ASSIGNMENT

CORPORATE LAW I

CONCEPT AND TYPES OF SHARES

SUBMITTED BYJaya Sharma

6TH SEM
B.A., LL.B. (Hons.)

ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my

Corporate Law Professor Mr. Q. Usman for his exemplary guidance, monitoring and
constant encouragement throughout the course of this assignment. The blessings, help
and guidance given by her time to time shall carry me a long way in the journey of life
which I am about to embark.
I am obliged to staff members of Faculty of law, for the valuable information provided
by them in their respective fields. I am grateful for their cooperation during the period
of my assignment.
Lastly, I thank almighty, my parents, brother, sister and friends for their continuous
encouragement without which this assignment could not be possible.

JAYA SHARMA

INTRODUCTION

A share is one unit into which the total share capital is divided. Each share forms a unit of
ownership and is offered for sale so as to raise capital for the company. The shares any
member in a company are movable property transferable in the manner provided by the
articles of the company. Face value of a share is the par value of the share. It is also known as
the Nominal value or denomination of a share. Share means a share in the share capital of a
company and includes stock1. Thus, in other words, shares are divisions of the share capital of
a company. A share represents a fractional part of the share capital of the company
Every company limited by shares must have a share capital. Share capital of a company refers
to the amount invested in the company for it to carry out its operations. The share capital may
be altered or increased, subject to certain conditions. A companys share capital may be
divided into small shares of different classes. The different classes of share capital and the
rights attached to these classes are different.
The amount of capital which a company may raise in future is mentioned in capital clause of
the Memorandum of Association. The capital is fixed after making careful analysis of present
and future requirements of the company.
The companys capital may be divided into following categories:
(a) Authorised or Nominal Capital:
This is the maximum amount of capital which a company can issue. The company, in no case,
can issue more capital than authorised by its Memorandum. It is called Authorised Capital
because the company has an authority to issue this much capital. The maximum limit of
capital to be issued is fixed at the time of registration of the company that is why it is called
Registered Capital also. While deciding about authorised capital, present and future needs of
the concern should be taken into consideration.
The company can fix any amount as authorised capital. In case a company wants to issue
more capital than authorised, it will have to alter capital clause in the Memorandum. The
alteration of this clause involves lot of formalities. The authorised capital is divided into a
number of shares. It may be written as the authorised capital of the company will be Rs. 10
lakhs, divided into 10,000 shares of Rs. 100 each. It is not necessary that the whole of
authorised capital be issued for subscription. The company can issue shares as per its
requirements. The authorised capital fixes only the maximum limits beyond which it cannot
go.
1 Section 2(84) of the Companies Act, 2013.

(b) Issued Capital:

The company will issue shares according to its requirements. It may not need the entire
capital at one time. Rather, capital needs go along with its development stages. The capital
which is offered to the public for subscription is known as Issued Capital. The part of capital
which is not issued is known as unissued capital. If out of 10,000 shares of Rs. 100 each, the
company issues 8,000 shares for public subscription, then Rs. 8 lakhs will be issued capital
and Rs. 2 lakhs will be unissued capital.
(c) Subscribed Capital:
The shares issued by the company for public subscription may not be applied for in full.
Subscribed capital denotes the share capital taken up by the public. Continuing the earlier
example, suppose the public subscribed for only 5,000 shares out of 8,000 shares issued ;
then subscribed capital will be Rs. 5 lakhs. The issued and subscribed capitals can be same
also.
If all the 8,000 shares are subscribed for by the public then issued and subscribed capital will
be Rs. 8 lakhs. The subscription of share capital depends upon reputation of the company. If
the company carries a sound reputation, it will have no problem in selling the shares.
The applications for shares may be more or less than the number of shares offered by the
company. If the applications are for more shares than the issued, it is known as Over
subscription. On the other hand, if applications are far less shares than offered for
subscription, it is known as under subscription.
(d) Called-up Capital:
After the receipt of share applications, the Board of Directors makes allotment of shares to
the applicants. Certain amount is payable on application and the balance is called at the time
of allotment and calls. The capital is called up as per requirements for funds. The amount of
capital is called called- up capital.
Taking the earlier example, suppose the company calls for Rs. 50 per share out of Rs. 100;
then called up capital will be Rs. 4 lakhs, if all the 8,000 shares have been subscribed for. The
part of capital which has not been called-up is known as Un-called capital. The shareholders
are under obligation to pay the money whenever it is called-up.
(e) Paid-up Capital:
The amount of capital actually received is termed as Paid-up Capital. The shareholders are
asked to pay the calls within a certain period. In case whole of the called-up money has been

