BBA II

Semester III
Subject : Secretarial Practice and Company Management
Unit III Company Shares-
3.1 Definition I types of share & structure of share capital.
3.2 Secretatial prodedure relating to applications, allotment and forfeiture of Shares
3.3Transfer and transmission of share, Share certificate.

Notes Compiled By : Raghunandan Shrivas ( MBA Finance )

Takshashila Mahavidhyalaya Amravati
Secretarial Practice and Company Management
3.1 Definition I types of share & structure of share capital.
Definition and Meaning of Share Capital:
The term capital usually means a particular amount of money with which a business is
started. In Indian Companies Act, it has been used in different senses in various parts of the Act,
but in general it means the money subscribed pursuant to Memorandum of Association of the
Company. Capital, in fact, represents the assets with which the undertaking is carried on.
The sum total of nominal value of shares of a company is known as its share capital. In
case of companies, the terms ‘capital’ and ‘share capital’ have been held to be synonymous.
Capital to be stated in the Memorandum of Association and Articles of Association of the
Company.
Types/Nature of Share Capital:
The share capital of company may be of the following types:
1. Registered, Authorised or Nominal Capital:
The Memorandum of Association of every company has to specify the amount of capital
with which it wants to be registered. The capital so stated is called Registered, Authorized or
Nominal Capital. The Registered Capital is the maximum amount of share capital which a
company can raise by way of public subscription.
2. Issued Capital:
The company may not issue the entire authorised capital at once. It goes on raising the
capital as and when the need for additional fund is felt. So, issued capital is that part of
Authorised/Registered or Nominal Capital which is offered to the public for subscription in the
form of shares.
3. Unissued Capital:
The balance of nominal capital remaining to be issued is called Unissued Capital.
4. Subscribed Capital:
It is that part of “issued capital” for which applications are received from the public. The
subscribed capital is allotted to the respective subscribers as per resolution passed by the
directors of the company.
5. Called up Capital:
It is that part of subscribed capital which has been called up by the company. A company
does not call at once the full amount on each of the shares it has allotted and therefore, calls up
only such amount as it needs.
6. Uncalled up Capital:
Represents contingent liability of the shareholders on the shares.
7. Paid up Capital:
It is that part of called up capital against which payment has been received from the
members on their respective shares in response to the calls made by the company.
8. Reserve Capital or Reserve Liability:
By Reserve Capital we mean that amount which is not callable by the company except in
the event of the company being wound up. The company cannot demand the payment of money
on the shares to that extent during its life time. Reserve capital may be created by means of a
special resolution passed by the company in its General Meeting by three-fourths majority of
those voting on it.
9. Fixed Capital:
The fixed capital of a company is what the company retains in the shape of fixed assets
such as land and buildings, plant and machinery, furniture, etc
10. Circulating Capital:
The circulating capital is a part of subscribed capital which is circulated in business in the
form of using goods or other assets such as book debts, bill receivables, cash, bank balance, etc.
Classes of Share Capital:
The share capital of a company limited by shares may be of the following two kinds:
1. Preference share capital, and
2. Equity share capital.
1. Preference Share Capital:
It means that part of the capital of the company which:
(a) Carries a preferential right as to payment of dividend at fixed rate during the life time of the
company.
(b) Carries, on the winding up of the company, a preferential right to be repaid the amount of the
capital paid up.
2. Equity Share Capital:
It means with reference to a company, limited by shares, all share capital which is not preference
share capital.
An equity share capital essentially means that capital of a company raised by offering shares. It
is the money that company owners and investors direct towards a company’s capital and use it to
develop or expand the operations of their venture.
It is also the money which is collected by the company by selling its shares at the price of face
value.
Equity share can be divided into 2 categories-
With voting rights or
With differential rights as to dividend, voting or otherwise in accordance with such rules as
prescribed.

