Company - Introduction:
A Company is an association of many persons who contribute money or money’s worth to a common stock and employs it for a common purpose. The common stock so contributed is denoted in terms of money and is called capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share.
According to Section 3 (1) of Indian Companies Act 1956 " Company means a company formed and registered under this Act."
According to Professor Haney “A Company is an artificial person, created by law having a separate entity with a perpetual succession and a common seal."
Characteristics of a Company: Following are the salient features of a Company:
a) Artificial Person: A company is an artificial person, which exists only in the eyes of law. The company carries business on its own behalf. It has a right to sue and can be sued, can have its own property and its own bank account. It can also own money and be a creditor.
b) Created by law: A company can be formed only with registration. It has to fulfill a lot of formalities to be registered. It has also to fulfill a lot of legal formalities in order to be dissolved.
c) Separate Legal entity: A company has a separate legal entity and is not affected by changes in its membership.
d) Perpetual succession: A company has a continuous existence. Its existence does not affected by admission, retirement, death or insolvency of its members. The members may come or go but the company may go forever. Only law can terminate its existence.
e) Limited Liability: The liability of every member is limited to the amount he has agreed to pay to the company on the shares held by him.
f) Voluntary Association: A company is a voluntary association. It cannot compel any one to become its member or shareholder.
g) Capital Structure: A company has to mention its maximum capital requirements in future in its memorandum of association. Its capital is divided into shares, which are easily transferable from person to person.
h) Transferability of Shares: The shares of a company are freely transferable by its members except in case of a private company, which may have certain restrictions of such transferability.
i) Common Seal: As a company is an artificial person, so it cannot sign any type of contracts. For this purpose its requires a common seal which acts as the official signatories of the company. All the contracts prepared by its directors must bear seal of the company.
j) Democratic Ownership: The directors of a company are elected by its shareholders in a democratic way.
k) Maintenance of Books: A limited Company is required by law to keep a prescribed set of account books and failure in this regard may attract penalty.
l) Periodical audit: A Company has to get its accounts periodically audited through the chartered accountants appointed for this purpose by the shareholders.
Shares and Its Types:
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.
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
ii) Forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.
According to section 86 of the companies act, a company can issue only two types of shares:
(a) Preference shares; and
(b) Equity shares.
(a) Partnership Firm and Joint Stock Company
(b) Equity Shares and Preference Shares
(c) Public Limited Company and Private Limited Company
(d) Shares and Debentures
(e) Shareholders and Debentureholders
(f) Shares and Stock
(a) Difference between Partnership Firm and Joint Stock Company
Basis of Difference
Joint Stock Company
Partnership Firm is formed under Indian Partnership Act, 1932.
A Joint Stock Company is formed under Indian Companies Act, 1956.
b) Number of persons
Minimum number of partners is 2 and maximum 10 in case of banking business and 20 in other kind of business.
Minimum numbers of members are 7 in case of a public company and there is no limit for maximum. In a private limited company minimum number of members is 2 and 50 are maximum.
Liability of a Partnership firm is unlimited.
Liability of members is limited to extent of shares held by him.
Every partner can take active part in the management of the firm.
Boards of Directors manage a company.
Auditing of books is not compulsory.
Auditing of books is compulsory.
A Partnership firm can do the business as agreed upon by the partners.
A company can do only that business which is stated in Memorandum of Association.
g) Separate legal entity
A partnership firm do not have a separate legal entity
A company has a separate legal entity.
Insolvency of a Partnership firm means insolvency of all partners.
Winding up of a company does not mean insolvency of its members.
(b) Difference between Equity Shares and Preference Shares
Equity Share: According to Indian Companies Act 1956 " an equity share is share which is not preference share". An equity share does not carry any preferential right. Equity shares are entitled to dividend and repayment of capital after the claims of preference shares are satisfied. Equity shareholders control the affairs of the company and have right to all the profits after the preference dividend has been paid.
Preference Share: A share that carries the following two preferential rights is called ‘Preference Share’:
(i) Preference shares have a right to receive dividend at a fixed rate before any dividend given to equity Shares.
