Concept of Shares


Author: Divya Vishal


A share in a company refers to a unit of ownership of the company issuing shares. There are different elements that may impact the price of shares. At the point when an organization performs well and develops, its stock value or share value will in general go up. The Companies Act, 2013 defines shares as, “a share in the share capital of a company including stocks.”[1] It is a kind of security. According to Section 44 of the said Act, the shares of any member in a company shall be movable property. It is considered to be transferable in the manner provided by the articles of the company.[2] The Capital amounts to the sum put into the company with the goal that it can carry on its exercises. The capital refers to “share capital” in a company.


Shares are mainly divided into two types-

1. Equity shares: It is also known as ordinary shares. They are one of the most widely recognized sorts of shares. These shares by the way of documents give right of possession and ownership to the investors. These equity shareholders bear the maximum possible hazard. These shareholders reserve the right to decide on different company matters by voting. Equity shares are additionally transferable and the dividend paid is an extent of benefit. Equity investors are not qualified for a fixed dividend. Their risk is constrained to the measure of their speculation or investment. There are no particular rights in holding.

Equity shares are further categorized according to the Share capital type:-

  • Auhorised– Authorised Share capital is the greatest measure of capital that can be issued by a company. It tends to be expanded now and again. For this, a company needs to adjust to certain customs and furthermore pay expected expenses to legitimate entities.
  • Issued-Issued Share Capital is the part of approved capital that is offered by a company to its investors.
  • Subscribed- This is the part of issued share capital that the investors acknowledge and concur.
  • Paid up capital: This alludes to the segment of the paid up capital for which the investors have to pay.
  • Right shares: These are the sort of offers that companies issues to its current investors in order to secure the rights of possession and ownership of existing investors.
  • Bonus shares: On some occasions the company may give offers to their investors as a profit. Such stocks are known as bonus shares.
  • Sweat equity shares: When workers, employees or executives play out their job extraordinarily well, sweat value shares are given to remunerate them.

2. Preference shares: At the time when liquidation of company takes place, the investors who hold preference shares are taken care of first. They likewise reserve the right to get benefits of the organization before the ordinary investors. It can be further classified as:

  • Participating and non-participating preference shares: Participating preference shareholders reserve the option to take an interest in residual profits after the profit has been paid out to equity shareholders. So in years where the organization has made more benefits, these shareholders are qualified for getting profits far beyond the fixed dividend. The non-participating preference shareholders don’t reserve a privilege to take an interest in the profits after the equity investors have been paid. So in case a company makes any overflow profits, they won’t get any extra profits. They will just get their fixed portion of profits each year.
  • Cumulative and non-cumulative preference shares: With respect to cumulative preference shares, when the company doesn’t announce profits for a specific year, it is conveyed forward and gathered. At the point when the company makes benefits later on, these aggregated profits are paid first. In case of non-cumulative preference shares, profits don’t get collected, which implies when there are no future benefits, no profits or dividends are paid.
  • Convertible and non-convertible preference shares: In convertible shareholders the Shareholders have a choice or option to change over these shares into ordinary equity shares. For this, particular terms and conditions should be met. Non-convertible shares don’t reserve an option to be changed over into value shares.
  • Redeemable and Irredeemable preference shares: Redeemable shares can be asserted or repurchased by the issuing company. This can occur at a foreordained cost and at a foreordained time. These don’t have a maturity date which implies these sorts of shares are unending. So there is no compulsion for company to pay any sum after a fixed period.


It refers to an apportionment of a specific number of shares to a candidate and dispersion of shares among the applicants who have submitted composed application. It is administered by Companies Act, 2013 and rules and guidelines in that and for Listed Companies( whose shares are recorded on the NSE and BSE or some other pertinent Stock trades in India) and its Subsidiary, the SEBI Act, 1992 and the Securities contracts Act, 1956, are likewise applicable. For an apportioning to be viewed as legitimate it will conform to the prerequisites and standards of the law of agreement that is in regards to the acknowledgment of shares.

  • Rules of allotment of shares

(a) Application Form: An outline is a solicitation to the general population to buy shares. Normally, the proposing buyer needs to apply in an endorsed structure (given in the outline) for the reason which is known as ‘application structure’.

The outline fixes when the application will be opened and the allocation will be made. Allotment letter ought to be sent to the share applicant after the apportioning is made.

(b) Offer and Acceptance: We realize that the enrollment of a company subsequent to buying shares is only an agreement. The application structure which is given by the individuals is the ‘offer’ and distribution by executives is the ‘acknowledgment’ of that ‘offer’ and, comparably, the notification of acknowledgment which is sent is the acceptance of the offer.

(c) Acceptance for ‘Offer’ and conditional offer: Typically, the conditions are imprinted in the application structure or form, e.g., if there should be an occurrence of over-membership of shares, shares will be assigned in proportion and so forth. Conditions for acknowledgment are for all intents and purposes invalid.

(d) Appropriate Authority: It ought to be recollected that the assignment of offers ought to consistently be made by the best possible authority e.g., by the governing body, and distribution made without legitimate authority is void. In spite of the fact that allocation can be assigned to certain people if the Articles provide so.