Structure of Share Capital and it’s Components

Capital Structure constitutes two words i.e. Capital and Structure. The word ‘Capital’
refers to the investment of funds in business while ‘Structure’ means arrangement of different
components in proper proportion. A company can raise its capital from different sources i.e.
owned capital, borrowed capital or both. To decide capital structure means to decide upon the
ratio of owned capital (i.e. equity share capital, preference share capital, reserves & surplus) to
borrowed capital (i.e. debentures, loans, etc).
The components of Capital Structure are as follows:
Equity Share Capital,Preference Share Capital, Retained Earning , Borrowed Capital.
I. Equity Share Capital:
Equity share capital is provided by equity shareholders and it is the basic source of
financing activities of business. The holders of such shares bear ultimate risk associated with the
ownership. Equity shares carry dividend at a fluctuating rate, depending upon the profits earned
by the company.
II. Preference Share Capital:
Preference shares carry dividend at a fixed rate and enjoy preferential right over equity shares for
return of capital in case of winding up of the company. Unlike equity shareholders, preference
shareholders have limited voting rights.
III. Retained Earnings:
The part of the profit retained by the company for meeting future financial needs and for
expansion of the firm is known as retained earnings. In simple words, it is ploughing back of
profits.
IV. Borrowed Capital:
It consists of the following:
A. Debentures:
A debenture is a certificate of loan evidencing the fact that the company is liable to pay a
specified amount with interest at an agreed rate.
B. Term Loans:
Term loans are provided by banks and other financial institutions at a fixed rate of interest
3.2 Secretatial prodedure relating to applications, allotment and forfeiture of Shares
Application for shares
  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 is the acceptance by the company of
the offer made by the applicant.

Duties Of Company Secretary For Application Of Shares:

1. To make arrangements for opening with the bankers a special account for receiving the
share application with the application money.
2. To see that the share application received by the company are sent to the bank.
3. To arrange for screening and sorting out of the application on receipt of the same with the
bank.
4. To see that all incomplete and irregular applications are rejected and in case of
insufficient money, the applicants are requested to remit the balance amount due to the
bank.
5. To notify the public through print media that the last date of receiving application is over
or that the issues have been subscribed fully.
Allotment of Shares :
A person intending to buy shares of a company has to make a written application in the
prescribed form supplied by the company, together with application money either covering full
value of the shares or in part or together with premium if as desired by the company, in case of a
widely held public company a share application form is attached to the Prospectus.

The term ‘allotment’ means acceptance of share application by the Board of Directors by
passing a resolution at a Board meeting. The Companies Act makes provisions for allotment of
shares.

There are three different situations under which allotment takes place and the Company
Secretary has to act accordingly. (I) When a new company is promoted and shares are issued or
offered for sale then as and when applications together with application money are coming in,
the Company Secretary has to do the following:

(a) To make a chronological (i.e., date and time-wise) record of the applications and sending the
money to a scheduled bank.

(b) To help the Board of Directors in the act of allotment. If applications for shares are received
less than the number of shares offered for sale then there is no problem and all the applicants will
get shares allotted to them. But problem arises when more applications have come.

The Secretary will do, on behalf of the Board of Directors, allotment which may
take place under any of the following three methods as to be mentioned in the Articles of
Association of the company: They are:
(i) Priority Basis:
Shares will be allotted to those applicants who have applied for shares first, according to
chronological order as recorded,

(ii) Pro-Rata Basis:

It i s not always justifiable that shares should be allotted on priority basis. And so allotment is
made on pro rata basis. Suppose, applications have been received for twice the number of the
shares offered for sale. Then each applicant will get half of the shares applied by him accepted
and shares are allotted accordingly and the remaining half rejected.

(iii) Lottery Basis:

Applications are drawn at random out of the total number of applications thoroughly mixed up
such drawings will continue until all the available shares are allotted and the remaining
applications will be rejected. Out of the three systems, the second one is the best.

It has to be noted that allotment of shares cannot be undertaken:

(i) Before the Minimum Subscription is received in case of a widely held public company (Sec.
69) and

(ii) Unless before at least three days a Statement in lieu of Prospectus has been filed (showing
the list of allotments) with the Registrar of Companies in case of a closely held public company
(Sec. 70).

