Share Issued by a Company: Meaning and Kinds

After reading this article you will learn about the meaning and kinds of shares issued by a company.

Meaning and Definition of Shares:

A share is the interest of a shareholder in a definite portion of the capital. Section 2 (46) of the Act defines a share as, “A share in the share capital of a company and includes stock, except where a distinction between stock and shares is expressed or implied.”

According to Farewell J, “A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se.”

A share is a personal estate capable of being transferred in the manner laid down in the articles of the company. It is a movable property which can either be mortgaged or pledged. Share is included in the definition of ‘goods’ under the provisions of the Sale of Goods Act, 1930. But even so, shares are not goods in the ordinary sense of the word.

“A share is undoubtedly movable property but is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to a totally different category of property. It is incorporeal in nature and it consists merely of a bundle of rights and obligations. Every one of these rights and obligations is created by a statute or under statutory instruments or powers which also define their extent, scope, boundaries and incidents.”

Every share issued by a company must by numbered so that one share may be distinguished from another share. A certificate of shares issued by a company under its common seal specified the shares held by any member. The share certificate is the prima facie evidence of the title of the member to such shares [Sec. 84 (1)]. The share certificate is not a negotiable instrument.

Kinds of Shares:

Before the Companies Act, 1956 was passed, a company limited by shares were allowed to issue three types of shares:

(1) Preference shares

(2) Equity (ordinary) shares; and

(3) Deferred shares.

But the Companies Act, 1956, now permits the issue of only two types of share.

A company limited by shares can issue only two types of shares, namely (a) equity shares, and (b) preference shares. However, a private company which is not subsidiary of a public company is exempted from this provision (Section 90).

Thus, an independent private company can still issue deferred shares along with equity and preference shares.

1. Preference Shares:

Preference shares are those shares which enjoy preferential rights both with respect to dividends and with respect to repayment of capital either during the life-time or on winding up of the company. They will have the first charge on the distributable amount of net profits. The dividend on these shares are desirable in the Articles of the Company. ‘Preference Shares Capital’ is the sum total of preference shares.

A preference share must satisfy the following two conditions:

i. It shall carry a preferential right as to the payment of dividend at a fixed rate.

ii. In the event of winding up, there must be a preferential right to the payment of the paid-up capital.

These are two dominant characteristics of preference shares.

A preference share may or may not carry such other rights as:

(a) A preferential right to any arrears of dividend;

(b) A right to share in surplus profits by way of additional dividend;

(c) A right to be paid a fixed premium specified in the memorandum; and

(d) A right to share in surplus assets in the event of a winding up, after all kinds of capital have been repaid.

Kinds of Preference Shares:

Preference shares may be of the following types:

i. Cumulative preference shares:

The dividend payable on these shares goes on accumulating till it is fully paid off. All preference shares are assumed to be cumulative, unless the contrary is stated in the Articles of the company. A cumulative preference share has a right to claim the fixed dividend only if it has sufficient profits available for distribution.

ii. Non-cumulative preference shares:

In the case of non-cumulative preference shares, the dividend shall be payable only out of the profits of the current year. If it is not paid in a particular year, it is lost and the arrears of dividend cannot be carried forward. In other words, the unpaid dividends cannot be accumulative.

iii. Participating preference shares:

Participating preference shares are not only entitled to a fixed rate of dividend, but also to a share in the surplus profits which remain after the claims of the equity shareholder have been met. If the articles are silent, all preference shares are deemed to be non-participating.

iv. Non-participating preference shares:

Non-participating preference shares are entitled to only a fixed rate of dividend and do not share in the surplus which belongs to the equity shareholders.

v. Convertible preference shares:

The holders of these shares have a right to convert them into equity shares within a certain period.

vi. Non-convertible preference shares:

The preference shares without a right of conversion into equity shares are known as non-convertible preference shares.

vii. Redeemable preference shares:

A company limited by shares, if authorised by its articles, may issue preference shares which are to be redeemed or repaid after a certain fixed period.

Section 80 of the Act lays down the necessary conditions for the redemption of such shares, which are as follows:

(a) Such shares must be fully paid.

(b) Such-shares shall be redeemed out of distributable profits or out of the proceeds of a fresh issue made for the purpose of redemption.

(c) Any premium to be paid on redemption of such shares must be paid out of profits or out of the share premium account.

(d) Where shares are so redeemed out of profits, a sum equal to the nominal value of the shares redeemed must be transferred to the ‘Capital Redemption Reserve Account’. This amount shall be treated as capital of the company and the provisions as regards reduction of capital shall apply. The amount credited to the account cannot be paid out of the shareholders as dividend, but it can be used to pay unissued shares to be issued as full paid bonus shares.

Redemption of preference shares is not to be taken as reduction of the company’s authorised share capital. Shares already issued cannot be converted into redeemable preference shares.

No company limited by shares shall, after the commencement of the Companies (Amendment) Act, 1988, issue irredeemable preference shares or redeemable preference shares which are redeemable after ten years of its issue. [Inserted by the Companies (Amendment) Act, 1988.]

Where a company fails to comply with these provisions, the company and every officer of the company who is in default shall be punishable with fine which may extend to rupees one thousand.

Redemption of redeemable preference shares shall be notified to the Registrar of Companies within one month of redemption (Section 95). Where redeemable preference shares have been issued, the Balance sheet must contain a statement specifying what part of the capital consists of such shares and the earliest date on which the company has power to redeem the shares (Schedule VI).

viii. Irredeemable preference shares:

Irredeemable preference shares constitute permanent capital of the company. These shares cannot be refunded before the winding up of the company.

2. Ordinary or Equity Shares:

Equity shares mean all shares which are not preference shares. After satisfying the rights of preference shares, the equity shares shall be entitled to share in the residual amount of distributable net profits of the company. ‘Equity Shares Capital’ is the sum total of equity shares.

The dividend on equity shares is not fixed and it will be changing according to the magnitude of available profit for distribution in the form of dividends. However, equity shareholders have normal voting rights.

3. Deferred or Founders Shares:

There is another type of shares, which is known as Deferred Shares. In case of deferred shares the right to participate in the distributable amount of net profits of a company is deferred or postponed till after that of other classes of shares- preference and equity.

Sometimes, they are known as Management or Founders Shares. They are used to have extraordinary voting rights and owners of such shares could easily enjoy controlling voice in the management of the company. In times of prosperity of the company, they used to get huge dividends. The face value of these shares used to be very low but their market price used to be very high.