Company Law and Secretarial Practice

Unit 4 – Share Capital & Membership

Topics covered under this chapter

• Share Capital • Shares• Meaning• Kinds of Shares • Issue of Shares• Prospectus and Contents• Share Certificate• Transfer and Transmission of

Shares

• Dematerialization • Shareholder / Member • Eligibility and Qualification • Rights of Members

Prospectus• Meaning – It refers to a formal legal document, which is required by and filed with the Securities and Exchange Commission that provides details about an investment offering for sale to the public. • Definition – Any document described or issued as a prospectus and includes any notice, circular, advertisement or other document, inviting deposits from the public or inviting offers from the public for the subscription or purchase of shares or debentures of a company or body corporate.

Contents of Prospectus• Names and Addresses of the Registered Office of the Company.

• Dates of Opening and Closing of the issue and declaration about the issue of allotment letters and refunds within prescribed time.

• A Statement by the Board of Directors about separate bank accounts maintained for the purpose of issue.

• Details about Underwriting of the issue.

• Consent of the Directors, Auditors, Bankers to the issue, Expert’s opinion.

• The authority for the issue and the details of the resolution passed.

Contents of Prospectus• Procedure and time schedule for allotment and issue of securities.

• Capital structure of the Company in the prescribed manner.

• Main objectives and present business of the Company and its location, schedule of implementation of the project.

• Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.

• Details of Directors including their appointments and remuneration, including extent of their interests in the Company.

• Disclosures with respect to sources of promoter’s contribution.

Share Capital and SharesMeaning• In relation to a company limited by shares, the word “capital” means the

share capital i.e., the capital in terms of rupees divided into specified number of shares of a fixed amount each. • Section 2(84) of the Act 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.”

Example• Share capital of a company is `1,00,000 which can be divided into 10,000

shares of `10 each or 1,000 shares of `100 each, whichever is feasible to the company.

Share Certificate • It is a document issued by a company stating that the person named therein

is the registered holder of a specified number of shares of a certain class and that they are fully paid up or paid up to a stated amount.

• Every person whose name is entered as a member in the register of members shall be entitled to receive one certificate for all his shares without payment.

• It has to be issued whether the shares are partly paid up or fully paid up. • It enables the share holder to deal more easily in the market.

Kinds of Shares(a) Equity share capital— with reference to any company limited by shares, means all share capital which is not preference 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.

(b) Preference share capital – with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to payment of dividend and repayment.

Issue of Shares

Issue of Shares• A company may issue securities at a premium when it is able to sell them at a

price above par or above nominal value. • The Companies Act, 2013, does not stipulate any conditions or restrictions

regulating the issue of securities by a company at a premium. • However, the Companies Act does impose conditions regulating the utilization

of the amount of premium collected on securities.• Section 52 (1) states that when a company issues shares at a premium, whether

for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account”.• Apply as if the securities premium account were the paidup share capital of the

company.

Issue of Shares

Issue of Shares

Transfer of Shares • As per section 58(2), the shares of any member in a public company shall be

freely transferable. One of the most important characteristics of a company is that its shares are transferable.

• The Board of directors of a Company has no discretion to refuse or withhold transfer of any shares. The transfer has to be effected by the company automatically and immediately.

• Section 44 of the Companies Act, 2013 states that the shares of any member in a company shall be movable property, transferable in the manner provided by the articles of the company.

Transmission of Shares

• Transmission of shares has not been defined by the Companies Act. ‘Transmission by operation of law’ is not a transfer.

• It refers to those cases where a person acquires an interest in property by operation of any provision of law, such as by right of inheritance or succession or by reason of the insolvency or lunacy of the holder of securities or by purchase in a Court-sale.

Transmission of Shares

• It takes place when the registered holder of shares dies or is declared as an insolvent, or if the holder of securities is a company, it goes into liquidation. Because a deceased person cannot own anything, the ownership of all his property passes, after his death, to those who legally represent him.

• Similarly, when a person is declared insolvent, his entire property vests in the Official Assignee or Official Receiver.

Dematerialization

Section 29 of the Act provides that every company making public offer of any security, shall issue the securities only in dematerialized form by complying with the provisions of Depositories Act, 1996.

The entire holding of convertible securities of the company by the promoters held in physical form up to the date of the initial public offer shall be converted in to dematerialized form before such offer is made and thereafter such promoter shareholding shall be held in dematerialized form only.

Dematerialization & Rematerialization

Dematerialization • The move from physical certificates to electronic book keeping. The share

certificates are being removed and retired from circulation in exchange for electronic recording.

Rematerialization • This is the reverse of dematerialization, in rematerialization the share

certificates are being moved from electronic book keeping to physical certificate.

Member (Shareholder)• A company is composed of members, though it has its own separate legal

entity. • The members of a company are the persons who, for the time being,

constitute the company, as a corporate entity. • In the case of a company limited by shares, the shareholders are the

members. • The terms “members” and “shareholders” are usually used

interchangeably, as there can be no membership except through the medium of shareholding. • Thus, generally speaking every shareholder is a member and every member

is a shareholder.

Member (Shareholder)• A member means a shareholder of a company whose name is entered in

the register of members. A person holding equity shares of a company and whose name is entered in the records of a depository as a beneficial owner of the share is deemed to be a member of the company.

• There are two important elements which must be present before a person can acquire membership of a company -

(i) Agreement to become a member(ii) Entry of the name of the person so agreeing, in the register of members of the company

Eligibility and Qualification• The person desirous of becoming a member of a company must have the

legal capacity of entering into an agreement –

(i) is of the age of majority (adulthood) according to the law to which he is subject(ii) is of sound mind(iii) is not disqualified from contracting by any law to which he is subject

Methods of Acquiring MembershipAs per the Companies Act, 2013, a person may acquire the membership of a company:

(a) by subscribing to the Memorandum of Association (deemed agreement); or

(b) by agreeing in writing to become a member: (i) by making an application to the company for allotment of shares; or (ii) by executing an instrument of transfer of shares as transferee; or (iii) by consenting to the transfer of share of a deceased member in his name; or (c) by holding shares of a company and whose name is entered as beneficial owner in the records of a depository (Under the Depositories Act, 1996)

Rights of Members• Every member of a company limited by shares and holding equity

share capital, shall have a right to vote on every resolution placed before the company.• His/her voting right on a poll shall be in proportion to his/her share in

the paid-up equity share capital of the company. • To receive copies of financial statement, auditor’s report, notices of

the general meetings • To inspect statutory registers and get its copies • To attend meetings of the shareholders and exercise voting rights at

these meetings

Rights of Members• To transfer shares • To receive dividend when declared• To appoint or nominate directors • To share the surplus assets on winding up of company• To be exercised collectively by passing a special resolution• To make application collectively to the Tribunal for relief in cases of

oppression and mismanagement • To file a suit or take any other action in case of any misleading

statement or the inclusion or omission of any matter in the prospectus.

Liabilities of Members• Liabilities of members depend upon the nature of the company.

• In case of companies with unlimited liability, the members are liable for all the debts incurred by the company, incurred during the period of membership.

• In case of companies limited by guarantee, the member’s liability is limited to the extent of amount guaranteed.

• In case of companies limited by shares, the member’s liability is restricted to the amount remaining unpaid on the shares held by him.