(c) At the instance of the Board of Directors the Company Secretary shall (i) issue Letters of
Allotment to all the applicants to whom shares have been allotted asking them to pay allotment
money within a stipulated time or (ii) issue Letters of Regret to those share applicants whose
applications have been rejected. Together with regret letters, cheques shall be sent as refund of
applications money.

(d) Within 3 months from the date of allotment of shares, share certificates (Sees. 84, 113)
containing the names of the shareholders, the number and value of shares held, serial number of
the certificate, date of issue, common seal of the company and signatures of at least two
Directors and of the Secretary himself, if any, shall be made ready for delivery and the names of
the shareholders with all other details shall be entered into the Register of Members (Sec 150).

(e) The Company Secretary, as an officer of the company and responsible in the process, shall be
personally liable and punishable if there is any irregular allotment of shares.
Duties Of Company Secretary For Allotment Of Shares:
1. To see that the minimum subscription has been received
2. To see that not less than 5% of the total face value of the shares have been received
3. To see that at least four days have been elapsed from the date of issue of the shares.
4. To see that the applications of shares have been checked, sorted and entered in the
application and allotment list.
5. To consult the stock exchange authorities regarding the allotment of the listed shares.
6. To see that every sheet of application and allotment list is initialed by the chairman of the
board and also signed by him at the end of the list.
7. To see that the board resolution is passed approving the allotment of the shares.

Forfeiture of Shares

It is to be noted that the Companies Act does not provide any Sections specifying
forfeiture of shares. Regulations 29 to 35 of the Table A, however, provide the procedure. It is
implied that a company can forfeit shares subject to two conditions:

(i) If there is such provision in the Articles of Association of the company and

(ii) Only when a shareholder has failed to pay call money and not any other dues by him to the
company.

The company may re-issue the forfeited shares at any price and there is a capital profit. Re-issue
of forfeited shares is not a case of new allotment but more or less a case of transfer.

Accordingly, a Company Secretary has the following duties in respect of forfeiture of shares:

(a) To arrange a Board meeting; to take a decision on forfeiture after the first reminder for
payment of call money to defaulting shareholders has been issued.

(b) To issue a second reminder to still defaulting members with a caution that shares may be
forfeited if the call money is not paid within a specified period of time.

(c) To have a resolution passed at a Board meeting on forfeiture.

(d) To make necessary changes in the Register of Members and to cancel the share certificates
forfeiture.

(e) In case forfeited shares are re-issued, the Company Secretary has to make further entries in
the Register of Members, to issue share certificates to the re-purchasers, and to see that necessary
entries are made in the books of account.

3.3 Transfer and transmission of share, Share certificate.

Transfer of shares
It is an inherent right of a shareholder to transfer his shares to another person freely in
case of a public company and under restrictions in case of a private company as provided in its
Articles of Association. The Companies Act provides the guidelines for transferring of shares
(Sees 108 to 113). Regulations 19 to 24 of the Table A provide a model of procedure.

According to the Act, a shareholder or transferor has to obtain a Share Transfer Deed or
Instrument of Share Transfer (purchasable in the market) duly certified by a public servant, on
which the shareholder as the transferor has to make endorsement of the shares in favour of the
transferee and sign his name on necessary stamp.

The transferor shall hand over the share certificate together with the instrument to the
transferee and take the money from the transferee by way of consideration. The transferee will
send these documents to the company for acceptance and other necessary actions.

On receiving these documents the duties of the company secretary will be:
(a) To inspect and to verify-the correctness of the instrument and genuineness of the share
certificate. He will issue a Transfer Receipt to the transferee.

(b) To write a letter to the transferor and the transferee each, called the ‘notice of lodgment of
transfer’, inviting objections to the transfer, if any. This is very important particularly when
shares are rot fully paid.

