The capital of a company is divided into indivisible units of a fixed amount called shares. Section 2(84) of the Companies Act, 2013, defines a share as a share in the share capital of a company and includes stock. The Supreme Court of India, in the case of CIT v. Standard Vacuum Oil Co. [1966], interpreted a share not as a sum of money but as an interest measured by a sum of money, comprising various rights conferred upon its holder under the articles of the company. These articles create a contractual relationship between the shareholder and the company.
In another landmark decision, Bucha F. Guzdar v. Commissioner of Income-tax, the Supreme Court defined a share as a right to participate in the profits of a company while it is a going concern and in the assets of the company upon its winding up. Therefore, a share embodies not just an interest in the company but also a set of rights and liabilities that operate during both the operational life of the company and upon its dissolution. In essence, a share represents a bundle of rights and obligations.
Nature of a Share
A share is more than a sum of money. It is an interest in the company that is initially quantified by a specific monetary value for liability purposes, and subsequently for the shareholder’s proprietary interest. It is also made up of mutual agreements or covenants among shareholders, as outlined in Borland’s Trustees v. Steel Bros. & Co. Ltd. [1901].
A share is classified as a chose-in-action, which means it is a right that must be claimed through legal action rather than possession. Until the share is issued and allotted, there is no holder with enforceable rights. In Indian law, shares are classified as goods. According to Section 2(7) of the Sale of Goods Act, 1930, goods include every kind of movable property other than actionable claims and money, and this definition encompasses shares. Section 44 of the Companies Act further establishes that shares are movable property, but they are transferable only under the company’s articles.
In the case of Vishwanathan v. East India Distilleries [1957], it was clarified that although a share is movable property, it is distinct from physical goods like a bale of cloth. Shares are not tangible and are created by statutory enactments, making them incorporeal. They consist of a bundle of rights and obligations rather than a physical substance.
Shares do not qualify as negotiable instruments. A negotiable instrument can be freely transferred, and the holder in due course can claim the rights embedded in it. Shares, however, do not offer such unconditional rights upon transfer.
The proprietary relationship a share establishes between the shareholder and the company was also affirmed in CIT v. Associated Industrial Development Co. [1969]. The court explained that the share represents a proprietary stake in the company, conditional upon compliance with the articles and relevant legal provisions.
The Calcutta High Court, in Shree Gopal Paper Mills Ltd. v. CIT [1967], provided a detailed analysis of the share’s nature. It outlined three phases of a share: before it is issued (as part of share capital), after it is issued (held by a member), and when it is converted into stock. In its initial phase, the share exists only as part of the company’s share capital and does not belong to any shareholder. Once issued, the share becomes associated with a specific member and is treated as movable property. However, it is governed by both the Companies Act and the company’s internal rules, not merely by the Sale of Goods Act.
According to Section 46 of the Companies Act, a share certificate bearing the company’s seal serves only as prima facie evidence of ownership. It is not the share itself. The certificate indicates entitlement to the rights and obligations associated with the share. Shares remain intangible, characterized by contractual and statutory rights.
Share and Share Certificate
In ordinary parlance, ‘share’ and ‘share certificate’ are often used interchangeably, but they have distinct meanings in corporate law. A share is the actual interest or right in the company, while a share certificate is the document that evidences this right.
Section 44 of the Companies Act recognizes a share as movable property transferable according to the articles of the company. Section 46 defines a share certificate as a document under the company’s common seal that specifies the shares or stock held by a member. This certificate acts as prima facie evidence of ownership but does not in itself constitute the share.
A share certificate enhances the shareholder’s ability to trade shares in the market. It provides proof of ownership and eases transactions by serving as evidence of marketable title. This marketability would be hampered if the certificate were not accepted as evidence of title.
Furthermore, a share certificate creates an estoppel against the company in certain situations. Estoppel means the company cannot deny the contents of the certificate in dealings with bona fide purchasers. If the certificate states that a certain amount has been paid on the share, the company cannot deny that fact to a bona fide transferee. However, this estoppel does not apply if the person knows the certificate contains false information, as illustrated in Crickmer’s case [1875].
