Company- Issue of Shares

1. ISSUE OF SHARES
L. PRAKASH KANNAN, M.COM., M.MPHIL., (PH.D.), ASSISTANT PROFESSOR.
S.J.MONISHA., III B.COM

2. CONTENTS
• Company – Meaning
• Share – Meaning
• Types of Shares
• Share Capital
• Types of Share Capital
• Shares Issued at Par
• Shares Issued at Discount
• Shares Issued at Premium

3. COMPANY – MEANING
• A company is an association of persons who contribute
money or money’s worth to a common stock (capital), for
carrying on business for the purposes of profit. The
capital is divided into shares, which are held by the
members (shareholders) in any proportion and are
transferable. It is a legal person, and in law exists like an
individual, but with no physical existence.
• Section 3(1)(i) of the Companies Act, 1956, defines a
company as “ a company formed and registered under
this Act or an existing company”. An existing company
means a company formed and registered under any of the
previous Companies Act.

4. SHARES
• The capital of the company is divided into units or small denomination. These units
are called shares. Section 2(46) of the Companies Act explains the meaning of
share as a share in the share capital of a company. Holders of shares are called
shareholders.
• Shares must be numbered so that they may be identified. They are transferable in
the manner provided by the Articles of Association.

5. TYPES OF SHARES
Preference
shares
Cumulative
Non-
Cumulative
Redeemable Irredeemable Participating
Non-
participating
Convertible Non-convertible
Equity shares

6. PREFERENCE SHARES
• The Companies Act 1956, Sec. 85 deals with preference shares. Preference
shares are those which satisfy the following conditions.
1. The right to receive dividend at a specified rate before any dividend is paid.
2. Right to return of capital in case of winding up before the capital of equity share
holders is returned.
• Preference shareholders must carry both these preferential rights. However,
preference shareholders have certain disabilities. For instance, they do not
normally enjoy voting rights. However they get the right to vote.

7. TYPES OF PREFERENCE SHARES
Cumulative preference share
• Cumulative Preference Shares are those Preference Shares which carry right to receive
arrears of dividend before the company makes payment to Equity Shareholders.
• Preference shares are always cumulative, unless the contrary is expressly stated in the
Articles of Association.
Non-Cumulative Preference Shares
• In the case of Non –Cumulative Preference Shares if dividend is not paid in any
particular year, it lapses. Dividend is not allowed to accumulate and such unpaid
dividend will not be paid in subsequent years even though sufficient profits are earned.

8. Participating Preference Shares
• The Articles of Association of a company may provide that after the company pays the
dividend to the Equity Shareholders, the holders of Preference Shares will also have a
right to participate in the remaining profits.
• Thus they get two kinds of dividend, one fixed rate and the changing every year
depending on the level of excess profits.
Non-Participating Preference Shares
• Preference Shares which do not carry the right to participate in the profits remaining
after Equity Shareholders are paid are called Non-Participating Preference Shares.
• These shares are entitled to only a fixed rate of dividend.

9. Convertible Preference Shares
• Those Preference Shares which have the right to be converted into Equity Shares are
called Convertible Preference Shares.
Non-Convertible Preference Shares
• Non-Convertible Preference Share do not have the right to be converted into Equity
Shares.
• Once issued as preference shares, they continue to be only preference shares
throughout the life time of the company without any change in their characteristics. If the
Articles are silent regarding this right to convert, the preference shares will be
considered to be only Non-Convertible Preference Share.

10. Redeemable Preference Shares
• Redeemable Preference Shares are those Preference Shares which are redeemed by
the company at a specific time (not exceeding 20 years from the date of issue) for the
repayment or earlier. We call this repayment of the amount as Redemption.
• Redeemable Preference Shares can be redeemed if they are full paid-up. A company
cannot convert existing preference share into redeemable preference shares.
Irredeemable Preference Shares
• The amount returned by the company at the time of wind up to the holders of such
shares is called Irredeemable Preference Shares.

