A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company…

A share is the interest of a shareholder in a definite portion of the capital. It expresses a proprietary relationship between the company and the shareholder. A shareholder is the proportionate owner of the company but he does not own the company’s assets which belong to the company as a separate legal entity. Section 2(46) defines a share as, “A share in the share capital of a company and includes stock except where a distinction between stock and shares is expressed or implied”. An exhaustive definition of share has been given by Farwell J. in Borland’s trustee v. steel bros. in the following words:

“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, and of interest the second, but also consisting of a series of mutual covenants entered into by all the shareholder inter se in accordance with the companies act”. Thus a share

i) Measures the right of a shareholder to receive a certain proportion of the profits of the company while it is a going concern and to contribute to the assets of the company when it is being wound up; and

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ii) Forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.

A share is a personal estate capable of being transferred in the manner laid down in the articles of association. It is a movable property which can either be mortgaged or pledged. Share is included in the definition of ‘good’ under the provisions of the sale of goods act, 1930. Every share issued by a company under its common seal specified the shares held by any member. The share certificate is the prima facie evidence of the title of the member to such shares. The share certificate is not a negotiable instrument.

Types of shares:

According to section 86 of the companies act, a company can issue only two types of shares:

(a) Preference shares; and

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(b) Equity shares.

Preference shares:

A preference share must satisfy the following two conditions:

I) It shall carry a preferential right as to the payment of dividend at a fixed rate; and

II) In the event of winding up, there must be a preferential right to the repayment of the paid up capital.

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These are two dominant characteristics of preference shares. So preference share may or may not carry such other right as:

(a) A preferential right to any arrears of dividend;

(b) A right to share in surplus profits by way of additional dividend;

(c) A right to be paid a fixed premium specified in the memorandum; and

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(d) A right to share in surplus assets in the event of a winding up, after all kinds of capital have been repaid.

Equity shares:

All shares which are not preference shares are equity shares. Equity shareholders have the residual rights of the company. They may get higher dividend than preference shareholders if the company is prosperous or get nothing if the business of the company flops. In the winding up, the equity shares are entitled to the entire surplus assets remaining after the payment of the liabilities and the capital of the company; unless the articles confer right on the preference shares a right to participate in the distribution of surplus assets.

1. Cumulative and non-cumulative preference shares:

With regard to the payment of dividend, preference shares may be cumulative or non-cumulative. In the case of cumulative preference shares, if the profits of the company in any years are not sufficient to pay the fixed dividend, on the preference shares the deficiency must be made up out of the profits of subsequent years. The accumulated arrears of dividend must be paid before anything is paid out of the profits to the holders of any other class of shares. In the case of non-cumulative preference shares, the dividend is only payable out of the net profits of each year. If there are no profits in any year, the arrears of dividend cannot be claimed in the subsequent years. Preference shares are presumed to be cumulative unless expressly described as non-cumulative. Any ambiguous language in the articles will not be enough to make them non-cumulative.

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2. Participating and Non-participating Preference Share:

Participating preference shares are those shares which are entitled, in addition to preference dividend at a fixed rate, to participate in the balance of profits with the equity shareholders after they get a fixed rate of dividend on their shares. The participating preference shares may also have the right to share in the surplus assets of the company on its winding up. Such a right must be expressly provided in the memorandum or the articles of association of the company.

Non-participating preference shares are entitled only to a fixed rate of dividend and do not share in the surplus profits. The preference shares are presumed to be non-participating, unless expressly provided in the memorandum or the articles or the terms of issue. A mere fact that the articles of a company confer on the preference shareholders a right to participate with the equity shareholders in the surplus profits does not necessarily mean that the preference shareholders are entitled to participate in the surplus assets also.

3. Redeemable preference shares:

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According to section 80, a company limited by shares, if so authorized by its articles, may issue redeemable preference shares. Such shares may be redeemed either after a fixed period or earlier at the option of the company. In the case of irredeemable shares, the capital is to be returned on the winding up of the company. The redeemable preference shares can be redeemed, only subject to the following conditions:

i) Such shares must be fully paid

ii) Such shares shall be redeemed out of distributable profits or out of the proceeds of a fresh issue made for the purposes of redemption.

iii) Any premium to be paid on redemption of such shares must be paid out of profits or out of the share premium account.

iv) Where shares are so redeemed out of profits, a sum equal to the nominal value of the shares redeemed must be transferred to the ‘capital redemption reserve account’. This amount shall be treated as capital of the company and the provisions as regards reduction of capital shall apply. The amount credited to the account cannot be paid out to the shareholders as dividend. But it can be used to pay up unissued shares to be issued as fully paid bonus shares.

Redemption of preference shares is not to be taken as reduction of the company’s authorized share capital. Shares already issued cannot be converted into redeemable preference shares.

Where a company fails to comply with these provisions, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 1,000.

Redemption of redeemable preference shares shall be notified to the registrar within one month of redemption. Where redeemable preference shares have been issued, the balance sheet must contain a statement specifying what part of the capital consists of such shares and the earliest date on which the company has power to redeem the shares.