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INDORE INSTITUTE OF LAW
(Affiliated to D.A.V.V. & Bar Council of India)
Year _____ Semester ______
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A research work of such great scope and precision could never have been possible without great co-
operationfromall sides.Contributionsof variouspeople have resultedinthiseffort.Firstly, I would like
to thank God for the knowledge he has bestowed upon us.
I would also like to take this opportunity to thank Asst. Prof.______________________________
withoutwhose valuable supportandguidance, this project would have been impossible. Also, I would
like toextendsincere gratitude tomyparents,whoguided me ateverypointduring the research of this
project. I would also like to thank the library staff for having put up with my persistent queries and
havinghelped me outwiththe voluminous materialsneededforthiswork. Iwouldalso like to thank my
seniors for having guided me and culminate this acknowledgement by thanking my friends for having
kept the flame of competition burning, which spurred me on through these days.
Andfinally myparents,whohave beenasupportto usthroughout mylife andhave helped me,guided
me to performmybestin all interestsof ourlife, mygrandparentswhohave alwaysinculcatedthe best
of theirqualitiesin me.
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THIS IS TO CERTIFY THAT SHIVAM SRIVASTAVA
HAS SUCESSFULLY COMPLETED THE PROJECT
“Meaning of share and share capital, kinds of share capital & rules
related to the alteration of share capital”
IN PARTIAL FULFILLMENT OF REQUIREMENTS
FOR THE KNOWLEDGE OF
______________________PRESCRIBED BY INDORE
INSTITUTE OF LAW.
THIS PROJECT IS THE RECORD OF AUTHENTIC
WORK CARRIED OUT DURING THE ACADEMIC
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I , Avinash Rai student of B.A.LLB.(H) 7TH
at INDORE INSTITUTE OF LAW declare that the
project work entitled “ was carried by me on my own
This project was undertaken as a part of academic
curriculum according to the university rules and
regulations and it has no commercial interest and motive,
it is my original work. It is not submitted to any other
organization for any other purpose.
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There are various terms used in connection with the share capital of the company.
They are as follows: Authorized / Registered / Nominal Capital This is the
Maximum Capital which the company can raise in its life time. This is mentioned
in the Memorandum of the Association of the Company. This is also called as
Registered Capital or Nominal Capital. Issued Capital This is the part of the
Authorized Capital which is issued to the public for Subscription. The act of
creating new issued shares is called issuance, allocation or allotment. After
allotment, a subscriber becomes a shareholder. The number of issued shares is a
subset of the total authorized shares and Shares authorized = Shares issued +
Shares unissued Subscribed CapitalTheissued Capitalmaynot be fully subscribed
by the public. Subscribed Capital is that part of issued Capital which has been
taken off by the public i.e. the capital for which applications are received from the
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Corporations issue shares which are offered for sale to raise share capital. The
owner of shares in the corporation is a shareholder (or stockholder) of the
corporation. A share is an indivisible unit of capital, expressing the ownership
relationship between the company and the shareholder. The denominated value of
a share is its face value, and the total of the face value of issued shares represent
the capital of a company, which may not reflect the market value of those shares.1
The income received from the ownership of shares is a dividend. The process of
purchasing and selling shares often involves going through a stockbroker as a
Definition: The capital of a company is divided into shares. Each share forms a
unit of ownership of a company and is offered for sale so as to raise capital for the
A unit of ownership that represents an equal proportion of a company's capital. It
entitles its holder (the shareholder) to an equal claim on the company's profits and
an equal obligation for the company's debts and losses.
Two major types of shares are (1) ordinary shares (common stock), which entitle
the shareholder to share in the earnings of the company as and when they occur,
and to vote at the company's annual general meetings and other official meetings,
and (2) preference shares (preferred stock) which entitle the shareholder to a fixed
periodic income (interest) but generally do not give him or her voting rights.
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Meaning And Types Of Share Capital
Share capital denotes the amount of capital raised by the issue of shares, by a
company. It is collected through the issue of shares and remains with the company
till its liquidation
A joint stock company should have capital in order to finance its activities. It raises
its capital by issue of shares. The Memorandum of Association must state the
amount of capital with which the company is desired to be registered and the
number of shares into which it is to be divided. When total capital of a company is
divided into shares, then it is called share capital. It constitutes the basis of the
capital structure of a company. In other words, the capital collected by a joint stock
company for its business operation is known as share capital. Share capital is the
total amount of capital collected from its shareholders for achieving the common
goal of the company as stated in Memorandum of Association.
