The concept of share capital under Companies Act

Author: Akanksh Deekonda, NLIU-Bhopal

INTRODUCTION

Section 2(47) of the Companies Act, 2013 defines Shares as “A share in the company includes stock until it has been explicitly distinguished between the stock and the share either implicitly or explicitly”. Shares can be taken as goods according to the Sales of Goods Act, 1930, they are also considered as movable property abide by the limitations of the articles of the association of the company.[1] Though the real meaning of Capital is cumbersome, under The Act, it means that the value of the assets contributed to the company by those who subscribe for its shares. The real thing which would matter is the value because assets will change in the form of course of business.[2]

WHAT IS A SHARE CAPITAL?

Share Capital is the amount of money that a company receives by the sale of its shares. The company uses this amount of money as the capital of the company to commence business and gain profits in its business. This capital is also used to acquire movable and immovable properties that are required for running the business.[3]

THE USAGE OF SHARE- CAPITAL UNDER COMPANIES ACT

The Share-Capital under Companies Act, 2013 is significantly used in memorandum of association in which a company limited by shares or by guarantee must state in its memorandum of association, the amount of share-capital and the division thereof into shares of fixed amount.[4]

It is used in Articles of Association when a company with unlimited liability and having share capital must state its authorized capital in its articles of association.[5]

Finally, it is used in Prospectus, The amount of capital and the number of shares in which the capital is dividend must be stated in the prospectus, the statement in lieu of prospectus and the annual return of the company.

NATURE AND FORMS OF SHARE CAPITAL

Authorized, Nominal or Registered capital

The amount of company with which registration of a company could take place, such capital is authorized capital. It is the amount of total value of shares that the company is authorized to offer for subscription.[6]

Issued Capital

It is authorized capital which is actually issued to the public for sale. Generally, a company does not issue the shares for its total authorized capital at one time. It rather invites front eh public for a part of its capital and the subscription for the remaining capital is called for as and when required.[7]

Subscribed Capital

Subscribed Capital is the part of issued Capital which is generally accepted and willfully taken by the public. If the public accepts the total issued capital, then the issued capital shall be equal to the Subscribed Capital.[8]

Allotted Capital

It is the same as the Subscribed capital, Allotted capital is that part of the issued capital for which the public has subscribed and which has been allotted to the public.[9]

Uncalled Capital

The part of the allotted capital which has not been called up by the company is the ‘uncalled capital’.[10]

KINDS OF SHARE CAPITAL

Section 86 of the Companies Act, 2013 deals with the kinds of Share Capital. The Share-Capital of a company limited by share is of two kinds.

Equity share Capital:

Every company requires substantial working capital to keep their business smooth. This capital is used when a company faces financial restrictions to keep its regular operations active. More often, companies use their equity shares to raise the required capital known as equity share capital. The share Capital which is not limited by shares is called an Equity Share Capital.

Preference Share Capital:

Preference shares are the shares which promise the holder a fixed dividend, whose payment takes priority over that of ordinary share dividends. Capital raised by the issue of preference shares is called preference share capital. A preferential Share-capital is that part of the capital of a company that carries preferential rights to be paid a fixed amount and on a winding up, or upon repayment of capital, to be repaid the capital paid up.

ALTERATION OF THE SHARE-CAPITAL.

Section 61 of the Companies Act, 2013 deals with the Alteration of Share-capital. It is mandatory for a company limited by the shares or by guarantee, and having a share capital, to have ‘a capital’ clause in its memorandum of association that states the authorized or nominal capital of the company and its division into shares of the specified value.[11]

A company can alter a share capital without confirming it to the Company Law Tribunal by passing an ordinary resolution. The company has a share capital has converted any of its shares into stock and has given notice of the conversion to the registrar, all the provisions of the act which are applicable shall cease to apply so much the share capital converted into the stick.[12] Alteration can be done in the following ways:

  • It may increase its share Capital by such amount as it thinks expedient by issuing new shares.
  • It may consolidate and divide all or any of its share capital into shares of larger amounts than it’s existing shares.
  • It may cancel the which are not taken or agreed not to be taken by any person.[13]

REDUCTION OF SHARE CAPITAL

Section 66 of the Companies Act, 2013 deals with the reduction of Share Capital. A company limited by shares or guarantee which has share capital can reduce the share capital in any manner by a special resolution.[14] The reduction can be made through by passing a special resolution and having a share capital. For a company to reduce its share capital, it needs to pass a special resolution. It may also pass an application to the National Company Law Tribunal for confirmation after passing the resolution.

Reduction occurs due to various reasons. If a company has suffered a loss in its business, it might try to improve its image by reducing its capital and writing- the loss in its final accounts.

Over-capitalization is not good for business. If a company has more capital than that is required for its operation, it can reduce its share capital for optimum utilization. Finally, reduction may also occur when a company’s fixed assets have been over-valued, they can be valued appropriately by a reduction in the capital of the company.[15]

CONCLUSION

The Researcher of this article intended to deal with the Concept of ‘Share-capital under Companies Act’. This short article aims to bring a basic concept for the readers by making them understand the terms ‘Share’, ‘Capital’ and then explaining the Share Capital, its related provisions under the companies act, 2013. The Article gave a detailed explanation of the concept of Share-Capital by discussing types, kinds, concepts of reduction, and alteration.

Share capital is the amount of money that a company receives by the sale of its shares. It is used for goods, movable properties, etc. it is used in the memorandum of Association, Articles of association,  and also in the prospectus.

The share capital has been devolved to various types like Authorized capital; Issued, Subscribed, Allotted, and Uncalled. Share-Capital is of two kinds. The Equity share capital where share capital is not limited by shares. The preference share capital which carries preferential rights.

Share-Capital can be altered using ordinary procedure without confirming to the National Company Law Tribunal by following the provisions of Section 61 of the act. Such Share-Capital can also be reduced. But, this requires a special procedure and confirmation from the National Company Law Tribunal which are mentioned under Section 66 of the Companies Act, 2013.


[1] Section 82, The companies Act, 2013.

[2] Ralli Brothers and Coney  v. Official Liquidator of the Swadeshi Mills Company Ltd, 2006 (1) BomCR 240.

[3] Bucha F. Guzdar v. Commissioner of Income Tax, Bombay,1955 ITR SC 271.

[4] State of Karnataka and Ors. v. Selvi J. Jayalalitha and Ors., Criminal Appeal Nos.304-307 of 2017.

[5] Vodafone International Holdings B.V. v. Union of India (UOI) and Ors., 2010 TAXMAN BOM 193 100.

[6] State v. Selvi. J. Jayalalitha, 2000 SCC 9 444.

[7] Supreme Court Advocates-on-Record-Association and Ors. v. Union of India (UOI), Writ Petitions (C) No. 13 Of 2015 No. 14.

[8] Berger Paints India Ltd . v. C . I . T . , Delhi, 2017 (357) ELT 0554.

[9] National Westminster Bank , Plc  v. The United States, 44 Fed. Cl. 120 (1999).

[10] Malayan Banking Bhd v . ASL Shipyard Pte Ltd and Ors, [2019] SGHC 61.

[11] Section 61, The companies Act, 2013.

[12] Ram Parshotam Mittal and Ors . v . Hotel Queen Road Pvt . Ltd . and Ors, C.A. No.-003934-003934 / 2017.

[13] Commissioner of Income Tax v. Glaxo Laboratories (India) Ltd, 1990 181 ITR 59.

[14] Section 66, The companies Act, 2013.

[15] Cosmosteels Private Ltd . and Ors . vs . Jairam Das Gupta and Ors, 1978 AIR  375.

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