This article has been written by Bhavana Nair, a student of Army Institute of Law, Mohali
Overview
All companies limited by shares require share capital, or the sum invested in the business to allow it to operate. It can be increased or changed in certain situations. The share capital of a company may also be divided into smaller shares of various classes. Share capital is not defined under the Companies Act of 2013. Share capital is defined as “the aggregate amount of money paid or credited as paid on the shares and/or stocks of a corporate entity” in the ICAI Guidance Note on Terms Used in Financial Statements.
Even if the requirement of share capital is not required for incorporation purposes, companies nonetheless prefer to incorporate with share capital since their business objectives demand it. According to Section 4(e) of the Companies Act of 2013, or CA, 2013, any company with a share capital must declare the amount of share capital with which it is being registered. The number of shares that each subscriber to the memorandum has agreed to subscribe for, as well as the division of the share capital into shares of a predetermined amount, should also be specified. A subscriber should never consent to owning fewer than one share.
It is also important to note that the minimum capital requirement for creating a company as a public or private company is set forth by company law. A public company must have at least five lakh rupees in paid-up share capital, or any greater paid-up share capital that may be required [s. 2(71), CA, 2013]. In a similar vein, a private company is defined as a business with a minimum paid-up share capital of one lakh rupees or a greater paid-up share capital as may be required [s. 2(68), CA, 2013]
Kinds of Share Capital
Section 43 of the Companies Act of 2013 states that there can only be two types of new share capital issues:
- Equity share capital: It is described as “all share capital that is not preference share capital.” It could include:
- Voting rights; or
- With varying dividend and voting rights, as well as other rights, in accordance with the rules and conditions that may be specified.
- Preferential share capital: It is that portion of the company’s share capital that satisfies both of the following criteria:
- That it carries or will carry a preferential right to receive a set payment or payment calculated at a fixed rate with respect to dividends; and
- That it has or will have a preferred right to be reimbursed the amount of capital paid up or deemed to have been paid up in the event of a winding up or repayment of capital.
Additionally, preference shares may have full or limited participation rights in excess capital or profit.
Preference shares may be issued and redeemed under S. 55 of the CA, 2013. It forbids any company limited by shares from issuing irredeemable preference shares. If allowed by its articles, a company may issue preference shares that are redeemable in no more than twenty years. A company may only issue these shares for infrastructure projects for a duration more than twenty years but not longer than thirty years. This is subject to the preference shareholders’ option to redeem a minimum of 10% of such shares each year beginning in the twenty-first year or earlier. A proportionate basis will be used for this redemption. Only fully paid shares may be redeemed, and only from company profits available for dividends or from the proceeds of a new issue made for this purpose. Additionally, a sum equal to the nominal value of the shares to be redeemed should be transferred to a reserve known as the Capital Redemption Reserve Account from the profits out of which redemption will take place.
Authorised Capital, Issued Capital and Subscribed Capital
According to Schedule III of the Companies Act, 2013, a company is required to show for each class of share capital:
- The number and amount of shares authorized
- The number of shares issued, subscribed and fully paid up and subscribed but not fully paid up.
- Authorised Share Capital: According to Section 2(8) of the Companies Act, 2013, “authorised capital” or “nominal capital” refers to the amount of capital that the company’s memorandum authorises to constitute its maximum share capital. “Authorized share capital” is defined as “the number and par value of each class of shares that an enterprise may issue in conformity with its instrument of incorporation” in the Guidance Note on Terms Used in Financial Statements. On the basis of authorised capital, stamp duty is paid.
Example: XYZ Ltd is incorporated with an authorized share capital of Rs. 50 lakh divided into 4 lakh equity shares of Rs. 10 each and 1 lakh preference shares of Rs. 10 each.
- Issued Share Capital: As a company may not issue the entire authorised share capital, the issued share capital is that fraction of the authorised share capital that is made available for subscription by the company. It could be greater than the authorised capital or less. Shares subscribed by signatories to the company’s memorandum of association, shares issued as bonus shares, shares issued for consideration other than cash, and shares issued to the public and others for cash are all included. Issued share capital is defined as “such capital as the company issues from time to time for subscription” in Section 2(50) of the Companies Act, 2013.
- Subscribed Share Capital: Subscribed capital is defined as “such part of the capital which is for the time being subscribed by the members of a company” in Section 2(86) of the Companies Act, 2013. The issued share capital that has actually been subscribed for and distributed is that portion. All bonus shares granted to shareholders are included in this. The subscribed and fully paid up capital will be Rs. 28,00,000 if allotted completely paid shares, for instance, if a public offering of 3,00,000 equity shares at a price of Rs. 10 per share results in a public demand for 2,80,000 shares.