Share capital is owned capital of the company, since it is the money of the
shareholder and the shareholder are the owners of the company. The total share
capital is divided into small parts and each part is called a share. Share is the
smallest part of the total capital of a company.
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Types Of Share Capital
Sharecapital of a companycan be divided into the following different categories:
1. Authorized, registered, maximum or normal capital
The maximum amount of capital, which a company is authorized to raise from the
public by the issue of shares, is known as authorized capital. It is a capital with
which a company is registered, therefore it is also known as registered capital.
Generally, a company does not issue its authorized capital to the public for
subscription, but issues a part of it. So, issued capital is a part of authorized capital,
which is offered to the public for subscription, including shares offered to the
vendor for consideration other than cash. The part of authorized capital not offered
for subscription to the public is known as 'un-issued capital'. Such capital can be
offered to the public at a later date.
It can not be said that the entire issued capital will be taken up or subscribed by the
public. It may be subscribed in full or in part. The part of issued capital, which is
subscribed by the public, is known as subscribed ccapital
It is that part of subscribed capital, which is called by the company to pay on
shares allotted. It is not necessary for the company to call for the entire amount on
shares subscribed for by shareholders. The amount, which is not called on
subscribed shares, is called uncalled capital.
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5. Paid-up Capital
It is that part of called up capital, which actually paid by the shareholders.
Therefore it is known as real capital of the company. Whenever a particular
amount is called and a shareholder fails to pay the amount fully or partially, it is
known an unpaid calls or calls in arrears.
Paid-up Capital= Called up capital - calls in arrears
6. Reserve Capital
It is that part of uncalled capital which has been reserved by the company by
passing a special resolution to be called only in the event of its liquidation. This
capital can not be called up during the existence of the company.It would be
available only in the event of liquidation as an additional security to the creditors
of the company
What is 'Share Capital'
Share capital consists of all funds raised by a company in exchange for shares of
either common or preferred shares of stock. The amount of share capital or equity
financing a company has can change over time. A company that wishes to raise
more equity can obtain authorization to issue and sell additional shares, thereby
increasing its share capital.
The amount of share capital a company reports on its balance sheet only accounts
for the total amount initial paid by shareholders. If those shareholders later resell
their shares on the secondary market, any difference between the initial and
subsequent sales prices does not impact the company's share capital.
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The term "share capital" is often used to mean slightly different things, depending
on the context. When discussing the amount of money a company can legally raise
through the sale of stock, there are actually several categories of share capital.
Accountants have a much narrower definition.
Authorized, Issued and Paid Share Capital
Before a company can raise equity capital, it must obtain permission to execute the
sale of stock. The company must specify the total amount of equity it wants to
raise and the base value of its shares, called the par value. The total par value of all
the shares a company is permitted to sell is called its authorized share capital.
While a company may elect not to sell all its shares of stock during its initial public
offering (IPO), it cannot generate more than its authorized amount. If a company
obtains authorization to raise $5 million and its stock has a par value of $1, for
example, it may issue and sell up to 5 million shares of stock.2
The total value of the shares the company elects to sell is called its issued share
capital. Not all these shares may sell right away, and the par value of the issued
capital cannot exceed the value of the authorized capital. The total par value of the
shares that the company sells is called its paid share capital. This is what most
people refer to when speaking about share capital.
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Share Capital in Accounting
The technical accounting definition of share capital is the par value of all equity
securities – either common or preferred stock – sold to shareholders. Lay people,
however, often include the price of the stock above par value in the calculation of
share capital. The par value of stock is typically $1 or less, so the difference
between the par and sale price of stock, called the share premium, may be
considerable, but oy is not technically included in share capital or capped by
authorized capital limits.
Assume company ABC issues and sells 1,000 shares. Each share has a par value of
$1 but sells for $25. The company accountant logs $1,000 raised as paid share
capital and the remaining $24,000, attributed to share premium, as additional paid
On the other hand, preference shares earn their holders only dividends, which are
fixed, giving no voting rights. Equity shareholders are regarded as the real owners
of the company. When the shares are offered for sale directly by the company for
the first time, they are offered in the primary market, whereas the trading of shares
takes place in the secondary market.