received from the shareholders, called-up and paid-up capital will be the same. There may be
some defaulters and the money which has not been received is called calls-in-arrears.
Continuing with the earlier example, if Rs. 3, 75,000 have been received out of Rs. 4 lakhs,
then paid-up capital will be Rs. 3, 75,000 and Rs. 25,000 will be calls in-arrears.
(f) Reserved Capital:
A limited company may earmark a part of uncalled capital as Reserved Capital. The reserved
capital is called-up only in case of winding up of the company. This is done in order to create
confidence in the minds of the creditors. Capital can be reserved by passing a special
resolution by the shareholders.

NATURE OF SHARES
A share is the interest of a member in a company. Section 2(84) of the Companies Act, 2013
(hereinafter referred to as Act) share means a share in the share capital of a company and

includes stock. It represents the interest of a shareholder in the company, measured for the
purposes of liability and dividend. It attaches various rights and liabilities. Share, debentures
or other interest of any member in a company shall be movable property. It shall be
transferable in any manner provided for in the articles of association of the company. A
member may transfer any other interest in the company in the manner provided in the
articles. For example rights attached to a member in a guarantee company such as
membership interest, suspension of membership or assignment of interest may be made
transferable by making a provision in the Articles of the company

SHARE CERTIFICATE

Every share in a company having share capital shall be distinguished by distinctive number.
This section does not apply to shares held by a person as a beneficial owner in depository.
Section 46 of the Act declares that a certificate, issued by the company under the common
seal of the company shall be prima facie evidence of the title of the person to such shares.
Such certificate shall specify the shares held by any person. Where the shares are held in
dematerialised form the record of the depository is the prima facie evidence of the interest of
the beneficial owner. Every company shall, unless prohibited by any provision of law or any
order of Court, Tribunal or other authority, deliver the certificates of all securities allotted2
(a) within a period of two months from the date of incorporation, in the case of subscribers
to the memorandum;
(b) Within a period of two months from the date of allotment, in the case of any allotment of
any of its shares.
The manner of issuance of a certificate of shares or the duplicate thereof, the form of such
certificate, the particulars to be entered in the register of members are prescribed under Rules.
The manner of issuance of a certificate of shares the rules provide that no certificate of any
share or shares held in the company shall be issued, except:
(a) In pursuance of a resolution passed by the Board; and
(b) On surrender to the company of the letter of allotment or fractional coupons of
requisite value, save in cases of issues against letters of acceptance or of renunciation,
or in cases of issue of bonus shares:
Provided that if the letter of allotment is lost or destroyed, the Board may impose such
reasonable terms, if any, as to seek supporting evidence and indemnity and the payment of
out-of-pocket expenses incurred by the company in investigating evidence, as it may think fit.
Every certificate of share or shares shall be in Form No. SH-1 or as near thereto as possible
and shall specify the name(s) of the person(s) in whose favour the certificate is issued, the
shares to which it relates and the amount paid-up thereon.
The rules further provide that every share certificate shall be issued under the seal of the
company, which shall be affixed in the presence of, and signed by:
(a) Two directors duly authorized by the Board of Directors of the company for the
purpose or the committee of the Board, if so authorized by the Board; and

2 Section 56(4) of the Act.

(b) The secretary or any person authorized by the Board for the purpose. Where a
Company Secretary is appointed under the provisions of law, he shall be authorized
for the purpose of this rule.
In companies wherein a Company Secretary is appointed under the provisions of the Act, he
shall deem to be authorised for the purpose of this rule. If the composition of the Board
permits of it, at least one of the aforesaid two directors shall be a person other than the
managing or whole-time director. Further in case of a One Person Company, every share
certificate shall be issued under the seal of the company, which shall be affixed in the
presence of and signed by one director or a person authorized by the Board of Directors of
the company for the purpose and the Company Secretary, or any other person authorized by
the Board for the purpose. A director shall be deemed to have signed the share certificate if
his signature is printed thereon as a facsimile signature by means of any machine, equipment
or other mechanical means such as engraving in metal or lithography, or digitally signed, but
not by means of a rubber stamp, provided that the director shall be personally responsible for
permitting the affixation of his signature thus and the safe custody of any machine,
equipment or other material used for the purpose. Particulars of every share certificate issued
shall be entered in the Register of Members along with the name(s) of person, to whom it has
been issued, indicating the date of issue.
Issuance of Duplicate Certificate
As for the duplicate certificate of shares, the section provides that the same may be issued, if
original certificate3
(a) Is proved to have been lost or destroyed; or
(b) Has been defaced, mutilated or torn and is surrendered to the company.
As for the manner of issuance of a duplicate certificate of shares the rules provide:
(A) no certificate of any share or shares shall be issued either in exchange for those
which are sub-divided or consolidated or in replacement of those which are defaced,
mutilated, torn or old, decrepit, worn out, or where the cages on the reverse for
recording transfers have been duly utilized, unless the certificate in lieu of which it
is issued is surrendered to the company. The company may charge such fee as the
Board thinks fit, not exceeding twenty rupees per certificate issued on splitting or
3 Section 56 of the Act.

