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Shares under company law

This article is written by VIVAN DUTTA, NMIMS NAVI MUMBAI, BA LLB during his internship at LeDroit India

Contents:

  1.  Introduction
  2. What is a share?
  3. Types of share in companies act, 2013
  4. Equity share capital
  5. Preference share capital and its types
  6. Conclusion

Introduction:

The Companies Act 2013 is a key piece of legislation in India governing the establishment, operation, and dissolution of companies. Enacted to replace the Companies Act 1956, it emphasizes corporate governance, financial transparency, and social responsibility. The Act classifies companies, outlines director responsibilities, mandates financial disclosures, and establishes regulatory bodies like the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT). With provisions for mergers, inspections, and penalties for non-compliance, the Companies Act 2013 plays a crucial role in shaping India’s corporate landscape.

What is a share?

A share is the interest of a member in a company. Section 2(84) of the Companies Act, 2013 (hereinafter referred to as Act) “share” means a share in the share capital of a company and includes stock. It represents the interest of a shareholder in the company, measured for the purposes of liability and dividend.

Types of shares in Companies Act,2013:

According to Section 43 of the Companies Act, 2013, the share capital of a company is of two types: Preferential Share Capital. Equity Share Capital.

Equity share capital:

Here are some key points related to equity share capital under the Companies Act, 2013:

  1. Definition: Section 43 of the Companies Act defines equity share capital as the total amount of money received by a company from the issue of equity shares.
  2. Nature of Equity Shares: Equity shares represent ownership in the company, and the holders of these shares are the residual owners, meaning they have a claim on the company’s assets and earnings after all other obligations are met.
  3. Voting Rights: Equity shareholders generally have voting rights in proportion to their shareholding. Each equity share usually carries one vote, and shareholders can participate in the decision-making processes of the company.
  4. Dividends: Dividends on equity shares are distributed among shareholders after meeting all the other obligations, and the rate of dividend is not fixed. It is recommended by the board of directors and approved by the shareholders in the Annual General Meeting (AGM).
  5. Issue of Equity Shares: The issuance of equity shares is governed by various provisions of the Companies Act, including those related to the issuance of shares at a premium, discount, and bonus shares.
  6. Share Capital and Debentures: The Act also distinguishes between share capital and debentures. Share capital represents ownership, while debentures represent debt.
  7. Buyback of Shares: The Companies Act, 2013, also contains provisions related to the buyback of shares, allowing companies to buy back their own shares under certain conditions.
  8. Alteration of Share Capital: Any alteration of share capital, including the issue of further shares or buyback, requires compliance with the provisions of the Companies Act.

 Preference share capital:

In the Companies Act 2013 of India, preference share capital is a type of share capital that combines features of both equity and debt. Preference shares give their holders a preferential right over equity shareholders in terms of dividend payment and repayment of capital in the event of liquidation. The Companies Act 2013 outlines the provisions related to preference share capital and its various types.

Types of preference share capitals:

  1. Cumulative preference share: Cumulative preference shares allow owners to receive cumulative dividend payouts from the company even if the company is not profitable. In years when the corporation is not profitable, these dividends will be reported as arrears and will be paid in full when the business becomes profitable.
  • Non cumulative preference shares: Corporations issue non-cumulative preference shares as a form of capital raising. Unlike cumulative preference shares, which allow unpaid dividends to accrue and be distributed before common shareholders receive any payout, non-cumulative preference shares do not allow dividends to accumulate.
  • Participating preference shares: Participating Preference shares are a type of ‘Preference’ or ‘Preferred’ shares with special rights to participate in surplus profits in the event of liquidation, after all the other shareholders have been paid. These shareholders will receive a fixed rate of dividend and a share in the company’s extra earnings.
  • Non participating preference shares: non-participating preference shareholders do not have a share in the extra earnings or surplus assets during the liquidation of a company. This type of share entitles its shareholders to receive only the pre-fixed dividends.
  • Convertible preference shares: Convertible preferred shares give their holders the option of converting them into a set amount of common stock shares in the future. This gives the shareholder the potential benefit of capital appreciation in addition to the guaranteed benefit of a regular dividend.
  • Non convertible preference share: Non-convertible shareholders cannot convert their shares into equity shares. Regardless, they enjoy the preferential benefit when it comes to accruing dividends or during company’s dissolution.
  • Redeemable preference share: Redeemable preference shares allow for the repayment of the principal share capital to shareholders. The company may redeem these shares at an agreed value on a specified date or at the discretion of the directors.
  • Irredeemable preference share: This particular share cannot be redeemed or repaid during the active lifetime of a company. To elaborate, shareholders will have to wait until the company decides to wind up its current operations or liquidate the venture altogether to initiate the same.
  • Dividend Priority:
    • Preference shareholders have a higher claim on dividends compared to equity shareholders. The rate of dividend is predetermined and must be paid before any dividend is distributed to equity shareholders.
  • Repayment in Case of Liquidation:
    • In the event of liquidation, preference shareholders are entitled to receive their capital back before the equity shareholders. However, they do not usually have voting rights.
  • Voting Rights:
    • Unless otherwise specified in the company’s articles of association, preference shareholders usually do not have voting rights, except in matters that directly affect their interests.

Conclusion:

In summary, shares play a fundamental role in corporate finance, providing a means for companies to raise capital and for investors to participate in the ownership and success of businesses. The Companies Act governs the issuance, classification, and management of shares, emphasizing fairness, transparency, and protection of shareholder rights. Understanding the various types of shares and their associated rights is essential for both companies and investors in navigating the complexities of company law.

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