(c) If no objection is received within two weeks from the sending of above notice, the matter will
be placed by the Company Secretary at the next meeting of the Board of Directors for approval
or disapproval of transfer. Normally, disapproval is not made unless there are strong reasons in
the interests of the company.
(d) Within two months from the approval, the Company Secretary shall issue a new share
certificate to the transferee in exchange of Transfer Receipt, remove the name of the transferor
from the Register of Members and enter the name of the transferee in it. Instead of issuing a new
share certificate the old certificate duly endorsed by the transferor may be given to the transferee.

Transmission of shares
Transmission of shares means transfer of shares by operation of Law. For example, when
a shareholder dies, his shares are transferred to his inheritor. The inheritor may hold the shares in
his own name or before that he may transfer the shares to any other person.

When a creditor, being unable to get payment from his debtor starts a case and gets a decree on
the assets of the debtor including some shares held by the debtor, there is a case of transmission.
The Companies Act does not provide any specific Sections for Transmission of shares. But Table
A provides Regulations 25 to 28 for the same.

The Company Secretary has the following duties to do in connection with transmission of
shares:
(a) To examine all the legal documents and evidences as to the claim made by a transferee. In
case of inheritance, the Probate of Will (i.e., a copy of the Will certified by the Court) of the
deceased shareholder entitling the inheritor to the shares shall be demanded. If there has been no
Will then a Letter of Administration has to be received from the person claiming transmission.

(b) The Company Secretary has to obtain the approval of transmission by the Board of Directors.
The Board of Directors has powers to reject transfer of shares but it cannot normally reject
transmission because it is by operation of law.

(c) After that the Company Secretary has to take all other steps, as in case of a transfer, with
regard to issue of new share certificates and necessary changes in the Register of Members. It
has to be noted that rules regarding transfer and transmission, of shares also apply to debentures.

Share Certificate

A Share Certificate is a document of title to shares. It is issued to the shareholders of the

company, as evidence to their shareholding in the company. The company issues the Share
Certificate under its Common seal. It must be signed by two directors and countersigned by the
authorized signatory or secretary of the company. Every Share Certificate must be stamped with
revenue stamp of proper value.
Definition: - Section 84 of the companies Act defines share certificate as ‘A certificate, under the
common seal of the company, specifying only the shares held by any member, shall be a prima
facie evidence of the title of the member of such shares’.

Contents of Share Certificate

a. Name and Address of the registered office of the company.

b. Name(s) of the Shareholder(s).

c. Serial number of share certificate.

d. Number of Share(s) held.

e. Number and class of shares. (i.e. whether Preference or equity shares)

f. Nominal value and amount paid on each share.

g. Distinctive Number(s) of shares.

h. Date of issue of Certificate.

i. Signature of two directors and one authorized signatory.

j. Seal of the company against the affixed revenue stamp.

k. The face value of the shares.

l. Whether the face value is fully paid or partly paid.

The share certificate is required for the transfer and transmission shares. It is a registered
document and not a bearer document. It can be transferred only by following a certain transfer
procedure.

Statutory Provision regarding share Certificate

1. Time Limit: -The share certificate must be prepared and delivered to the shareholders
within 3 months of allotment of shares. In case of transfer, the share certificate should Reach the
transferee within 2 months from the date if transfer.
2. Resolution: -Share certificate is issued only after passing of resolution in the board meeting
to that effect.

3. Contents in certificate: -Share certificate must specify the name of the shareholder, number,
type of shares, amount paid on each shares etc. it should be signed by two directors and the
secretary and bear the common seal of the company.

4. Entry in the Register: -All the particulars of share certificate must be entered in the Register
of Members. These entries must be authenticated by the secretary or signatories to the certificate.

5. Duplicate and Surrendered Certificates: -If the company issues duplicate certificate, it
should be clearly mentioned on the certificate by putting a stamp of word ‘Duplicate’ on the face
of the certificate.

In case of surrendered certificates a cancellation mark must be put on the face of the certificate
such certificates may be destroyed after three years.