consolidation of share certificate(s) or in replacement of share certificate(s) that are

defaced, mutilated, torn or old, decrepit or worn out. Where a certificate is issued in
any of the aforesaid circumstances, it shall be stated on the face of it and be recorded
in the Register maintained for the purpose, that it is Issued in lieu of share
certificate No..... sub-divided/ replaced/on consolidation and also that no fee shall
be payable pursuant to scheme of arrangement sanctioned by the High Court or
Central Government.
A company may replace all the existing certificates by new certificates upon subdivision or consolidation of shares or merger or demerger or any reconstitution
without requiring old certificates to be surrendered, in the manner of issuance of
original share certificates discussed above.
(B) The rules provide that no duplicate share certificate shall be issued in lieu of those
that are lost or destroyed, without the prior consent of the Board or without payment
of such fees as the Board thinks fit, not exceeding rupees fifty per certificate and on
such reasonable terms, such as furnishing supporting evidence and indemnity and
the payment of out of-pocket expenses incurred by the company in investigating the
evidence produced. Where a certificate is issued in any of the aforesaid
circumstances it shall be stated prominently on the face of it and be recorded in the
Register maintained for the purpose, that it is duplicate issued in lieu of share
certificate No....... Further, the word duplicate shall be stamped or printed
prominently on the face of the share certificate. The Duplicate Share Certificates
shall be issued:
In case unlisted companies, within a period of three months.
in case of listed companies, within fifteen days, from the date of submission of
complete documents with the company.
Particulars of every share certificate issued shall be recorded in a Register of
Renewed and Duplicate Share Certificates. Such register shall be maintained in
Form No. SH-2 indicating against the name(s) of the person(s) to whom the
certificate is issued, the number and date of issue of the share certificate in lieu of
which the new certificate is issued, and the necessary changes indicated in the
Register of Members by suitable cross-references in the Remarks column. Such
register shall be kept at the registered office of the company or at such other place
where the Register of Members is kept. The register shall be preserved permanently
and shall be kept in the custody of the company secretary of the company or any
other person authorized by the Board for the purpose. All entries made in the

Register of Renewed and Duplicate Share Certificates shall be authenticated by the

company secretary or such other person as may be authorized by the Board for
purposes of sealing and signing the share certificate.

Maintenance of share certificate forms and related books and documents

(A) All blank forms to be used for issue of share certificates shall be printed and the printing
shall be done only on the authority of a resolution of the Board. The blank form shall be
consecutively machine-numbered and the forms and the blocks, engravings, facsimiles
and hues relating to the printing of such forms shall be kept in the custody of the
secretary or such other person as the Board may authorize for the purpose; and the
company secretary or other person aforesaid shall be responsible for rendering an
account of these forms to the Board.
(B) The following persons shall be responsible for the maintenance, preservation and safe
custody of all books and documents relating to the issue of share certificates, including
the blank forms of share certificates, namely:
(a) The committee of the Board, if so authorized by the Board or where the company has
a company secretary, the company secretary; or
(b) Where the company has no company secretary, a Director specifically authorised by
the Board for such purpose.
(C) All books shall be preserved in good order for not less than thirty years and in case of
disputed cases, shall be preserved permanently, and all certificates surrendered to a
company shall immediately be defaced by stamping or printing the word cancelled in
bold letters and may be destroyed after the expiry of three years from the date on which
they are surrendered, under the authority of a resolution of the Board and in the presence
of a person duly appointed by the Board in this behalf. 4
4

Nothing in this sub-rule shall apply to cancellation of the certificates of securities, under

sub-section (2) of section 6 of the Depositories Act, 1996 (22 of 1996), when such certificates
are cancelled in accordance with sub-regulation (5) of regulation 54 of the Securities and
Exchange Board of India (Depositories and Participants) Regulations, 1996, made under
section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) read with
section 25 of the Depositories Act, 1996 (22 of 1996).

