In financial markets, a share is a unit of account for various financial instruments including stocks, mutual funds, limited partnerships, and REIT's. In British English, use of the word shares in the plural to refer to stock is so common that it almost replaces the word stock itself. And especially in American English, the plural stocks is widely used instead of shares, in other words to refer to the stock (or perhaps originally stock certificates) of even a single company. Traditionalist demands that the plural stocks be used to refer only to stock of more than one company are rarely heard nowadays.
The income received from shares is called a dividend, and a person who owns shares is called a shareholder.
A share is one of a finite number of equal portions in the capital of a company, entitling the owner to a proportion of distributed, non-reinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Shares can be voting or non-voting, meaning they either do or do not carry the right to vote on the board of directors and corporate policy. Whether this right exists often affects the value of the share. Voting and Non-Voting shares are also known as Class A and B shares.
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 :-
Equity shares means that part of the share capital of the company which are not preference shares.
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.
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 :-
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 authorised by the articles of association of the company :-
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 court.
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 Rs50 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 :-
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 authorised 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:-
Where the company is over capitalised :-
Where 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 :-
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:
Buy-back of Shares
Buy back of its own shares by a company is nothing but reduction of share capital. After the recent amendments in the Companies Act, 1956 buy back of its own shares by a company is allowed without sanction of the Court. It is nothing but a process which enables a company to go back to the holders of its shares and offer to purchase from them the shares that they hold.
There are three main reasons why a company would opt for buy back :-
A company may purchase its own shares or other specified securities out of :-
No buy-back of any kind of shares or other specified securities can be made out of the earlier proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.
No company can purchase its own shares or other specified securities unless :-
The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating
Every buy-back must be completed within twelve months from the date of passing the special resolution.
The buy-back may be :-
Where a company has passed a special resolution to buy-back its own shares or other securities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any:
Such a declaration of solvency need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.
Where a company buys back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back.
Where a company completes a buy-back of its shares or, other specified securities under this section, it shall not make further issue of the same kind of shares or other specified securities within a period of twenty four months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.
Where a company buys back its securities under this section it shall maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed.
A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion as may be prescribed. However such return need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.
If a company makes default in complying with the provisions of this section or any rules or any regulations, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.
For the purposes of buy back, "specified securities" includes employees' stock option or other securities as may be notified by the Central Government from time to time;
Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet."
No company shall directly or indirectly purchase its own shares or other specified securities -
No Company can, directly or indirectly, purchase its own shares or other specified securities in case such company has not filed its annual returns with the Registrar of Companies, or has not paid the dividends declared by it within 42 days from the date of declaration or has not prepared its annual accounts in the prescribed manner.
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 :-
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 favour 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 the company.
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.
Further Issue of the Capital
Rights Issue of Shares
If, at any time after the expiry of 2 Years from the date of incorporation of the company or after one year from the date of first allotment of shares, whichever is earlier, a public company limited by shares issues further shares within the limit of authorised capital, its directors must first offer such shares to the existing holders of equity shares in proportion to the capital paid up on their shares at the time of further issue. This is commonly known as "Rights Issue of shares". The company must give notice each of the equity shareholders giving him the option to buy the shares offered to him. The shareholders must be informed of the number of shares he has the option to buy. He must be given at least 15 days to decide for exercising his option. The directors must state in the notice of the offer the fact that the shareholders also has the right to renounce the offer in whole or part in favour of some other person. This is commonly known as "Renunciation of Rights".
If the shareholder does not inform the company of his decision to take the shares, it is deemed that he has declined the offer. In case where the rights shares are not taken by the shareholders, the directors of the company may dispose of the shares in the manner they think fit.
A company may by special resolution in the general meeting decide that the directors need not offer the shares to the existing shareholders of the equity shares and that they may dispose them off in a manner thought fit by them. This is known as "preferential offer of shares" where third parties or only certain shareholders are given shares in priority over the other shareholders.