The distinction between a share and a share certificate was further clarified in Shree Gopal Paper Mills Ltd. v. CIT. The court reiterated that the share certificate is not the share itself. Section 46 describes it as prima facie evidence of ownership, not as the property. Section 44 defines shares as movable property, intangible, and governed by statutory and contractual terms.
Each share has a distinctive number, whereas a single certificate may refer to multiple shares. For example, a certificate may represent 100 shares, and the certificate has one number, while each share will have its unique number. This further supports the point that the certificate merely serves as proof of the existence and ownership of those individual shares.
Share and Stock
Although the terms ‘share’ and ‘stock’ are sometimes used interchangeably, they represent different concepts in company law. A share is a defined unit of a company’s capital. For example, if a company has capital of Rs. 5 lakhs divided into 50,000 units of Rs. 10, each unit is a share.
Stock, by contrast, refers to an aggregate of fully paid-up shares that are merged into a single fund. It represents a bundle of shares expressed in monetary terms rather than individual units. Unlike shares, stock does not have a nominal value or distinctive numbers.
A company cannot issue stock directly. It must first issue fully paid-up shares and then convert them into stock if authorized by its articles and approved by a resolution in a general meeting under Section 61. After conversion, the company’s register of members must show the amount of stock held by each member, rather than the number of shares.
Stock allows for greater flexibility because it can be subdivided into fractions of any value and transferred accordingly. Shares, on the other hand, can only be transferred as whole units. Furthermore, while all shares of a particular class are of the same denomination, stock can consist of varied denominations once converted.
Legal Framework Governing Share Capital
The legal framework surrounding share capital is primarily established through a country’s corporate law, such as the Companies Act in India or the Companies Act 2006 in the UK. These legal statutes provide detailed rules and requirements concerning the issuance, structure, and maintenance of share capital by companies. The framework ensures transparency, fairness, and accountability in how companies raise and manage funds through shares. The rules generally apply to all types of companies, although public companies may face additional requirements due to their ability to raise capital from the public.
Authorised, Issued, and Paid-up Capital: Legal Definitions
Within the legal context, share capital is commonly divided into three distinct terms: authorised capital, issued capital, and paid-up capital. Authorised capital, sometimes called nominal or registered capital, is the maximum amount of share capital a company is legally permitted to issue to shareholders, as stated in its constitutional documents. Issued capital refers to the portion of authorized capital that has been issued to shareholders. Paid-up capital is the amount shareholders have paid to the company for the shares they hold. Legal provisions ensure companies disclose these figures in their financial statements and periodic filings. These components of share capital define the limits of shareholder ownership and the capital structure of a company.
Alteration of Share Capital: Legal Provisions
Companies may wish to alter their share capital structure for several reasons, including business expansion, restructuring, mergers, or regulatory compliance. Corporate law allows for the alteration of share capital through specific legal procedures. These alterations can include increasing the authorised share capital, consolidating or subdividing shares, converting shares, and reducing share capital. For example, an increase in authorized capital typically requires shareholder approval via a resolution passed at a general meeting and subsequent filing with the Registrar of Companies. Reduction of share capital, on the other hand, is often subject to more stringent conditions, including creditor consent and court approval. These provisions are designed to protect the interests of shareholders and creditors and to ensure the legal and financial integrity of the company.
Types of Shares and Legal Characteristics
From a legal perspective, shares can be categorized into several types, each with distinct characteristics and rights as set out in the company’s Articles of Association and relevant legislation. The most common types include equity shares and preference shares. Equity shares, also known as ordinary shares, typically carry voting rights and entitlement to dividends declared by the company. Preference shares generally offer a fixed dividend and preferential treatment in the event of liquidation, but often lack voting rights. In addition to these, companies may issue redeemable shares, cumulative or non-cumulative preference shares, convertible shares, and participating preference shares. The legal distinctions between these types of shares are crucial, as they determine the extent of ownership, entitlement to profits, and influence over corporate decisions.
