SHARES

Meaning: A share is the interest of a shareholder in a definite portion of the capital. A company’s
capital is divided into small equal units of a finite number. Each unit is known as a share. In simple
terms, a share is a percentage of ownership in a company or a financial asset. Investors who hold
shares of any company are known as shareholders.
Section 2 (46) “A share in the share capital of a company and includes stock, except where a
distinction between stock & shares is expressed or implied.”
According to Farewell: “A share is the interest of a shareholder in the company, measured by a
sum of money, for the purpose of liability in the first place, & interest in the second, but also
consisting of a series of mutual covenants entered into by all the shareholders.”
Types of Shares:
1. Preference Shares: Preference shares are those shares on which there is preference right to
claim dividend during the life time of the company, & to claim repayment of capital on the
winding up. The percentage of dividend is fixed in preference shares. The holders of preference
shares get fixed dividend before any dividend is paid to others shareholders. At the time of
winding up of the company, the preference shareholders can get back their capital before any
other classes of shareholders can get back their money.
Features of Preference Shares: Preference share have the following features:
a) Preference shares are long-term source of finance.
b) The dividend payable on preference shares is generally higher than debenture interest.
c) Preference shareholders get fixed rate of dividend irrespective of the volume of profit.
d) Preference shareholders do not have any voting rights.
e) Preference shareholders have special right for repayment of capital in winding up.
Types of Preference Shares: There are different classes of preference shares.
a) Cumulative preference shares: Shares which have the right of dividend of a company even
in those years in which it makes no profit are called cumulative preference share. The
company must pay unpaid dividends before the payment of dividends to equity shareholders.
In case of cumulative preference shares, such unpaid dividend is treated as arrears.
b) Non-Cumulative preference shares: Non-cumulative dividends do not accumulate if they are
not paid when due. The dividend on these shares are payable only out of the profits of the
current year. If in any year the company does not earn adequate profit, the holders get no
dividend or partial dividend. The holder cannot claim arrears of dividend.
c) Convertible preference shares: Convertible preference shares are those which are converted
into equity shares at a specified rate on the expiry of a stated period. The holders of this kind
of shares have a right to convert their shares into equity shares within a specified period.
d) Non-Convertible preference shares: Non-convertible preference shares are not converted
into equity stock. Non-convertible preference shares may also be redeemable. The holders of
this kind of shares have no right to convert their preference shares into equity shares.
e) Participating preference shares: Participating preference shares are not only entitled to a
fixed rate of dividend, but also to a share in the surplus profits which remain after the claims of
the equity shareholder have been met.
f) Non-participating preference shares: Non-participating preference shares are entitled to
fixed rate of dividend & do not share in the surplus which belongs to the equity shareholders.
g) Redeemable preference shares: The preference shares, which can be redeemed after a
specified period or at the maturity of the company, are called redeemable preference shares.
Non-redeemable preference share is permanent in nature and its shareholding is continuous till
the company goes into liquidation. So, in order to attract the investor, a clause is included in
the agreement for redeeming the preference share after the expiry of a specified period.
h) Non-redeemable preference shares: Redeemable preference shares are also called, at the
option of the company. Investment in equity share is more profitable than that of preference
share. Preference share holders do not participate, in the extra earnings of the company, except
in the case of participating preference shares.
Equity Shares: Equity shares are the ordinary shares of the company. The holder of the equity
shares are the real owners of the company, i.e. the amount of shares held by them is the portion of
their ownership in the company. Equity shareholders have some privileges like they get voting
rights at the general meeting, they can appoint or remove the directors and auditors of the
company. Apart from that, they have the right to get the profits of the company, i.e. the more the
profit, the more is their dividend and vice versa. Therefore, the amount of dividends is not fixed.
Features of Equity Shares: The main features of equity shares are:
a) They are permanent in nature.
b) Equity shareholders are the actual owners of the company and they bear the highest risk.
c) Dividend payable to equity shareholders is an appropriation of profit.
d) Equity shareholders do not get fixed rate of dividend.
e) Equity shareholders have the right to control the affairs of the company.
 Comparison Chart

BASIS EQUITY SHARES PREFERENCE SHARES

Meaning Equity shares are the ordinary shares Preference shares are the shares that carry
of the company representing the part preferential rights on the matters of
ownership of the shareholder in the payment of dividend and repayment of
company. capital.