Shares issued to the following parties are also included: (i) Memorandum Subscribers, Friends and Relatives of Promoters; (ii) Vendors for payment other than cash; and (iii) Bonus Shares Allotted by the Company.
Issued capital equals subscribed capital if the number of shares issued for subscription and the number of shares issued for subscription are equal.
The number of shares that have been issued, subscribed and fully paid up, and subscribed but not fully paid up must be stated in accordance with Schedule III of the 2013 Companies Act. Even though the disclosure just includes the number of shares, it should also include the amount of issued share capital, subscribed and fully paid up share capital, and subscribed but not fully paid share capital in order for the disclosure to be meaningful in comprehending the company’s share capital.
Called Up Share Capital
Depending on the needs of the company, shareholders may be obliged to pay a portion of the face value (i.e., nominal) of the shares. The portion of the subscribed capital that the company’s directors have called up is known as called-up share capital.
Example: If the directors have called up the share capital on 2,000 000 shares at a price of 20 rupees each at a rate of Rs. 10,00,000, that amounts to Rs. 20,000,000.
Uncalled Share Capital
It is that part of the subscribed share capital which has not been called up by the directors of the company.
Paid Up Share Capital
It is the portion of the called-up share capital for which the company has been compensated in cash or another form.
Example: If shareholders holding 5000 shares have not paid the first call of Rs. 3 per share and the company’s directors have called 2,80,000 shares of Rs. 10 each at Rs. 8 per share, the paid-up share capital will be Rs. 22,40,000 less calls-in-arrear Rs. 15,000. The company’s bonus shares are included in the paid-up share capital.
Calls that were not paid for must be disclosed individually under Schedule III. However, the balance statement should accurately disclose the debt due from the subscriber as an asset and the unpaid amount toward shares subscribed by the memorandum of association subscribers as “subscribed and paid-up capital”.
Reserve Capital
Only in the event and for the purposes of the company’s winding up will that portion of the uncalled share capital be allowed to be called up. It should be noted that the Companies Act of 2013 makes no mention of reserve capital. Previously, Section 99 of the Companies Act of 1956 required companies to adopt a special resolution to determine reserve capital.
Case laws
- Economy Hotels India Service (P) Ltd. v. Registrar of Companies
The appellant/company had requested relief to confirm the decrease of the petitioner company’s issued, subscribed, and paid-up equity share capital as decided by the Members in the Annual General Meeting by approving the special resolution.
Additionally, the appellant’s pre-trial argument was that the NCLT had overlooked the insertion of a “inadvertent typographical error” in the portion of the meeting minutes that described the special resolution as a unanimous ordinary resolution. Additionally, the petition seeking approval of the “Reduction of Share Capital” had been dismissed since the appellant had satisfied all legal criteria of its own “Articles of Association.”
According to the ruling, “Reduction of Capital” is a “Domestic Affair” of a certain corporation in which, ordinarily, a Tribunal will not intervene since a “majority decision” is what is binding. For subjects for which the Act calls for a “special resolution,” one must be passed; aside from these matters, all other matters call for a “Ordinary Resolution.”
- Tamil Nadu Newsprint and Papers Ltd. v. Registrar of Companies
The company issued 9,81,80,000 equity shares for Rs 10 each as part of its 98,18,00,000 share capital. Through a general meeting, the company adopted a resolution proposing to lower the capital to Rs. 50 crore, which would consist of 5 crore equity shares valued at Rs. 10 each, and return the remaining Rs. 48.18 crore, divided into 4,81,80,000 equity shares valued at Rs. 10, to the shareholders in a proportionate amount. This payment was to be made in two different ways: partially in cash and partially by issuing non-convertible debentures. The aforementioned proposition was largely accepted by the creditors. The Madras High Court allowed both the reduction and the company’s method of operation.
- Re OCL India Ltd
Based on a special resolution that had been adopted, the firm desired to reduce the capital. The Orissa High Court ruled that before approving the reduction, the court must ensure that the resolution is being made in accordance with the law and that the creditors’ interests are not being jeopardised. The court must determine whether or not the plan is fair as well. The interests of the creditors should be protected first by the court, followed by the interests of the shareholders, and the public interest should also be taken into account.
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