This article has been written by Aditi Ananya from Chanakya National Law University

Table of Contents

MEANING OF SHARE

A share is a unit that denotes a portion of the company’s ownership. The people who own them are known as shareholders. Any earnings the business makes are payable to the shareholders as dividends. They also carry the risk of any losses the business could sustain.

Put simply, as a shareholder in a firm, you own a piece of the issuing company according to the number of shares you have purchased, which is often handled using a share market app. If something were to happen to the company, the shareholders would not be legally obligated to get their money back because they represent ownership rather than debt.

A share is the right to a particular quantity of a company’s share capital, together with associated obligations and privileges. It is an entitlement to share in a business’s earnings.

Equities or stocks are other terms for shares. They are regarded as financial assets by some businesses. Therefore, a firm can utilise the money it raises from the sale of stock to investors to finance operations, grow, or make acquisitions.

Consequently, investors get ownership stakes in the business and are eligible to receive a share of its assets and earnings. Shares are created when a company’s whole capital is split up into smaller denomination pieces.

For instance, if the company’s entire capital is ₹5,00,000 and it is divided into 10,000 units, each worth ₹50, then each unit of ₹50 will be referred to as a share (of ₹ 10 each).

In the aforementioned scenario, the corporation has 1,00,000 shares, each worth ₹10. The shares need to be numbered so that they may be recognised.

Because they have no set maturity date, shares are eternal in nature. The supply and demand in the market affect the value of shares. It varies all the time.

As per the Companies Act of 2013, shares are classified as a particular kind of security. The definition of a “share” is a portion of the company’s share capital, including stock. This is in compliance with Companies Act of 2013 Section 2(84). Put differently, a share represents a shareholder’s stake in the company’s assets.

The company’s Memorandum and Articles of Association specify the rights and responsibilities of shareholders. In addition, a shareholder is required under the Companies Act of 2013 to have certain contractual and other rights.

The Companies Act of 2013 stipulates in Section 44 that any member’s shares, debentures, or other interests in a business are moveable goods. Additionally, they can be transferred in the way specified by the company’s articles.

Every share in a company with share capital must be identified by its unique number, per Section 45 of the Companies Act of 2013. However, this provision does not apply to shares held by individuals whose names are listed in a depository’s records as holders of beneficial interests in those shares.

Usually, the number of shares that can be granted to the board of directors of a corporation is limited. We refer to this as authorised shares. The quantity of shares sold to shareholders and tallied for ownership reasons is known as issued shares. Thus, a company may issue just 8 million of the 10 million authorised shares.

The number of authorised shares affects shareholders’ ownership; thus, shareholders have the power to vote to restrict that number as they see fit. Shareholders convene to deliberate and reach a consensus on matters pertaining to the authorization of additional shares. Articles of modification are filed with the state in order to formally propose changes to the authorised number of shares.

Publicly traded corporations list their shares on markets for the general public, usually through an initial public offering (IPO). This is a costly, time-consuming, and highly regulated procedure where a business must go through stages of fund-raising and regulatory inspection.

A share is also considered a good in India. The Sale of Goods Act, 1930 defines “goods” as any sort of moveable property, including shares and stocks, except than money and actionable claims.

KINDS OF SHARES

A company may issue two types of Shares under Section 43 of the Companies Act, 2013. They are:

Preference Shares
Equity Shares

1. Preference Shares

Particular rights or preferred treatment are associated with preference shares, particularly with regard to dividend payment and capital repayment during an organization’s wind-down. When it comes to a company’s profitability, preferred shareholders are given precedence over common shareholders. Moreover, preferential shareholders receive payment ahead of common shareholders in the case of a company’s collapse. Additionally, they are entitled to a portion of any extra earnings once a certain dividend on the equity shares is paid, as well as the right to collect the premium when the shares are redeemed. They are not, however, able to vote or participate in management decisions. Additionally, as the dividend on these shares is only payable upon the company’s profitability, they do not have a guaranteed rate of return.

In addition to a guaranteed rate of return and investment security, these shares give stockholders a consistent income stream. Preference shares are not a good option for investors who are ready to take on more risk in exchange for a better return because there is less risk involved.

Types of Preference Shares:

On the basis of Dividend Arrears:

Cumulative Preference Shares: These are shares that give shareholders the right to receive their preference dividend arrears before receiving any equity dividend payments. In the event that the company’s profits are inadequate in any given year to cover the dividend on these shares, the dividend will continue to accrue until it is paid in full. Dividend arrears on these shares are displayed under “Contingent Liability and Commitments” on the balance sheet.
Non-Cumulative Preference Shares: These are shares that are designated as such because their holders get a set dividend from the company’s annual profits. These shareholders get nothing, and if no dividend is announced for whatever reason, they are not eligible to recover the unpaid dividend for any year in any following year.

In accordance with Profit Sharing:

Participating Preference Shares: These are the shares that, in addition to the set preference dividend, grant owners the right to partake in any excess profits that remain after dividends at a certain rate have been distributed to equity shareholders.
Non-Participating Preference Shares: These are shares that only receive an annual fixed dividend rate and have no entitlement to share in any excess profits or assets remaining after the business is dissolved.

According to convertible terms:

Convertible Preference Shares: These are shares that, under the conditions of the issuance, may be converted into equity shares.
Non-convertible Preference Shares: These shares are those that are not convertible into equity shares.