Shareholders’ Rights and Obligations
Shareholders are the legal owners of the company to the extent of their shareholding. Their rights and obligations are governed by the company’s constitutional documents, the Companies Act, and shareholder agreements. Key rights include the right to vote at general meetings, receive dividends, inspect company records, and participate in surplus assets upon winding up. Some shareholders may also have pre-emptive rights to be offered new shares before they are issued to others, depending on the jurisdiction and the company’s policies. In return, shareholders must fulfill certain obligations, such as paying for the shares subscribed and abiding by corporate governance norms. Legal provisions ensure that these rights and obligations are clearly defined and enforceable, thus maintaining order and fairness within the corporate framework.
Share Certificates and Legal Evidence of Ownership
A share certificate is a legal document issued by a company to certify that a person is the registered owner of a specified number of shares. It serves as prima facie evidence of ownership, though in many jurisdictions, shares are now increasingly held in dematerialized or electronic form. The Companies Act or similar legislation usually prescribes the format, contents, and issuance timeline for share certificates. The certificate must typically contain the shareholder’s name, number of shares, distinctive numbers, and the company’s seal or authorised signatory. Any delay or irregularity in issuing share certificates can result in legal penalties and loss of trust among investors. With advancements in technology, many countries now operate centralized depository systems to hold and transfer shares electronically, further strengthening the legal framework around share ownership.
Share Allotment and Legal Requirements
Allotment of shares refers to the legal process through which a company allocates new shares to applicants. This process must comply with statutory requirements to ensure transparency and equity. The board of directors must approve allotments through a resolution, and the company must file a return of allotment with the appropriate regulatory authority, such as the Registrar of Companies. Allotment may be made through private placement, rights issue, bonus issue, or public offering. In the case of public companies, compliance with securities regulations is also mandatory. Improper or fraudulent allotment practices can attract regulatory penalties, shareholder litigation, and reputational damage. Thus, the legal oversight of share allotment serves to protect investors and ensure market integrity.
Share Transfer and Transmission: Legal Implications
Share transfer involves a voluntary act by a shareholder to transfer ownership to another person, while transmission occurs by operation of law upon the death or insolvency of a shareholder. Both processes are governed by specific legal rules. For a valid transfer, the company typically requires a duly executed transfer deed, the original share certificate, and board approval. Some companies may impose restrictions on transferability, especially in the case of private limited companies. Transmission, on the other hand, requires legal documentation such as a death certificate or probate of a will. The company is obligated to record the new owner in its register of members and issue a new share certificate. Legal compliance in these processes is crucial to maintain accurate ownership records and prevent disputes.
Reduction of Share Capital and Legal Protections
Reduction of share capital involves decreasing the company’s share capital either by cancelling unpaid share capital, buying back shares, or writing off accumulated losses. While it can strengthen a company’s financial position, the process is legally complex and must adhere to strict regulatory safeguards. Typically, it requires a special resolution passed by shareholders and confirmation by a competent court or regulatory authority. Creditors must also be allowed to object, as a reduction in capital may affect their security. Legal provisions are designed to ensure that the reduction does not prejudice the interests of creditors or minority shareholders. Non-compliance with the reduction process can render it invalid and expose the company and its officers to legal consequences.
Buyback of Shares and Statutory Guidelines
Buyback of shares is a process where a company repurchases its shares from the existing shareholders. It is legally permissible under certain conditions and is often used to return surplus cash to shareholders or to consolidate ownership. The Companies Act or equivalent legislation typically lays down conditions for buybacks, such as permissible sources of funds, maximum limits, duration, and approval mechanisms. For instance, the buyback may need to be approved by shareholders via a special resolution, and the company may be prohibited from issuing new shares for a defined period post-buyback. Regulatory oversight ensures that buybacks are not misused to manipulate share prices or undermine shareholder value.
Bonus Shares and Legal Procedures
Bonus shares are additional shares issued to existing shareholders without any cost, capitalized from the company’s free reserves or share premium account. The issuance of bonus shares is governed by statutory provisions that require board and shareholder approval. Companies must ensure that the articles of association permit such issuance, and they must file necessary documents with the regulatory authority. Bonus issues do not alter the overall value of a shareholder’s investment but increase the number of shares held. The legal procedures for bonus issues ensure equitable treatment of shareholders and prevent dilution of value.
