Ch5 Share Capital - Sheet1 Flashcards
Nature of shares [Section 2(63) & 60 to 62]
“share” means a share in the share capital of a company.
Shares and share certificates have several characteristics:
* A share is a form of movable property, carrying rights and obligations, and is transferable from one person to another in the manner provided by articles.
A share must be paid for. It must be paid for in full when it is allotted to the shareholder.
Every share in a company having a share capital shall be distinguished by its distinctive number.
A certificate issued in physical form under signature of authorised officer of the company as may be specified or issued in book-entry form (i.e. electronic) shall be the main evidence of the title of the person to such shares.
The manner of issue of a certificate of shares, form of such certificate and other matters may be specified in articles.
Issuance of shares is the first step of offering shares by the company, then people or promoters pay for the shares, this is termed as subscription of shares and finally shares are allotted to respective names of applicants, this is termed as paying up of the capital.
Authorised and paid up share capital
Definition: Authorised share capital [Section 2(5)]
“authorised capital” or “nominal capital” means such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.
Issued and paid up share capital
The nominal value of shares that have been issued to shareholders. This amount may be equal to or less than authorised share capital but cannot exceed it. This is also called allotted shares.
Publication of authorised and paid up capital [Section 25]
Where any notice, advertisement or other official publication of a company contains a statement of amount of authorised capital of the company, such notice, advertisement or other official publication shall also contain a statement in an equally prominent position and in equally conspicuous characters of amount of the paid up capital.
Any company which makes default in complying with the requirements of above and every officer of the company who is party to the default shall be liable to a penalty not exceeding of level 1 on the standard scale.
Fully paid shares [Section 58]
A company having share capital shall issue only fully paid shares. Many years ago, it was allowed to issue partly paid shares but now companies can only issue fully paid shares.
Example 01:
ABC Limited, a public company has authorised share capital of 800,000 ordinary shares of Rs.10 each (Rs. 8,000,000 in total). The nominal value of the shares is Rs.10 per share. The issued share capital is 400,000 ordinary shares. All of these, 400,000 shares are fully paid.
Authorised share capital is Rs. 8,000,000 (800,000 shares of Rs. 10). Issued share capital is 4,000,000 (400,000 shares of Rs. 10). The maximum liability of the shareholders for the unpaid debts of the company, in the event of the company’s liquidation, is zero as all of the nominal value is fully paid.
Nominal Value vs Market Value
Nominal value
This is face value of shares, also called par value and stated value.
Market value
This is the value at which share are traded at stock exchange or otherwise. This is usually higher than nominal value.
Classes and kind of share capital [Section 58]
The share capital of a company may be divided into several different classes, or there may be just one class of shares. Within each class of shares, all the shares must be of the same fixed nominal amount.
Requirement
A company having share capital shall issue only fully paid shares which may be of different kinds and classes as provided by its memorandum and articles.
Explanation
A company shall have more than one kind of share capital only if it has authorised capital (in memorandum) of all those kinds.
Example 02:
The ordinary shares in a company may be divided into 500,000 shares, all of Rs.10 each. Within the same class, there cannot be shares for differing nominal amounts and all the shares carry equal rights and privileges.
Example 03:
A company limited by shares may have different kinds (ordinary and preference etc.) of share capital and various classes (class A, class B etc.) under each kind.
Ordinary shares vs. preference shares
Voting Rights
Dividend Rights
Winding Up
Basis for Different Classes
Variation of shareholders’ rights [Section 38]
Special resolution
The variation in shareholders’ rights shall only be made by alteration of articles by passing a special resolution.
Restriction on alteration
If alteration affects the substantive rights or liabilities of members or of a class of members, it shall be carried out only if a majority of at least 3/4th of the members or of the class of members affected by such alteration vote for such alteration.
Right to challenge the variation in the court [Section 59]
Criteria for application to Court
Any member or members of affected class representing at least 10% shareholding of that class who are aggrieved by the variation of their rights may, within 30 days of the date of the resolution varying their rights, apply to the Court for an order cancelling the resolution.
The application may be made on behalf of the shareholders entitled to make it by such one or more of their number as they may authorise in writing in this behalf.
Basis of Court decision
The court has got the powers to declare the resolution null and void if it feels that either:
the company withheld certain facts while getting the resolution passed, had the members been in knowledge of those facts, they would not have passed the resolution varying the rights of a particular class; or
the variation is otherwise prejudicial to the interest of members.
Filing with registrar
The company is required to file a copy of the order of the court to the registrar within 15 days of receipt of the order.
Practice Question 01:
Saga Limited (SL), a listed company, has two classes of ordinary shares i.e. Class A and Class B. In order to attract foreign investors, the directors intend to issue a new class of ordinary shares i.e. Class C, with no voting rights. Currently SL’s memorandum and articles of association do not contain such class of shares.
Under the provisions of the Companies Act, 2017 briefly describe the steps which the directors should take prior to issuance of Class C shares. (Procedure for issuance of shares is not required)
Solution:
SL can issue new class C shares only if it is permitted by the memorandum and articles of association. Since SL’s articles and memorandum lack any such classification, the directors are first required to alter the provisions of SL’s articles of association and memorandum of association by getting a special resolution passed by general meeting.
