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Company Law

Meaning of Shares A part or portion of a larger amount that is divided among a number of people, or to which a number of people contribute. Definition of Shares
Share- Share is defined as an interest having a money value and made up of diverse rights specified under the articles of association.

Classification of shares

Under the Companies Act, 1956 the shares are classified into two types Preference Shares Equity Shares

Preference Shares
Preference share capital is the sum total of preference shares. These shares carry the following preferential rights over equity shares: As regards dividends, to be paid a fixed amount or an amount calculated at a fixed rate; On winding up of the company, to return of capital paid up. There are four types of preference shares: Cumulative preferred, for which dividends must be paid including skipped dividends. Non-cumulative preferred, for which skipped dividends are not included.

Participating preferred, which give the holder dividends plus extra earnings based on certain conditions. Convertible preferred, which can be exchanged for a specified number of shares of common stock. Preference shares may further be classified as Redeemable Preference Shares Irredeemable Preference Shares

Equity Shares
Equity shares are those shares which are ordinary in the course of company's business. They are also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend and repayment of capital. Equity shareholders are paid dividend out of the profits made by a company. Higher the profits, higher will be the dividend and lower the profits, lower will be the dividend.

Share Capital Share capital means the capital raised by the company by issue of shares. Types of Share Capital

Share Capital This is the capital with which the company is registered. It comprises of the total face value of the shares in a company. It is also called Total or Nominal Capital of the company.


Capital The entire authorized capital may not be required to be raised by the company initially. The company issues shares to the extent of its requirement. This is called Issued Capital. Issued Capital is always less than the Authorized or Nominal Capital, or equal to it. Subscribed Capital That part of issued capital which is agreed to be taken up by the public, is called the Subscribed Capital.

Paid-up Capital The amount actually paid by the subscribers towards the capital accepted by them is called Paid-up Capital. The entire amount of the share money may not be paid up immediately. Called up Capital Called up capital is a part of subscribed capital which has been called up by the company for payment.
For example- If 10,000 shares of Rs. 100 each have been subscribed by the public and of which Rs. 50 per share has been called up. Then the subscribed capital of the Company works out to Rs. 1,00,000 of which the called up capital of the Company is Rs. 50,0000.


Capital The may not require the full amount of the subscribed capital and therefore, it may call up only a part of the capital subscribed and that part which has not been called up i.e., the remainder of the subscribed capital is called Un-called Capital. Allotment of Shares The allotment of shares by the company shall be made in accordance with Sections 69,70,72and 73 of the companies Act. Application for shares is an offer and allotment of shares by the company is an acceptance of the offer. Allotment can be made on a written or

The following rules are to be observed: 1. A prospectus or a statement in lieu of prospectus shall be filed with the Register. 2. No allotment of shares shall be made to public unless the minimum subscription amount stated in the prospectus is raised and received by the company. 3. Application for shares should be made to the company in the prescribed from called Application Form. 4. No allotment shall be made until the beginning of the 5th day after a date on which the prospectus is issued or such later time as may be specified in the prospectus.

5. The beginning of the 5th day or such later time shall be called time of the opening of the subscription list. 6. Every company intended to offer shares or debentures to the public for subscription, before such issues shall make an application to one or more recognized stock exchanges for permission. 7. The amount payable on application on each share shall not be less than 5% of the nominal amount of the share. 8. The whole of the application money should have been paid to and received by the company in cash. 9. All money received from applicants for shares shall be deposited and kept deposited in a scheduled been obtained, then until the entire amount payable on application for shares in respect of the minimum subscription has been received by the company.

Effect of Irregular Allotment

Within two months after the holding of the statutory meeting of the company. In any case where the company is not required to hold a statutory meeting or where the allotment is made after the holding of the statutory meeting, within two months after the date of allotment, and not later. The allotment shall be a voidable even if the company is in course being wound up.

Transfer of Shares

AOA (Articles of Association) provides for the procedure of transfer of shares. It is a voluntary action of the shareholder. It can be made even by a blank transfer In such cases the transferor only signs the transfer form without making any other entries.
In case it is a forged transfer, the transferors signature is forged on the share transfer instrument.


share of a company are freely transferable. The share holder can transfer his share to any person without the consent of other member. can not impose absolute restrictions on the rights of the members to transfer their shares.



of shares is by operation of law, e.g. by death, insolvency of the shareholder etc.



Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate.

The prospectus must include the following sections: 1. Important information on the scheme 2. Definitions of the technical terms which are used throughout the Prospectus 3. Principal features of regarding the company and the scheme. The information contained in this section should be read in conjunction with the full prospectus. This include following

Structure of the Company; Investment Objective, policies and restrictions Fund Income Manager, registrar and secretary Custodian and Bankers Base Currency of the fund Applications for purchase of shares Dealing Dealing price Charges Minimum Investment Management and Custodian Fees Accounting reference date Sponsoring stockbroker Stock exchange listing

4. Description of the company and its management 5. Investment objectives, policies and restrictions. This includes a description of the scheme's investment objectives, including its financial objectives, investment policy, and an indication of any techniques and instruments which may be used for the purposes of efficient portfolio management, and of any borrowing powers which may be used in the management of the scheme. 6. The shares including a description of the shares in each fund and of the founder shares.

7. Purchasing and Repurchasing of Shares. This section would typically include the procedures and conditions for the repurchase, redemption and cancellation of shares and details of the circumstances in which repurchase or redemption may be suspended. 8. The manager, registrar and secretary i.e. name, registered office and head office if this is different from the registered office and status. The main activity should also be included. 9. The custodian i.e. name, registered office and head office if this is different from the registered office and status. The main activity should also be included.

11. Conflicts of Interest. This includes a description of the potention conflicts of interest which could arise between the directors, the management company, or the Custodian and the Scheme. 12. Taxation i.e. an indication of the tax provisions applicable to the Scheme including details of whether deductions are made at source from the income and capital gains paid by the Scheme to holders of Units. 13. Accountants' report at the time the Company was formed 14. General Information 15. Determination of the Net Asset Value (NAV) 16. Suspension of the determination of the Net Asset Value

17. Allocation of assets and liabilities of Funds 18. Schedule of fees 19. Directory with contact details of the Scheme, Manager, Registrar and secretary, custodian, sponsoring stockbroker, auditors and legal advisers.

Procedure for issuing shares under a prospectus

The Prospectus together with an application form is made available to the general public. Receiving applications along with the application money. Minimum subscription must be received before allotment Allotment of shares at directors discretion Allotment advice is communicated to the applicant. Allotment monies may be required at this stage. Making calls for payment of balance money, if any.

Dividend The sharing of profits in the going concerns and the distribution of the assets after the winding up can be called as dividends

will be distributed among the shares holders


dividends can be declared and paid out of: Current profits Reserves Monies provided by the government and the depreciation as provided by the companies. It can be paid after presenting the balance sheet and profit and loss account in the AGM

Other than the equity shareholders, even the preferential shareholders can get the dividends. Rather they are the first ones to get the dividends. Dividends are to be only in cash, if otherwise specified in the AOA. In exceptional cases, even the central government may permit the payment of interest to shareholders , even though there is no profit.

Bonus Share
Free shares of stock given to current shareholders, based upon the number of shares that a shareholder owns. While this stock action increases the number of shares owned, it does not increase the total value. This is due to the fact that since the total number of shares increases, the ratio of number of shares held to number of shares outstanding remains constant.

Right Share
A security

giving stockholders entitlement to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. A rights issue is an issue of rights to buy additional securities in a company made to the company's existing security holders.

are issued only for a short period of time, after which they expire

As a shareholder, you essentially have three options when considering what to do in response to the rights issue. 1.Take up the rights to purchase in full 2. Ignore the rights issue

3 Sell your rights to other investors

Sweat Equity Share Sweat Equity Shares means equity shares issued by
the company to employees or directors at a discount or for consideration other than cash for providing know how or making available rights in the nature of intellectual property rights or value additions. (Section 79A of the Companies Act, 1956 )

1. Such issue is authorised by a special resolution of the company in the general meeting

Such resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of the directors or employees to whom such shares are to be issued. 3. Such issue is after an expiry of one year from the date on which the company was entitled to commence business.