Related Penal Provision 5

The Act has provides for stringent penal provisions. If a company issues duplicate shares with
an intention to defraud public, the company shall be punishable with a fine which will range
from five times and ten times of the face value of the shares or Rs. 10 crore whichever is
higher and every officer in default shall be liable for action for fraud under section 447. As
per Section 447 of the -Act any person who is found to be guilty of fraud, shall be punishable
with imprisonment for a term which shall not be less than six months but which may extend
to ten years and shall also be liable to fine which shall not be less than the amount involved in
the fraud, but which may extend to three times the amount involved in the fraud Provided that
where the fraud in question involves public interest, the term of imprisonment shall not be
less than three years. For the purpose of this section,
(i)

fraud in relation to affairs of a company or any, body corporate, includes any

act, omission, concealment of any fact or abuse of position committed by any
person or any other person with the connivance in any manner, with intent to
deceive, to gain undue advantage from, or to injure the interests of, the company
or its shareholders or its creditors or any other person, whether or not there is any

(ii)

wrongful gain or wrongful loss;

wrongful gain means the gain by unlawful means of property to which the

(iii)

person gaining is not legally entitled;

wrongful loss means the loss by unlawful means of property to which the
person losing is legally entitled.

VOTING RIGHTS
The Act provides that every member of a company limited by shares and holding equity share
capital therein, shall have a right to vote on every resolution placed before the company; and
his voting right on a poll shall be in proportion to his share in the paid-up equity share capital
of the company6. In case of member of a company limited by shares and holding preference
share capital, shall have a right to vote only on:-

5 Section 447 of the Act.

6 Section 47 of the Act.

 Resolutions placed before the company which directly affect the rights attached to his
preference shares and,
Any resolution for the winding up of the company or
For the repayment or reduction of its share capital. Voting right of holder of preference
share capital shall be in proportion to his share in the paid-up preference share capital of the
company. The proportion of the voting rights of equity shareholders to the voting rights of the
preference shareholders shall be in the same proportion as the paid-up capital in respect of the
equity shares bears to the paid-up capital in respect of the preference shares. Preference
shareholders are entitled to vote on every resolution placed before the company at any
meeting, if the dividend due on such class of preference shares is in arrears for a period of
two years or more.

CALLS, FORFEITURE & REISSUANCE

Calls
Where any calls for further share capital are made on the shares of a class, such call shall be
made on a uniform basis on all shares falling under that class.7 There cannot be any
discrimination between shareholders of the same class as regards amount and time of
repayment of call. Usually articles of association provide for the manner in which the unpaid
amount on shares. The pattern followed in this case is similar to as given in schedule I Table
F(hereinafter Table F):
The Board may, from time to time, make calls upon the members in respect of any monies
unpaid on their shares (whether on account of the nominal value of the shares or by way of
premium) and not by the conditions of allotment thereof made payable at fixed times:
Provided that no call shall exceed one-fourth of the nominal value of the share or be payable
at less than one month from the date fixed for the payment of the last preceding call.
Each member shall, subject to receiving at least fourteen days notice specifying the time or
times and place of payment, pay to the company, at the time or times and place so specified,
the amount called on his shares. A call may be revoked or postponed at the discretion of the
Board.8
7 Section 49 of the Act.
8 Provision 13 of Table F

A call shall be deemed to have been made at the time when the resolution of the Board
authorising the call was passed and may be required to be paid by instalments.9 The joint
holders of a share shall be jointly and severally liable to pay all calls in respect thereof.10
If a sum called in respect of a share is not paid before or on the day appointed for payment
thereof, the person from whom the sum is due shall pay interest thereon from the day
appointed for payment thereof to the time of actual payment at ten per cent per annum or at
such lower rate, if any, as the Board may determine. The Board shall be at liberty to waive
payment of any such interest wholly or in part.11
Any sum which by the terms of issue of a share becomes payable on allotment or at any fixed
date, whether on account of the nominal value of the share or by way of premium, shall, for
the purposes of these regulations, be deemed to be a call duly made and payable on the date
on which by the terms of issue such sum becomes payable.12
(ii) In case of non-payment of such sum, all the relevant provisions of these regulations as to
payment of interest and expenses, forfeiture or otherwise shall apply as if such sum had
become payable by virtue of a call duly made and notified.
The Board (a) may, if it thinks fit, receive from any member willing to advance the same,
all or any part of the monies uncalled and unpaid upon any shares held by him; and (b) upon
all or any of the monies so advanced, may (until the same would, but for such advance,
become presently payable) pay interest at such rate not exceeding, unless the company in
general meeting shall otherwise direct, twelve per cent per annum, as may be agreed upon
between the Board and the member paying the sum in advance.13 According to SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 if the issuer proposes to receive
subscription monies in calls, it shall ensure that the outstanding subscription money is called
within twelve months from the date of allotment in the issue. If any allotee fails to pay the
9 Provision 14 of Table F
10 Provision 15 of Table F
11 Provision 16 of Table F
12 Provision 18 of atble F
13 Provision 18