(ii) Preference shares have a right to get their capital returned, before the capital of equity shareholders is returned in case the company is going to wind up.
Difference between Preference Share and Equity Share are given below:
Basis of Difference
a) Right of Dividend
Preference shares are paid dividend before the Equity shares.
Equity shares are paid dividend out of the balance of profit available after the dividend paid to preference shareholders.
b) Rate of Dividend
Rate of dividend is fixed.
Rate of dividend is decided by the Board of Directors, year to year depending on profits.
Preference Shares may be converted into Equity shares, if the terms of issue provide so.
Equity shares are not convertible.
d) Participation in Management
Preference shareholders do not have the right to participate in the management of the company.
Equity shareholders have the right to participate in the management of the company.
e) Voting Right
Preference shareholders do not carry the voting right. They can vote only in special circumstances.
Equity shareholders have voting rights in all circumstances.
f)Redemption of Share Capital
Preference shares may be redeemed.
A company may buy-back its equity shares.
g) Refund of Capital
At the time of winding up of the company, preference share capital is paid before the payment of Equity share capital.
On winding up, Equity Share capital is repaid after preference share capital is paid.
(C) Difference between Public Limited Company and Private Limited Company
Basis of Difference
a) Number of persons
Minimum number of members is 2 and the maximum 50, excluding its present or past employee members.
Minimum number of members is 7 and there is no limit as to maximum numbers.
b) Issue of Prospectus
Prospectus need not be issued.
Prospectus or a Statement in lieu of Prospectus must be issued for inviting public to subscribe to its shares or debentures.
c) Transfer of Shares
Transfer of shares is generally restricted by the articles of association of a private limited company.
The shares of a public company are freely transferable.
d) Paid-up Capital
Minimum paid-up Capital should be
Rs. 1, 00,000.
Minimum paid-up Capital should be Rs. 5, 00,000.
e) Number of Directors
A Private Company must have at least two directors.
A Public Company must have at least three directors.
f) Commencement of Business
A Private Company can commence its business after getting the certificate of incorporation.
In addition to the certificate of incorporation, certificate for commencement must be obtained.
The quorum for a meeting is two.
The quorum for a meeting is five.
The word ‘Private Limited’ must be used as a part of the name.
The word ‘Limited’ must be used as a part of the name.
i) Managerial Remuneration
There is no restriction on managerial remuneration.
Managerial remuneration cannot exceed 11% of the net profits.
(d) Difference between Shares and Debentures
Basis of Difference
Shareholders are the owners of the Company.
Debentureholders are the Creditors of the Company.
Normally, the amount of share is not returned during the life of the company.
Debentures are issued for a definite period.
Shares cannot be converted into debentures.
Debentures can be converted into shares.
There are legal restrictions to be fulfilled to issue shares at a discount.
There are no restrictions on the issue of debentures at a discount.
A company can buy back its own shares, but subject to fulfillment of stipulated conditions.
A Company can purchase its own debentures from the market without any conditions.
Shares can be forfeited for non-payment of allotment and call monies.
Debentures cannot be forfeited for non-payment of call monies.
g) Payment of dividend/ Interest
Shareholders will get dividend which is dependent on the profits of the company.
Debentureholders will get interest on debentures and will be paid in all circumstances, whether there is profit or loss.
(e) Difference between Shareholders and Debentureholders
Basis of Difference
Shareholders are the owners of the company.
Debentureholders are the creditors of the company.
A shareholder gets dividend.
A Debenture holder gets interest on his investment at the rate stated whether or not there is a profit to the company.
A shareholder has a right to control over the working of the company.
A Debenture holder has no such right to control.
Shareholders are at a greater risk. Even they can lose the amount invested in the shares.
Debenture holders are relatively safe. Secured debenture holders have almost no risk.
(f) Difference between Shares and Stocks
Basis of Difference
a) Paid-up value
Shares may be fully paid up or partly paid up.
