The capital of a company is divided into several indivisible units of a fixed amount. These units are known as shares. According to section 2(84) of the Companies Act, 2013, a share is a share in the share capital of a company and includes stock. The Supreme Court of India in CIT v. Standard Vacuum Oil Co. [1966] Comp. LJ 187 observed that a share in a company does not refer merely to a sum of money but to an interest measured by a sum of money and made up of diverse rights conferred on its holders by the articles of the company, which constitute a contract between the shareholder and the company.
In another case, the Supreme Court defined a share as a right to participate in the profits made by a company while it is a going concern and declares a dividend, and in the assets of the company when it is wound up. In short, a share does not merely represent an interest of a shareholder in a company; it carries with it certain rights and liabilities while the company is a going concern or while it is being wound up. It thus represents a bundle of rights and obligations.
Nature of a Share
A share is not a sum of money but is the interest of a shareholder in the company, measured by a sum of money for liability and of interest, but also consisting of a series of mutual covenants entered by all the shareholders inter se. A share is a chose-in-action. A chose-in-action implies the existence of some person entitled to the rights, which are rights in action as distinct from rights in possession, and until the share is issued, no such person exists.
In India, a share is regarded as goods. Section 2(7) of the Sale of Goods Act, 1930, defines goods to mean any kind of movable property other than actionable claims and money, and includes stock and shares. However, section 44 of the Companies Act, while recognising shares as movable property, provides that they shall be transferable only in the manner provided by the articles of the company.
In Vishwanathan v. East India Distilleries [1957] 27 Comp. Cas. 175, it was observed that a share is undoubtedly movable property, but it is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to a different category of property. It is incorporeal and consists merely of a bundle of rights and obligations.
A share is not a negotiable instrument. It is an expression of a proprietary relationship between a shareholder and the company. In CIT v. Associated Industrial Development Co. [1969] 2 Comp. LJ 19, the nature of this proprietary relationship was discussed further.
In Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.), the court made comprehensive observations on the nature of a share. The statutory meaning of share covers three phases. The first is when the share is part of the share capital that remains unexploited by the company. The second arises when it is issued and held by a shareholder. The third is when the share is converted into stock. Every company limited by shares has a nominal or authorised, or registered share capital. This capital is a key feature in the company’s constitution and must be mentioned in the memorandum of association. The capital is usually divided into shares of a fixed amount.
The first phase refers to shares that are still within the company, with no shareholders. The second phase arises when the share is associated with a member and becomes movable property. However, this is not property governed solely by the Sale of Goods Act but also by the Companies Act and the company’s Articles. Each share has a distinctive number. A share certificate is not the share itself. According to section 46, a certificate under the company’s common seal specifying any share or stock held by any member shall be prima facie evidence of the member’s title to the shares or stock specified.
Therefore, a share certificate is not the share itself. It is only prima facie evidence of ownership. A share is movable property but not tangible property. It consists of a bundle of rights and obligations. A share can either exist in its initial stage as part of capital or reside with a shareholder. It cannot exist in an intermediate form.
Share and Share Certificate
Many people confuse the terms share and share certificate, using them interchangeably. However, they are distinct. Section 44 of the Companies Act, 2013 describes a share as movable property transferable in the manner provided by the articles of the company. Section 46 defines a share certificate as a document under the common seal of the company specifying the shares held by a member. It serves as prima facie evidence of the member’s title to the shares.
Thus, a share represents property, while a share certificate is merely evidence of that property. This certificate allows the shareholder to deal with the shares in the market more conveniently, as it enables them to sell their shares by presenting a marketable title. Moreover, the share certificate serves as an estoppel. It prevents the company from denying the payment status shown on the certificate to a bona fide purchaser. However, a person who knows the certificate contains false statements cannot use it to claim estoppel against the company.
In Shree Gopal Paper Mills Ltd. v. CIT, the Calcutta High Court highlighted that the share certificate is not the share. It only serves as prima facie evidence. Each share has a unique, distinctive number, which differs from the share certificate number. A single certificate may represent many shares. For instance, one certificate may evidence 50 or 1,00 or even 1 lakh shares. Therefore, there is only one certificate number, but as many distinctive numbers as the shares it covers.