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The value of equity capital is computed by estimating the current market value of
everything owned by the company from which the total of all liabilities is
subtracted. On the balance sheet of the company, equity capital is listed as
stockholders' equity or owners' equity. Also called equity financing or share
Invested money that, in contrast to debt capital, is not repaid to the investors in the
normal course of business. It represents the risk capital staked by the owners
through purchase of a company's common stock (ordinary shares).
Preference shares, more commonly referred to as preferred stock, are shares of a
company’s stock with dividends that are paid out to shareholders before common
stock dividends are issued. If the company enters bankruptcy, the shareholders
with preferred stock are entitled to be paid from company assets first. Most
preference shares have a fixed dividend, while common stocks generally do not.
Preferred stock shareholders also typically do not hold any voting rights, but
common shareholders usually do.
TYPES OF PREFERENCE SHARES
There are four types of preference shares:
Cumulative preferred stock includes a provision that requires the company to pay
preferred shareholders all dividends, including those that were omitted in the past,
before the common shareholders are able to receive their dividend payments.
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Non-cumulative preferred stock does not issue any omitted or unpaid dividends. If
the company chooses not to pay dividends in any given year, the shareholders of
the non-cumulative preferred stock have no right or power to claim such forgone
dividends at any time in the future.
Participating preferred stock provides its shareholders with the right to be paid
dividends in an amount equal to the generally specified rate of preferred dividends
plus an additional dividend based on a predetermined condition. This additional
dividend is typically designed to be paid out only if the amount of dividends
received by common shareholders is greater than a predetermined per-share
amount. If the company is liquidated, participating preferred shareholders may also
have the right to be paid back the purchasing price of the stock as well as a pro-rata
share of remaining proceeds received by common shareholders.
Convertible preferred stock includes an option that allows shareholders to convert
their preferred shares into a set number of common shares, generally any time after
a pre-established date. Under normal circumstances, convertible preferred shares
are exchanged in this way at the shareholder's request. However, a company may
have a provision on such shares that allows the shareholders or the issuer to force
the issue. How valuable convertible common stocks are is based, ultimately, on
how well the common stock performs.
EXPLAINING HOW TO CALCULATE SHAREHOLDERS' EQUITY
Shareholders' equity represents the amount of financing the company experiences
through common and preferred shares. Shareholders' equity could also be
calculated by subtracting the value of treasury shares from a company's share
capital and retained earnings.
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For example, as of March 28, 2015, Apple Incorporated had total assets of
$261.194 billion, total liabilities of $132.188 billion, common stock of $25.376
billion, retained earnings of $100.92 billion and other stockholder equity of $2.71
To calculate total shareholders' or stockholders' equity of Apple Incorporated,
simply subtract total liabilities from total assets. The resulting shareholders' equity
is $129.006 billion, or $261.194 billion less $132.188 billion.
Similarly, the shareholders' equity could also be calculated by adding the value of
common stock, retained earnings and other stockholder equity of Apple
Incorporated. Since, Apple Incorporated does not have any value for its treasury
stock, it is not included in the calculation.
The shareholders' equity is equivalent to the sum of $25.376 billion, $100.92
billion and $2.71 billion, or $129.006 billion. This value indicates the $129.006
billion would be left after Apple Incorporated paid off all its liabilities.
The capital of a company is divided into number of equal parts known as shares.
As the name suggests, there have been certain preference as compared to other
type of shares. These shares are given two preferences. There is a preference for
payment of dividend. The second preference for shares is repayment of capital at
the remaining of the profits.
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Feature of preferences shares
1. Preference share have been priority over payment of dividend and repayment of
2. Preferences shares do not hold voting rights.
a. Cumulative preference shares:-these shares have been a right to claim
dividend for those years also for which there were no profits.
b. Non cumulating preference shares:-the holders of these share have no claim
for the arrears of dividend. They are paid a dividend if there are sufficient profits.
c. Redeemable preference share:-neither the company can return the share
capital nor the shareholder can demand its repayment.
d. Irredeemable preference shares:- the shares which cannot be redeemed unless
the company is liquidated are known as irredeemable preference shares.
RULES TO BE FOLLOWED FOR THE ALTERATION OF SHARE
The share capital of a company is the only security on which the creditors rely.
