CORPORATE LAW PROJECT

CONCEPT, NATURE &

KINDS OF SHARES

SUBMITTED TO-
DR. QAZI USMAN
SUBMITTED BY-
EHTAMAMUL HAQUE
VI SEMESTER/ SELF FINANCED

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 ACKNOWLEDGEMENT

This project has been made possible through direct and indirect support of various people for
whom I wish to express my appreciation and gratitude.

This project of mine could not have seen the light of the day without the coordination of
Dr. Qazi Usman , my project guide. I would like to express my special thanks and gratitude to
him for constantly guiding me and tackling a variety of hurdles with implicit patience
throughout my research project and whose deep involvement and interest , infused in me
great inspiration and confidence in taking up this study in the right direction .Without her
overall guidance and help ,the project may not have been completed .

I am committed to extend my profound thanks for giving me an opportunity to work on a

valuable project

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 DEFINITION OF SHARE

According to the section 2(46) of the Company’s Act 1956, share means a part in the share
capital of the company and it also includes stock except where a distinction between stock
and share capital is made expressed or implied.

Share is not a sum of money but an interest or right measured in a sum of money to
participate in the profits made by the companywhile it is going concern ,or in the assets of the
company when it is wound up.

“The interest of a shareholder in a company measured by a sum of money, for the

purpose of liability in the first place, and of interest in the second, but also consisting a
series of mutual covenants entered in to by all the shareholders interest.” —Farewell. J.

The Memorandum and Articles of Association of the company prescribe the rights and
obligations of shareholders. Further, a shareholder must have certain contractual and other rights
as per the provisions of the Companies Act, 2013.

Section 44 of the Companies Act, 2013, states that shares or debentures or other interests of any
member in a company are movable properties. Also, they are transferable in the manner
prescribed in the Articles of the company.

Further, Section 45 of the Act mandates the numbering of every share. This number is
distinctive. However, if a person is a holder of the beneficial interest in the share, then this rule
does not apply (example: share in the records of a depository).

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 STOCK AND SHARE

The capital stock (or simply stock) of a business entity represents the original capital paid
into or invested in the business by its founders. It serves as a security for the creditors of a
business since it cannot be withdrawn to the detriment of the creditors. Stock is different from
the property and the assets of a business which may fluctuate in quantity and value.

The stock of a business is divided into multiple shares, the total of which must be stated at the
time of business formation. Given the total amount of money invested in the business, a share
has a certain declared face value, commonly known as the par value of a share.

The par value is the de minimis (minimum) amount of money that a business may issue and
sell shares for in many jurisdictions and it is the value represented as capital in the
accounting of the business. In other jurisdictions, however, shares may not have an associated
par value at all. Such stock is often called non-par stock.

Shares represent a fraction of ownership in a business. A business may declare different

types (classes) of shares, each having distinctive ownership rules, privileges, or share values.

Ownership of shares is documented by issuance of a stock certificate. A stock certificate is a

legal document that specifies the amount of shares owned by the shareholder, and other
specifics of the shares, such as the par value, if any, or the class of the shares.

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 TYPES OF SHARES

As per the provision of section 85 of the Companies Act, 1956, the share capital of a
company consists of two classes of shares, namely:

§ Equity Shares

§ Preference Shares

§ PREFERENCE SHARES:

According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries
the following two preferential rights:

(a) The payment of dividend at fixed rate before paying dividend to equity shareholders.

(b) The return of capital at the time of winding up of the company, before the payment to the
equity shareholder.

Both the rights must exist to make any share a preference share and should be clearly
mentioned in the Articles of Association.

Preference shareholders do not have any voting rights, but in the following conditions they
can enjoy the voting rights:

(1) In case of cumulative preference shares, if dividend is outstanding for more than two
years.

(2) In case of non-cumulative preference shares, if dividend is outstanding for more than
three years.

(3) On any resolution of winding up.

(4) On any resolution of capital reduction.

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Types of preference shares:

In addition to the aforesaid two rights, a preference shares may carry some other rights. On
the basis of additional rights, preference shares can be classified as follows:

Cumulative Preference Shares: Cumulative preference shares are those shares on which the
amount of divided if not paid in any year, due to loss or inadequate profits, then such unpaid
divided will accumulate and will be paid in the subsequent years before any divided is paid to
the equity share holders. Preference shares are always deemed to be cumulative unless any
express provision is mentioned in the Articles.