call money within the said twelve months, the equity shares on which there are calls in arrear
along with the subscription money already paid on such shares shall be forfeited. Further it
shall not be necessary to call the outstanding subscription money within twelve months, if the
issuer has appointed a monitoring agency. According to section 50 of the Act if a company
may, if so authorised by its articles, accept from any member, the whole or a part of the
amount remaining unpaid on any shares held by him, even if no part of that amount has been
called up. A member of the company limited by shares shall not be entitled to any voting
rights in respect of the amount paid by him in advance until that amount has been called up. A
company if authorised by its articles may pay dividends in proportion to the amount paid-up
on each share. In the case of preference shares, dividend shall be paid on fixed rate. In case of
equity shares, dividend may be paid according to amount paid-up on the shares.14

FORFEITURE OF SHARES
The provision with regard to forfeiture of shares is contained in Table F (Articles of
Association of Company Limited by Shares)
If a member fails to pay any call, or instalment of a call, on the day appointed for payment
thereof, the Board may, at any time thereafter during such time as any part of the call or
instalment remains unpaid, serve a notice on him requiring payment of so much of the call or
instalment as is unpaid, together with any interest which may have accrued.15
The notice aforesaid shall (a) name a further day (not being earlier than the expiry of
fourteen days from the date of service of the notice) on or before which the payment required
by the notice is to be made; and (b) state that, in the event of non-payment on or before the
day so named, the shares in respect of which the call was made shall be liable to be forfeited.
30. If the requirements of any such notice as aforesaid are not complied with, any share in
respect of which the notice has been given may, at any time thereafter, before the payment
required by the notice has been made, be forfeited by a resolution of the Board to that effect.16

14 Section 51 of the Act.

15 Provision 28 in Table F
16 Provision 29 of Table F

A forfeited share may be sold or otherwise disposed of on such terms and in such manner as
the Board thinks fit.17At any time before a sale or disposal as aforesaid, the Board may cancel
the forfeiture on such terms as it thinks fit.18
A person whose shares have been forfeited shall cease to be a member in respect of the
forfeited shares, but shall, notwithstanding the forfeiture, remain liable to pay to the company
all monies which, at the date of forfeiture, were presently payable by him to the company in
respect of the shares.19 The liability of such person shall cease if and when the company shall
have received payment in full of all such monies in respect of the shares.20
(i) A duly verified declaration in writing that the declarant is a director, the manager or the
secretary, of the company, and that a share in the company has been duly forfeited on a date
stated in the declaration, shall be conclusive evidence of the facts therein stated as against all
persons claiming to be entitled to the share; (ii) The company may receive the consideration,
if any, given for the share on any sale or disposal thereof and may execute a transfer of the
share in favour of the person to whom the share is sold or disposed of; (iii) The transferee
shall thereupon be registered as the holder of the share; and (iv) The transferee shall not be
bound to see to the application of the purchase money, if any, nor shall his title to the share be
affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale
or disposal of the share.21
The provisions of these regulations as to forfeiture shall apply in the case of non-payment of
any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on
account of the nominal value of the share or by way of premium, as if the same had been
payable by virtue of a call duly made and notified. According to SEBI22, the issuer company
needs to call all the outstanding subscription money within one year of allotment and if any
allotee fails to pay the call money within the twelve months, the equity shares on which there
are calls in arrear along with the subscription money already paid on such shares shall be
17 Provision 31(i) of Table F
18 Provision 31(ii) of Table F
19 Provision 32(i) of Table F
20 Provision 32(ii) of Table F
21 Provision 33 of Table F
22 (Issue of Capital and Disclosure Requirements) Regulations, 2009

forfeited. The company derives its authority to forfeit shares through the Articles. Where the
articles provide for forfeiture of shares with respect to manner of forfeiting shares, the
company must comply with the same or else forfeiture shall be void.23