However, if a special resolution for preferential issue of shares is not passed but merely an ordinary resolution is passed, preferential issue of shares may be done provided sanction of the Central Government is obtained. The price at which the preferential shares are to be offered are governed by the SEBI guidelines in case of listed companies. Such shares cannot be issued at a price which is less than the higher of the following :-
The above provisions of preferential allotment do not apply to conversion of loans or debentures in equity shares provided the terms of the loan or terms of issue of debentures give an option to convert such loans or debentures into shares of the company. Such terms and conditions must be approved before the issue of debenture or raising of the loan by the Central Government or must be in confirmity with the rules made by the Government for this purpose. The proposal must be approved by the special resolution passed by Company at the general meeting before the issue of debentures or raising of the loan. For this purpose the Central Government has framed the Public Companies (Terms of issue of debentures and raising of loans with option to convert such debentures or loan into equity shares ) Rules, 1977.
The following is the broad gist of these rules :
The provisions of rights and preferential issue do not apply in the following cases :-
Issue of Shares at Discount
A company may issue shares at a discount i.e at a value below its par value. The following conditions must be satisfied in connection with the issue of shares at a discount :
Issue of Shares at Premium
A company may issue shares at a premium i.e. at a value above its par value. The following conditions must be satisfied in connection with the issue of shares at a premium:-
The amount of premium must be transfered to an account to be called share premium account. The provisions of this Act relating to the reduction of share capital of the company will apply as if the share account premium account were paid up share capital of the company.
Share premium account can be used only for the following purposes :-
Issue of Bonus Shares
Bonus shares are issued by converting the reserves of the company into share capital. It is nothing but capitalization of the reserves of the company. Bonus shares can be issued by a company only if the Articles of Association of the company authorises a bonus issue. Where there is no provision in this regard in the articles, they must be amended by passing special resolution act at the general meeting of the company. Care must be taken that issue of bonus shares does not lead to total share capital in excess of the authorised share capital. Otherwise, the authorised capital must be increased by amending the capital clause of the Memorandum of association. If the company has availed of any loan from the financial institutions, prior permission is to obtained from the institutions for issue of bonus shares. If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting. Where the bonus shares are to be issued to the non-resident members, prior consent of the Reserve Bank should be obtained.
Only fully paid up bonus share can be issued. Partly paid up bonus shares cannot be issued since the shareholders become liable to pay the uncalled amount on those shares.
Sweat Equity and Employee Stock Options
Sweat Equity Shares mean equity shares issued by the company to its directors and / or employees at a discount or for consideration other than cash for providing know how or making available the rights in the nature of intellectual property rights or value additions.
A company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled :-
A share certificate is a document issued by the company stating that the person named therein is the registered holder of specified number of shares of a certain class and they are paid up upto the amount specified in the share certificate. The share certificate must bear the common seal of the company and also must be stamped under the relevant stamp act. One or more directors must sign it .It should state the name as well as occupation of the holder and number of shares , their distinctive number and the amount paid up.
Every company making allotment of shares must deliver the share certificate of all shareholders within three months of allotment. In case of transfer of shares, the share certificate must be ready for delivery within two months after the shares are lodged with the company for transfer. If default is made in complying with the above provisions, the company and every officer of company who is in default is liable to punishment by way of fine which may extent to Rs500 for every day of default. The allotee must give notice to the company reminding of its obligation and even then, if default is not made good within 10 days of the notice, the allotee may apply to the Company Law Board for direction to the company to issue such share certificate in accordance with the Act. Application for this purpose must be made with the concerned regional bench of the Company Law Board by way of petition.
The petition should be accompanied by the following documents :-
A Shareholder must keep his share certificate in safe custody or in case of shares which are traded in demat mode, with the depository. The company may renew or issue a duplicate certificate if such certificate is proved to have been lost or destroyed or having being defaced or mutilated or torn or is surrendered to the company. However, if the company, with the intention to defraud issues duplicate certificate, the company shall be punishable with the fine upto Rs10000 and every officer of the company who is in default with imprisonment upto 6 months or fine upto Rs10000 or both.
Once a share certificate is issued by the company, the name of the person in whose favour it has been issued becomes the registered shareholder. Nobody can then deny the fact of his being the registered shareholder of the company. Similarly, if the certificate states that on each of shares a certain amount has been paid up, nobody can deny the fact that such amount has been paid up