Based on Redemption:

Redeemable Preference Shares: These are shares that, upon fulfilment of specific requirements outlined in Section 55 of the Companies Act 2013, will be repaid by the company within a predetermined timeframe in compliance with the terms of issuance.
Irredeemable Preference Shares: These shares are defined as such because the capital cannot be returned prior to winding up.

2. Equity Shares

Ordinary shares are another name for equity shares. They are among the most often used types of shares. Investors are granted ownership rights in the corporation through these stocks. The most vulnerable shareholders are equity holders.

These shares are also transferable, and the dividend is calculated as a percentage of earnings. An equity shareholder’s liability is capped at the amount they invested. There are, however, no special privileges in holding.

Since they are only to be reimbursed at the moment of a company’s demise, these shares represent perpetual capital of the enterprise. There is no levy placed on the company’s assets when money is obtained through equity shares.

These shares are appropriate for investors who are ready to assume risk in exchange for larger rewards because they carry higher hazards. It is more expensive than alternative funding sources. It gives the business creditworthiness and gives potential lenders trust.

These shares are the financial instruments that give shareholders voting rights and partial ownership in the firm, enabling them to make decisions about the business. Equity shareholders have the ability to choose the board of directors by using their voting rights.

Two forms of reward are available to equity shareholders for their investments: dividends and capital appreciation, or the difference between the purchase and sale price of a share. Dividends are paid to equity owners after to preference shareholders.

If there are either no profits or insufficient profits in any given year, they receive nothing. When the corporation generates more earnings, they receive a greater dividend rate. Companies are not required to distribute dividends to equity owners, nevertheless. If they stay invested for an extended period of time, they could be rewarded with a sizable financial appreciation.

Equity shares make up the bulk of the company’s share issues. The secondary or stock market is where this kind of share is most regularly traded. They also have a claim to any dividends that the board of directors declares.

Nevertheless, the dividend on these shares is not set, and it could change yearly based on the profitability of the business. Only after preference share capital has been fully repaid is equity share capital refunded.

Types of Equity Shares:

Based on share capital:

Authorised Share Capital: All companies must specify in their Memorandum of Associations the maximum amount of capital that can be generated via the issuance of equity shares. However, if certain legal procedures are finished and additional costs are paid, the limit might be raised.
Issued Share Capital: This refers to a certain amount of the company’s capital that has been made available to investors by way of equity share issuance. For instance, the issued share capital will be Rs 40 lakh if the business issues 20,000 equity shares at a nominal value of Rs 200 each.
Subscribed Share Capital: Investor-subscribed share capital is the portion of the issued capital that has been subscribed.
Paid-Up Capital: The sum of money investors have to pay the firm in exchange for owning its stock is referred to as paid-up capital. The terms “subscribed” and “paid-up capital” refer to the same sum since investors pay the whole amount at once.

Based on the definition:

Bonus Shares: The term “bonus share” refers to extra shares that are given away for free to current shareholders, or as a bonus.
Rights Shares: The concept of “right shares” refers to a company’s ability to issue new shares to current owners at a predetermined price and time frame prior to the shares being made available for trade on stock exchanges.
Sweat Equity Shares: The firm may award a person with sweat equity shares if that person has made a noteworthy contribution while working there.
Voting and Non-Voting Shares: The corporation may choose to grant shareholders differential or zero voting rights, even while the majority of shares have voting rights.

Based on Returns:

Dividend Shares: A business may elect to distribute dividends on a pro rata basis by issuing additional shares.
Growth Shares: These shares are linked to businesses experiencing exceptionally high rates of growth. Even though some businesses do not pay dividends, investors can still benefit from the quick appreciation in value of their stocks.
Value Shares: These shares are sold on stock exchanges for less than their true worth. Over time, investors might anticipate that prices will rise, giving them a higher share price.

Other types of shares

Treasury shares: Another name for these shares is reacquired shares. The term “treasury shares” refers to shares that the corporation wishes to retain in its own holdings. In the event that the business needs to raise money, it can sell these shares back. The shares are owned by the firm, hence no dividends nor voting rights are granted to them.
Class A, Class B, and Class C shares: These shares are many kinds of equity in the corporation, and each has certain benefits and rights. For example, Class A shares are typically the most voting rights; nevertheless, they may not be accessible to the general public and are more expensive than Class B and Class C shares. Shares of class B are purchased and traded on open markets. On the other hand, employees receive Class C shares as part of their benefits. The specifics of Class A, Class B, and Class C shares might differ depending on the business.
Differential Voting Right (DVR) shares: When it comes to voting rights, DVR shareholders are not as entitled as equity owners. Companies give more dividends to DVR shareholders in order to reduce the voting rights. DVR shares are inexpensive because they have fewer voting rights. The difference in pricing between DVR and stock shares is around 30–40%.

Conclusion

This article encapsulates the vital need for issuing shares and their significance within a corporation. Every corporate organization requires funds for its operations, with the choice of obtaining them internally or externally.

The issuance of shares, synonymous with raising capital, is a fundamental element for any business. This process not only enables the organization to reinvest in itself but also serves as a means to attract investments from both investors and shareholders.

The article emphasizes that a thriving business can not only support its directors, shareholders, and employees but also motivate them to contribute their best efforts.