Payment of The dividend is paid after the payment Priority in payment of dividend over
dividend of all liabilities. equity shareholders.

Rate of Fluctuating Fixed

dividend

Redemption No Yes

Voting rights Equity shares carry voting rights. Preference shares do not carry voting
rights.

Convertibility Equity shares can never be converted. Preference shares can be converted into
equity shares.

SHARE CAPITAL
The term capital usually means a particular amount of money with which a business is started.
Capital, in fact, represents the assets with which the undertaking is carried on. The sum total of
nominal value of shares of a company is known as its share capital. Capital to be stated in the
Memorandum of Association and Articles of Association of the Company.
Types/Nature of Share Capital: The share capital of company may be of the following types:
1. Registered, Authorised Capital: The Memorandum of Association of every company has to
specify the amount of capital with which it wants to be registered. The Registered Capital is the
maximum amount of share capital which a company can raise by way of public subscription.
2. Fixed Capital: The fixed capital of a company is what the company retains in the shape of
fixed assets such as land and buildings, plant and machinery, furniture, etc.
3. Circulating Capital: The circulating capital is subscribed capital which is circulated in
business in the form of using goods or other assets like bill receivables, cash, bank balance, etc.
4. Paid up Capital: It is that part of called up capital against which payment has been received
from the members on their respective shares in response to the calls made by the company.
5. Issued Capital: The Company may not issue the entire authorised capital at once. It goes on
raising the capital as and when the need for additional fund is felt. So, issued capital is that part
of Authorised/Registered Capital which is offered to the public for subscription of shares.
6. Paid up Capital: It is that part of called up capital against which payment has been received
from the members on their respective shares in response to the calls made by the company.
7. Subscribed Capital: It is that part of “issued capital” for which applications are received from
the public. The subscribed capital is allotted to the respective subscribers as per resolution
passed by the directors of the company.
8. Called up Capital: It is that part of subscribed capital which has been called up by the
company. A company does not call at once the full amount on each of the shares it has allotted
and therefore, calls up only such amount as it needs.
Classes of Share Capital:
a) Preference share capital: It means that part of the capital of the company which: A
preferential right as to payment of dividend at fixed rate during the life time of the company.
b) Equity Share Capital: It means with reference to a company, limited by shares, all share
capital which is not preference share capital.
MEMBERS OF A COMPANY
The term ‘Member ‘denotes a person who holds shares in a company. The members or the
shareholders are the real owners of a company. The ultimate authority relating to the appointment
& removal of the directors, auditors & other managerial personnel lies with shareholders. The
powers of Board are also subject to the control & supervision of the general body of the members.
Meaning and Definition: According to Sec. 41 Companies Act, the three classes of members are:
1. The persons who have subscribed to the Memorandum of a company.
2. Every other person who has agreed in writing to become a member of the company and whose
name has been entered in the Register of Members.
3. Every person holding share capital of a company & whose names are recorded as beneficial
owner in the depository records are considered as members of the concerned company.
All the subscribers are deemed to be the members & their names not appear in Register. The
person must have agreed in writing to become a member, his name must have been entered in the
Register of Members. If any conditions is not satisfied, the person shall not become a member.
Who can become a member?
1. Minors: A minor, is not a competent person to enter into a valid contract. As such, he is
disqualified to acquire membership. However, minors may be allotted shares. The minor can
avoid the contract. But the minor should repudiate the contract within a reasonable time.
2. Lunatic and Insolvent: A lunatic cannot become a member. An insolvent, however, can
become a member and is entitled to vote at the meetings of the company. But his shares vest in
the Official Receiver when he is adjudged insolvent.
3. Partnership Firm: A partnership firm may hold shares in a company in the individual name of
partners as joint holders. But the shares cannot be issued in the name of the partnership firm, as
it is not a legal person in the eye of law.
4. Company: A company, being a legal person, can become the member of another company in its
own name. But a company can subscribe for the shares of another company only when it is