Rights Issue and Legal Compliance
A rights issue allows existing shareholders to purchase additional shares at a discounted price in proportion to their current holdings. This method of raising capital requires strict adherence to legal norms to protect shareholder interests. The company must provide an offer letter containing all relevant information, ensure the availability of financial disclosures, and offer a reasonable time frame for acceptance. Shareholders may choose to subscribe, decline, or renounce their rights in favor of another party. Legal provisions ensure the rights issue process is transparent and fair, avoiding undue advantage to insiders or selected shareholders.
Sweat Equity Shares: Legal Recognition
Sweat equity shares are issued to employees or directors at a discount or for consideration other than cash, in recognition of their contribution to the company in terms of know-how, intellectual property, or value additions. The legal framework typically restricts the issuance to a certain percentage of the paid-up capital and mandates shareholder approval. The process must comply with rules regarding valuation, disclosure, and lock-in periods. Sweat equity serves as a tool for employee retention and motivation, but must be used judiciously within the legal limits to avoid dilution and protect investor confidence.
Employee Stock Option Plans (ESOPs) and Legal Oversight
Employee Stock Option Plans (ESOPs) give employees the right to purchase shares of the company at a predetermined price after a vesting period. The legal structure around ESOPs mandates transparency, shareholder approval, and fair valuation. Companies must disclose ESOP-related information in their annual reports and ensure that grants do not exceed prescribed limits. Regulatory bodies may require companies to file ESOP schemes and seek necessary approvals. The legal oversight ensures that ESOPs are implemented as intended—to align employee interests with company performance—and prevents misuse by management.
Regulatory Authorities and Compliance Mechanisms
Regulatory authorities such as the Registrar of Companies, Securities and Exchange Commission (or its equivalent), and stock exchanges play a crucial role in enforcing share capital laws. These bodies ensure that companies comply with reporting obligations, disclosure norms, and corporate governance standards. Non-compliance may result in penalties, suspension of trading, or legal prosecution. Companies are required to maintain detailed records such as the register of members, minutes of meetings, and statutory filings. Regular audits, inspections, and reporting obligations serve as compliance mechanisms to uphold investor protection and market confidence.
Legal Provisions Regarding Share Capital Under the Companies Act, 2013
The Companies Act, 2013, governs the regulation and administration of share capital in India. It provides a comprehensive legal framework for different types of share capital, issuance, alteration, and related compliance procedures. Several sections of the Act specifically deal with aspects of share capital, including the issuance of shares, types of share capital, and restrictions or requirements regarding such capital.
Section 43 – Kinds of Share Capital
Section 43 of the Companies Act, 2013, deals with the kinds of share capital a company limited by shares may have. According to this section, share capital can be broadly categorized into two types:
- Equity share capital:
a. With voting rights.
b. With differential rights as to dividend, voting, or otherwise. - Preference share capital.
This classification enables companies to issue shares with tailored rights that suit various stakeholders’ needs while complying with legal mandates.
Section 44 – Shares as Movable Property
This section confirms that shares are considered movable property. They can be transferred in the manner provided by the articles of association of a company. This classification enables ease of trading and liquidity in the market.
Section 45 – Numbering of Shares
Every share in a company having a share capital must be distinguished by its appropriate number, except in the case of shares held with a depository. When shares are dematerialized, such identification numbers may not be assigned in the same traditional format, as the records are maintained electronically.
Section 46 – Certificate of Shares
According to this provision:
- A certificate, under the common seal (if any) of the company, shall be issued to every shareholder for the shares held by them.
- The certificate shall be signed by two directors or by a director and the company secretary (where appointed), and it serves as prima facie evidence of the title of the shareholder to such shares.
In the case of dematerialized shares, no physical share certificate is issued. Ownership is reflected through entries in the electronic records maintained by depositories.
Section 47 – Voting Rights
This section outlines that:
- Every shareholder of equity shares has a right to vote on every resolution placed before the company.
- On a show of hands, each member present has one vote.
In a poll, the voting rights are proportionate to the shareholder’s share in the paid-up equity share capital of the company. - Preference shareholders have the right to vote only on matters that affect their rights or if their dividend remains unpaid for two years or more.