Stocks are fully paid up.
b) Restriction on issue
Shares are issued when a company is incorporated.
Stock cannot be issued. Only fully paid shares can be converted into stock.
Shares are serially numbered.
Stocks are not numbered.
Shares are of equal nominal value.
Stocks may be divided into unequal amounts.
Shares are always registered.
Stock may be registered or unregistered.
Shares are not transferable by mere delivery.
Unregistered stock can be transferred by mere delivery.
Share Capital and Its various categories:
The capital of a joint stock company is divided into shares which are collectively called ‘Share Capital’. Share capital refers to the amount that a company can raise or has raised by the issue of shares. The share capital may be classified as below:
a) Nominal/Authorized/Registered Capital: This is the amount of the capital which is stated in Memorandum of Association and with which the company is registered. Nominal capital is the maximum amount which the company is authorised to raise from the public.
b) Issued Capital: Issued capital is that part of the nominal capital, which is offered to the public for subscription. The balance of the nominal capital, which is not offered to the public for subscription, is called unissued capital.
c) Subscribed Capital: Subscribed capital is that part of the issued capital, which is applied for by the public. The balance of the issued capital, which is not subscribed for by the public is called, unsubscribe capital.
d) Called up Capital: This is the amount of the capital that the shareholders have been called to pay on the shares subscribed for by them. The amount of the subscribed capital, which is not called, is known as uncalled capital.
e) Paid up Capital: This represents that part of the called up capital, which is actually received by the company. The amount of the called-up capital, which not paid by the shareholders, is called as unpaid capital or calls in arrears.
f) Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.
Issue of shares at Premium and purpose for which the amount of Securities Premium can be utilized:
If Shares are issued at a price, which is more than the face value of shares, it is said that the shares have been issued at a premium. The Company Act 1956 does not place any restriction on issue of shares at a premium but the amount received, as premium has to be placed in a separate account called Securities Premium Account.
Under Section 78 of the Company Act 1956, the amount of security premium may be used only for the following purposes:
a) To write off the preliminary expenses of the company.
b) To write off the expenses, commission or discount allowed on issued of shares or debentures of the company.
c) To provide for the premium payable on redemption of redeemable preference shares or debentures of the company.
d) To issue fully paid bonus shares to the shareholders of the company.
e) In purchasing its own shares (buy back).
Can a company issue shares at discount:
As a general rule, a company cannot ordinarily issue shares at a discount, except in case of ‘reissue of forfeited shares’ and in accordance with the provisions of Companies Act.
But according to Section 79 of company act 1956, a company is permitted to issue shares at discount provided the following conditions are satisfied: -
a) The issue of shares at a discount is authorised by a resolution passed by the company in its general meeting and sanctioned by the Central Government.
b) The resolution must specify the maximum rate of discount at which the shares are to be issued but the rate of discount must not exceed 10 per cent of the nominal value of shares. The rate of discount can be more than 10 per cent if the Government is convinced that a higher rate is called for under special circumstances of a case.
c) At least one year must have elapsed since the company was entitled to commence the business.
d) The shares are of a class, which has already been issued.
e) The shares are issued within two months from the date of sanction received from the Government.
Reserve Capital Vs Capital Reserve:
Reserve Capital: A company may by special resolution determine that any portion of its share capital which has not been already called up shall not be capable of being called-up, except in the event of winding up of the company. Such type of share capital is known as reserve-capital.
Difference between Reserve Capital and Capital Reserve
Basis of Difference
Reserve Capital is the part of uncalled capital, which shall not be called except in the event of winding up of the company.
It is that part of the reserves which is not free for distribution as dividend.
It is created out of uncalled capital.
It is created out of capital profits.
c) Optional/ Mandatory
It is not mandatory to create Reserve Capital.
Capital Reserve is mandatory to be created in case of profit on reissue of forfeited shares.
It is not to be disclosed in the Balance Sheet of the company.
Capital Reserve is to be shown in liability side of the balance sheet of the company under the heading of ’Reserve and Surplus.’
e) Writing of Capital Losses
Reserve Capital cannot be used to write off capital losses.
