Concept of Share Capital, Small Shareholders’ Director Detail

elearning4umore.blogspot.com/2019/03/concept-of-share-capital.html

A company is formed with share capital.

Share capital represents the total
amount of shares subscribed by
shareholders to serve as capital for the
Company. No trading concern can run
without capital. The main division of
share capital are:

1. Authorized or Registered or
Nominal Capital: The amount of
capital with which the company is
registered is called authorized capital
or registered capital. It is the
maximum amount which the
company is authorized to raise by way
of public subscription.
2. Issued Capital: That portion of authorized capital which is offered to the public for
subscription is called issued capital.
3. Subscribed Capital: That portion of issued capital which has been taken up by the
public or for which application is received from the public.
4. Called up Capital: The amount on the share actually demanded by the company to pe
paid is known as called up capital.
5. Paid up Capital: That part of the called up capital which is actually paid up by the
shareholders is known as paid up capital.
6. Calls in Arrears: Calles in arrears represent the extent to which the shareholder
has not paid the calls made thereon.
7. Uncalled Capital: It is the amount remaining to be called on the shares actually issued
to the public or the vendors.

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SHARES:

Total capital of the company is divided into small parts. Each part is called a share.
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For Example: In a company the total capital of RS. 5,00,000 is divided into 50,000 units
of
RS.10 each then each unit is called a share of RS.10 Share must be numbered so that be
identified they are movable property and are transferable.

Classes of Share:

The following are the three classes of shares.

1) Preference Shares: The part of the total capital of the Company which enjoys the
preferential right is called preference shares. The preferential rights are:
Payment of dividend at a fixed rate during the life of the company and
Return of capital on winding up of the company.
Preference shareholders have the preferential right as to the payment of dividend and
not the right to get the dividend. They get priority over equity shareholders when the
dividend is declared. Preference shareholders have no voting right except in some
cases.

A) Cumulative preference shares: A preference share is cumulative preference shares

when the arrears of dividend accumulate and paid first of all whenever dividend declared. At
the time of liquidation arrears of dividend are not payable unless Article of Association
provides in the respect.

B) Non-cumulative Preference Share: A non-cumulative preference share is the shares

where the arrears of dividend do not accumulate. If no dividend is paid by the company in a
particular year then it lapses.

C) Participating preference share: A participating preference share is a share which

carriers that right of sharing profits left after paying preference and equity dividend at a fixed
rate.

D) Non-participating preference shares: A Non-participating share is that share which

does not carry the right of sharing in the surplus left after paying equity dividend.

E) Convertible and non-convertible preference share: is that which can be converted in

equity shares. When a share cannot be converted into equity share than it is said to be non-
convertible preference share.
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convertible preference share.

D) Redeemable come with an agreement that the company can buy them back at a future
date - this can be at a fixed date or at the choice of the business. A company cannot issue
only redeemable shares, so they must ensure that they also issue .

2) Equity share are those which does not carry any special right, Dividend is paid only when
profits are left paying preference dividend. As regards returns of capital an equity
Shareholders is paid only preference shares Capital is paid in full. An equity share capital
voting right.

3) Deferred Share: A deferred share is that share where the payment of both dividend and
capital made only after having paid to equity shareholders. They carry disproportionate
voting right. These shares now can be issued by independent private companies only. No
public company or private company can issue deferred shares.

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A Company may issue its shares for consideration more or less than their face value
or nominal value When it issues shares for consideration more than its face value. It is
known as issue

The rule relating to the issue of shares at a premium

A company can issue shares at a premium, even if the Articles do not contain any
provision in this respect, the issue of shares is governed by the following rules:

1) An amount equal to the premium received on the shares be transferred to a

separate account called “Share-Premium” A/C.” The amount of premium shall be
treated as paid-up capital of the company and shall be governed by the provisional
application to the paid-up capital of the company.

2) The company shall apply the amount standing to the credit of “Share” premium
A/C for the following purpose only:-

A) For the issued of fully paid-up bonus shares to the members of the company
B) For writing off the preliminary expenses of the company.
C) For writing off the expenses of, or the commission paid or discount allowed, on
any issue of shares or debenture of the company.
D) For providing the premium payable on the redemption of any redeemable
preference shares or debentures of the company.