Section 48 – Variation of Shareholder Rights
This provision enables a company to vary the rights attached to a class of shares. However, this can only be done with:
- The consent in writing of the holders of not less than three-fourths of the issued shares of that class; or
- A special resolution was passed at a separate meeting of the holders of the issued shares of that class.
Such variations must be recorded and must follow the procedure laid out in the articles of association and the Companies Act.
Section 49 – Calls on Shares of Same Class to Be Made on a Uniform Basis
When making calls for unpaid share capital, the company must apply the call uniformly on all shares of the same class. It prevents discrimination among shareholders holding similar classes of shares.
Section 50 – Company to Accept Uncalled Share Capital in Advance
A shareholder may pay in advance the whole or part of the amount remaining unpaid on their shares, even if no call has been made. However, unless expressly provided by the articles, such payments will not carry any voting rights or interest unless determined by the Board.
Section 51 – Payment of Dividend in Proportion to Amount Paid-up
Dividends must be paid in proportion to the amount paid up on each share, where shares are partly paid. A company cannot declare dividends in a discriminatory manner unless specified under differential rights.
Section 52 – Application of Premium Received on Issue of Shares
When shares are issued at a premium, the amount received more of face value must be transferred to a Securities Premium Account. The Act provides the following purposes for which the premium may be utilized:
- Issuing fully paid bonus shares to shareholders.
- Writing off preliminary expenses.
- Writing off expenses, commission, or discount on securities.
- Providing for a premium payable on redemption of preference shares or debentures.
- Purchasing its shares or other securities under Section 68.
This account cannot be used for paying dividends.
Section 53 – Prohibition on Issue of Shares at Discount
A company cannot issue shares at a discount, except in the case of sweat equity shares issued under Section 54. Any shares issued in violation of this provision are invalid, and the company is liable to refund the money received with interest.
Section 54 – Issue of Sweat Equity Shares
Sweat equity shares can be issued to employees or directors of the company at a discount or for consideration other than cash. Such issuance must be authorized by a special resolution and is subject to prescribed conditions. These shares are generally issued to recognize technical know-how, intellectual property, or added value provided by employees or directors.
Section 55 – Issue and Redemption of Preference Shares
The Act allows a company to issue preference shares with the following key conditions:
- The preference shares must be redeemable within 20 years from the date of issue.
- Redemption must be from profits of the company or proceeds of a fresh issue of shares made for redemption.
- In case of infrastructure projects, the period of redemption can be extended to 30 years, provided a certain portion is redeemed on an annual basis.
Additional compliance includes maintaining a Capital Redemption Reserve and observing the rules laid down for redemption.
Types of Alteration in Share Capital
The Companies Act, 2013, also allows companies to alter their share capital in specified ways under Section 61, provided they are authorized by their articles of association and have obtained the necessary shareholder approval. Alterations can be done in the following manners:
Increase in Authorized Share Capital
A company may increase its authorized share capital by passing an ordinary resolution at a general meeting. This alteration must be made to its articles and involves filing the necessary forms with the Registrar of Companies (RoC), including Form SH-7.
Consolidation and Division of Share Capital
A company may consolidate its share capital into shares of a larger amount than its existing shares. For example, ten shares of Rs. 10 each may be consolidated into one share of Rs. 100. This action results in fewer shares but the same capital base.
Sub-division of Shares
Conversely, a company may subdivide its shares into smaller denominations. For instance, one share of Rs. 100 may be subdivided into ten shares of Rs. 10 each. This increases the number of shares without affecting the capital base.
Conversion of Shares into Stock and Vice Versa
Fully paid-up shares can be converted into stock, and vice versa. Stock is essentially aggregate capital without distinct numbers, unlike individual shares. Such conversion must be authorized by the articles and carried out under a resolution.
Cancellation of Unissued Shares
A company may cancel shares that have not been taken or agreed to be taken by any person. This action reduces the authorized share capital and must be reported to the RoC.
