A share is a token or evidence of ownership, and each one represents a vote in the company. Any individual shareholder can have one, or many shares as they required.As every share counts as a vote in the company, the more shares you have then you get more votes. if a person with 5 shares, he get 4 votes except him. The quantity of these votes depend on how many shares you have .commonly many shares do not be issued because the number of shares increase your liability.
Shares may also carry the dividend and may allow the individual shareholder to benefit from the sale of the company. There is no minimum share capital for private limited companies and there is no maximum to any company’s authorised share capital and However, a public limited company must have an authorised share capital of minimum £50,000 (and, if it is trading, an issued capital of £50,000).In a private limited company there is no commitment for the shareholders to pay for the shares they own. A director may be responsible to further claims if it can be shown that he or she acted illegally.
Kinds of share capital
The shares of the company clearly defined and classified in the Section 85 of companies act,1956 which is similar to the section 43 of the 2013 Act.It is slightly differ from 2013,except the scope and availability.Share capital is of two kinds.1.Equity share capital and 2.preference share capital.Any share capital that is not preference is equity capital. The equity capital has been further divided into two kinds.
1.Equity shares with voting rights
2.Equity shares with differential rights as to dividend,voting or otherwise.
Kinds and classes of shares
Kind and class may convey different meanings.Shares can be of two kinds only-equity and preference,where equity can be further sub-divided into equity with or without differential rights. There can be any number of classes of preference shares-preference shares with different rates of dividend will constitute different classes.Preference share with different redemption periods will be regarded as separate classes of preference shares.Similarly there can be any classes of Equity shares.However ,keeping in view broad interpretations given to term class by the courts over time;It may also be said that equity shares constitute a “class” of shares different from the preference shares,having a different set of interests.
Equity shares ,in financial terminology sometimes referred to as the “risk” capital,normally confer on their holders the residue of rights of the company which which have not been conferred on other classes.The Equity shares usually carry the main financial risk if the company is unsuccessful,but they carry the greatest prospects of financial reward if the venture of the company is successful.Equity shares carry voting rights and therefore confer power on the equity shareholders to take decisions.The law also permits issuance of the Equity shares with differential rights.
As their name implies ,preference shares carry some preferential rights in relation to other class of shares,particularly in relation to equity shares.
A preference shares must be satisfy the following two conditions-
- as regards dividends,it must carry a preferential right to a fixed amount.or an amount calculated at a fixed rate and
- as regards capital ,in the event of a winding-up and other arrangements to the repayment of capital ,there must be a preferential right to be repaid the amount of capital paid-up on such shares.
Those are two essential and dominant characteristics of preference share capital of a company.Additionally a preference share may carry such other rights as the following
A preference right to be paid any arrears of dividend remaining due on such share;It may be noted that section 85 (b)(1)of the 1956 Act was an enabling provision under the 1956 Act so as to vest such right on preference shareholders to be paid any arrears of dividend remaining due on such shares.Though,there is no such enabling provisions under the 2013 Act,the accounts as per the format provided under part-1 of schedule 3,of fixed cumulative dividends on preference shares shall also be disclosed separately,which implies that preference shares may carry such rights.
- a right to be fixed premium or premium on a fixed scale as per the memorandum or articles.
- a right to have share either fully or to a limited extent ,in surplus profits by way of additional dividend,and
- a right to have share ,either fully or to a limited extent,in surplus asserts in the event of winding -up ,after all kind of capital have been repaid.
preference shares vs shares issued on preferential basis
Preferential shares carry preferential rights as to payment of dividend and repayment of share capital on winding up; on the other hand ,shares issued on preferential basis are shares issued and allotted to class of preferred persons (generally institutional investors).While preference share capital is itself a kind of capital;preferential allotment is a manner in which shares are issued.Both equity and preference shares may be allotted on preferential basis.
Issue and redemption of preference shares have been dealt with separately under section 55 of the 2013 Act.section 62 of the 2013 Act provides for issue of shares on preferential basis under certain conditions.
Rights of preference shareholders
The rights of preference shareholders,like other class rights,may be stated in the memorandum,articles or in the terms of issue .In modern practices they are normally set out in detail in the company’s articles.It is desirable that the rights of the preference shareholders should be stated in the articles or ,if desired ,in the memorandum, as preciously and exhaustively as possible.This will exclude any doubt as to the nature and ambit of those rights.Where this precaution of exhaustively stating the rights is not taken,insurmountable problems as to the ambit of their rights ,particularly those relating to dividends and participation in the distribution of surplus asserts,may arise.provisions should also be inserted as to the way in which ,in the case of need ,their rights shall be alterable. By far the most important aspects of their rights that ought to be clarified are those relating to accumulation of dividend while the company is a going concern and participation in the distribution of surplus asserts in the winding up of the company.
Declaration and payment of dividend on preference shares
As per the section 205 of the 1956 Act,no dividend shall be declared or paid by a company for any financial year except out of the profits of that company for that year or out of the profits of the company for any previous financial year(s),remaining undistributed or out of the both,subject to the conditions laid down in the said section.Accordingly a company which has incurred losses cannot declare or pay dividend for years in which losses are incurred. The company becomes liable to pay dividend on preference shares only when it declare dividend,and if in the meanwhile the preference shares are redeemed,the right of the preference share holders to dividend,in the absence of any specific stipulation in this regard,does not continue after such redemption.