Share and Stock
It is important to distinguish between the terms share and stock. A share is a unit into which the capital of a company is divided. For example, if a company has share capital of five lakh rupees divided into 50,000 units of ten rupees each, each unit is called a share.
Stock, on the other hand, is the aggregate of fully paid-up shares of a member merged into one fund. It is not expressed in units but in terms of money. Stock may be divided into any fraction and can be transferred accordingly. A company cannot make an original issue of stock. However, if authorised by its Articles, a company may, by passing a resolution in a general meeting, convert fully paid-up shares into stock under section 61. After conversion, the register of members must reflect the amount of stock held by each member instead of the number of shares.
The conversion does not alter the rights of members. The key distinctions are as follows. A share has a nominal value and a distinctive number. It can only be issued originally as a share. A share may be partly or fully paid up and is transferred as a whole, not in fractions. All shares of a class are of equal denomination. In contrast, stock has no nominal value and bears no distinctive number. A company cannot issue stock initially; it is created by converting fully paid-up shares. Stock is always fully paid-up and may be transferred in any fraction. It can exist in different denominations.
Classification of Share Capital
Share capital refers to the amount of capital raised by a company through the issue of shares. It is broadly divided into several categories depending upon various considerations such as its status, the nature of the issue, and its treatment in the books of the company.
Authorized Capital
This is the maximum amount of share capital that a company is legally authorized to issue to shareholders, as mentioned in the capital clause of its Memorandum of Association. The company cannot issue capital exceeding this limit unless it alters its capital clause as per the provisions of the Companies Act, 2013. For example, if a company’s authorized capital is ₹10,00,000 divided into 1,00,000 equity shares of ₹10 each, then it cannot issue more than 1,00,000 shares unless the authorized capital is increased.
Issued Capital
Issued capital refers to that portion of authorized capital which is offered by the company for subscription. It may be equal to or less than the authorized capital, depending on the company’s capital requirements. For instance, if out of the ₹10,00,000 authorized capital, the company issues 50,000 shares of ₹10 each, then the issued capital would be ₹5,00,000.
Subscribed Capital
Subscribed capital is the portion of issued capital that is subscribed or taken up by the public. It represents the number of shares for which applications are received. It may be equal to or less than the issued capital. If, out of 50,000 shares issued, the public applies for 40,000 shares, the subscribed capital will be ₹4,00,000.
Called-Up Capital
Called-up capital refers to the portion of the subscribed capital that the company has called upon the shareholders to pay. It may be equal to or less than the subscribed capital. For example, if the company has asked the shareholders to pay ₹6 per share out of the total ₹10 face value on 40,000 subscribed shares, the called-up capital would be ₹2,40,000.
Paid-Up Capital
Paid-up capital is the part of the called-up capital that has been paid by the shareholders. It is the actual amount received by the company towards share capital. If shareholders have paid ₹5 per share out of ₹6 called-up on 40,000 shares, the paid-up capital would be ₹2,00,000.
Uncalled Capital
Uncalled capital refers to the portion of subscribed capital that has not yet been called by the company. It represents the amount that the company is entitled to call in the future. Continuing the above example, if only ₹6 has been called up out of ₹10 face value per share, the uncalled capital per share would be ₹4.
Reserve Capital
Reserve capital is a portion of the uncalled capital that the company decides, through a special resolution, will not be called up except in the event of winding up. It serves as a security for creditors and cannot be utilized during the lifetime of the company. For example, if a company with shares of ₹10 each has not called ₹3 per share and resolves that this amount shall be called only at the time of winding up, then ₹3 per share becomes reserve capital.
Types of Shares
Shares are primarily classified into two categories under the Companies Act, 2013: equity shares and preference shares. Each has its characteristics, rights, and obligations.
Equity Shares
Equity shares, also known as ordinary shares, are those that do not carry any preferential rights. These shareholders bear the highest risk and enjoy the highest reward, as they are entitled to residual profits and assets of the company. Equity shareholders have voting rights and can participate in the management of the company. The dividend on equity shares is not fixed and depends on the availability of profits and the discretion of the Board.