It may be noted that a company may charge different amount of premium from the
different applications of share category of shares.

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A company may issue shares for a consideration less than its face value or nominal value.
Such an issue is known as the issue of shares at a discount. The difference between the face
value
And the consideration ‘payable for the share, is the amount of discount allowed by the
company.
The rule relating to the issue of shares at a discount:

1) The shares must be of a class already issued.

2) The issue of shares at a discount must be authorized by an ordinary resolution of the

company, which shall specify the maximum rate of discount to be allowed thereon.

3) The permission of the Company Law Board must be obtained for the issue of shares at
a discount. However, it will not permit the company to allow a discount in excess of 10% of
the face value of shares.

4) One year must have elapsed since the date on which the company was entitled to
commence business.

5) The issue of shares at a discount must take place within 2 months of the date of the
permission of the Company Law Board.

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4/17
 1) A SHARE may be fully paid up or partly
paid up. 1) A STOCK is always fully paid up.
3) A company can issue shares at any time 2) A stock has no distinctive number.
during its existence 3) A company can convert fully paid shares
4) Shares can be transferred in round into stock.
numbers. 4) Stock can be transferred in small
5) A share has a definite and uniform face fractions.
value. 5) A stock has no definite and uniform face
6) Shares can be issued by the private and value.
public company. 6) Stock can be converted by the public
7) A shareholder is a member of the company only.
company 7) A stockholder is not necessarily a
member of the company

A company can purchase its owns shares. A company can buy back shares out of
free reserves, share premium and the proceeds of any other securities. A free reserve
is that which is available for dividend.

Requirements to be complied with before buyback of shares:

1) The Articles of an association shall authorize the company to buy back shares.
2) A special resolution to this effect should be passed in general meeting.
3) The amount should not be more than 25% of its total paid-up capital and free
reserve.
4) All such shares are fully paid up.

5) The notice to pass special resolution should be given along with an explanatory
statement containing:

A) Full disclosure of material facts.

B) A necessity for the buyback.
C) The class security intended to be purchased under buy-back,
D) The amount involved under the buyback

E) The time limit for the completion of the buyback.

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Requirements to be complied with after buy-back.

2) After buyback company cannot issue the same kind of shares except:

3) The company should maintain a register and record there in the shares buy back
the amount paid for the same and date of cancellation or destruction of shares.

4) The return of buyback should be filled with Registrar of the company and SEBI
within 30 days

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Allotment of shares is an act of distribution the shares of the company to the

persons in response to their application or as per contract. It is an act of the company
by which the application become the holders of shares.

Allotment of shares is valid only when:

1) The statutory conditions regarding allotment as per the Companies Act, and
2) The provision of the Indian Contract Act, are fulfilled.
a) Minimum Subscription Amount:- The minimum subscription amount prospectus
must be raised.
b) An amount payable on the application:- An amount not less than 5% of the
nominal value of each share payable in cash at the time of application
c) Deposit of application money:- The application money received must be
deposited in a scheduled bank until Trading Certificate is obtained.
d) Prospectus:- No allotment of the shares or debentures can be made until the
prospectus is issued.

e) A statement in lieu of prospectus:- If a company with a share capital does not

issue prospectus, a statement in lieu of prospectus is to be filled with the Registrar.

f) Central Government Section:- If the issue of capital exceeds RS.25 Lakhs sanction
of the
Central Government must be obtained.

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What is Gratuity? How to calculate? Is Income Tax Exempted on Gratuity?