authorized by Memorandum. A subsidiary company cannot buy shares of its holding company.
5. Foreigners: Foreign national can be members of companies registered in India. RBI permission
is mandatory. When he turns an alien enemy, his right as a member will be suspended.
6. Fictitious Person: A person who takes the shares in the name of fictitious person becomes
liable as a member. Besides, such a person can be punished for imposture under section 68-A.
Rights of the Members
A. Statutory Rights: These are the rights conferred upon the members by Companies Act. These
rights cannot be taken away by the Articles of Association or Memorandum of Association.
 Right to receive notice of meetings, attend, to take part in the discussion & vote at meetings.
 Right to transfer the shares [in case of public companies].
 Right to receive copies of the Annual Accounts of the company.
 Right to inspect the documents of the company such as register of members, annual returns, etc
 Right to participate in appointments of directors and auditors in the Annual General Meetings.
 Rights to apply to the Government for ordering an investigation into the affairs of the company.
 Right to apply to the Court for winding up of the company.
B. Documentary Rights: In addition to the statutory rights, there are certain rights that can be
conferred upon the shareholders by the documents like the Memorandum and the Articles of
Association.
C.Legal Rights: These are the rights, which are given to the members by the General Law.
 TRANSFER AND TRANSMISSION OF SHARES
Transfer of Shares: Transfer of shares refers to the intentional transfer of title to shares by one
person to another. There are two parties to transfer of shares, i.e. transferor and transferee. The
shares of the public company are freely transferable. However, the company can refuse the transfer
of shares, if it has a valid reason for the same. In the case of a private company, there is a
restriction on the transfer of shares subject to certain exceptions.
Procedure for Transfer of Shares
1. At first, the deeds which are transferred need to be obtained in the prescribed form SH-4.
2. According to the provisions of the Companies Act, you need to get AOA in shares, trust deed in
Debentures where the transfer deed is registered either by transferor & transferee.
3. According to the Indian Stamp Act, the transfer deed should need to have stamps. The present
stamp duty rate of transfer of share is 25 paise for every 1000 rupees of the value of the share.
4. The person who has given his signature, name, and address as approval of transfer must verify
that the transferor and transferee have signed the share/ debentures transfer deed.
5. The share/debenture certificate, along with deed, must be attached & sent to the company.
6. In case the shares of the company are listed in a recognized stock exchange, then the company
cannot charge any fee for the registration of transfer of shares and debentures.
7. A company shall not register the transfer of securities of the company other than the beneficial
owners without a proper instrument. The time prescribed is 60 days from the date of execution.
8. The transfer shall not be registered until the company gives notice of the application to the
transferor. Here, the transferee gives NOC within two weeks from the receipt of the notice.
9. Penalties: There is a minimum plenty of Rs 25000 and a maximum of Rs 5 lakh in case of a
company. And For an officer the minimum amount is Rs 10000 and maximum of Rs 1 lakh.
Transmission of Shares: There are some cases when the transfer of shares occurs due to the
operation of law, i.e. when the registered shareholder is no more, or when he is insolvent or
lunatic. Transmission of shares also occurs when the shares are held by a company, and it is wound
up. The shares are transferred to the legal representative & official assignee of the insolvent. The
transmission is recorded by the company when the transferee gives the proof of right of shares
.Basic Procedure for the Transmission of Share
1. In the case of joint holding or legal heir, the survivor who wants transmission by operation of
law needs to file a simple application with the company. Relevant documents such as Death
certificate, succession Certificate, probate, etc. need to be attached to the application.
2. Thereafter, the company records the information about the death certificate, and a reference
number of recording is given to the shareholder.
3. After the documents are submitted, the company reviews these documents and approve the
transmission request in case the documents are in order.
4. In case the documents submitted with the transmission request are not in order, the company
shall communicate refusal to the concerned person within 30 days.
5. Before the death of the shareholder, the dividend declared will be payable to the legal
representative, and in case after the death of the shareholder, the dividend will be paid to him
only after the registration of his/her name.

