Company Fundamentals and Share Capital Structure

Features Of A Company

A company is a form of business organisation that is created by law. It is distinct from its owners (shareholders). It is governed by the provisions of the Companies Act, 2013 in India.

Here are the key features of a company:

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Separate Legal Entity

A company has an existence independent of its members. It can own property, enter into contracts, conduct business, and sue or be sued in its own name. The shareholders and directors are not personally liable for the company's debts or obligations beyond their share contribution.

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Perpetual Succession

A company has a continuous existence until it is wound up as per legal provisions. The death, insolvency, or retirement of any member does not affect the company's existence. 'Members may come and members may go, but the company goes on forever'.

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Common Seal

Being an artificial person, a company cannot sign documents like natural persons. The common seal acts as the official signature of the company. As per the Companies (Amendment) Act, 2015, having a common seal is no longer mandatory. A document requiring a common seal may be signed by two directors or by one director and the company secretary.

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Limited Liability

The liability of the shareholders is generally limited to the unpaid amount on the shares they hold or the amount guaranteed by them. Their personal assets are not at risk to pay off the company's debts.

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Transferability of Shares

Shares of a public company are freely transferable (subject to conditions in the Articles of Association for private companies). This allows shareholders to sell their shares and realise their investment without dissolving the company.

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Capacity to Sue and Be Sued

Just like a natural person, a company can file suits against others and can be sued in its own name.

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Separate Property

A company is capable of owning, enjoying, and disposing of property in its own name. No member can claim ownership of the company's property as long as the company is a going concern.

Kinds Of Companies

Companies can be classified on various bases under the Companies Act, 2013. Here are some common classifications:

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Based on Incorporation

Chartered Companies

Formed under a special charter granted by the Sovereign (e.g., East India Company in the past). This type is not relevant in modern India.

Statutory Companies

Formed by a special Act of Parliament or State Legislature (e.g., Reserve Bank of India, Life Insurance Corporation of India). Their powers and objectives are defined by the specific Act.

Registered Companies

Formed by being registered under the Companies Act, 2013 (or previous Companies Acts). This is the most common type of company in India.

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Based on Liability

Company Limited by Shares

The liability of members is limited to the unpaid amount on the shares held by them. This is the most common type of registered company.

Company Limited by Guarantee

The liability of members is limited to the amount they undertake to contribute in case of the winding up of the company. This type is often used for non-profit organisations.

Unlimited Company

There is no limit on the liability of the members. Members are liable to contribute to the assets of the company in the event of winding up, without any limit.

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Based on Number of Members

One Person Company (OPC)

A company formed with only one person as a member. It is a type of private company. The sole member nominates a person who, in the event of the member's death or incapacity, shall become the member of the company.

Private Company

Defined by Section 2(68) of the Companies Act, 2013. A private company is one that:

• Restricts the right to transfer its shares.
• Limits the number of its members to 200 (excluding employee members).
• Prohibits any invitation to the public to subscribe for any securities of the company.

It must use the words "Private Limited" or "Pvt. Ltd." as the last words of its name.

Public Company

Defined by Section 2(71) of the Companies Act, 2013. A public company is a company which is not a private company. It must have a minimum paid-up share capital as may be prescribed (currently, no minimum paid-up capital is prescribed). A subsidiary of a public company is deemed to be a public company, even if it is a private company by its articles.

It can offer its shares to the public and its shares are freely transferable.

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Comparison: Private vs. Public Company

Feature	Private Company	Public Company
Minimum Members	2	7
Maximum Members	200 (excluding past/present employee members)	Unlimited
Minimum Directors	2	3
Transferability of Shares	Restricted	Freely Transferable
Invitation to Public for Securities	Prohibited	Can invite
Name Suffix	Private Limited (Pvt. Ltd.)	Limited (Ltd.)

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Based on Control

Holding Company

A company is a holding company of another company if it controls that other company.

Subsidiary Company

A company is a subsidiary company of another company (the holding company) if the holding company:

• Controls the composition of the Board of Directors; OR
• Controls more than half of the total voting power (either on its own or together with one or more of its subsidiary companies).

Associate Company

A company in which the other company has significant influence ($>$20% but $\le$ 50% of total voting power or control of business decisions under an agreement), but which is not a subsidiary company or a joint venture company.

