A company is formed when a group of people known as the owners invest some money called capital for the company to start its activities. Capital is the share capital of the company. Equity is the amount of funds contributed by the owners i.e. the stockholders at the formation of the company. A company is not allowed to issue more share capital than the limit stated without altering the capital clause mentioned in the memorandum of association.
The share capital can be described in the following categories based on the Companies Act 1956:
- Registered, authorised or nominal capital: This is the maximum amount that a company can raise by way of issuance of shares as agreed upon in the capital clause of the memorandum of association of a company, since the registration fees of the company is paid accordingly.
- Issued Capital: A part of the authorised capital which is offered to the public for subscription
- Subscribed Capital: This is a portion of the issued capital at face value which the public has subscribed and been allotted. By the directors.
- Called-up Capital: The amount that is asked for on the shares that are issued and paid for by the shareholders for example if the face value of a share is Rs 10, but since the company needs only Rs. 3 per share, they call for only that much amount. The difference of Rs7/ is called uncalled share capital while Rs 3/ is the called up capital.
- Paid up Capital: This is the part of called up capital paid to the company. The balance which is yet to be paid is called Calls in arrears.
There are two types of shares
- Equity shares: An equity shareholder is one of the owners of the company and has voting rights.
- Preference shares: Are shares carrying rights of dividend at fixed rate or percent and must be paid before the equity shareholders are paid profits. The preference shareholders are paid before anything is paid to equity shareholders in case the company is winding up. Hence they are “preferred” shareholders.
The memorandum of association can be altered by any of the following ways but the articles of association also should have authorised it to do so:
- Issue of new shares as required to increase share capital
- Increase the face value of shares by collecting shares of Rs.10 and converting them to Rs.100 value
- Fully paid shares can be converted to stocks and reconverted back to shares
- Shares which were issued but not taken by some public should be cancelled and that much amount reduced from the share capital.
The face value of shares as per the Indian Companies Act, 1956 is Rs.10 or Rs.100/ but can be fixed to any amount if mentioned in the memorandum of association of the company. A few changes which a company can do with the share face value and their terminology are:
When a company issues shares for more than the face value like Rs.12 instead of Rs.10 the difference of Rs.2 is called issue of shares at premium. When shares are issued at lower price than the face value i.e. Rs 8 instead of Rs.10 this amount of Rs.2 is called issue of shares at discount.
After 2 years of incorporation or 1 year from first allotment of shares which ever is earlier, the company issues further shares to the existing equity shareholders. This is called rights issue of shares but in case some shareholders do not take the offer within 15 days, they can renounce the same to some other shareholders. This is called renunciation of shares. Bonus shares to be issued should have the prior provision l in the articles of association. They can be issued by the conversion of the reserves of the company.
The shareholders are given by the company a share certificate which has the company seal with one or two director’s signature on it. It must have the relevant stamps affixed as directed by the Stamps Act. The distinctive numbers with the number of shares and the value of share with the amount paid up and shareholder’s name should be printed in the certificate. Every company must issue the certificates within three months of issuance.