Share capital and kinds of shares

1. Sources of capital and the meaning of share

A company raises long-term funds in two ways: owned capital, by issuing shares, and borrowed capital, by debentures, deposits and loans. Shares give ownership and a claim on residual profit; debt gives a fixed return and priority on winding up.

A share is a share in the share capital of a company, and includes stock (section 2(84)). It is movable property, transferable as the articles provide (section 44), and each share is distinguished by its number unless held in a depository (section 45). In Borland's Trustee v. Steel Brothers & Co. (1901) Farwell J. described a share as 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 in the second, but also consisting of a series of mutual covenants entered into by all the shareholders under the articles. A share is not a sum of money; it is a bundle of rights and liabilities.

2. Kinds of share capital

• Authorised (nominal) capital (section 2(8)): the maximum capital the memorandum authorises the company to issue.
• Issued capital (section 2(50)): the part of authorised capital the company offers for subscription from time to time.
• Subscribed capital (section 2(86)): the part of issued capital actually taken up by members.
• Called-up capital (section 2(15)): the part of subscribed capital the company has called for payment.
• Paid-up capital (section 2(64)): the amount actually paid, or credited as paid, on the shares issued.
• Uncalled and reserve capital. Unpaid capital not yet called is uncalled capital. Reserve capital is uncalled capital that can be called up only on winding up. The 1956 Act (section 99) let any limited company create it by special resolution; the 2013 Act provides for it only where an unlimited company converts into a limited one (section 65).

3. Kinds of shares: section 43

Equity share capital is all share capital that is not preference capital. It may be (i) with voting rights, or (ii) with differential rights as to dividend, voting or otherwise, in accordance with the rules (the “DVR” share). Equity holders bear the risk: they are paid after preference holders and creditors, but take all residual profits and control the company by their votes (section 47(1): voting in proportion to paid-up equity).

Preference share capital carries a preferential right (a) to dividend at a fixed amount or fixed rate, and (b) to repayment of capital on winding up or repayment of capital. Preference shares may in addition participate in surplus profits or assets without losing their character. Preference holders vote only on resolutions directly affecting their rights and on resolutions for winding up or for repayment or reduction of capital, or on all resolutions if their dividend has been unpaid for two years or more (section 47(2)).

Types of preference shares:

• Cumulative or non-cumulative: unpaid dividend on cumulative shares carries forward to later years.
• Participating or non-participating in surplus profits or surplus assets.
• Convertible or non-convertible into equity.
• Redeemable: after the 2013 Act no company may issue irredeemable preference shares (section 55(1)). Redeemable preference shares may be issued if the articles authorise, redeemable within twenty years (longer for infrastructure projects), only out of distributable profits or a fresh issue, and only if fully paid; where redeemed out of profits, an equal sum goes to the capital redemption reserve account (section 55(2)).

4. Other categories of share issue

• Sweat equity shares (sections 2(88), 54): equity shares issued to directors or employees at a discount or for consideration other than cash, for know-how, intellectual property or value additions; authorised by special resolution.
• Bonus shares (section 63): fully paid shares issued to members free, out of free reserves, securities premium or capital redemption reserve; not in lieu of dividend, and not out of revaluation reserves.
• Rights shares (section 62(1)(a)): further shares offered first to existing equity holders in proportion to their holding, with a right to renounce unless the articles provide otherwise; the offer must be open for at least fifteen and not more than thirty days.
• Employee stock options (section 62(1)(b)) and preferential allotment to others by special resolution (section 62(1)(c)).

5. Issue at premium and at discount

Shares may be issued at a premium; the premium goes to the securities premium account and can be used only for the purposes in section 52 (bonus shares, writing off preliminary expenses or issue expenses, premium on redemption, buy-back). Issue of shares at a discount is prohibited, and such shares are void (section 53), except sweat equity under section 54 and, since 2018, shares issued to creditors on conversion of debt under a statutory resolution plan or a debt restructuring scheme of the Reserve Bank (section 53(2A)).

6. Variation of class rights: section 48

Where capital is divided into classes, the rights of a class may be varied with the written consent of holders of three-fourths of the issued shares of that class, or by special resolution at a separate class meeting, if the memorandum or articles provide for variation or the terms of issue do not prohibit it. Holders of at least ten per cent of the class who did not consent may apply to the Tribunal within twenty-one days to have the variation cancelled, and it has no effect until confirmed.

7. Alteration and reduction of capital

Alteration (section 61): a limited company with share capital, if its articles authorise, may by resolution in general meeting increase its authorised capital; consolidate and divide shares into larger units (with Tribunal approval if voting percentages change); convert fully paid shares into stock and back; sub-divide shares into smaller units; and cancel unissued shares. None of these is a reduction of capital.

Reduction (section 66): by special resolution confirmed by the Tribunal, a company may extinguish or reduce liability on unpaid capital, cancel paid-up capital lost or unrepresented by assets, or pay off paid-up capital in excess of its needs. Notice goes to the Central Government, the Registrar, SEBI (for listed companies) and the creditors, whose objections the Tribunal considers. No reduction is allowed while the company is in arrears in repaying deposits or interest. The rule protects creditors, for whom the capital is the fund they look to: Trevor v. Whitworth (House of Lords, 1887), which also explains the general prohibition on a company buying its own shares (section 67).

How this is examined

June 2025 set “Kinds of share capital” as a 6-mark note. Earlier papers ask for the kinds of shares, the distinction between equity and preference shares, or notes on bonus shares and sweat equity. For the note on share capital: the five stages with section numbers and reserve capital. For kinds of shares: section 43, the voting rules in section 47, the types of preference shares and the twenty-year redemption rule in section 55.