Preference Shares
Preference shares are those that carryy preferential rights regarding the payment of dividends and repayment of capital in the event of winding up. However, they usually do not carry voting rights except in certain circumstances prescribed by the law. The rate of dividend on preference shares is fixed.
Cumulative and Non-Cumulative Preference Shares
Cumulative preference shares have a right to accumulate unpaid dividends. If in a particular year, a dividend is not declared due to insufficient profits, the unpaid dividend is carried forward and paid in subsequent years before any dividend is paid to equity shareholders. Non-cumulative preference shares, on the other hand, do not have this right. If the dividend is not paid in a year, it lapses.
Participating and Non-Participating Preference Shares
Participating preference shares are entitled to participate, in addition to the fixed dividend, in the surplus profits or surplus assets of the company after all other dues are paid. Non-participating preference shares do not enjoy such additional rights.
Convertible and Non-Convertible Preference Shares
Convertible preference shares can be converted into equity shares after a specified period or on the happening of a specified event, subject to the terms of issue. Non-convertible preference shares do not have this conversion right.
Redeemable and Irredeemable Preference Shares
Redeemable preference shares are those that thee company can redeem (buy back) at a fixed date or after a certain period, subject to conditions laid down in the Companies Act, 2013. Irredeemable preference shares are not permitted under Indian law, as all preference shares must be redeemable within a maximum period of 20 years.
Legal Provisions Relating to Share Capital
The Companies Act, 2013, lays down various legal provisions regarding sharcapital that must be complied with by companies while issuing, increasing, or altering their share capital.
Alteration of Share Capital
A company can alter its share capital only if authorized by its Articles of Association. Section 61 of the Companies Act, 2013 provides that a limited company having a share capital may, if so authorized by its Articles, alter its share capital in the following ways by passing an ordinary resolution:
- Increase its authorized share capital by such amount as it thinks expedient.
- Consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares.
- Convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares.
- Subdivide its shares or any of them into shares of a smaller amount than is fixed by the memorandum.
- Cancel shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person, and reduce the amount of its share capital by the amount of the shares so canceled.
Reduction of Share Capital
Reduction of share capital involves diminishing the company’s share capital and can only be done under Section 66 of the Companies Act, 2013. It requires:
- Authorization by the Articles of Association.
- A special resolution was passed by the company.
- Approval of the National Company Law Tribunal (NCLT).
Reduction may be in the form of extinguishing or reducing the liability on any unpaid share capital, canceling any paid-up share capital which is lost or unrepresented by available assets, or paying off any paid-up share capital which is more than the company wants.
Buy-Back of Shares
Buy-back of shares refers to the process by which a company purchases its shares from existing shareholders. Under Section 68 of the Companies Act, 2013, a company may buy back its shares from:
- It’ss free reserves.
- The securities premium account.
- The proceeds of any shares or other specified securities.
However, no buy-back can be made out of the proceeds of the same kind of shares. A company can buy back up to 25 percent of the aggregate of paid-up capital and free reserves. It must extinguish and physically destroy the bought-back shares within seven days of completion of the buy-back.
Sweat Equity Shares
Sweat equity shares are shares issued to employees or directors at a discount or for consideration other than cash, for providing know-how, intellectual property, or value additions. Section 54 of the Companies Act, 2013 permits the issuance of sweat equity shares by a company if:
- The issue is authorized by a special resolution.
- The resolution specifies the number of shares, current market price, and consideration.
- One year has passed since the company became entitled to commence business.
Sweat equity shares are subject to lock-in for three years from the date of allotment.
Employee Stock Option Plan (ESOP)
ESOPs allow companies to offer shares to their employees at a future date at a predetermined price. It serves as a tool to attract, retain, and reward talent. Section 62(1)(b) of the Companies Act, 2013 deals with the issuance of ESOPs. For unlisted companies, ESOPs must be issued by Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
Private Placement of Shares
Private placement refers to the issuance of shares or securities to a select group of persons identified by the Board, other than by way of public offer. Section 42 of the Companies Act, 2013 governs the process of private placement. The company must issue a private placement offer letter and record the name and details of offerees. Allotment must be completed within 60 days,, and the amount should be received through banking channels and not in cash.
