for the amount so stated have been paid to and received by the
company by cheque or other instrument.

(2) The amount payable on application on every security shall not be less
than five per cent of the nominal amount of the security or such other
percentage or amount, as may be specified by the Securities and
Exchange Board by making regulations in this behalf. [sec- 39(2)]

SEBI prescribes that application money should not be less than 25%
of the issue price.

(3) If the stated minimum amount has not been subscribed and the sum
payable on application is not received within a period of thirty days from the
date of issue of the prospectus, or such other period as may be specified
by the Securities and Exchange Board, the amount received under section
39(1) shall be returned within such time and manner as may be
prescribed. Currently prescribed time is 15 days.

(4) Whenever a company having a share capital makes any allotment of

securities, it shall file with the Registrar of company a return of allotment in
such manner as may be prescribed.(Effective from 01-04-2014)

(5) In case of any default under sub-section (3) or sub-section (4), the
company and its officer who is in default shall be liable to a penalty, for
each default, of one thousand rupees for each day during which such
default continues or one lakh rupees, whichever is less.