ESOP (Employee Stock Ownership Plan)

An employee stock ownership plan (ESOP) is a defined contribution plan that provides a company's workers with an ownership interest in the company. In an ESOP, companies provide their employees with stock ownership, typically at no cost to the employees. Shares are given to employees and are held in the ESOP trust until the employee retires or leaves the company. There are annual limits on the amount of deductible contributions an employer can make to an ESOP. ESOPs are governed by federal pension laws, called the Employee Retirement Income Security Act, or ERISA.

Forfeiture of Shares

The articles generally give powers to Board of Directors to forfeit shares as under: If a member fails to pay any call or installment of a call, and Any other circumstance which the articles may provide. The articles may also provide that the failure by a member to fulfill any engagement with any other member would forfeit his share. Power of forfeiture is not inherent in a company and therefore this power exists only when it is given by the articles.



The total sweat equity shares issued during the year should not exceed 15% of the total paid-up equity share capital in a year or shares of the value of Rs.5 crores of rupees.


The shares shall be locked in for a period of 3 years from the date of allotment.

The benefits for the company include increased cash flow, tax savings, and increased productivity from highly motivated workers.


Memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act. According to Section 2(28) of the Companies act. The Memorandum of Association is a document which contains the fundamental rules regarding the construction and activities of a company. It is the basic document which lays down how the company is to be constituted and what work it shall undertake. The purpose of the memorandum is to enable the members of the company, its creditors, and the public to know what its powers are and what is the range of its activities. The memorandum contains rules regarding the capital structure, the liability of the members, the objects of the company, and all other important matters relating to the company. The memorandum is altered only after certain formalities are observed.

THE FORM AND CONTENTS OF THE MEMORANDUM Section 13 : The Act lays down that the memorandum of a association of every company shall contain the following particulars : 1. Name Clause The name of the company with the word limited at the end of the name of a public company and the words private Limited at the end of the name of a private company. 2. Situation Clause The name of the State in which the registered office of the is to be situated. 3. Objects Clause 4. Liability of the members 5. Details of share capital of the company 6. Subscription or Association clause


A company being a separate legal entity must have a name. A company may select any name which does not resemble the name of any other company and it should not contain the words like king, queen, emperor, government bodies and the names of world bodies like UNO, WHO, World Bank etc.


Every company should have a registered office, the address of which should be communicated to the Registrar of Companies. This helps the Registrar to have correspondence with the company. The place of registered office can be intimated to the Registrar within 30 days of incorporation or commencement of business, whichever is earlier.

OBJECT CLAUSE(Sec. 13& 149)

This is one of the important clauses of the Memorandum of Association. It determines the rights and powers of the company and also defines its sphere of activities.


This clause states that the liability of the members is limited to the value of shares held by them. It means that the memes will be liable to pay only the unpaid balance of their shares. The liability of the members may be limited by guarantee. It also states the amount which every member will undertake to contribute to the assets of the company in the event of its winding up.


The clause states the total capital of the proposed company. The division of capital into equity share capital and preference share capital should also be mentioned. The number of shares in each category and their value should be given. If some special rights and privileges are conferred on any type of shareholders, mention may also be made in the clause to enable the public to know the exact nature of capital structure of the company.

SUBSCRIPTION OR ASSOCIATION CLAUSE(Sec.13) This clause contains the names of signatories to the memorandum of association. The memorandum must be singed by at least seven persons in the cause of public limited company and by at least two persons in the case of private limited company. Each subscriber must take at least one share in the company. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names. The signatures of subscriber are attested by at least one witness each. The full addresses and occupations of subscribers and the witnesses are also given.



Section 2(2) of the Companies Act defines Articles as the Articles of Association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act. But it is not clearly defined what is an Article of Association. Basically Article of Association contains the rules and regulations relating to the management of companies internal affairs. It is similar to as a partnership deed in a partnership. Memorandum defines the area or business of the company. A company cannot operate beyond the limits of its memorandum. At the same time an Article contains the rules and regulations of the business of the company. Therefore, Article is subordinate to, and controlled by the Memorandum.


Under sec 36, the memorandum and the articles when registered, shall bind the company andits members to the same extent as if it had been signed by them and had contained a covenant ontheir part that the memorandum and the articles shall be observed. With respect to the above section, the importance of articles of association can be summed up as follows:

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