In this article, we shall study important concepts associated with shares under the companies Act, 2013 like: Shares, Stocks, Share certificate, Allotment of shares, Share transfer, Forfeiture of shares, Surrender of shares.
Select Sub-Topic
- Shares
- Stocks
- Shares and Stocks Comparision
- Rights of Members
- Share Warrant
- Share Certificate
- Share Warrant and Share Certificate Comparision
- Transfer of Shares
- Transmission of Shares
- Transfer and Transmission of Shares Comparision
- DEMAT Shares
- Issue of Shares at Premium
- Issue of Shares at Discount
- Forfeiture of Shares
- Surrender of Shares
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.
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 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.
- 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.
- 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.
- 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.
b) Stocks:
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.
Characteristics of Stocks:
- A Stock is an aggregate of fully paid-up shares.
- A company cannot directly issue stock. It must first issue shares and then convert the shares into stock.
- In case of stocks a stock certificate is issued.
- Stocks need not be divided into equal parts.
- The value of two different stocks of a company may or may not be equal to each other.
- There is no nominal value that is associated with stocks.
- Stocks need not be numbered
- The stocks of a company (or a group of companies) are always fully paid up.
| 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. |
d) Rights of Members:
Following are the rights of member/shareholders:
- 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.
e) Share Warrant:
A Share Warrant is a document issued by the company under its common seal, stating that its bearer is entitled to the shares or stock specified therein. Only public limited companies have the right to issue share warrant. Stock warrant is negotiable instrument. The transfer of share warrant can be done by mere hand delivery. Stock warrant is issued only against fully paid-up shares. Prior approval of Central Government is required for issuing share warrant. Provision in Articles of Association is required for issue of share warrant.
Share warrant gives the holder the right to buy or sell shares of stock to or from the issuing public company at a specified price before a specified date.
A stock warrant is a derivative contract between a public company and an investor. Like options contracts, warrants carry a strike price. This is the price per share at which the holder can buy or sell the stock. They also carry an expiration date after which they become useless. Holders of warrants are under no obligation to buy or sell the underlying stocks.
There are two types of warrants: put warrants and call warrants. Put warrants allow holders to sell shares of stock they already own while call warrants allow investors to buy shares of stock.
Companies issue warrants for following reasons:
- To raise capital.
- To fund acquisitions.
- To encourage bond or preferred stock purchases.
- To attract employees.
Advantages of Share Warrants:
- Share warrants are negotiable. Through this warrant a holder can buy and sell the securities and shares in the market.
- Warrants can provide holder with exposure to an underlying asset for a lower upfront cost than direct ownership.
- Small changes in the value of the underlying asset result in larger changes in the value of the warrant.
- Due to lower prices, the capital gains and losses may be high.
- They can offer gains and protection in the market.
Disadvantages of Share Warrant:
- The high price of leverage and gearing of warrants is not good for investors as they have to take more losses than gains as the percentage of loss of the warrant increases.
- The risk which is involved with the value of the certificate which will be provided is that the certificate value can drop to zero due to which the warrant may lose the redemption value.
- Holder can’t have the opinion in voting, shareholding and dividend rights. So, the holder becomes isolated in overall functioning of the company but the holder is affected by the decisions which will be made by the company.
The Companies Act, 2013 does not provide for issue of share warrants.
f) Share Certificate:
A share certificate is a certificate issued by the company under its common seal specifying the shares held by any member and the amount paid on each Share. A share certificate is evidence of title of the allottee or transferee to the shares. It is a declaration that the person in whose name the certificate is made out ant to whom it is given, is a shareholder in the company. Share certificate is not ‘ a negotiable instrument. Thus, the share certificate is a statement by the company that the moment when it was issued, the person named in it was the legal owner of the shares specified in it, and those shares were paid-up to the extent stated. The face value or nominal value of shares mentioned on the share certificate must be as per the Memorandum of Association and Articles of Association of the Company.
Section 46 (2) states that a duplicate certificate of shares may be issued, if such certificate — (a) is proved to have been lost or destroyed; or (b) has been defaced, mutilated or torn and is surrendered to the company.