Capital Reserve is used to write off capital losses and to issue bonus shares to shareholder.
Write short notes on the following:
2. Issue of share in consideration other than cash
5. Minimum Subscription
6. Preliminary Expenses
7. Statement in lieu of Prospectus
8. Sweat Equity Shares
9. Escrow Account
10. Preferential Allotment
1. Prospectus: Prospectus is an invitation to the public to subscribe for its shares or debentures. A prospectus has been defined as "any document described or issued as a prospectus and included notice, circular advertisement or other document inviting offers from the public for the subscription or purchase of any shares in, or debentures of, a body corporate." The main purpose of the prospectus is to pursue the public to purchase the shares or debentures of the company.
A public company is required to publish a prospectus whenever it wants to make a public issue of its shares or debentures. Everything stated in the prospectus must be correct because prospectus is the basis of contract between the company and the intending purchaser of shares who buys shares on the faith of a prospectus. Therefore, a shareholder has the right to rescind the contract within a reasonable time and before the winding up of the company if the prospectus contains a misleading statement.
2. Issue of Shares in consideration other than cash: A company may issue shares for consideration other than cash to the vendors who sell their whole business or some assets to the company or to the promoters for rendering services to the company. When shares are so issued, there is no receipt of cash and hence it is termed as issue of shares for consideration other than cash. The fact of such issues must be stated in the balance sheet of the company and must be distinguished from the shares issued for cash as per requirement of Schedule VI Part 1 of the Companies Act pertaining to the prescribed balance sheet.
3. Calls-in-Arrears: It often happens that some shareholders fail to pay the amount on allotment and or calls due on the shares held by them. The total of the unpaid amounts on account of one or more installments is known as ‘Calls-in-Arrears’.
It is not mandatory to maintain a separate account for calls in arrears. The debit balance on the Allotment or Calls Account will be presented in the balance sheet not as an asset but by way of deduction from the called up capital.
The Articles of Association of a company usually empower the directors to charge interest at a stipulated rate on calls in arrears. In case the Articles are silent in this regard, the rule contained in Table A shall be applicable. Table A represents the model Articles of Association framed under Companies Act 1956. It provides the rate of interest must not exceed 5 per cent.
4. Calls-in-Advance: Sometimes, it so happens that a shareholder may pay the entire amount on his shares even though the whole amount has not been called up. The amount received in advance of calls from such a shareholder should be credited to "calls in advance" account and should be shown separately from the called up capital in the Balance Sheet. The company can receive calls in advance if the article permits. Interest is usually paid on calls in advance and the article specifies the rate of interest. The maximum rate of interest allowed on calls in advance is 6% per annum. It should be noted that calls in advance are not entitled to any dividend.
5. Minimum Subscription: However a company invites the general public to subscribe to its share capital. An individual who is interested to subscribe to the share capital of the company sends an application to the company with application money. The Company Act 1956 provides that the directors of the company fix the amount of the application money but it can in no case be less than 5 per cent of the face value of the shares.
Therefore no allotment shall be made unless the amount of share capital stated in the prospectus as the minimum subscription has been subscribed and the company thereof has received the sum of at least 5 per cent in cash.
Minimum Subscription is that amount of money which in the opinion of directors, must be made available to meet the financial need of the business of the company for the following operations:
a) The purchase price of any property acquired or to be acquired out of the proceeds of the issue of shares.
b) For Working Capital
c) Preliminary Expenses payable by the company.
d) Underwriting Commission payable by the company.
e) Repayment of any money borrowed by the company in respect of any of the forgoing matters.
f) Any other expenditure required for the conduct of usual business operations.
6. Preliminary Expenses: Expenses incurred to the formation of a company are called ‘Preliminary Expenses’. Preliminary expenses include the following: -
a) Expenses incurred in order to get the company registered.
b) Expenses incurred for the preparation, printing and issue of prospectus.
c) Cost of preliminary books and Common Seal.
d) Duty payable on Authorized Capital.
e) Underwriting Commission etc.