Issue of Bonus Shares
Bonus shares are additional shares issued to existing shareholders without any extra cost. The objective is to capitalize part of the company’s reserves or surplus. The following conditions generally apply:
- Bonus shares are issued from free reserves, securities premium account, or capital redemption reserve.
- The issue must be authorized by the articles and approved in a general meeting.
- The company must not have defaulted in payment of interest or principal of debt securities or fixed deposits.
Issuing bonus shares increases the number of shares in circulation and may improve liquidity without altering the company’s net worth.
Rights Issue and Private Placement
Rights Issue
A rights issue allows existing shareholders to purchase additional shares in proportion to their holdings at a specified price. This method helps raise capital without diluting the ownership structure significantly. The rights must be offered through a letter of offer and should be open for at least 15 days and not more than 30 days.
Private Placement
Private placement involves the issue of shares to a select group of persons, not exceeding 200 in a financial year, excluding qualified institutional buyers and employees under an ESOP. This method helps raise funds quickly without a public issue. It is governed by Sections 42 and 62 of the Companies Act and involves strict filing requirements with the RoC, including private placement offer letters and subscription money through banking channels.
Preferential Allotment
Preferential allotment is the issue of shares to a select group of people at a predetermined price, approved by a special resolution. It must comply with valuation norms, SEBI guidelines (for listed companies), and applicable provisions of the Companies Act.
Preferential allotments are often used to bring in strategic investors or for issuing shares to promoters, employees, or partners.
Buy-back of Shares
Buy-back refers to the repurchase of shares by the company from existing shareholders. It is allowed under Section 68 of the Companies Act, 2013, and can be done from:
- Free reserves
- Securities premium account
- Proceeds of a fresh issue of shares (excluding the same kind of shares)
Conditions include:
- Authorized by articles
- Special resolution passed (or Board resolution if the buy-back is less than 10% of total paid-up capital and reserves)
- Buy-back not exceeding 25% of the paid-up capital and free reserves..
- Ratio of debt owed to equity not exceeding 2:1
- Shares bought back must be extinguished within 7 days of completion.on
Buy-backs are typically used to return surplus cash, improve EPS, or consolidate promoter holdings.
Forfeiture and Reissue of Shares
Forfeiture of shares occurs when a shareholder fails to pay the call money within the stipulated time, and the company decides to forfeit their shares. This process is governed by the Articles of Association of the company. Forfeiture must follow due process, including serving notice to the shareholder and giving them adequate time to pay the due amount. If the shareholder fails to comply, the company may forfeit the shares. Once forfeited, the shareholder loses all right tothose shares, including dividends and voting rights. After forfeiture, the company can reissue those shares. The reissue can be at par, at a premium, or at a discount, but the total amount received (including the amount paid before forfeiture) should not be less than the face value of the shares. The reissue should also be properly authorized through board resolutions. The forfeiture and reissue must be reflected in the books of accounts, and proper entries must be made to reflect the change in capital structure.
Alteration of Share Capital
A company can alter its share capital structure, provided it is authorized by its Articles of Association and complies with the Companies Act provisions. Alteration may involve an increase in authorized capital, consolidation or division of shares into shares of a larger or smaller amount, conversion of fully paid-up shares into stock, or cancellation of unissued share capital. For instance, consolidation could involve converting 1000 shares of ₹1 each into 100 shares of ₹10 each. Similarly, a company may subdivide 100 shares of ₹100 each into 1000 shares of ₹10 each. The company must pass an ordinary resolution in a general meeting and file the necessary forms with the Registrar of Companies (ROC). Any alteration must be notified to the ROC in the prescribed form and within the stipulated time frame, failing which penalties may apply. This flexibility allows companies to align their capital structure with business needs and investor expectations.
Reduction of Share Capital
Reduction of share capital refers to decreasing a company’s issued, subscribed, or paid-up share capital. It can be done under Section 66 of the Companies Act, 2013, subject to approval by the National Company Law Tribunal (NCLT). Reduction may occur by extinguishing or reducing the liability on any unpaid share capital, cancelling paid-up capital which is lost or unrepresented by available assets, or paying off excess capital. The company must pass a special resolution and seek confirmation from the NCLT. Creditors’ interests must be protected, and the company must submit a declaration of solvency. Public notice is given for objections, and once satisfied, the Tribunal may approve the reduction. The order must be filed with the ROC, and the capital clause of the Memorandum of Association is updated accordingly. Reduction of capital is often used in restructuring, to write off accumulated losses or return surplus capital to shareholders. The process ensures transparency and protection for stakeholders.