All share certificate of a company-issued in India must have the following information mentioned on the share certificate.
- The share certificate should be issued in Form SH-1 or any document that resembles Form SH-1
- Name of the Company
- CIN Number of the Company
- Registered Office of the Company
- Name of the owners of the shares
- Folio number of the member
- Number of shares represented by the share certificate
- Amount paid on the shares
- Distinctive number of shares
- Number of share certificate
- Issue Date
- Kind of Shares
Section 56 (4) of the Act lays down specific time limits within which share certificates are to be delivered.
A share certificate once issued by the company binds it in two ways, namely:
- by estoppel as to title, and
- by estoppel as to payment
| Share warrant | Share Certificate |
| A document which indicates that the bearer of the share warrant is entitled to the specified number of shares is share warrant. | A legal document that indicates the possession of the shareholder on the specified number of shares is known as share certificate. |
| Only public limited companies have the right to issue share warrant. | All the companies limited by shares irrespective of public or private issue share certificates. |
| Stock warrant is negotiable instrument. | Share certificate is non-negotiable instrument. |
| The transfer of share warrant can be done by mere hand delivery. | The transfer of share certificate can be done by executing a valid transfer deed. |
| Stock warrant is issued only against fully paidup shares. | Share certificate is issued against fully or partly paid up share. |
| Prior approval of Central Government is required for issuing share warrant. | Prior approval of Central Government is not required for issuing share certificate. |
| Provision in Articles of Association is required. | Provision in Articles of Association is not required. |
h) Transfer of Shares:
A company issues shares to each of its members which represent that that they hold such part of company and a person/entity holding such shares are known as shareholders. 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.
As per section 58(2), the securities or other interest of any member in a public company shall be freely transferable. Proviso to section 58(2) provides that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. In terms of Section 2(68), a private company is required to restrict the right to transfer its shares by its articles. Section 56 of the Companies Act deals with transfer and transmission of securities.
Transfer of shares means the voluntary handing over of the rights and the duties / liabilities of a company member (as represented in a share of the company). The rights and duties of the share transfer happen from a shareholder who wishes to not be a member of the company any more called transferor to a person who wishes of becoming a member called transferee. From time to time there are certain situations where an existing shareholder wanted to transfer their shares of respective company to other person/entity. A transfer of share can only be transferred for only existing shares and from existing shareholders.
Shares may be transferred by executing an instrument of transfer (called the ‘transfer deed’). The instrument of transfer must be in the prescribed form (SH 4). Before it is signed by or on behalf of the transferor and before any entry is made therein, it shall be presented to the prescribed authority which shall stamp or otherwise endorse on it the date of presentation.
According to Section 56(5) of the Act, the transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not a holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.
Section 56 of the Companies Act, 2013 gives the process to transfer the Shares.
i) Transmission of Shares:
A company issues shares to each of its members which represent that that they hold such part of company and a person/entity holding such shares are known as shareholders. 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.
Transmission of securities has not been defined by the Companies Act. Transmission of securities means where a person acquires an interest in property by operation of law, such as by right of inheritance or by reason of the insolvency or lunacy of the holder of securities or by purchase in a Court-sale.
Thus, transmission of securities takes place when the registered holder of securities dies or is adjudicated 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. Upon the death of a sole registered holder of securities, so far as the company is concerned, the legal representatives of the deceased holder of securities are the only persons having title to the securities unless securities-holder had appointed a nominee, in which case he would be entitled to the exclusion of all others.
- No instrument of transfer is required in case of transmission.
- Transmission takes place on death or insolvency of a holder of securities.
- Transmission of securities is generally made without any consideration.
- No stamp duty is payable on transmission of securities.