Comparison of Popular Saving Schemes
When evaluating various saving schemes, it is important to compare them on key parameters such as safety, returns, tax benefits, and liquidity. Each scheme suits different financial goals and investor profiles. Let us compare some of the most popular options.
Public Provident Fund
The Public Provident Fund is a long-term savings instrument backed by the Government of India. It offers guaranteed returns and is ideal for risk-averse investors. The current interest rate is revised quarterly and compounded annually. The investment period is 15 years, and partial withdrawals are permitted from the 7th year onwards. The PPF enjoys EEE tax status, meaning that the investment, interest earned, and maturity amount are all exempt from tax under Section 80C.
Senior Citizens Savings Scheme
Designed for individuals above the age of 60, this scheme provides regular income with a relatively high interest rate. The maturity period is five years and can be extended by three more years. Interest is paid quarterly and is taxable. It is a preferred choice for retirees due to the assured returns and low risk.
National Savings Certificates
NSCs are fixed-income instruments suitable for investors looking for low-risk investment options. The investment is locked for five years, and the interest is compounded annually but payable at maturity. Investments up to INR 1.5 lakh qualify for deduction under Section 80C, but the interest earned is taxable unless reinvested.
Post Office Monthly Income Scheme
This scheme provides monthly interest income for those seeking a regular payout. The investment is locked for five years, and premature withdrawals are allowed with penalties. It is suitable for conservative investors and pensioners looking for steady income. However, the interest earned is fully taxable.
Kisan Vikas Patra
This is a certificate scheme that doubles the invested amount in a predetermined period, depending on the interest rate applicable. It is considered a long-term investment option and is not eligible for tax deduction under Section 80C. The returns are taxable, and the scheme is best suited for individuals who prefer assured long-term capital growth.
Recurring Deposit
Post Office Recurring Deposit offers a disciplined way to save small amounts monthly. The tenure is five years, and interest is compounded quarterly. It is an excellent option for those with regular monthly income who want to accumulate a lump sum amount over time. No tax benefit is available on the investment or interest earned.
Term Deposit
Post Office Term Deposit schemes are similar to bank fixed deposits but are backed by the Government of India. The tenure options range from 1 to 5 years, and the interest is compounded quarterly but payable annually. The 5-year term deposit qualifies for tax deduction under Section 80C, though the interest is taxable.
Atal Pension Yojana
Atal Pension Yojana is a government-backed pension scheme for workers in the unorganized sector. It guarantees a fixed pension amount based on the contribution made and the age at which the subscriber joins. Contributions are eligible for tax benefits under Section 80CCD, and the pension amount is taxable upon withdrawal.
Pradhan Mantri Vaya Vandana Yojana
This pension scheme for senior citizens is operated by the Life Insurance Corporation of India. It offers an assured return and provides pension income monthly, quarterly, half-yearly, or yearly as per the investor’s choice. The scheme has a 10-year tenure and allows premature exit in specific situations. It is an attractive alternative for senior citizens looking for regular income with capital protection.
Tax-Saving Fixed Deposit
Banks also offer tax-saving fixed deposits with a 5-year lock-in period. Investments up to INR 1.5 lakh qualify for deduction under Section 80C. The interest is taxable and is added to the investor’s income. These fixed deposits are suitable for those looking for assured returns with a medium-term horizon.
Equity-Linked Savings Scheme
ELSS is a tax-saving mutual fund that invests primarily in equity markets. It has a lock-in period of three years, the shortest among tax-saving instruments under Section 80C. ELSS has the potential to deliver high returns, but it also carries market risks. The returns are subject to long-term capital gains tax. This scheme is ideal for investors with a higher risk appetite.
Comparison Based on Key Parameters
A comprehensive comparison should factor in safety, return potential, liquidity, tax benefits, and investor suitability.
Safety: Government-backed schemes like PPF, Sukanya Samriddhi, and SCSS provide high safety. Bank deposits and NSCs are also considered safe. ELSS and market-linked instruments carry market risks.