TRANSMISSION OF
BASIS TRANSFER OF SHARES
SHARES

Meaning Transfer of shares refers to the Transmission of shares means

transfer of title to shares, the transfer of title to shares by
voluntarily, by one party to the operation of law.
another.

Affected by Deliberate act of parties. Insolvency, death, inheritance or

lunacy of the member.

Initiated by Transferor and transferee Legal heir or receiver

Consideration Adequate consideration there. No consideration is paid.

Execution Yes No

Stamp duty Payable on market value of shares. No need to pay

DIRECTORS
The directors are the persons elected by the shareholders to direct, conduct, manage or supervise
the affairs of the company. Number of Directors: Every public company by virtue of Sec. 43 A,
shall have at least three directors, private company shall have at least two directors. [Sec. 252]
Sec. 2 (13), “Director includes any person occupying the position of director.”
According to Sec. 2(30), “A director is the officer of the company.”
Legal position of directors:
1. Position of Directors as Trustees:
a) Legally a director is not the trustee: Legally speaking, a director is not the trustee of the
company. “A trustee is a man who is the owner of property and deals with it as principal, as
owner equitable obligation to account to some persons to whom stands in relation of a trustee.
b) Directors as the company’s property & money: The directors are not, properly the trustees,
yet they are trustees of the company’s money & property & they are bound to deal with capital.
They must act in good faith & exercise their powers in the interest & benefit of the company.
c) Directors as trustees to the powers entrusted to them: Examples of powers are as follows:
 The power of employing the funds of the company;
 The power to declare dividend in the general meeting;
 The power to make call;
 The power of forfeiting shares;
 The power of receiving payment of call in advance;
d) Directors not as trustees to the shareholders: It should be noted that directors occupy a
fiduciary relationship only in relation to the company and not in relation to an individual
shareholder. They are not trustees for any particular shareholder.
2. Directors as Agents: The Company being an artificial person cannot manage its affairs itself
but the management of the company is entrusted to some human agency known as directors.
They run the business on behalf of the shareholders known as the agent of company.
3. Directors as Managing Partner: Directors have been described as the managing partners
because, on the one hand, they are entrusted with management and control of the affairs of the
company, and on the other hand, they are usually important shareholders of the company.
4. Directors as Officers: The directors are the officers of the company. As officers, they may by
held liable if the provisions of the Companies Act have not been fully complied with by them.
5. Directors as Employees: The directors may be considered as employees of company because
they work under a special contract of service with the company & paid remuneration.
Qualifications of Directors:
1. Qualification Shares: If the articles of the company so provide then as per Sec. 270, the
directors must obtain their qualification shares as follows:
a) The directors must obtain qualification shares within two months after their appointment unless
they already hold shares.
b) If any provision in the articles requiring a person to hold the qualification shares before his
appointment as a director within a period shorter than two months shall be void.
c) The nominal value of one qualification share must not exceed Rs. 5,000.
d) If a director does not obtain qualification shares within two months of his appointment or
thereafter does not possess such shares at any time, he ceases to be a director automatically.
e) A person who acts as a director of a company without holding qualification shares even after the
expiry of the period of two months from the date of his appointment shall be punishable with a
fine extending to Rs. 50 for every day from the date of expiry of the period [Sec. 272]
2. Written Consent: Every person proposed as a candidate for the office of a director has to sign
and file with the company his consent to act as a director, if appointed (Sec. 264).
a) A person who is retiring from directorship by rotation or otherwise.
b) A person who has given notice for directorship at the registered office of the company.
c) A newly appointed director shall not act as a director unless he has also within 30 days of
his appointment signed and filed with the Registrar his consent to act as such director.
Disqualifications of Directors:
1. He has been found to be of unsound mind by a competent court and the finding is in force;
2. He is an undercharged insolvent;
3. He has been convicted of an offence involving sentenced to imprisonment for not less than six
months and a period of five years has not elapsed since the expiry of his sentence;
4. He has not paid any call in respect of shares of the company held by him for a period of six
months from the last day fixed for the payment;
5. He has been disqualified by an order of the Court under Sec. 203 of an offence in relation to
