When a company issue a prospectus inviting the public to subscribe for the shares of a company, it is merely an invitation rather than an offer. An application for shares is an offer by the prospective shareholders to take the shares of the company. Such offers are made on application forms supplied by the company. When an application is accepted, it is called allotment. Allotment of share is the acceptance by the company of the offer made by the applicant. Allotment results in a binding contract between the parties. The term allotment has not been defined in the Companies Act.
In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd., AIR 1964 SC 250 case, allotment of shares was explained by the Supreme Court as “the appropriation, out of the previously unappropriated capital of the company, of a certain number of shares to a person. It is only after allotment that shares come into existence. Reissue of forfeited shares is not an allotment’.
Share of a Company:
Section 2(84) of the Companies Act 2013, defines “Shares” as, “Share” means a share in the share capital of a company including stocks.
Characteristics of a Share:
- A share is a right to a specified amount of the share capital of a company, carrying with it certain rights and liabilities while the company is a going concern and in its winding up. (Halsbury’s Laws of England)
- A share is a right to participate in the profits made by a company, while it is a going concern.
- A share is not a negotiable instrument, but it is a movable property. Section 44 of the Companies Act, 2013 provides that a share or other interest of any member in a company is a movable property transferable in the manner provided by the articles of the company.
- In India, a share is regarded as goods. According to the Sale of Goods Act, 1930, “Goods” means any kind of movable property other than actionable claim and money, and includes stock and shares.
- According to Section 45 of the Companies Act, 2013 every share in a company having a share capital shall be distinguished by its distinctive number but this provision shall not apply to a share held by a person whose name is entered as holder of beneficial interest in such share in the records of a depository i.e., Demat Shares.
- The company has to issue the share certificate. A certificate of shares issued by a company under its common seal specified the shares held by any member.
- Shares may or may not be fully paid.
- Share is subject to stamp duty.
- The ‘Call’ on Shares is a demand made for payment of price of the shares allotted to the members by the Board of Directors in accordance with the Articles of Association. The call may be for full amount or part of it
Stock:
Stock is an aggregate of fully paid-up shares. Thus, stock is simply a set of shares put together in a bundle. When shares are fully paid-up, they may be converted into stock. A company may, if so authorized by its Articles, convert all or any of its fully paid-up shares into stock, and recovered that stock into fully paid-up shares of any denomination. “So every stock is a share while every share may not be a stock”.
A company cannot directly issue stock. It must first issue shares and then convert the shares into stock.
Method of conversion of shares into stock is as follows:-
- To pass a resolution in the General meeting of shareholders.
- Information of conversion to the registrar.
- To make alteration in the Articles.
- To close transfer books and to inform the shareholders.
- To issue stock certificate and prepare register.
- Transfer of stock.
Distinguish Between Share and Stock:
| Shares | Stocks |
| “Share” means a share in the share capital of a company including stocks. | A Stock is an aggregate of fully paid-up shares. |
| A company can directly issue shares. | A company cannot directly issue stock. It must first issue shares and then convert the shares into stock. |
| In case of shares a share certificate is issued. | In case of stocks a stock certificate is issued. |
| Shares are divided into equal parts | Stocks need not be divided into equal parts. |
| The value of two different shares of a company can be equal to each other. | The value of two different stocks of a company may or may not be equal to each other. |
| There is a nominal value that is associated with shares. | There is no nominal value that is associated with stocks. |
| Shares have distinctive numbers | Stocks need not be numbered |
| The shares of a company are either fully paid up or partially paid up. | The stocks of a company (or a group of companies) are always fully paid up. |
| Shares have a narrower scope when compared to stocks. | Stocks have a wider scope when compared to shares. |
Rights of Share Holders:
- The Shareholders have right to receive notice of general meetings and resolutions proposed.
- The shareholders have the right to vote. This right enables shareholders to participate in corporate decision-making. Companies Act 2013 recognizes the following types of voting:
- by showing hands,
- by polling,
- by electronic means,
- by postal ballot.
- The Shareholders have a right to appoint directors, the right to make proposals, the right to vote for structural changes such as mergers and acquisitions, or liquidation.
- The Shareholder also has a right to appoint a proxy on his behalf when he is unable to attend the meeting. Though the proxy is not allowed to be included in the quorum of the meeting in case of voting. They have right to examine proxy-register.
- The Shareholders can bring legal action against a director if any act was done by the director in any manner which is prejudicial against the affairs of the company, commits fraud, any act is done which is beyond the law or against the constitution, when the assets of the company are being transferred at an undervalued rate, act done in mala fide manner, when there is a diversion of funds of the company.
- The Shareholders have the right to a share in the profit in the form of the right to dividend.
- The Shareholders have the right to call an extra-ordinary general meeting.
- An ordinary resolution is required to be passed by the Shareholders for the appointment of directors. Shareholders also can challenge any resolution passed for the appointment of a director in the general body meeting.
- The Shareholders have the right to inspect the accounts register and also the books of the firm and can ask questions about the same if they feel so.
- The Shareholders have the priority right to subscribe for new shares in the Company also in the case of an issue of securities convertible into shares in the Company or incorporating the right to subscribe for shares of the Company.
- Before the company is wound up the company has to inform all the shareholders about the same and also all the credit has to be given to all the shareholders. Thus the Shareholders have right to share surplus assets at the time of winding up the company.
- The Shareholders have right to seek relief from Appropriate Authorities in case of oppression and mismanagement.
- The Shareholders have the right to dispose of Shares. The disposal of Shares includes the sale (transfer of ownership) and other forms of disposal, including the establishment of a pledge, the right of use, or lease of Shares.
Duties / Liabilities of Shareholders:
- Duty to be in touch with other members of the company so that they can see the work progress of the company.
- Shareholders are not entitled to anything except for their ownership interest in the company.
- Shareholders should consult on the matters of finance and other topics.
- Shareholders are also not responsible for the company’s debt. However, if a company is liquidated, creditors are first in line to have their debts paid, then bondholders, and then common shareholders. However, an exemption to this is that a shareholder is liable to pay the company for any amount unpaid on their shares.
- Shareholders should participate in the general body meetings so that they can see and also can advise on the matters which they feel is not going well.
Conclusion:
“Share” means a share in the share capital of a company including stocks. Shareholders play an important role in the functioning of a company. They have various rights which include the right to vote, the right to appoint the company’s director, auditor etc., to get dividend. Thus, they can take part in the working of the company. Shareholders must use their rights and fulfil their liabilities which is essential for the health of the company.