Any reduction of share capital, therefore, diminishes the fund out of which they are
to be paid. For these specific reasons the companies limited by shares are not
allowed to reduce the capital. But sometimes there may be some genuine reasons
for the reduction of share capital. 3The process ofdecreasing a company’s
shareholder equity through share cancellations and share repurchases. The
reduction of capital is done by companies for numerous reasons including
increasing shareholder value and producing a more efficient capital structure. The
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need of reducing capital may arise in various circumstances, for example,
accumulated business losses, assets of reduced or doubtful value, etc. As a result,
the original capital may either have becomelost or a company may find that it has
more resources that it can profitably employ. In either of these cases, the need may
arise to adjust the relation between capital and assets.
The need for reducing the capital may arise on account of various reasons like to
distribute assets to shareholders, to remedy deficit, to reduce the basis for taxes,
make up for trading losses, heavy capital expenses, etc. Also, sometimes
companies may have more capital resources and reserves than they can profitably
employ, giving rise to the need to readjust the relation between capital and assets
by reduction of capital. When a company has been making losses, the financial
position does not present a true and fair view of the state of the affairs of the
company. The assets are overvalued, and assets side of the balance sheet consists
of fictitious assets with debit balance in profit and loss account. Such situation
does not depict what a real net worth ought to be. In short, the company is over
capitalized. Such a situation brings the need for reconstruction. Here, scheme of
reduction will be to write-off that portion of capital which is already lost and to
make balance sheet healthy. Reconstruction is a process by which affairs of a
company are reorganized by revaluation of the assets, reassessment of liabilities
and by writing off the losses already suffered by reducing the paid up of shares and
or varying rights attached to the Reduction of share capital different classes of
shares. The object of the reconstruction is usually to recognize capital or to
compound with creditors or to effect economies. Such a process is called as
Internal Reconstruction which is carried out without liquidating the Company. The
aforesaid comprise is an agreement between a company and its members and
outside liabilities when the company faces financial problems. Such arrangement
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involves sacrifice from shareholders or creditors or by all. Accounting effect of the
scheme along with other is detailed belowHowever, there may be external
reconstruction which is altogether different and involves liquidation of the
Company. The most common reasons why a company may want to reduce its
1. To increase or to create distributable reserves to enable future dividends to
be paid to shareholders
2. To return surplus capital to shareholders
3. To facilitate a share buyback or redemption of shares, or
4. As part of a scheme of arrangement
Before going to the comparative analysis it is very much necessary to know the
bare provision which prescribes the Reduction of Share Capital. Reduction of
Share Capital was given under Section 100 of Companies Act, 1956 earlier. But
after the amendment it is now given under Section 66 of Companies Act, 2013 and
was notifies on 1-04-2014.
The 2013 Act gives cognisance to one of the amendments made in the listing
agreement by SEBI. A new clause 24(i) was inserted to the listing agreement
which provided that a scheme of amalgamation or merger or reconstruction, should
comply with the requirements of section 211(3C) of the 1956 Act. A similar
requirement has been introduced in section 66 of 2013 Act, which states that no
application for reduction of share capital shall be sanctioned by the Tribunal unless
the accounting treatment, proposed by the company for such a reduction is in
conformity with the accounting standards specified in section 133 or any other
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provision of the 2013 Act and a certificate to that effect by the company™s auditor
has been filed with the Tribunal. Further, the 2013 Act clarifies that no such
reduction shall be made if the company is in arrears in repayment of any deposits
accepted by it, either before or after the commencement of the 2013 Act, or the
interest payable thereon.
There are few new provisions in the new Act of 2013 which are given below:-
Penalty has been increased in the new Act.
No reduction of capital is allowed in the company in the arrear of payment
Provisions for notice by the Tribunal to Central Government, Registrar,
SEBI and Creditors are now included in the new Act.
Tribunals order is to be filed within 30 days with the Registrar and
mandatory published, as against the discretionary power of the tribunal in
Companies Act, 1956 to order publication.
New penalty clause has been inserted in the 2013 Act. The amount of penalty has
also been increased. The tribunal is now giving penalty more and more for the
incompliance with the clause 3 of the Section 66. The amount of penalty may vary
from Re. 5lakhs to Re. 25lakhs. Now also any officer will be liable under Section
447( Fraud) if he knowingly conceals the name of the any creditor or misrepresents
the nature or amount of the debt or claim.
