Share Capital & Types of Shares
1. What is Share Capital?
Definition – Share Capital
Share capital refers to the amount of money raised by a company through the issue of shares. It represents the ownership interest of shareholders in the company and serves as a major source of long-term finance.
Statutory Basis
Under Section 2(84) of the Companies Act, 2013:
“Share” means a share in the share capital of a company, and includes stock.
The Companies Act, 2013, particularly Sections 43, 44, and 61 to 72, governs the rules relating to share capital.
2. Classification of Share Capital
a) Authorized (Nominal) Capital
The maximum amount of share capital that a company is authorized to issue as per its Memorandum of Association (MoA).
b) Issued Capital
The portion of the authorized capital that is actually offered to investors by the company.
c) Subscribed Capital
The part of issued capital that is subscribed (purchased) by investors.
d) Called-up Capital
The portion of subscribed capital that the company has called for payment from shareholders.
e) Paid-up Capital
The actual amount paid by shareholders in response to the call made by the company.
Paid-up capital = Called-up capital – Calls in arrears
f) Reserve Capital
The portion of subscribed capital that the company decides not to call up except in the event of winding up.
3. Types of Shares
Under Section 43 of the Companies Act, 2013, a company limited by shares can issue the following two types of shares:
I. Equity Shares
Definition
Equity shares are ordinary shares that carry voting rights and residual claim on profits and assets.
Features
- Voting rights as per Section 47
- Entitled to dividends (not fixed)
- Residual claim in winding up
- May be with or without differential rights
Types of Equity Shares
- With Voting Rights
- With Differential Voting Rights (DVRs) – may differ in voting, dividend, or other rights.
II. Preference Shares
Definition
Shares that carry preferential rights:
- For payment of dividends, and
- For repayment of capital in the event of winding up.
Features
- No general voting rights (except in special circumstances – Section 47)
- Fixed dividend rate
- Priority over equity shareholders
Types of Preference Shares
- Cumulative Preference Shares
Unpaid dividends are carried forward and paid in future years. - Non-Cumulative Preference Shares
Dividend is not carried forward if not declared in a year. - Participating Preference Shares
In addition to fixed dividends, they participate in surplus profits. - Non-Participating Preference Shares
Entitled only to fixed dividend. - Convertible Preference Shares
Can be converted into equity shares after a specified period. - Non-Convertible Preference Shares
Cannot be converted into equity shares. - Redeemable Preference Shares
Can be redeemed after a fixed term (Section 55). - Irredeemable Preference Shares
Prohibited under the Companies Act, 2013.
4. Allotment and Payment of Share Capital
- Governed by SEBI regulations (for listed companies) and Companies Act provisions.
- Shares must be allotted within 60 days of application money receipt.
- Minimum subscription and compliance with prospectus provisions required.
5. Bonus Shares & Rights Issue
Bonus Shares
Issued to existing shareholders out of free reserves or share premium.
Rights Issue
Offer of new shares to existing shareholders in proportion to their current holdings under Section 62.
Conclusion
Understanding share capital and the various types of shares is essential for interpreting ownership structure, investor rights, and the financial foundation of a company. Companies must comply with the Companies Act, 2013, and applicable SEBI regulations to ensure fair and legal issuance of shares.