Cumulative preference shares give the right to the preference shareholders to demand the
unpaid dividend in any year during the subsequent year or years when the profits are
available for distribution

Non-Cumulative Preference Shares:

A non-cumulative or simple preference shares gives right to fixed percentage dividend of

profit of each year. In case no dividend thereon is declared in any year because of absence of
profit. Non-cumulative preference shares are those shares on which arrear of dividend do not
accumulate.

Therefore if divided is not paid on these shares in any year, the right receive the dividend
lapses and as such, the arrear of divided is not paid out of the profits of the subsequent years.

Participating Preference Shares: Participation preference shares are those shares, which, in
addition to the basic preferential rights, also carry one or more of the following rights:

(a) To receive dividend, out of surplus profit left after paying the dividend to equity
shareholders.

(b) To have share in surplus assets, which remains after the entire capital has been paid on
winding up of the company.

Non-Participating Preference Shares: Non-participation preference shares are those shares,

which do not have the following rights:

(a) To receive dividend, out of surplus profit left after paying the dividend to equity
shareholders.

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(b) To have share in surplus assets, which remains after the entire capital has been paid on
winding up of the company.

Preference shares are always deemed to be non-participating, if the Article of the company is
silent.

Convertible Preference Shares:Convertible preference shares are those shares, which can
be converted into equity shares on or after the specified date according to terms mentioned in
the prospectus.

Non-Convertible Preference Shares: Non-convertible preference shares, which cannot be

converted into equity shares. Preference shares are always being to be non-convertible, if the
Article of the company is silent.

Redeemable Preference Shares: Redeemable preference shares are those shares which can
be redeemed by the company on or after the certain date after giving the prescribed notice.
These shares are redeemed in accordance with the terms and sec. 80 of the Company’s Act
1956.

Redeemable Preference shares are preference shares which have to be repaid by the company
after the term of which for which the preference shares have been issued

Irredeemable Preference Shares:Irredeemable preference shares are those shares, which

cannot be redeemed by the company during its life time, in other words it can be said that
these shares can only be redeemed by the company at the time of winding up. But according
to the sec. 80 (5A) of the Company’s (Amendment) Act 1988 no company can issue
irredeemable preference shares.

Irredeemable Preference shares means preference shares need not repaid by the company
except on winding up of the company.

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EQUITY SHARES:

According to section 85 (2), of Companies Act, 1956, Equity share can be defined as the
share, which is not preference shares. In other words equity shares are those shares, which do
not have the following preferential rights:

(a) Preference of dividend over others.

(b) Preference for repayment of capital over others at the time of winding up of the company.

These shares are also known as ‘Risk Capital’, because they get dividend on the balance of
profit if any, left after payment of dividend on preference shares and also at the time of
winding up of the company, they are paid from the balance asset left after payment of other
liabilities and preference share capital.

Apart from this they have to claim dividend only, if the company in its A. G. M. declares the
dividend. The rate of dividend on such shares is not pre-determined, but it depends on the
profit earned by the company. The equity shareholders have the right to vote on each and
every resolution placed before the company and the holders of these shares are the real
owners of the company.

Equity shares is the equally divided capital of a company. Total capital

contribution for a company comprises of investments through equity share holdings by small
and big investors. The investors who have a stake in a company are referred to as
shareholders. The equity shares are therefore documents issued by a company and floated in
the open market for purchase by shareholders which entitles them to be one of the owners of
the company.

The profits of equity shareholders depend on the profit making capability of the company that
they have invested in. In a situation where the company has made huge profits the benefits
are passed over to the equity share holders by way of dividends. The equity shareholders also
enjoy voting rights in the company.