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Other Types

Government Company

A company in which not less than 51% of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments.

Foreign Company

A company incorporated outside India which has a place of business in India, whether by itself or through an agent, physically or through electronic mode, and conducts any business activity in India in any other manner.

Section 8 Company (Non-Profit Organisation)

Companies formed for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other useful object. These companies intend to apply their profits, if any, or other income in promoting their objects and prohibit the payment of any dividend to their members.

Share Capital Of A Company

The capital of a company is divided into small units called shares. The total nominal value of shares which a company can issue is called its share capital.

Share capital is the financial backbone of a company, representing the amount of money raised by issuing shares to the public or private individuals/entities.

Share capital is typically represented in the company's balance sheet under the 'Shareholder's Funds' section.

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Categories Of Share Capital

The share capital of a company is categorised based on different stages of its issuance and collection. These categories are often represented in the Memorandum of Association (MoA) and the balance sheet of the company.

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Authorised Capital (or Nominal Capital or Registered Capital)

This is the maximum amount of share capital that a company is authorised to issue to its shareholders by its Memorandum of Association. It is the limit up to which a company can raise funds through the issue of shares without altering its MoA. The stamp duty and registration fee are often paid on the amount of authorised capital.

Symbolically, let $A$ be the Authorised Capital.

Answer:

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Issued Capital

This is the part of the authorised capital which the company has offered to the public or to its existing shareholders for subscription. A company may not issue the entire authorised capital at once.

Issued Capital $\le$ Authorised Capital.

Symbolically, let $I$ be the Issued Capital. $I \le A$.

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Subscribed Capital

This is the part of the issued capital which has been subscribed (taken up) by the public. The public may subscribe for the full issued capital or less. If the subscription is less than 90% of the issue (as per SEBI guidelines for public issues), the issue is deemed undersubscribed, and the company might have to refund the application money.

Subscribed Capital $\le$ Issued Capital.

Symbolically, let $S$ be the Subscribed Capital. $S \le I$.

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Called-up Capital

This is the part of the subscribed capital which the company has demanded or 'called up' from the shareholders for payment. The full nominal value of the share may not be called at once.

Called-up Capital $\le$ Subscribed Capital.

Symbolically, let $C$ be the Called-up Capital. $C \le S$.

Answer:

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Paid-up Capital (or Paid-up Share Capital)

This is the part of the called-up capital that has actually been paid by the shareholders. Sometimes, shareholders may not pay the called amount (calls in arrears). Also, shareholders might pay amounts not yet called by the company (calls in advance).

Paid-up Capital = Called-up Capital - Calls in Arrears + Calls in Advance (if any).

Paid-up Capital $\le$ Called-up Capital.

Symbolically, let $P$ be the Paid-up Capital. $P \le C$.

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Uncalled Capital

This is the remaining part of the subscribed capital which has not yet been called up by the company.

Uncalled Capital = Subscribed Capital - Called-up Capital.

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Reserve Capital

This is a part of the uncalled capital which a company decides, by passing a special resolution, not to call up except in the event and for the purpose of the company being wound up. It cannot be called during the lifetime of the company for its normal business needs.

Reserve Capital is a part of Uncalled Capital.

Reserve Capital $\le$ Uncalled Capital.

Answer:

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Relationship between categories can be visualised:

Authorised Capital ($A$)

$\quad \downarrow$ (Issued up to this limit)

Issued Capital ($I$) $\le A$

$\quad \downarrow$ (Subscribed by public)

Subscribed Capital ($S$) $\le I$

$\quad \downarrow$ (Can be divided into Called-up and Uncalled)

Called-up Capital ($C$) + Uncalled Capital ($S-C$) = Subscribed Capital ($S$)

$\quad \downarrow$ (Uncalled Capital can be divided into Reserve Capital and remaining Uncalled Capital)

Uncalled Capital = Reserve Capital + Remaining Uncalled Capital

$\quad \downarrow$ (Paid by shareholders)

Paid-up Capital ($P$) = Called-up Capital - Calls in Arrears

Nature And Classes Of Shares

A share is a unit into which the total share capital of a company is divided. Each share has a nominal value, also called face value or par value (e.g., ₹10, ₹100).