promotion, formation or management of the company or fraud in relation to the company.
Restriction of Number of Directorship: A person cannot be appointed as a director for more than
20 companies at a time. If any person holds office for 20 companies as a director of a company,
then no appointment can be made in any other company he vacates his office within 15 days.
1. An unlimited company.
2. A private company which is neither a subsidiary nor a holding company of a public company.
3. An association not carrying on business for profit.
4. Alternate directorship.
5. If a person holds office for more than 20 companies, he shall be punishable with fine which may
extend to Rs. 5,000 for each company after the first 20 companies.
MANAGING DIRECTOR
It is a common practice that the Board of Directors appoints one of its members to manage the
affairs of the company as a whole time officer and calls him the Managing Director. He acts as the
chief executive. He occupies a position of dual authority and responsibility.
Managing Director: means a director who by virtue of an agreement with the company or of a
resolution passed by the company in general meeting or by its Board of Directors or by virtue of its
Memorandum or Articles of Association
 The managing director must be an individual,
 He must be a member of the Board of Directors,
 He must be appointed by virtue of an agreement with the company or of a resolution passed
by the company in general meeting or by its Board of Directors
 He is entrusted with substantial power of management,
 He is not entrusted with powers of routine nature, and
 He shall exercise his powers subject to control & direction of its Board of Directors.
Appointment of Managing Director: A managing director is appointed by the Board of Directors
subject to the approval of the Central govt. He is appointed at the first instance for the period of
five years which can extend for a period of another five years. In case of a new company, the
approval must be made within three months of his appointment.
1. It is the interest of the company to have a managing director,
2. The proposed incumbent is a fit and proper person for such appointment,
3. His appointment is not against public interest,
4. The conditions of appointment of the proposed managing director are not against public interest.
Disqualifications of Managing Director: No person can be appointed a managing director if:
1. He is an un-discharged insolvent, or has at any time been adjudged an insolvent,
2. He suspends or has at any time suspended, payment to his creditors,
3. He makes, or has at any-time made, a composition with his creditors, or
4. He is, or has at any time, convicted by a Court of an offence involving moral turpitude.
Powers and Duties: Managing Director is entrusted with substantial powers of company
management subject to the superintendence, control & direction of the Board of Directors.
1. To affix the common seal of the company to any document, or
2. To draw and endorse any cheque on account of the company in any bank, or
3. To draw and endorse any negotiable instrument, or
4. To sign any certificate of shares, or
5. To direct registration of transfer of any share.
Powers, duties and responsibilities of the managing director may be stated as follows:
1. As a member of the Board of Directors he participates in formulating the objectives and policy-
making functions of the Board.
2. To execute policies laid down by the Board of Directors.
3. He is the liaison officer between the Board of Directors and the rest of the organisation.
4. To interpret and communicate policies of the company to subordinate employees.
5. To review the operations of the company.
6. To formulate the employment & compensation plan in accordance with the policies of company.
7. To plan the development and expansion of business.
8. To organise meetings with department heads.
9. To promote high morale among the employees of company by creating a sense of belonging.
10. To maintain contact with the govt., chamber of commerce, trade unions and community at large.
11. To maintain a harmonious relationship between line and staff managers.
12. To establish a system of budgetary control by which the actual performance of the company.
13. To administer production and sales activities of the company.
14. To give due attention to consumer satisfaction which is ensured by the continued supply of
goods and services to the market.
Remuneration of Managing Director: A Managing Director or a Whole time Director of a com-
pany may be paid remuneration either
1. By way of a monthly payment, or
2. At a specified percentage of the net profits of the company, or
3. partly by one and partly by the other.
 Provided that, except with the approval of the Central Govt., such remuneration shall not exceed
5% of the net profit for one such director and 10% for all of them together.
 In case of inadequacy of profits, the company may pay, subject to the approval of the Central
Govt., to its managing director and other managerial staff together minimum remuneration—such
sum not exceeding Rs. 50,000 per annum.
 Such sum shall be exclusive of any fees payable to directors. Increase of remuneration to

managing director requires the approval of the Central Govt.