Reissuance Of Shares
Shares forfeited by a company may either be cancelled or reissued to another person at the
discretion of the Board. Reissue of forfeited shares is a sale of shares and it does not amount
to an allotment. According to Secretarial Standard on Forfeiture of Shares the directors would
fix a price for the forfeited share that should not be lower than the amount of the call(s) due
and unpaid on the share at the time of forfeiture. In the case of a company whose shares are
listed in a recognized stock exchange, re-issue of forfeited shares shall be as per Guidelines
for Preferential Issue of the Securities and Exchange Board of India and the listing
agreement.

KINDS OF SHARES
The share capital of a company limited by shares shall be of two kinds24:
(a) equity share capital
(i)
with voting rights; or
(ii)
with differential rights as to dividend, voting or otherwise in accordance with
such rules as may be prescribed; and
(b) preference share capital:

Equity Share Capital

Equity shares were earlier known as ordinary shares. The holders of these shares are the real
owners of the company. They have a voting right in the meetings of holders of the company.
They have a control over the working of the company. Equity shareholders are paid dividend
23 Provision 34 of Table F.
24 Section 43 of the Act.

after paying it to the preference shareholders. The rate of dividend on these shares depends
upon the profits of the company. They may be paid a higher rate of dividend or they may not
get anything. These shareholders take more risk as compared to preference shareholders.
Equity capital is paid after meeting all other claims including that of preference shareholders.
They take risk both regarding dividend and return of capital. Equity share capital cannot be
redeemed during the life time of the company.
Equity shares have the following features:
(i)

Equity share capital remains permanently with the company. It is returned only

(ii)
(iii)

when the company is wound up.

Equity shareholders have voting rights and elect the management of the company.
The rate of dividend on equity capital depends upon the availability of surplus
funds. There is no fixed rate of dividend on equity capital.

Advantages
1. Equity shares do not create any obligation to pay a fixed rate of dividend.
2. Equity shares can be issued without creating any charge over the assets of the
company.
3. It is a permanent source of capital and the company has to repay it except under
liquidation.
4. Equity shareholders are the real owners of the company who have the voting rights.
5. In case of profits, equity shareholders are the real gainers by way of increased
dividends and appreciation in the value of shares.
Disadvantages
1. If only equity shares are issued, the company cannot take the advantage of trading on
equity.
2. As equity capital cannot be redeemed, there is a danger of over capitalisation.
3. Equity shareholders can put obstacles for management by manipulation and
organising themselves.
4. During prosperous periods higher dividends have to be paid leading to increase in the
value of shares in the market and it leads to speculation.
5. Investors who desire to invest in safe securities with a fixed income have no attraction
for such shares.
Equity share capital, with reference to any company limited by shares, means all share
capital which is not preference share capital. Equity share capital may be divided on the

basis of voting rights and differential rights (DVR) as to dividend25, voting rights or otherwise
according to the rules. A DVR share is like an ordinary equity share, but it provides fewer
voting rights to the shareholder. The difference in voting rights can be achieved by reducing
the degree of voting power. It is ideal for long term investors, typically small investors who
seek higher dividend and are not necessarily interested in taking a voting position. The
Companies (Share Capital and Debentures) Rules, 2014 (hereinafter referred to as Rules)
provide that no company whether it is unlisted, listed or a public company limited by shares
shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it
complies with the following conditions:
(a) the articles of association of the company authorizes the issue of shares with
differential rights;
(b) the issue of shares is authorized by an ordinary resolution passed at a general meeting
of the shareholders: Provided that where the equity shares of a company are listed on
a recognized stock exchange, the issue of such shares shall be approved by the
shareholders through postal ballot ;
(c) the shares with differential rights shall not exceed twenty six percent of the total postissue paid up equity share capital including equity shares with differential rights
issued at any point of time;
(d) the company having consistent track record of distributable profits for the last three
years;
(e) the company has not defaulted in filing financial statements and annual returns for
three financial years immediately preceding the financial year in which it is decided to
issue such shares;
(f) the company has no subsisting default in the payment of adeclared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference
shares or debentures that have become due for redemption or payment of interest on
such deposits or debentures or payment of dividend;
(g) the company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or State level financial
institution or scheduled Bank that has become repayable or interest payable thereon or
dues with respect to statutory payments relating to its employees to any authority or
default in crediting the amount in Investor Education and Protection Fund to the
Central Government;
(h) the company has not been penalized by Court or Tribunal during the last three years
of any offence under the Reserve Bank of India Act, 1934 , the Securities and
25 Section43(a) of the Act

Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956,
the Foreign Exchange Management Act, 1999 or any other special Act, under which
such companies being regulated by sectoral regulators.
The Rules as aforesaid clearly state that the company shall issue DVR shares only after
approval from shareholder by passing a ordinary resolution. It further provides that a listed
company where the equity shares of a company are listed on a recognized stock exchange, the
issue of such shares shall be approved by the shareholders through postal ballot. The
explanatory statement to be annexed to the notice of the general meeting to be convened
pursuant to section 102 or of a postal ballot pursuant to section 110 shall contain the
following particulars:
(a) the total number of shares to be issued with differential rights;
(b) the details of the differential rights;
(c) the percentage of the shares with differential rights to the total post issue paid up
equity share capital including equity shares with differential rights issued at any point
(d)
(e)
(f)
(g)

of time;
the reasons or justification for the issue;
the price at which such shares are proposed to be issued either at par or at premium;
the basis on which the price has been arrived at;
(i) in case of private placement or preferential issue - (a) details of total number of
shares proposed to be allotted to promoters, directors and key managerial personnel;
(b) details of total number of shares proposed to be allotted to persons other than
promoters, directors and key managerial personnel and their relationship if any with
any promoter, director or key managerial personnel; (ii) in case of public issue reservation, if any, for different classes of applicants including promoters, directors or

key managerial personnel;

(h) the percentage of voting right which the equity share capital with differential voting
right shall carry to the total voting right of the aggregate equity share capital;
(i) the scale or proportion in which the voting rights of such class or type of shares shall
vary;
(j) the change in control, if any, in the company that may occur consequent to the issue of
equity shares with differential voting rights;
(k) the diluted earnings Per Share pursuant to the issue of such shares, calculated in
accordance with the applicable accounting standards;
(l) the pre and post issue shareholding pattern along with voting rights as per clause 35 of
the listing agreement issued by Security Exchange Board of India from time to time.

The Rules further provide that the company shall not convert its existing equity share capital
with voting rights into equity share capital carrying differential voting rights and viceversa.
According to the Rules the Boards Report for the financial year in which the issue of equity
shares with differential rights was completed shall include the following details with respect
to DVR shares:
(i) total number of shares allotted with differential rights;
(ii) details of the differential rights relating to voting rights and dividends;
(iii)
the percentage of the shares with differential rights to the total post issue
equity share capital with differential rights issued at any point of time and percentage
of voting rights which the equity share capital with differential voting right shall carry
to the total voting right of the aggregate equity share capital;
(iv)price at which such shares have been issued;
(v) particulars of promoters, directors or key managerial personnel to whom such shares
are issued;
(vi)change in control, if any, in the company consequent to the issue of equity shares with
differential voting rights;
(vii)
diluted Earning Per Share pursuant to the issue of such each class of shares,
calculated in accordance with the applicable accounting standards;
(viii)
Pre and post issue shareholding pattern along with voting rights in the same
specified format as given in explanatory statement. The rules provide that the holders
of the equity shares with differential rights shall enjoy all other rights such as bonus
shares, rights shares etc., which the holders of equity shares are entitled to, subject to
the differential rights with which such shares have been issued. The company issuing
equity shares with differential rights, shall ensure that the Register of Members
contains all the relevant particulars of the shares so issued along-with details of the
shareholders.

Preference Share Capital

As the name suggests, these have certain preferences as compared to other types of shares.
These shares are given two preferences. There is a preference for payment of dividend.
Whenever the company has distributable profits, the dividend is first paid on preference share
capital.

Other shareholders are paid dividend only out of the remaining profits, if any. The second
preference for shares is repayment of capital at the time of liquidation of the company. After
payment of outside creditors, preference share capital is returned. Equity shareholders will be
paid only when preference share capital is paid in full.
Preference Share Capital have the following features
(i) Preference shares have priority over payment of dividend and repayment of capital.
(ii) The rate of dividend on preference shares is fixed. Only in case of participating
preference shares additional dividend may be paid if profits remain after paying
equity dividend.
(iii) Except in case of redeemable preference shares, the preference share capital
remains with the company on a permanent basis.
(iv) Preference shares do not create any charge over the assets of the company.
(v) Preference shareholders do not hold voting rights.
(vi)Redeemable preference shares can be paid off, if the company has surplus funds.
(vii) Dividend on cumulative preference shares is carried forward to the next year if
company does not have sufficient profits in the current year.