Buy-Back of Shares
Buy-back refers to the repurchase of its own shares by a company from shareholders, permitted under Sections 68 to 70 of the Companies Act, 2013. Companies may buy back shares out of free reserves, securities premium account, or proceeds of an earlier issue (excluding the same kind of shares). The buy-back must be authorized by the Articles of Association, and approval is required via board resolution or shareholder resolution, depending on the size. The buy-back is limited to 25% of the paid-up capital and free reserves in a financial year and must follow SEBI guidelines if listed. The debt-equity ratio post buy-back must not exceed 2:1. The shares bought back must be extinguished within seven days of completion. The objective of buy-backs includes improving earnings per share, returning surplus cash, or preventing hostile takeovers. It also signals management’s confidence in the company’s future. However, misuse or violation of conditions can attract penalties.
Bonus Shares and Right Issues
Bonus shares are additional shares issued free of cost to existing shareholders, usually from accumulated profits or reserves. It is a method of capitalizing reserves and does not involve the infusion of fresh funds. Bonus issues must be authorized by the Articles and approved by shareholders. Such issues increase the number of outstanding shares but do not affect the total capital invested by shareholders, thus reducing the earnings per share and market price per share proportionately. On the other hand, rights issues involve offering shares to existing shareholders in proportion to their holdings at a predetermined price, often at a discount to market value. This allows companies to raise fresh capital while giving existing shareholders a chance to maintain their ownership proportion. Both bonus and rights issues must comply with the Companies Act and SEBI regulations. Companies must disclose relevant information in offer documents and file returns with the ROC.
Global Depository Receipts (GDRs) and American Depository Receipts (ADRs)
To raise capital from foreign markets, Indian companies can issue Global Depository Receipts (GDRs) and American Depository Receipts (ADRs). A GDR is a negotiable instrument issued by a depository bank outside India, representing shares of a foreign company, usually traded on European markets. ADRs serve the same purpose but are traded in U.S. markets. Indian companies issue shares to a custodian bank in India, which is then held against the GDRs or ADRs issued by the foreign depository bank. This allows foreign investors to invest in Indian companies without dealing with Indian regulations directly. The issue must comply with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, and SEBI guidelines. The proceeds can be used for permissible purposes under RBI rules. GDRs and ADRs expand access to international capital, enhance global visibility, and diversify the investor base.
Legal Framework and Compliance
The legal framework governing share capital in India is primarily embedded in the Companies Act, 2013. It provides detailed provisions on share issuance, types of capital, calls on shares, forfeiture, transfer, buy-back, bonus issues, and reduction of capital. Listed companies must additionally comply with SEBI (Issue of Capital and Disclosure Requirements) Regulations, SEBI (Listing Obligations and Disclosure Requirements), and the relevant stock exchange rules. Foreign capital issues such as GDRs/ADRs fall under FEMA regulations and the Companies (Issue of Global Depository Receipts) Rules. Furthermore, the company’s Articles of Association play a crucial role in regulating share capital-related matters. Statutory forms like PAS-3 (Return of Allotment), SH-7 (Alteration), MGT-7 (Annual Return), and others must be filed with the Registrar of Companies. Non-compliance attracts penalties, disqualification of directors, and even legal action. Maintaining statutory records like the Register of Members and proper board/shareholder resolutions is essential to uphold transparency and governance.
Conclusion
Share capital forms the financial backbone of a company and defines the ownership structure among its shareholders. Understanding its different forms, modes of alteration, legal requirements, and implications is essential for sound corporate governance and informed decision-making. Whether raising capital through equity, issuing bonus or rights shares, or reducing share capital, companies must operate within a robust legal framework. Proper compliance ensures transparency, protects stakeholder interests, and enhances investor confidence in the long run.