Introduction | Company Law - CLAT PG PDF Download

Introduction

The terms ‘capital’ and ‘share capital’ are often used interchangeably. While share capital is not a mandatory requirement for incorporation, companies typically opt for it to secure the necessary funds for their business operations.

Capital Clause in Memorandum of Association

• According to S. 13(4)(a) of the Companies Act, 1956(CA, 1956), the capital clause in the memorandum of association must specify the nominal capital of the company, along with the number and value of shares into which it is divided.
• Section 4(e) of the Companies Act, 2013 (CA, 2013) requires that, for a company with share capital, the amount of share capital at the time of registration be clearly stated. This includes the division of share capital into shares of a fixed amount and the number of shares each subscriber to the memorandum agrees to subscribe. It is important to note that no subscriber can agree to take less than one share.

Minimum Capital Requirements

• The company law stipulates minimum capital requirements for incorporating both public and private companies.
• Public Company: A public company must have a minimum paid-up share capital of five lakh rupees or a higher amount as prescribed [s. 2(71), CA, 2013].
• Private Company: A private company is required to have a minimum paid-up share capital of one lakh rupees or a higher amount as prescribed [s. 2(68), CA, 2013].

Removal of Minimum Paid-up Capital Requirement

The amendment in the Companies Act, 2013 removed the minimum paid-up capital requirement to facilitate the ease of incorporating companies, thereby encouraging business and startup initiatives.

Fundraising Methods

• Public Company: A public company can raise funds from the public through public offerings and increase its share capital.
• Private Company: A private company can raise finance through private placement of securities. However, a public company can also raise capital through private placement of securities.

Capital Raising Decision

• A company may meet its fund requirements through raising share capital or through borrowings. The decision depends on various factors such as the company’s business model, capital requirements, interest rates, asset availability for security, profitability, and the number of shareholders.
• A proper financial analysis is conducted by the company before making such decisions. Additionally, when raising capital through share capital, the company must choose between issuing equity shares and preference shares.

Share Capital

Authorized Capital

• The amount of share capital a company is authorized to have, as stated in its memorandum, is known as authorized capital or nominal capital.
• This represents the maximum amount of share capital the company can issue.

Issued Capital

• When a company issues part of its authorized capital to the public, this is called issued capital.
• Issued capital refers to the capital the company offers for subscription at any given time.

Subscribed Capital

• The portion of issued capital that is subscribed by the public is known as subscribed capital.
• Subscribed capital represents the capital that members of the company have agreed to take up.
• The minimum subscription requirement is currently ninety percent of the issued capital.

Paid-up Capital

• The actual amount received by the company from the subscribed capital is referred to as paid-up capital.
• Paid-up capital represents the funds that the company has received from its shareholders for the shares they have subscribed to.

Uncalled Capital and Reserve Capital

• Uncalled capital can be converted into reserve capital by passing a special resolution.
• Reserve capital is a part of uncalled capital that the company decides to keep in reserve for future use.

Members and Shareholders in a Company

In the context of a company, the terms "member" and "shareholder" have specific meanings under the Companies Act, 2013.

Definition of a Member

• A "member" of a company, as per section 2(55) of the Companies Act, 2013, includes:
• Subscribers to the Memorandum: These are the individuals who initially agree to become members of the company by signing the memorandum. Once the company is registered, their names are added to the register of members.
• Agreed Members: Any person who agrees in writing to become a member of the company and whose name is entered in the register of members.
• Beneficial Owners: Individuals holding shares of the company whose names are recorded as beneficial owners in the depository's records.

Shareholder vs. Member

• A shareholder is a specific type of member who holds shares in the company. While "shareholder" and "member" are often used interchangeably, "member" is a broader term.
• Companies limited by guarantee and unlimited companies may not have shareholders in the traditional sense, as they may not have share capital. However, they still have members.

Ways to Become a Member

• A person can become a member of a company through various means, including:
• Subscription to the Memorandum: Agreeing to become a member by signing the memorandum of the company.
• Allotment of Shares: Receiving shares allotted by the company.
• Written Agreement: Agreeing in writing to become a member, with the name entered in the register of members.
• Beneficial Ownership: Being recorded as a beneficial owner in the depository records.
• Transfer or Transmission of Shares: Acquiring membership through the transfer or transmission of shares.

Types of Capital in a Company

Nominal, Authorised or Registered Capital(Section 2(8))

• This is the maximum amount of share capital that a company is authorized to have, as specified in its memorandum.

Issued Capital(Section 2(50))

• Issued capital refers to the portion of authorized or nominal capital that the company issues for public subscription and allotment at any given time.
• This is calculated at the face or nominal value of the shares.

Subscribed Capital(Section 2(86))

• Subscribed capital is the part of issued capital that members of the company have agreed to take up at face value.
• It represents the portion of issued capital that has been subscribed for by shareholders.
• Not all issued capital may be subscribed.

Paid-up Share Capital(Section 2(64))

• Paid-up share capital is the total amount of money credited as paid-up for shares issued by the company.
• It includes the amount received as paid-up for shares and any amounts credited as paid-up for shares, but does not include any other amounts received in respect of such shares.

Kinds of Share Capital

Share capital is divided into shares of a fixed amount. The Companies Act (CA) 1956 allowed for two types of share capital: equity share capital (ordinary shares) and preference share capital (preference shares). The CA 2013, under Chapter IV, also recognizes these two categories.

