Shares

Contents:
Definition of Shares Stock Difference between Stock & Share Types of shares Types of Preference Shares Difference between Preference & Equity Shares Application & Allotment of Shares Statutory Provision Calls on Shares Share Certificate Lien of Shares Forfeiture of Shares Buy back of Shares

Meaning & Definition

A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietory relationship between the company and the shareholder.

The Supreme Court defines a share as-

By a share in a company is meant not any sum of money but an interest measured by a sum of money and made of diverse rights conferred on its holder by the articles of the company which constitute a contract between him and the company.

Stock
When shares are fully paid up, they may be converted into stock. Stock is simply a set of shares put together in a bundle.

Stock is the capital in the form of a fund which may be divided into any desired amount.
It is a aggregate of fully paid shares. The aggregate can be split up into fractions of any amount without regard to the original nominal amount of shares

Difference between Shares & Stock

SHARES
Paid-up Issued directly Nominal value Value Transfer in fraction

STOCK

Shares may be partly or fully paid-up Stock must be fully paid Shares can be issued directly Shares has a nominal value Each share has a same value (in terms of money) Shares cannot be transferred in fraction amount Stock cannot be issued directly Stock has no nominal value Stock can be split into unequal amounts Stock can be transferred in fraction

Types of Shares
According to section 86 of the companies Act, a company can issue only two types of shares(a) Preference Shares; and (b) Equity Shares However equity shares can carry differential voting rights. Such equity shares are deferred shares

Preference Shares
A preference share must satisfy the following two conditions: (i) It shall carry a preferential right as to the payment of the dividend at a fixed rate; and (ii) In the event of winding up, there must be a preferential right to the payment of the paid up capital. A preference share may carry such rights as(i) a preferential right to any arrears of dividend (ii) a right to share in surplus profits by additional dividend (iii) a right to be paid fixed premium specified in memorandum

Equity shares
All shares which are not preference shares are equity shares. Equity shareholders have the residual right of the company.

They may get higher dividend than preference shareholders if the company is prosperous or get nothing if the business of the company flops. In the winding up, the equity shares are entitled to the entire surplus assets remaining after the payment of the liabilities and the capital of the company.

Kinds of preference shares

Cumulative and non-cumulative

Convertible and non-Convertible

participating and non-participating

Redeemable and irredeemable

Cumulative & non-cumulative

In case of cumulative preference shares, if the profits of the company in any year are not sufficient to pay the fixed dividend on the preference shares, the deficiency must be made up out of the profits of subsequent years. In the case of non-cumulative preference share, the dividend is only payable out of the net profits of each year. If there are no profits in any year, the arrears of the dividend cannot be claimed in the subsequent year.

Participating & non-participating

Participating preference shares are those shares which are entitled, in addition to preference dividend at a fixed rate, to participate in the balance of profits with the equity shareholders after they get a fixed rate of dividend on their shares. They also have the right to share in surplus assets of the company on its winding up.
Non-participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profits.

Convertible & non-Convertible

Convertible preference shares are those shares which can be converted into equity shares within a certain period.

Those shares, which do not carry the right of conversion into equity shares. Are called non-convertible preference shares

Redeemable & non-redeemable

Redeemable preference shares may be redeemed either after the fixed period or earlier at the option of the company

In case of irredeemable preference shares, the capital is to be returned on the winding up of the company.

Lien of shares
A lien is the right to retain possession of a thing until a claim is satisfied In case of a company lien on shares means that the member would not be permitted to transfer his shares unless he pays his debt to the company Example If Mr. A owes 10% shares in XYZ Ltd. Company and the company suffers a loss of Rs 10,00,000. In this case Mr. A cannot transfer his shares unless he give 10% of total loss i.e. Rs 100,000

Forfeiture of Shares
If a shareholder, having been called upon to pay any call on his shares, fails to pay, the company may forfeit the shares of a shareholder, who has made a default.

The shares may be forfeited if the following conditions are satisfied:

1. Conform to the provisions of articles of association 2. Notice prior to forfeiture 3. Resolution of the board 4. Good faith

Conform to the provisions of articles of association

A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a shareholder fails to pay the amount due on the call, the director may, if so authorized by the articles, forfeit his shares.