- Shares continue to be subject to the original liabilities.
| Transfer of Shares | Transmission of Shares |
| Transfer takes place by a voluntary or deliberate act of the parties by way of a contract. | Transmission is the result of the operation of law. For example, due to death, insolvency or lunacy of a member. |
| An instrument of transfer is required in case of transfer. | No instrument of transfer is required in case of transmission. |
| Transfer is a normal course of transferring property. | Transmission takes place on death or insolvency of a holder of securities. |
| Transfer of securities is generally made for some consideration. | Transmission of securities is generally made without any consideration. |
| Stamp duty is payable on transfer of securities by a holder of securities. | No stamp duty is payable on transmission of securities. |
| As soon as transfer is complete, the liability of the transferor ceases. | Shares continue to be subject to the original liabilities. |
k) DEMAT Shares:
A depository is an organization which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities. A Depository Participant (DP) is an agent of the depository through which it interfaces with the investor and provides depository services.
Under dematerialization of securities, physical certificates of securities are converted into an electronic form in an equivalent number of securities of the investor and credited into the investor’s account with his DP.
Dematerialized shares do not have any distinctive numbers. These shares are fungible, which means that all the holdings of a particular security will be identical and interchangeable.
The procedure for buying and selling dematerialized securities is similar to the procedure for buying and selling physical securities. The difference lies in the process of delivery (in case of sale) and receipt (in case of purchase) of securities.
There are numerous benefits of Dematerialization of Securities of Unlisted Public Companies:
- A safe and convenient way to hold securities;
- Immediate transfer of securities;
- No stamp duty on transfer of securities;
- Elimination of risks associated with physical certificates such as bad delivery, fake securities, delays, thefts etc.
- Reduction in paperwork involved in transfer of securities;
- Reduction in transaction cost;
- No odd lot problem, even one share can be traded;
- Nomination facility;
- Change in address recorded with DP gets registered with all companies in which investor holds securities electronically eliminating the need to correspond with each of them separately;
- Transmission of securities is done by DP eliminating correspondence with companies;
- Automatic credit into DEMAT account of shares, arising out of bonus/split/consolidation/merger etc.
- Holding investments in equity and debt instruments in a single account.
l) Issue of Shares at Premium:
A company may issue securities at a premium when it is able to sell them at a price above par or above face value, for example, Rs. 100 per share at a price of Rs. 120, thereby earning a premium of Rs. 20 per share.
The Act, does not stipulate any conditions or restrictions regulating the issue of shares by a company at a premium. However, the Act does impose conditions regarding the utilization of the amount of premium collected on securities. Firstly, the premium cannot be treated as profit and, therefore, cannot be distributed as dividend. However, the same can be capitalized and distributed in the form of bonus shares. Secondly, the amount of premium, whether received in cash or in kind, must be recorded in a separate account, known as the “securities premium A/c”. Thirdly, the amount of share premium is to be maintained with the same sanctity as the share capital.
According to Section 52 (2), the share premium can be utilised only for:
- issuing fully paid bonus shares to members.
- writing off the balance of the preliminary expenses of the company;
- writing off the commission paid or discount allowed, or expenses incurred on issue of shares or debentures of the company;
- providing for the premium payable on redemption of any redeemable preference shares or debentures of the company.
- for the purchase of its own shares or other securities under section 68.
In Re. Hyderabad Industries Ltd., [2004] 53 SCL 376 (AP) case, the Court held that unless articles of association of company permit utilization of share premium account for purposes other than mentioned in Section 52 of the Act, company court cannot approve resolution to that effect. Court further held that unless and until there is diminution of the share capital and corresponding reduction of the share premium account, no company can be allowed to write off or adjust the loss against share premium account.
In Re. Mangalam Cement Ltd., [2008] 86 SCL 153 (Raj.). case, Rajasthan High Court has held that a company can utilize credit balance in securities premium account for purpose of meeting deferred tax liability.
m) Issue of Shares at Discount:
Section 2(84) of the Companies Act 2013, defines “Shares” as, “Share” means a share in the share capital of a company including stocks. Investors invest in shares because it can give huge profits to them unlike the fixed rate of return on debentures. There are various ways or prices at which a company issues its shares like at par, at a premium and at discount.
The issue of shares at a discount means the issue of the shares at a price less than the face value of the share, for example, the shareholder pays Rs. 9 on a share of nominal or face value of Rs. 10, then the share is said to be issued or sold at a discount. It is nothing but a loss to the company.