Preliminary Expenses are to be written off out Securities Premium Account or it may be written off out of the Profit & Loss A/c gradually over some period. The balance left of preliminary expenses is to be shown in the asset side of the balance sheet of the company under the heading of ‘Miscellaneous Expenditure’.
7. Statement in lieu of Prospectus: A public company, which does not raise its capital by public issue, need not issue a prospectus. In such a case a statement in lieu of prospectus must be filed with the Registrar 3 days before the allotment of shares or debentures is made. It should be dated and signed by each director or proposed director and should contain the same particulars as are required in case of prospectus proper.
8. Sweat Equity Shares: The expression ‘sweat equity shares’ means equity shares issued by the company to employees or directors at a discount or for consideration other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called. The companies will be allowed to issue Sweat Equity Shares if authorized by a resolution passed by a general meeting. The resolution should specify the number of shares, their value and class or classes of directors or employees to whom such equity is proposed to be issued. The issue of sweat equity shares will be further subject to regulations made by SEBI in this behalf. All limitations, restrictions and provisions relating to equity shares shall be applicable to sweat equity shares as well.
9. Escrow Account: A reference has been made about Escrow Account in the context of buy back of shares. Escrow Account means an account in which money is held until a specified duty is performed e.g., a document is sighed or goods are delivered. SEBI’s Regulation 10(1) provides that a company shall, as and by way of security for performance of its obligations on or before the opening of repurchase, deposit in an escrow.
10. Preferential Allotment: Preferential Allotment means placing a bulk of fresh shares with individuals, companies, financial institutions and venture capitalists. The placement is made at a pre-determined price to such parties, who wish to have strategic stake in the company. Such placements have to seek approval from the shareholders by way of special resolution, i.e., it must be approved by at least 75% shareholders foregoing their rights to subscribe to fresh issue and also approving the preferential allotment. A listed company making the preferential allotment shall have to follow the guidelines issued by SEBI in this regard. Mainly the guidelines prescribe that the minimum price of such an issue should be average of highs and lows of 26 weeks proceeding the date on which the Board of Directors resolves to make the preferential allotment. Also, if the preferential allotment is above 15 per cent of the equity, an open offer is mandated by SEBI. It may be noted that such shares carry a lock-in period of three years from the date of allotment, i.e., the holders cannot sell the shares for a period of three years. In case, shares have been allotted by an unlisted company, the lock-in period is one year from the date of commercial production or the date of allotment in the public issue, whichever is earlier.
Reservation for Small Individual Applicants
In Case the issue is over subscribed, the applicants will have to be allotted lesser number of shares than applied for. The Board of Directors may adopt either the lottery method, or pro rata method. SEBI Guidelines, 2000, in this regard, stipulate that the allotment shall be subject to allotment in marketable lots on a proportionate basis. In order to protect the interest of small investors, SEBI Guidelines stipulate a minimum reservation of 50% of the net offer or securities to be allotted to small individual applicants who have applied up to ten marketable lots.
A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a share holder fail to pay the amount due on any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.
Before the shares are forfeited the shareholder:
i) Must be served with a notice requiring him to pay the money due on the call together with interest;
ii) The notice shall specify a date, not being earlier than the expiry of 14 days from the date of service of notice, on or before which the payment is to be made and must also state that in the event of non-payment within that date will make the shares liable for forfeiture;
iii) There must be a proper resolution of the board;
iv) The power of forfeiture must be exercised bonafide and for the benefit of the company.
A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain 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. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares.
Reissue of the forfeited shares:
The directors of the company have the power to re-issue the forfeited shares on such terms as it think fit. Thus the forfeited shares can be reissued at par, or at premium or at discount. However, if the forfeited shares are reissued at discount, the amount of discount should not exceed the amount credited to the share forfeiture A/c. If the discount allowed on reissue is less than the forfeited amount there will be the surplus left in the share forfeited A/c. This surplus will be of the nature of capital profits so it will be transferred to the Capital Reserve A/c.