PROCEDURE OF ALLOTMENT (Secretarial Work)

1) Collection of Applications:- The secretary collects all the applications from the
bankers and makes an entry in the Application and prepares allotment list.
2) The basis of Allotment:- The secretary then places the list before the Board of
Directors who will fix the basis of the allotment. Usually, a sub-committee is appointed
to deal with the allotment work.
3) Minimum Subscription:- The secretary will see that the minimum subscription
amount is raised before the allotment of shares.
4) Board Meeting:- At the Board Meeting, the resolution sanctioning the allotment is
passed.
5) Allotment Letter:- The Secretary issues the allotment letters to whom shares
have been allotted.
6) Letter of Regret:- The secretary Issues letters of regret to those to whom the
shares have not been allotted. The application money is refunded to the applicants.
7) Returns as to Allotment:- The secretary will see that return must be filled with
the Registrar within 30 days of allotment

8) Preparation of Share Certificate etc:- The secretary will see that the share
certificates signed by at least two directors are issued to the members against
allotment letters within 3 months of allotment. With the issue of the share certificate,
the allotment procedure will be completed.

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CALLS

A Call is a demand by a company from its shareholders to pays whole or the part of
the balance remaining unpaid on each share. The company can demand this unpaid
amount during its lifetime. Even on winding up, the liquidator can demand the unpaid
amount of the shares. The application money and the allotment money paid in respect
of share are not termed as calls. Where the due dates the installments on shares are
stated in the prospectus, such installments also cannot be termed as a call.

The Companies Act has made no provision in respect of forfeiture of shares. A

company, therefore, has no right to forfeit the shares unless it is expressly given in the
Articles of Association. 7/17
Articles of Association.

Forfeiture of shares means compulsory termination of membership and confiscation

of shares due to non-payment of any calls, installment or premium of shares.

WHEN a Shareholder was voluntarily given up his shares to the company, he is said
to have surrendered his shares to the company. There is not any provision in
tCompaniesies Act or in respect of surrender of shares. But the Articles sometimes
give power to directors to accept pt surrender of shares. When the shareholder is
almost unable to pay future calls on his shares, the directors may accept such
surrender of shares. Surrender of shares is regarded as a short cut to forfeiture of
shares. Every surrender of fully paid up shares involves a reduction of capital which is
illegal except sanctioned by the court. Hence surrender can apply only to partly paid-
up shares, and the company may accept in those cases only where forfeiture would be
justified.

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A) Selling of share is generally termed as the transfer of shares. Shares is movable

property and the shareholder has a right to sell his shares. So the transfer takes place.
Companies Act provide certain provision for transfer of shares. There are two types of
transfer of shares one is full transfer and another one is the part transfer of shares.
We shall discuss the full transfer first.
B) Full Transfer of Shares: The total shares indicated by the share certificate are
transferred at a time. It is called as the full transfer. In the process of transfer of
shares, the ownership is also transferred from transferor to the transferee.

Transfer of shares by the operation of law (application fo law) is called transmission

of shares. The original shareholder's shares are transmitted only in case of death,
insanity, and insolvency to the legal representative.

DEBENTURES

A Company for its development may acquire to raise funds without increasing its
share capital. The Company may invite the public to lend money for a fixed period. The
debenture is an instrument in writing given by the company’s Assets and carrying a
certain rate of interest. Debentures are generally repayable or irredeemable during
the existences of the company.

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What is Gratuity? How to calculate? Is Income Tax Exempted on Gratuity?