It should be noted that the issue of share below the market price but above face value is not termed as ‘Issue of Share at Discount’ Issue of Share at Discount is always below the nominal value of shares. It is debited to separate account called ‘Discount on Issue of Share’ Account.
According to Section 53 of the Act prohibits the issue of shares at discount as it states in its clause (2) that any share (which means either equity share or preference share) issued by a company at a discounted price shall be void.
Section 54 allows only ‘sweat equity shares’ to be issued at a discount and that too subject to compliance of the specified conditions. Any share issued by a company at a discounted price shall be void. A company may, however, issue shares at a discount to its creditors, when debt is converted into shares or debt restructuring scheme as per RBI regulations. Thus, if a company issues any shares, except sweat equity shares, as aforesaid, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both (Section 53 (3)).
n) Forfeiture of Shares:
We know that the company does not require the shareholders to pay the full amount of shares in one instalment. It makes calls on them as and when the money is needed. If a shareholder fails to pay a valid call within the stipulated time, the company has two options:
(1) the company may file a suit for the recovery of the amount, or
(2) the company may forfeit the shares.
The first option is a lengthy process. Therefore, the company generally decides to forfeit such shares. The term ‘forfeiture’ means taking them away from the member. It deprives the shareholder of his property.
Table ‘F’, which is generally adopted by the companies with respect to forfeiture of shares, contains the following rules:
- The power to forfeit shares must be given in the Articles of the company.
- Shares can be forfeited only for non-payment of calls.
- The company must serve a proper notice on the defaulting member asking him to pay the amount within a fixed period, failing which the shares shall be forfeited.
- The Board of directors must pass a resolution for the forfeiture of shares.
- The power for forfeiture must be exercised in good faith and for the benefit of the company. Thus, forfeiture for the purpose of relieving a friend from liability shall be invalid.
Effect of Forfeiture of Shares:
- A person whose shares have been forfeited ceases to be a member in respect of the forfeited shares.
- Notwithstanding the forfeiture, he remains liable to pay to the company all moneys which, at the date of forfeiture, were payable by him to the company in respect of the shares forfeited.
- On forfeiture, the forfeited shares become the property of the company.
In Naresh Chandra Sanyal vs. Calcutta Stock Exchange Assn. Ltd. AIR 1971 SC 422 case, the Court held that the right of the company upon forfeiture is only to dispose of the share and use the proceeds for discharging the liability for which the forfeiture was effected, and if there is any balance it belongs to the defaulter and, cannot be appropriated by the company.
o) Surrender of Shares:
Surrender is a voluntary act of the shareholder under which the shares are returned to the company for purposes of cancellation. Neither the Companies Act nor Table ‘F’ provides for the surrender of shares. But, the articles may provide for the surrender of the partly paid-up shares under circumstances where forfeiture seems to be justified. You must note that when shares are surrendered to the company, no amount is refunded to the shareholder. It is so, because if some money is refunded it will amount to a purchase by the company of its own shares which is prohibited by Section 67 of the Companies Act.
Surrender of shares may be allowed in the following cases if its acceptance is authorised by the Articles of the company:
- When shares are surrendered in exchange for new shares of the same nominal value, as it does not amount to any reduction of capital.
- When the circumstances are such where forfeiture is justified, because surrender is a short-cut to forfeiture.
If the surrender of shares is accepted by the company for any other reason, other than the reasons given above, it will be invalid. On a valid surrender of shares, the member ceases to be a member of the company, but his name can be placed on list of contributories. Thus, if the company is wound up within twelve months of the surrender of shares, he shall be liable as a past member.
If the surrender of shares is proved to be illegal, the shareholder may apply for the rectification of register of members after lapse of any number of years, provided the shares have not been reissued in the meantime. Forfeiture and surrender of shares, both lead to the termination of membership. But in case of forfeiture, it is compulsory or a forced action, while in case of surrender it is a voluntary act on the part of the member to avoid the disgrace of forfeiture.