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Notice of the Tribunal:-
The tribunal after the commencement of the new act is under the duty to notify the
central government, Registrar, SEBI and the Creditors about the reduction in Share
Capital. This new provision adds on to the just provision for the creditors.
Time Limit for the Filling:-
Now according to the new Act the tribunal’s order must be filled with the
Registrar. Then Secondly the order must be mandatorily Published. These two new
small provisions are the breaks on the discretionary power of the tribunal given
under Companies Act, 1956.
Procedure for Reduction of Share Capital:-
After passing the special resolution for the reduction of capital, the company has to
apply to the tribunal by way of petition to confirm the special resolution under
section 66 of the Companies Act. The creditors are entitled to object where the
proposed reduction of share capital involves either:
1. the diminution of liability in respect of unpaid capital
2. the payment to any share holder of any paid-up share cap[ital, or in any other
case, if the tribunal no direct4
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To enable the creditors the tribunal settles a list of such people. If any creditor
objects, either his consent to the proposed reduction should be obtained or he
should be paid off or his payment secured. However the tribunal may dispense
with the consent of a creditor on the company securing payment of the debt or
claim by appropriating the full amount or that fixed by the tribunal.
1. 1. Special Resolution
This is the first and main requirement for the reduction of share capital. Unless a
special resolution, as authorised by the articles, is passed for reduction of the share
capital, a company cannot effect share reduction.
1. 2. Court Sanction
Next step for the Reduction of Share Capital is to secure the sanction of the
Tribunal for reduction. Before confirming the reduction the Tribunal shall be
satisfied that the
consent of the creditors to the reduction has been obtained or
the creditors have been discharged or
their debts or claims have been discharged or settled or secured.
(The creditor for this purpose means a person who has a debt or any claim
againstthe companyof such a nature as would have been provable in winding up.)
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As per section 102, the Court has first to be satisfied that the creditors who
had objected to the reduction that either their consent to the reduction has
been obtained or their debts or claims have been discharged or settled or
If the company does not admit or provide the full amount of debt or the
amount is contingent or not ascertainable then the Court has the right to fix
Under the special circumstances and if the Court thinks it proper then it has
the power to dispense with the provisions of securing the debts of the
creditors as mentioned above.
In other cases the creditors can object only with the consent of the Tribunal.
1. 3. Court confirming reduction and power on making such order
The Court may direct the company that the words “and reduced” be added to the
Company name for a specified period, and that the Company must publish the
reasons for reduction of share capital and also the causes which led to it, with a
view to giving proper information to the public.
1. Registration & Minute of Reduction
As per section 103(4) minutes with a copy of the order has to be registered
with the Registrar of the Companies and according to that Registrar of
Companies will issue Certificate under his hand or authenticated by his seal.
Once the minutes get registered it shall be deemed to be substituted for the
corresponding part of the memorandum of the company, and shall be valid
and alterable as if had been originally contained therein. The substitution of
any such minute as aforesaid for part of the memorandum of the company
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shall be deemed to be an alteration of the memorandum within the meaning
and for the purpose of section 40.
1. 5. Liability of Members and Penalty
On the reduction of share capital, the extent of liability of any past or present
member on any call or contribution shall not exceed the difference between
the amount paid on the share, or the reduced amount, if any, which is to be
deemed to have been paid thereon, by the member, and the amount of the
shares fixed by the scheme of reduction.
If, however any creditor entitled to object to the reduction of share capital is
not entered in the list of creditors by reason of his ignorance of the
proceedings for reduction and after the reduction, the company is unable to
pay his debt or claim then every person who was member at the time of the
registration of the order and minutes of the reduction will be liable to
contribute for the payment of the debt of the creditor.
If any officer of the company, who conceals the name of the creditor or
misrepresents the nature of the debt or claim of the creditor who is entitled
to object to the reduction of the share capital as per the provisions of section
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From the above analysis and the case studies given it is clear that Reduction of
Share Capital is very important aspect of company. It is one of the mechanism by
which the company reduces the share capital and thereby increases the value of
shares or deducts the unnecessary shares. But it is very important to follow the
correct procedure and the court [Tribunal] is very much strict about the procedure.
The main object of the courts are to protect the interest of the creditors and the
shareholders. The new provision in 2013 Act is very precise and very much to the
point approach adapted by the legislature. As compared to 1956 Act provisions
these provisions are more simple and given under one heading.