11. EQUITY SHARES
• Equity shares are those, which are not preference shares. They were also known as
ordinary shares. They are entitled to get dividend only after the fixed rate of
dividend is paid to preference shareholders.
• At the time of winding up of the company, only after returning preference share
capital in full, and if there is any surplus, it will be paid to equity shareholders.
• The rate of dividend varies from year to year depending on the profits earned by the
company.
• The larger the profits the higher may be th dividend for equity shareholder.
• However, when there is no profit in any year, equity shareholders’ dividend for that
year will not be paid as arrears of dividend in subsequent arrears even though
profits maybe very large.
• Equity shareholders are entitled to vote on all resolutions.

12. SHARE CAPITAL
• Share capital is the money a company raises by issuing common or preferred stock.
The amount of share capital or equity financing a company has can change over
time with additional public offerings.
• A company’s share capital is the money it raises from selling commor or preferred
stock.
• Authorized share capital is the maximum amount a company has been approved to
raise in a public offering.
• A company may opt for a new offer of stock in order to increase the share capital on
its balance sheet.

13. TYPES OF SHARE CAPITAL
Types of Share
Capital
Nominal or
Authorised Issued
Subscribed
Called-up
Uncalled capital
Paid up capital
Reserve

14. Authorised Or Nominal Capital
• The Memorandum of Association of every company has to specify the amount of capital
with which it wants to be registered. The capital so stated is called Registered, Authorised
or Nominal Capital. The Registered Capital is the maximum amount of share capital which
a company can raise by way of public subscription.
Issued Capital
• The company may not issue the entire authorised capital at once. It goes on raising the
capital as and when the need for additional fund is felt. So, issued capital is that part of
Authorised/Registered or Nominal Capital which is offered to the public for subscription in
the form of shares.
• The balance of nominal capital remaining to be issued is called Unissued Capital.

15. Subscribed Capital
• It is that part of “issued capital” for which applications are received from the public. The
subscribed capital is allotted to the respective subscribers as per resolution passed by
the directors of the company.
• The difference between the issued capital and subscribed capital represents
Unsubscribed capital.
Called up Capital
• It is that part of subscribed capital which has been called up by the company. A
company does not call at once the full amount on each of the shares it has allotted and
therefore, calls up only such amount as it needs.
Uncalled up Capital
• It is the uncalled portion of the allotted capital and represents contigent liability of the
shareholders on the shares.

16. Paid up Capital
• It is that part of called up capital against which payment has been received from the members
on their respective shares in response to the calls made by the company.
Reserve Capital
• A company can reserve part of its uncalled capital to be called up only at the time of winding
up. A special resolution has to be passed for that purpose. This is called Reserve Capital. It
is not disclosed in the companies balance sheet.
• The Reserve Capital cannot be charged as security for loans by the directors. It cannot be
turned into ordinary capital without the order of the court. It cannot be cancelled at the time of
reduction of capital.

17. SHARES ISSUED AT PAR
• The shares will be at par is when the shares are sold at their nominal value. Shares
sold at a premium cost more than their nominal value, and the amount in excess of
the face value is the premium.

18. SHARES ISSUED AT PREMIUM
• A company can issue shares at a premium. It means that the issue price can be
higher that the face value of the shares. In other words, the difference between the
issue price and the face value constitutes share premium.
• Premium is the excess money collected over and above the face value of the share.
When share of Rs.10(face value) are issued at Rs.12, it is said to be issued at a
premium of Rs.2.
• When shares are issued at premium, the amount of premium shall be credited to a
separated account called as ‘Securities Premium Account’.
• Under sec. 78 the amount to the credit of the securities premium account may be
used for the following purposes:
• Issue of fully paid bonus shares
• Writing off the preliminary expenses
• Writing off expenses like commission paid or discount allowed on shares/debentures
• For the premium payable on redemption of preference shares/debentures.

19. SHARES ISSUED AT DISCOUNT
• When a company issues its shares at a price less than the face value, it is said to
be issued at discount. Discount is the difference between the face value and the
issue price.
• For example a share of Rs. 10 (face value) is issued at Rs.9. it is said that shares
are issued at discount of Rs.1.
a. A company can issue shares at a discount only when the following conditions are
satisfied (Sec. 79)
b. Issue of shares at discount is authorised by an ordinary resolution passed by the
company in its general body meeting and sanctioned by Company Law Board.
c. The maximum amount of discount can not exceed 10%, however, if the Company Law
Board is convinced the shares can be issued at a higher at a higher discount rate.
d. The company has to be in existence at least for one year.