Return Potential: ELSS and equity-linked products offer the potential for higher returns but with volatility. SSY and SCSS offer relatively high fixed returns. PPF and NSCs provide moderate but assured returns.
Liquidity: Term deposits and recurring deposits offer better liquidity with options for premature withdrawal. PPF and SSY have limited liquidity. ELSS is locked in for three years.
Tax Benefits: PPF, ELSS, SSY, and 5-year FDs qualify for Section 80C benefits. PPF and SSY enjoy EEE tax status. Interest from bank FDs and SCSS is taxable.
Investor Suitability: PPF is suitable for long-term conservative investors. SSY is ideal for girl child savings. SCSS and PMVVY are best for senior citizens. ELSS suits young investors willing to take market risks.
Impact of Inflation on Returns
While small saving schemes provide assured returns, it is crucial to consider the real rate of return, which is the return adjusted for inflation. For example, if the interest rate is 7 percent and inflation is 6 percent, the real return is only 1 percent. Over long periods, inflation can erode the purchasing power of returns. Hence, it is advisable to balance assured return products with market-linked investments to beat inflation in the long run.
Role of Saving Schemes in Financial Planning
Saving schemes form an integral part of financial planning. They help in building a financial corpus for various life goals like children’s education, retirement, and emergencies. A diversified portfolio comprising government-backed instruments, market-linked investments, and regular income products can ensure financial stability and growth.
Tips to Choose the Right Scheme
Assess your financial goals, risk tolerance, investment horizon, and need for liquidity. Long-term goals may be served better by PPF or ELSS, while short-term goals can rely on RDs or FDs. For regular income, SCSS and PMVVY are appropriate. Parents planning for a girl child should consider SSY. Choose a mix of schemes for a balanced risk-return profile.
Government’s Role in Promoting Saving Schemes
The government promotes household savings through incentives like tax benefits, guaranteed returns, and safety assurances. It periodically revises interest rates based on market conditions and inflation. Initiatives like digital access, simplified KYC norms, and expanding the reach through India Post and banks have made these schemes more accessible.
Challenges in Small Saving Schemes
While these schemes are safe and widely accessible, they are not without challenges. Interest rates are revised quarterly and may be reduced depending on market conditions. Most schemes have long lock-in periods or low liquidity. Taxable returns reduce net earnings in certain cases. Also, they may not be sufficient for wealth creation if not supplemented with higher-yielding investments.
Importance of Diversification
To maximize returns and minimize risk, investors should diversify across various savingss schemes. Relying solely on fixed return schemes may not help achieve long-term financial goals due to inflation and taxation. Combining these with mutual funds, equities, and real estate can ensure better growth prospects. Each asset class performs differently across economic cycles, and diversification ensures portfolio stability.
Investment Guidelines and Maturity Proceeds
Each savings scheme has its own maturity rules and withdrawal conditions. For instance, PPF matures in 15 years, and partial withdrawals are permitted only after the sixth year. In contrast, the National Savings Certificate matures in 5 years, with interest reinvested and compounded annually. Fixed deposits in post offices can be opened for 1, 2, 3, or 5 years. Upon maturity, the principal and interest are paid out, and tax is deducted at source if interest exceeds a certain threshold. The SCSS allows quarterly interest payouts and matures in 5 years with the possibility of an extension. Sukanya Samriddhi Account matures when the girl reaches the age of 21 or on her marriage after 18 years. Post Office Monthly Income Scheme offers monthly interest payouts and has a maturity period of 5 years. The Kisan Vikas Patra doubles the investment amount upon maturity, which varies with the interest rate (currently around 115 months). It’s important to understand these rules for planning your financial goals.
Taxation on Returns
Some savings schemes offer tax advantages under Section 80C of the Income Tax Act. For example, investments in PPF, NSC, SCSS, and Sukanya Samriddhi Account are eligible for tax deduction up to ₹1.5 lakh. PPF and Sukanya Samriddhi are completely tax-free—principal, interest, and maturity proceeds are exempt. On the other hand, NSC and SCSS interest is taxable, though NSC’s reinvested interest is eligible for 80C deduction. Post Office Time Deposits also qualify under 80C, but the interest is taxable. TDS applies if the interest earned exceeds the prescribed threshold. Post Office Monthly Income Scheme and KVP do not offer tax deductions, and their interest is fully taxable. Therefore, investors must assess their tax liability before choosing the scheme.