(e) Rational Time: In the wake of getting the application form assignment ought to be made as quickly as time permits by the executives i.e., within a sound time or else ‘offer’ applications will be canceled if such time terminates.

(f) False Name: Section 68A states that any individual who under a fictitious name for getting or buying in for any share; or, initiates a company to assign, register any exchange of shares to him or some other person in a fictitious name shall be punishable by imprisonment.

  • Restrictions in Allotment of Shares

(a)Minimum Subscription- According to Section 49 of Companies Act, 2013 the primary essential of an allotment is the requirement of a minimum subscription. The minimum subscription amount in the company prospectus will be expressed when offers of shares are made to the public. No offers will be assigned except if a predefined sum has been subscribed.

(b) Application Money: Section 69(3) sets out that the sum payable on each offer with the application structure must not be under 5% of the ostensible estimation of the shares.

(c) Money to be deposited in a Scheduled Bank: Section 69(4) states that money from the applicants must be stored in a Scheduled Bank until the declaration to begin business has been acquired or until the whole sum payable on applications for shares in regard of the minimum subscription has been received by the company.

(d). Over-subscribed Prospectus –An apportioning is substantial when the authorization of a stock exchange has been conceded and the outline being considered as over-bought in a bit of the cash got will be sent back to the candidates inside the given time period.

(f) Opening of the Subscription List:  Section 72 sets out that allotment can be made until the start of the fifth day after the distribution of the prospectus or such later time as might be recommended for the reasons in the prospectus.

(g) Revocation of Application: Application for shares can’t be denied until after the lapse of the fifth day after the hour of opening of the membership list with the exception in one case, for example on the off chance that any responsible person gives open notification of withdrawal of the agreement to the issue of the plan, any applicant can disavow his application.

  • Consequences of Irregular Allotment of Shares

(a) Option: Section 71(1) and (2) expresses that the allotment gets voidable at the alternative of the investors. The choice to stay away from the contract must be practiced inside a period of 2 months of holding the legal meeting or where no legal meeting is held or where the distribution is made after the holding of the legal meeting, inside 2 months after the date of allocation. The equivalent can be practiced regardless of whether the company is under the liquidation process.

(b) Compensation: Section 71(3) sets out that if any chief intentionally or willfully repudiates the guidelines or approves the negation, he is subject to pay to the shareholders with respect to any misfortune or harm endured by them. In any case, the suit for remuneration must be filed inside 2 years from the allotment date.

(c) Fine: Section 72(3) states that the legitimacy of an allotment of shares will not be influenced by any repudiation of the previous provisions under this section, however, in case of any such contradiction, the company, each official who is in default, will be culpable with compensation which may stretch out to Rs. 5,000.

(d) Void: In the event that any apportioning or allotment of shares is done infringing upon Section 73, the equivalent is treated as void.


A majority shareholder is one who possesses half or more than half of the shares in a company. This can be an individual or a party that has been established for a particular goal. Contrary to it, a minority shareholder is anybody possessing not exactly 50% of shares or even lesser than 50% of shares. Courts will not interfere with the management of a company by its Board of Directors so long as they are acting within the powers conferred on them under the articles of the company.[3]

It is seen that the majority of shareholders hold dominance over minority shareholders as they have powers to control the matters of the company and minority shareholders have to agree with the majority verdict. This, however, may lead to a possibility that the members having majority vote may tend to be oppressive towards the minority shareholders misusing their majority strength.[4]


  • Acknowledgment of basic rights of shareholders.
  • Investors or shareholders reserve the rights to take an interest in choices concerning key corporate changes.
  • The right of casting votes by shareholders.
  • Divulgence of disproportionate voting rights of certain shareholders to get a level of control in the affairs of company.
  • Markets for corporate control ought to be permitted to work.
  • Shareholders ought to consider the expenses and advantages of practicing their democratic rights.


Under Section 47 of the Companies Act, 2013, the holder of equity shares will reserve a right to cast a vote in regard to such capital on each goal set before the company. Member’s entitlement to cast a vote is perceived as the right of property and the investor may practice it as he might suspect fit by his advantage and decision. This standard is altered in specific cases. The specific resolution requires a greater part of 3/fourth of those votes at the meeting.

Therefore, where the act or the articles require a special resolution for any purpose, a 3/4 majority is necessary and a simple majority is not enough.[5] The resolution of a majority of shareholders passed at a duly convened and held general meeting, upon any question with which the company is legally competent to deal, is binding upon the minority and consequently upon the company.[6]

A clear understanding of the concept of shares and its allotment will enable an investor or a shareholder to see how the stock market functions.

[1]  Section 2(84) of the Companies Act, 2013

[2] Section 44 of the Companies Act, 2013

[3] O.Orojo ,Company Law and Practice in Nigeria 5ed (London: Lexis Nexis 2002) pg. 203

[4]N. V. Paaranjabe Textbook on Company Law, 10th Edition ( India: Central Law Agency, 1995) at pg. 389

[5] Edwards v. Halliwell, (1950) 2 All.E.R.1064

[6] North-West Transportation Co. v. Beatty, (1887) L.R. 12 A.C. 589.

Know More