It should however be noted that where such alteration affects the substantive rights or liabilities of members or of a class of members, it shall be carried out only if a majority of at least three-fourths (3/4) of the members or of the class of members affected by such alteration, as the case may be, exercise the option through vote either personally or through proxy.
An altered copy of the articles of association shall be filed with the registrar, within 30 days from the date of passing of the resolution. The registrar shall register the same and then the alteration shall be effective.
Practice Question 02:
The directors of Pioneer Shipping Limited have decided to issue Class B ordinary shares which would have different rights and would be issued to a group of investors. The existing paid up capital will be classified as Class A shares.
In the light of Companies Act, 2017 explain the following:
a) Validity of directors’ resolution regarding the issuance of Class B shares.
b) The nature of variation in the rights and privileges that may be attached to different classes of shares.
Ahmed and Faraz holding 9% and 10% shareholdings respectively, do not agree with the issuance of class B shares as in their opinion this would adversely affect their interest, though a majority of the members are in favour of the resolution.
c) In the light of the provisions of the Companies Act, 2017 advise the course of action which Ahmed and Faraz should take in respect of the above.
Solution:
Part (a)
The directors may issue more than one kind of share capital which may have different classes of shares under each kind. However, the decision of the directors would only be valid if such issuance is specifically provided in PSL’s memorandum and articles of association.
Part (b)
The variation in the rights and privileges attached to different classes of shares may be of the following nature:
different voting rights; voting rights disproportionate to the paid up value of share held; voting rights for specific purposes only; or no voting rights at all;
different rights for entitlement of dividend, right shares or bonus shares or entitlement to receive the notices and to attend the general meetings; and
rights and privileges for indefinite period, for a limited specified period.
Part (c)
Since Ahmed and Faraz hold more than 10% of the Class A shares, they can apply for cancellation of resolution to the Court within 30 days of the date of resolution. However, in order to get a favourable decision, they shall have to satisfy the Court that:
some facts which would have had a bearing on the decision of the shareholders were withheld by PSL in getting the aforesaid resolution passed; or
having regard to all the circumstances of the case, the variation would unfairly prejudice the Class A shareholders.
Practice Question 03:
Paradise Limited, upon passing a special resolution on August 20, 20X3 made amendments in its Articles of Association affecting substantial rights associated with class “B” shares of the company. Few aggrieved shareholders having objection on the special resolution intend to file an application in the Court, for the cancellation of the above resolution.
Discuss the relevant provisions of the Companies Act, 2017 specifying the following:
a) What is meant by variation of shareholders’ rights?
b) The conditions which the aggrieved shareholders will have to comply with, to be eligible for filing an application in the court for the cancellation of the above resolution.
c) The matters which the Court would consider while making a decision on the above application.
Solution:
Part (a)
Variation of shareholders’ rights means changing of the rights i.e. reducing, enhancing or cancelling the rights of the shareholders.
Part (b)
The following conditions would have to be complied with by the aggrieved shareholders:
Their holding should be at least ten percent of the total class ‘B’ shares.
Application must be filed within 30 days of the date of passing of special resolution.
Part (c)
The Court shall pass an order for cancellation of the resolution only if it is satisfied that some facts having impact on the decision of the shareholders were withheld by the company in getting the special resolution passed or, the variation in rights would unfairly prejudice the shareholders of the class represented by the applicant.
Practice Question 04:
In the 14th annual general meeting of Sapphire Limited, a special resolution has been passed to increase the voting rights of shareholders of class A by 50%.
Faiza Ibrahim, a shareholder from class B, wants to get the said special resolution cancelled.
Under the Companies Act, 2017 discuss how Faiza Ibrahim can challenge the special resolution and ask for its cancellation. Also determine the grounds on which the decision may be made in her favour.
Solution:
Faiza Ibrahim can challenge the special resolution by applying to the Court for an order cancelling the resolution; if she holds 10% or more shares of class B either in her own name or collectively with others who should authorize her in writing. The said application shall be filed within 30 days of the date of the said resolution.
Following are the grounds on which the decision may be made by the Court in her favour:
If the applicant(s) had casted vote in favour of the resolution and some facts which would have had a bearing on the decision of Faiza Ibrahim, were withheld by Sapphire Limited in getting the aforesaid resolution passed.
If the applicant(s) had not casted vote in favour of the resolution, then it will have to be proved by Faiza Ibrahim, that the variation would unfairly prejudice their rights.
ALTERATION OF SHARE CAPITAL CLAUSE IN MEMORANDUM
Possible alterations [Section 85]
A company having share capital may, if so authorised by its articles, alter the authorised capital clause in memorandum through a special resolution, so as to:
a) increase its authorised capital;
b) consolidate and divide its share capital into shares of larger amount than its existing shares;
c) sub-divide its shares, into shares of smaller amount than is fixed by the memorandum
d) cancel shares which have not been taken or agreed to be taken by any person, and diminish share capital by the amount of the shares so cancelled.
Filing with registrar [Section 85]
The company shall file resolution and altered copy of memorandum with the registrar within 15 days from the date of passing the resolution.