Preference shares are of the following types:

(a) Cumulative Preference Shares:
These shares have a right to claim dividend for those years also for which there were no
profits. Whenever there are divisible profits, cumulative preference shares are paid dividend
for all the previous years in which dividend could not be declared.
Take for example, a company which is unable to pay dividend on preference shares for the
year 1981 and 1982. If in the year 1983 the company has sufficient profits, cumulative
dividend will be paid first for the year 1981 and 1982 and only then the dividend for the year
1983 will be declared. The dividend goes on cumulating unless otherwise it is paid.
(b) Non-Cumulating Preference Shares:
The holders of these shares have no claim for the arrears of dividend. They are paid a
dividend if there are sufficient profits. They cannot claim arrears of dividend in subsequent
years.

(c) Redeemable Preference Shares:

Formally, the capital of a company is repaid only at the time of liquidation. Neither the
company can return the share capital nor can the shareholders demand its repayment. The
company, however, can issue redeemable preferences shares if articles of association allow
such an issue. The company has a right to return redeemable preferences share capital after a
certain period.
The Companies Act has provided certain restrictions on the return of this capital. The shares
to be redeemed should be fully paid up. The company should redeem these shares either out
of profits or out of fresh issue of capital. The object of these restrictions is that the resources
of the company are not depleted.
(d) Irredeemable Preference Shares:
The shares which cannot be redeemed, unless the company is liquidated, are known as
irredeemable preference shares.
(e) Participating Preference Shares:
The holders of these shares participate in the surplus profits of the company. They are firstly
paid a fixed rate of dividend and then a reasonable rate of dividend is paid on equity shares. If
some profits remain after paying both these dividends, then preference shareholders
participate in the surplus profits. The mode for dividing surplus profits between preference
and equity shareholders is given in the articles of association.
(f) Non-Participating Preference Shares:
The shares on which only a fixed rate of dividend is paid are known as non- participating
preference shares. The shares do not carry the additional right of sharing of profits of the
company.
(g) Convertible Preference Shares:
The holders of these shares may be given a right to convert their holdings into equity shares
after a specified period. These are called convertible preference shares. The right of
conversion must be authorised by the articles of association.
(h) Non-Convertible Preference Shares:

The shares which cannot be converted into equity shares are known as non- convertible
preference shares.
Advantages
1. Rate of return is guaranteed. Such investors, who prefer safety on their capital and
want to earn income with greater certainty always prefer to invest in preference
shares.
2. Helpful in raising long-term capital for a company.
3. Control of the company is vested with the management by issuing the preference
shares to outsiders as preference shareholders have restricted voting rights.
4. Redeemable preference shares have the added advantage of repayment of capital
whenever there is surplus in the company.
5. There is no need to mortgage property on these shares.
6. As a fixed rate of dividend is payable on preference shares, these enable a company to
adopt trading on equity i.e. to increase rate of earnings on equity shares after paying a
lower rate of fixed dividend on preference shares.
Disadvantages:
1. Permanent burden on the company to pay a fixed rate of dividend before paying
anything on other shares.
2. Not advantageous to investors from the point of view of control and management as
preference shares do not carry voting rights.
3. Compared to other fixed interest bearing securities such as debentures, usually the
cost of raising the preference share capital is higher.
With reference to any company limited by shares, Preference share capital means that part of
the issued share capital of the company which carries or would carry a preferential right with
respect to
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate,
which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share
capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to
the payment of any fixed premium or premium on any fixed scale, specified in the
memorandum or articles of the company;

Capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or

both of the following rights, namely:
(a) that in respect of dividends, in addition to the preferential rights to the amounts with
respect to dividend, it has a right to participate, whether fully or to a limited extent, with
capital not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a
winding up, of the amounts aforesaid, it has a right to participate, whether fully or to a limited
extent, with capital not entitled to that preferential right in any surplus which may remain
after the entire capital has been repaid.

CONCLUSION
With the provisions relating to securities in the Act, the regulators have tried to rationalise the
activities of the unlisted companies in comparison to the listed companies. Most of the
provisions in the Chapter remain the same with strong enforcement tool i.e. stricter penal
provision. I see lot of consolidation of the sections with a rationalised approach.