Shares represent the ownership interest of the shareholder in the company. Shareholders are the owners of the company.

Companies can issue different classes of shares, primarily based on the rights attached to them, particularly regarding dividend payment and return of capital during winding up.

The two main classes of shares are Preference Shares and Equity Shares.

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Preference Shares

Preference shares are those shares which carry certain preferential rights over equity shares. These rights are:

1. Preferential Right to Dividend: Preference shareholders have a right to receive dividend at a fixed rate before any dividend is paid to equity shareholders. The dividend rate is usually fixed as a percentage of the face value (e.g., 8% Preference Shares).

2. Preferential Right to Repayment of Capital: In the event of the winding up of the company, preference shareholders have a right to get their capital repaid before the capital of equity shareholders is returned.

Preference shareholders generally do not have voting rights, except in matters directly affecting their rights or in case of non-payment of dividend for a specified period.

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Types of Preference Shares

Preference shares can be classified into various types based on the rights they carry:

Cumulative Preference Shares

Dividend, if not paid in any year due to insufficient profits, accumulates and becomes payable in future years when the company makes profits, before any dividend is paid to equity shareholders.

Non-cumulative Preference Shares

Dividend does not accumulate. If the dividend is not paid in a year, the right to receive that year's dividend lapses.

Participating Preference Shares

In addition to the fixed preferential dividend, these shares have a right to participate in the surplus profits of the company along with equity shareholders, after the fixed preference dividend and equity dividend at a certain rate have been paid.

Non-participating Preference Shares

These shares are entitled only to the fixed preferential dividend and do not participate in any surplus profits.

Redeemable Preference Shares

Shares that can be redeemed (repaid) by the company after a fixed period or at any time after giving due notice, as per the terms of issue and legal provisions. Companies cannot issue irredeemable preference shares in India.

Irredeemable Preference Shares

Shares that cannot be redeemed during the lifetime of the company. These are not allowed to be issued by companies in India under the Companies Act, 2013.

Convertible Preference Shares

Shares that give the holder the right to convert them into equity shares after a specified period or on a future date as per the terms of issue.

Non-convertible Preference Shares

Shares that cannot be converted into equity shares.

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Equity Shares

Equity shares (also known as ordinary shares) are shares which are not preference shares. They represent the basic ownership in a company.

Equity shareholders are the ultimate owners of the company. They bear the maximum risk but also have the potential to gain the most.

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Features of Equity Shares

• Residual Owners: Equity shareholders receive dividend and return of capital only after all other claims (creditors, preference shareholders) have been settled.
• Fluctuating Dividend: The dividend rate on equity shares is not fixed. It depends on the company's profits and the discretion of the Board of Directors. If the company earns high profits, the dividend rate can be very high, and if there are no profits, no dividend may be paid.
• Voting Rights: Equity shareholders typically have voting rights in the company's meetings. This allows them to participate in the management and control of the company (e.g., electing directors, approving major decisions). Their voting power is usually proportionate to the number of shares held.
• Right to Participate in Surplus: After payment of all liabilities and repayment of preference capital and equity capital, any remaining surplus belongs to the equity shareholders.

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Difference between Preference Shares and Equity Shares

Feature	Preference Shares	Equity Shares
Dividend Payment	Receive dividend at a fixed rate before equity shareholders.	Receive dividend after preference shareholders; rate fluctuates based on profit.
Arrears of Dividend	Can accumulate (in case of cumulative preference shares).	Do not accumulate.
Repayment of Capital	Have a preferential right to repayment of capital during winding up, before equity shareholders.	Repaid only after preference shareholders have been repaid.
Voting Rights	Generally do not have voting rights (except on matters affecting their rights or specific conditions like non-payment of dividend).	Usually have voting rights (one vote per share).
Participation in Surplus	Generally do not participate in surplus profits (unless they are participating preference shares).	Have a right to the residual surplus profits and assets.
Nature of Return	More stable but limited return (fixed dividend).	Potentially high but volatile return (fluctuating dividend, capital appreciation).
Redemption	Can be redeemable (cannot be irredeemable in India).	Cannot be redeemed during the lifetime of the company (capital is returned only on winding up or buyback).