Sec. 151 of the Companies Act, 2013

A listed company may have one director elected by such small shareholders in such manner
and with such terms and conditions as may be prescribed.
Explanation.—For the purposes of this section “small shareholders” means a shareholder
holding shares of nominal value of not more than twenty thousand rupees or such other sum
as may be prescribed.
Rule 7 of Companies (Appointment and Qualification of Directors) Rules 2014
Small Shareholders’ Director
(1) A listed company, may upon notice of not less than one thousand small shareholders or
one-tenth of the total number of such shareholders, whichever is lower, have a small
shareholders’ director elected by the small shareholders:
Provided that nothing in this sub-rule shall prevent a listed company to opt to have a director
representing small shareholders suo motu and in such a case the provisions of sub-rule (2)
shall not apply for appointment of such director.
(2) The small shareholders intending to propose a person as a candidate for the post of small
shareholders’ director shall leave a notice of their intention with the company at least
fourteen days before the meeting under their signatures specifying the name, address,
shares held and folio number of the person whose name is being proposed for the post of
director and of the small shareholders who are proposing such person for the office of
director:
Provided that if the person being proposed does not hold any shares in the company, the
details of shares held and folio number need not be specified in the notice:
(3) The notice shall be accompanied by a statement signed by the person whose name is
being proposed for the post of small shareholders’ director stating –
(a) his Director Identification Number;
(b) that he is not disqualified to become a director under the Act; and
(c) his consent to act as a director of the company
(4) Such director shall be considered as an independent director subject to , his being eligible
under sub-section (6) of section 149 and his giving a declaration of his independence in
accordance with sub-section (7) of section 149 of the Act.
(5) The appointment of small shareholders’ director shall be subject to the provisions
of section 152 except that-
(a) such director shall not be liable to retire by rotation;
(b) such director’s tenure as small shareholders’ director shall not exceed a period of three
consecutive years; and
(c) on the expiry of the tenure, such director shall not be eligible for re-appointment.
(6) A person shall not be appointed as small shareholders’ director of a company if the
person is not eligible for appointment in terms of section 164.
(7) A person appointed as small shareholders’ director shall vacate the office if –
(a) the director incurs any of the disqualifications specified in section 164;
(b) the office of the director becomes vacant in pursuance of section 167;
(c) the director ceases to meet the criteria of independence as provided in sub-section (6)
9/17
of section 149.
(8) No person shall hold the position of small shareholders’ director in more than two
companies at the same time:
Provided that the second company in which he has been appointed shall not be in a business
which is competing or is in conflict with the business of the first company.

(9) A small shareholders’ director shall not, for a period of three years from the date on which
he ceases to hold office as a small shareholders’ director in a company, be appointed in or be
associated with such company in any other capacity, either directly or indirectly.

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COMMENTS ON SECTION 151 OF THE COMPANIES ACT, 2013

Originally in Companies Act, 1956 there was no provision for small shareholders’ director but
Companies (Amendment) Act, 2000 brought the provision relating to SSD in the Companies
Act, 1956. Companies (Second Amendment) Bill 1999, which ultimately led to Companies
(Amendment) Act 2000, contained provision for SSD (as proviso to section 252(1) of the
Companies Act, 1956 i.e clause 122 of the bill) for specified class of public companies on
mandatory basis but while passing this bill this provision got converted from mandatory to
optional basis.
Purpose of this section was to protect the minority shareholders by having their director on
the board of specified public companies but to some extent lost its relevance because of
optional nature of provision (section 128 of Companies (Amendment) Act, 2000 inserted
proviso under section 252(1)).
Under Companies Act, 2013 scope of this SSD provision has been restricted even more than
earlier, as now section 151 of the Companies Act, 2013 (corresponds to proviso of section
252(1) of the Companies Act, 1956) is applicable only on listed companies and unlisted public
companies are out of this provision. Earlier under the Companies Act, 1956, SSD provision
was applicable on public companies have paid up capital of five crore rupees or more and
having one thousand or more small shareholders.

Although in the Companies Act, 2013 has made one welcome change with regard to the
number of small shareholders proposing candidature for SSD now 1000 small shareholders
or 1/10th of the total number of such shareholders whichever is lower can propose a person
for the post of small shareholders’ director. Earlier in Companies Act, 1956 there was the
requirement of at least 1000 small shareholders who could have proposed candidature of
SSD.

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Definition of small shareholders is same in both the Acts.
A listed company may have SSD on suo moto basis. (Refer proviso to sub-rule 1 of rule 7
of Companies (Appointment and Qualification of Directors) Rules, 2014)
There is no requirement for the candidate to be a small shareholder or even shareholder of
the concerned listed company.
A person cannot become SSD in more than 2 companies and the second company in which
he has been appointed as SSD shall not be in a business which is competing or is in conflict
with the business of the first company.
SSD‘s tenure shall not exceed a period of three consecutive years and after the expiry of the
tenure, such director shall not be eligible for re-appointment.

The candidate shall not be disqualified under section 164 of the Companies Act, 2013 and
after appointment vacate office if incurs disqualification u/s 164, section 167 got attracted
and not independent as per section 149(6) of the Companies Act, 2013.
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