Equity shares will get dividend and repayment of capital after meeting the claims of
preference shareholders. There will be no fixed rate of dividend to be paid to the equity
shareholders and this rate may vary form year to year. This rate of dividend is determined by
directors and in case of larger profits, it may even be more than the rate attached to
preference shares. Such shareholders may go without any dividend if no profit is made

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RIGHT SHARES

Right shares are those shares which are issued to existing shareholders. Rights shares are
issued u/s 81 of the Companies Act, 1956 when the company decides to increase its
subscribed capital. Wherever, an existing company wants to issue new series of equity shares
to finance its additional activities, it is required to offer these shares to the existing
shareholders at a specified price during a particular period. It is called a 'right' or Pre-emptive
right'. It may simply be defined as an option to buy a security at a specified price, generally at
par or at premium but much below the market price.

The shares offered are called Right Shares and financing the projects of a company by the
issue of such right shares is 'right financing'.

Section 81 of the Companies Act provides that at any time after the expiry of two years from
the formation of the company limited by shares or of one year after the first allotment of
shares in that company, whichever is earlier, a company can increase its further capital by
issue of new shares.

The new shares must first be offered to the existing equity shareholders of the company in
proportion, ax nearly as circumstances admit, to the capital paid up on those shares at the
time of offer.

It must comply with the following provisions of section 81(1):

(a) Such share shall be offered to its equity shareholders in proportion to their holding.

(b) The offer shall be made by a notice of not less than 15 days within which the offer is to be
accepted. Otherwise it is deemed as declined.

(c) The equity shareholders to whom the offer is made shall be given a right to renounce the
offer in full or in part in favour of any other person and the notice shall contain a statement to
this effect.

(d) After the expiry of the notice period or on receipt of intimation declining the offer,
whichever is earlier, the Board of Directors may dispose of such shares in the manner most
beneficial to the company.

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 NATURE OF SHARES

Sec 82 - Nature of shares

The shares or debentures or other interest of any member in a company shall be movable
property, transferable in the manner provided by the articles of the company.

Section 98. Nature of shares.

The shares or other interest of any member in a company shall be movable property,
transferable in the manner provided by the articles, and shall not be of the nature of
immovable property.

Ownership of shares does not give any interest over the assets of the company. At best, shares
represent a bundle of rights and liabilities.

These rights include, inter alia, the rights

(i) to elect directors;

(ii) to vote on resolutions at meetings of the company;
(iii) to enjoy the profits of the company, if and when dividends is declared and
distributed; and
(iv) to share in the surplus, if any, on liquidation” (Hindustan Lever Employees
Union v. Hindustan Lever Ltd. AIR 1995 SC 470)

That shareholders hold no legal or equitable interest over any property owned by the
company is also the position under English company law. (Commissioners of Inland
Revenue v. Laird Group PLC, [2003] UKHL 54, para 35, 36 and Macaura v. Northern
Assurance Co., [1925] AC 619.)

The precise scope of rights attached to a share is a function of the terms of the contract setting
out those rights (Articles of association) and not a function of any inherent rights associated
with the ownership of shares. However, the Companies Act 1956 allows companies to issue
only two kinds of shares-equity shares and preference shares. (sec.86)

The share capital of a company is divided into a number of indivisible units of a fixed
amount. These indivisible units are known as shares.
10,000 shares of Rs.10 each= 1, 00,000 Rs.
According to sec 2 clause 46 “A share is a share in the share capital of the company and
includes stock except where a distinction between stock and share is expressed or implied.

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According to Supreme Court, a share is right to participate in the profits made by the
company, while it is a going concern and decreases a dividend and in the assets of the
company when it is wound up.
According to the sale of goods act the term goods includes every kind of movable property
including stock and shares.
A share is not a negotiable instrument.

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 BIBLIOGRAPHY

 Company Law ,Dr. G.K. Kapoor & Sanjay Dhamija, 19th edition 2016,
Taxmann’s

 Corporate Law, 5th edition 2016, Lexis Nexis

 http://taxguru.in/company-law/allotment-shares-companies-act-2013.html
 http://taxguru.in/company-law/allotment-shares-companies-act-2013.html
 http://www.manupatrafast.com/articles/PopOpenArticle.aspx?ID=77e42045-
aacc-4e08-9292-1038efe8c9fc&txtsearch=Subject:%20Finance/Banking
 http://www.sharetipsinfo.com/economy-stock-market.html
 http://www.yourarticlelibrary.com
 https://anno1777tutorials.wordpress.com/2010/09/20/why-are-shares-important/

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