Liquidity and Premature Withdrawal
Liquidity varies across savings schemes. While post office savings accounts and recurring deposits offer high liquidity, PPF has strict rules—withdrawals are allowed only after a specific period, and loans can be taken against the balance. NSC does not allow premature withdrawals except under exceptional circumstances like the death of the account holder or court order. SCSS allows premature closure after one year with penalties. Post Office Term Deposits and Monthly Income Schemes allow premature closure, but again with certain penalties. Sukanya Samriddhi can be prematurely closed in exceptional cases like the marriage of the girl after age 18 or the death of the account holder. Kisan Vikas Patra allows premature closure only under specific conditions. Therefore, the investor must consider liquidity needs before committing to a scheme.
Safety and Government Backing
One of the main advantages of government savings schemes is the safety they offer. All the small savings schemes are backed by the Central Government, which makes them more secure than many market-based investments. There is little or no risk of default, and the interest rates are notified quarterly to reflect market conditions. However, the returns are often lower than those of equity or mutual funds. Despite this, the safety net provided by the government makes these schemes ideal for risk-averse investors, senior citizens, and long-term planners.
Suitability for Different Investor Profiles
These schemes are suitable for different investor categories. For example, the Public Provident Fund is ideal for salaried individuals planning for retirement. Sukanya Samriddhi is specifically for parents of girl children who want to build a corpus for education or marriage. SCSS is tailored for retirees looking for regular income with capital safety. NSC is suitable for those seeking tax savings and a moderate return. Post Office Monthly Income Scheme suits individuals who require a steady income stream. Kisan Vikas Patra is more suited to those seeking to double their investment with no market dependency. Therefore, assessing one’s investment horizon, risk appetite, and financial goals is key before selecting a scheme.
How to Open a Savings Scheme Account
Most small savings scheme accounts can be opened at designated post offices and authorized banks. For opening, valid ID and address proof, photographs, and account-opening forms are required. Some banks and post offices also offer online account opening for PPF, Sukanya Samriddhi, and SCSS. A nomination facility is available, and joint accounts are permitted in many schemes. Accounts can be transferred from one post office to another or from a bank to a post office and vice versa. Upon maturity, the amount can be credited directly to a savings account via ECS or cheque.
Interest Rate Revisions and Market Trends
The government revises interest rates for these schemes every quarter. The revision is based on yields of government securities and inflation data. For instance, in a rising interest rate environment, the government may hike rates for schemes like PPF and SCSS. Conversely, in a low-inflation period, rates may be cut. These revisions affect new investments, not existing ones, which continue at the contracted rate. Investors must keep an eye on these revisions to make informed decisions. It is also important to remember that despite these adjustments, small savings schemes are often more attractive than bank fixed deposits due to higher rates and better safety.
Comparison with Other Investment Avenues
Compared to bank deposits, small savings schemes often offer higher interest rates and better safety. However, they lack the liquidity of mutual funds or equities and do not offer inflation-beating returns like equities over the long term. Tax-saving schemes like ELSS (Equity Linked Savings Scheme) have shorter lock-in periods and better returns,, but come with market risk. Small savings schemes, on the other hand, are suitable for preserving capital and ensuring steady returns. Therefore, they should form a part of a diversified portfolio rather than being the sole investment avenue.
Conclusion
Small savings schemes are a secure and reliable investment option for conservative investors, senior citizens, and families with long-term financial goals. With government backing, attractive interest rates, and tax-saving benefits, these schemes provide a strong foundation for financial planning. However, it’s essential to match the features of each scheme with one’s financial needs, investment horizon, and risk profile. Regular review of interest rates and tax implications can help optimize returns. In a volatile market environment, small savings schemes continue to play an important role in achieving financial stability and long-term wealth preservation.