1. Types of Share Capital in CA 2013

According to Section 43 of the Companies Act, 2013, share capital can be classified into:

• Equity Share Capital: All share capital that is not preference share capital. Equity shareholders have voting rights and are entitled to dividends, but these are not guaranteed.
• Preference Share Capital: Shares that have preferential rights over equity shares regarding dividends and capital repayment. Preference shares may have fixed dividends and preferential rights in case of winding up.

2. Equity Share Capital

• Also known as Common Stock or common share capital, represents ownership in a company.
• Divided into units known as shares, and unit holders are called equity shareholders.
• Equity shareholders are the real owners of the company and have the right to vote on company resolutions, receive dividends (if declared), and participate in the distribution of assets upon winding up.
• They do not manage the day-to-day affairs of the company but appoint a board of directors to oversee operations.

3. Preference Share Capital

• Preference shares receive dividends before ordinary shares and may have limited or no voting rights.
• They must have a preferential right to a fixed amount or a fixed rate for dividends.
• In case of winding up, preference shareholders have a preferential right to be repaid the capital paid up on such shares.
• Preference shares may carry additional rights as specified in the terms of issue.

4. Derivative and Hybrid Shares

• Derivative: Introduced by the Companies (Amendment) Act, 2000, derivatives have the same meaning as in the Securities Contracts (Regulation) Act, 1956.
• Hybrid: Refers to any security with characteristics of more than one type of security, including derivatives.

Preference Share Capital

Preference share capital refers to the part of a company's issued share capital that comes with preferential rights regarding dividend payments and repayment in the event of winding up or capital repayment.

Key Features:

• Preferential Rights: Preference shares carry preferential rights for dividend payments and repayment in case of winding up or capital repayment.
• Dividend Payment: Dividends on preference shares can be fixed amounts or calculated at a fixed rate.
• Right of Repayment: The right of repayment is irrespective of any fixed premium or premium on a fixed scale specified in the company's memorandum or articles.
• Participating vs Non-Participating: Preference shares can be participating or non-participating. Participating preference shareholders have the right to extra dividends and may also participate in surplus capital after the entire capital has been repaid.

Legal Provisions

• Section 55 of the Companies Act, 2013 governs the issue and redemption of preference shares.
• It prohibits the issue of irredeemable preference shares by companies limited by shares.

Issuance and Redemption

• Redeemable Preference Shares: Companies may issue redeemable preference shares within a period not exceeding twenty years, subject to authorization in their articles.
• Infrastructure Projects: For infrastructure projects, companies may issue preference shares for a period exceeding twenty years but not exceeding thirty years. This is subject to the redemption of a minimum of 10% of such shares per year from the twenty-first year onwards or earlier at the option of preference shareholders.
• Redemption Conditions: Redemption of preference shares is subject to conditions such as only fully paid shares can be redeemed, and redemption can be made only from the company's profits available for dividend or out of the proceeds of a fresh issue made for this purpose.
• Capital Redemption Reserve: A sum equal to the nominal value of 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. The Capital Redemption Reserve is to be preserved with the same sanctity as share capital.
• Treatment of Redemption: Redemption of preference shares is not treated as a reduction of share capital. Premium on redemption can be paid from the company's profits or securities premium account.
• Default in Redemption: If a company is unable to redeem preference shares or pay dividends, it may, with the consent of holders of three-fourths in value of such preference shares and with the approval of the Tribunal, further issue redeemable preference shares of the same value including dividend. This will be deemed redemption of unredeemed preference shares.
• Registrar Notification: Companies must notify the Registrar about the redemption of preference shares within thirty days of redemption.

Bonus Shares

• A bonus share represents an increase in the number of shares held by existing shareholders. It is issued when a company decides to capitalize its profits by transferring an amount equal to the face value of the share from its reserves to the nominal capital. Essentially, the company converts its accumulated profits into additional shares instead of distributing them as cash dividends.
• Bonus shares are a way for a company to provide capital by utilizing its own accumulated profits, rather than through public offerings or borrowing.

Key Provisions under Section 63 of the Companies Act, 2013

• Issuance to Members: A company can issue bonus shares to its members in any manner whatsoever.
• Sources for Issuance: Bonus shares can be issued out of free reserves, securities premium account, or capital redemption reserve.
• Restrictions: Reserves created from the revaluation of assets cannot be used for issuing bonus shares. Additionally, bonus shares cannot be issued in lieu of dividends.

Sweat Equity Shares

• Sweat equity shares are a type of equity shares issued by a company at a discount or for consideration other than cash.
• These shares are specifically given to directors or employees of the company in recognition of their contributions such as:
• Providing technical know-how
• Makin g available intellectual property rights
• Adding value to the company in other significant ways.

Employee Stock Option (ESOP)

• The term "Employee Stock Option" (ESOP) is defined in the Companies Act, 2013, as the option given to directors, officers, or employees of a company (or its holding or subsidiary companies) to purchase or subscribe for shares at a future date and at a pre-determined price.
• According to Section 62(1)(b) of the Act, a company can issue further shares to its employees under an ESOP scheme, provided a special resolution is passed by the company and certain conditions are met.
• For private companies, the special resolution requirement is replaced by an ordinary resolution when it comes to issuing shares under an ESOP.