[FAQs] on Different Types of Capital and Share Issuance Methods

  • Blog|Company Law|
  • 18 Min Read
  • By Taxmann
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  • Last Updated on 8 August, 2024

Share Capital

In business and finance, capital typically refers to the financial assets needed for a company to produce goods and services. There are different types of capital, each serving a unique purpose in the business environment. Additionally, companies have various methods for issuing shares to raise capital. Share issuance is a method by which companies distribute shares to raise equity capital.

Table of Contents

  1. Types of Capital
  2. Issue & Redemption of Preference Shares
  3. Issue of Shares at Premium
  4. Issue of Shares at Discount
  5. Sweat Equity Shares
  6. Shares With Differential Voting Rights
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1. Types of Capital

FAQ 1. What is the difference between Nominal Capital & Subscribed Capital?

Nominal, Authorized or Registered Capital [Section 2(8)]: This is the sum stated in the memorandum of association of a company limited by shares as the capital of the company with which it is registered.

It is the maximum amount which the company is authorized to raise by issuing shares.

This is the capital, on which the company had paid the prescribed fee at the time of registration; hence it is also called Registered Capital. As and when this capital is increased, fees for such increase will have to be paid to the ROC.

Subscribed Capital [Section 2(86)]: It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company.

FAQ 2. What is the difference between Share and Stock?

Following are the main points of distinction between share & stock:

Points Share Stock
Nature Shares in physical form bear distinct numbers. Stocks are the consolidated value of share capital.
Paid-up value Shares may or may not be fully paid-up. Stock is always fully paid-up.
Nominal value Shares have a nominal value. Stock does not have any nominal value.
Denomination All shares are of equal denomination. Denomination of stocks varies.
Fractions It is not possible to transfer shares into fraction. Stock is divisible into any amount required. Thus, it is possible to transfer even into fractions.
Existence A share comes into existence before the stock and it is issued initially. Stock comes into existence after conversion of shares into stock and on conversion of shares into stock, the provisions of the Act governing the shares shall cease to apply to the share capital as it is converted into stock.

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FAQ 3. What is the difference between Reserve Capital & Capital Reserve?

Following are the main points of distinction between reserve capital & capital reserve:

Points Reserve Capital Capital Reserve
Meaning Reserve capital is that part of the uncalled capital of a company which the limited company has decided by special resolution not to call except in the event and for the purpose of the company being woundup. Capital reserves are created out of capital profit. Capital reserve may be statutory capital reserve or non- statutory capital reserve.
Mandatory Creation of reserve capital is not mandatory. Creation of capital reserve is mandatory in certain cases.
Balance sheet disclosure There is no need to disclose reserve capital in balance sheet. Capital reserves are disclosed in balance sheet under the head “Reserve & Surplus”.
Writing off capital losses Reserve capital cannot be used to write-off capital losses. Capital reserve can be used to write-off capital losses.
Process Special resolution is required to be passed at general meeting by the shareholders. Capital reserve is created out of accounting process.

2. Issue & Redemption of Preference Shares

FAQ 4. Preference share are cumulative unless expressly stated to be non-cumulative. Comment.

Dividends on preference shares, like equity shares, can be paid only out of profits.

With regard to the payment of dividends, preference shares may be cumulative or non-cumulative.

A cumulative preference share confers a right on its holder to claim fixed dividend of the past and the current year and out of future profits. The dividend keeps on accumulating until it is fully paid.

The non-cumulative preference share gives right to its holder to a fixed amount or a fixed percentage of dividends out of the profits of each year. If no profits are available in any year, the shareholders get nothing, nor can they claim, unpaid dividend in any subsequent year.

Preference shares are cumulative unless expressly stated to be non-cumulative.

FAQ 5. What are the conditions which must be fulfilled for issue and redemption of preference shares?

Issue & Redemption of Preference Shares [Section 55]:

1. Irredeemable preference shares cannot be issued: No company limited by shares shall issue any preference shares which are irredeemable.

2. Period for which preference shares can be issued: If authorized by its articles, a company limited by shares may issue preference shares which are liable to be redeemed within a period not exceeding 20 years from the date of their issue subject to prescribed conditions.

However, a company may issue preference shares for a period exceeding 20 years for infrastructure projects, subject to the redemption of prescribed percentage of shares on an annual basis at the option of such preferential shareholders.

As per Rule 10 of the Companies (Share Capital & Debentures) Rules,  2014, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum 10% of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders. The term ‘‘infrastructure projects’’ means the infrastructure projects specified in Schedule VI.

3. Source of funds for redemption: Preference shares shall be redeemed:

(a) Out of the profits of the company which would otherwise be available for dividend.

(b) Out of the proceeds of a fresh issue of shares.

(c) Partly out the profits of the company and partly out of the proceeds of a fresh issue of shares.

4. Paid-up value of redemption: Preference shares shall be redeemed only if they are fully paid-up.

5. Capital Redemption Reserve Account: Where preference shares are proposed to be redeemed out of the profits a sum equal to the nominal amount of the shares should be transferred to the Capital Redemption Reserve Account. Capital Redemption Reserve Account may be applied for issue of fully paid-up bonus shares.

6. Premium on redemption of preference shares:

(i) In case of prescribed class of companies whose financial statement required to comply with the prescribed accounting standards under section 133, the premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed.

(ii) In a other cases, the premium payable on redemption shall be provided for:

(a) Out of the profits of the company.

(b) Out of the company’s securities premium account, before such shares are redeemed.

(c) Partly out the profits of the company and partly out of securities premium account.

7. Redemption of preference shares by issue of further redeemable preference shares: Where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares referred as unredeemed preference shares), it may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

While giving approval, the Tribunal shall order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

Explanation: The issue of further redeemable preference shares or redemption of preference shares shall not be deemed to be an increase or a reduction, in the share capital of the company.

FAQ 6. Whether equity shares already issued can be converted into redeemable preference shares?

There is not specific provision in the Companies Act, 2013 regarding conversion of equity shares into redeemable preference shares. However, it was held that where the equity shares are to be converted into redeemable preference shares it was necessary to adopt the process of reduction of capital u/s 66 of the Companies Act, 2013. [Re. Chowgule & Co. (P.) Ltd., St. James Court Estates Ltd.]

FAQ 7. Is it correct that in no circumstances a company can issue redeemable preference shares with a redemption period of 20 years?

As per Section 55 of the Companies Act, 2013, a company limited by shares shall not issue preference shares which are irredeemable.

A company limited by shares may issue preference shares which are liable to be redeemed within a period 20 years from the date of issue.

As per Rule 10 of the Companies (Share Capital & Debentures) Rules, 2014, a company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding 20 years but not exceeding 30 years, subject to the redemption of a minimum ten percent of such preference shares per year from the 21st year onwards or earlier, on proportionate basis, at the option of the preference shareholders. The term ‘‘infrastructure projects’’ means the infrastructure projects specified in Schedule VI.

Thus, it is incorrect to say that in no circumstances a company can issue redeemable preference shares with a redemption period of 20 years.

FAQ 8. What is the difference between Preference Share Capital & Equity Share Capital?

Following are the main points of distinction between preference share capital & equity share capital:

Points Preference Share Capital Equity Share Capital
Dividend Preference shares are entitled to a fixed rate of dividend. Rate of dividend on equity shares is recommended by the  board  of directors in its report to the shareholders, which is approved by the shareholders at the AGM.
Preference in dividend Dividend on the preference shares is paid in preference to the equity shares. Dividend on equity shares is paid only after preference dividend has been paid.
Preference in winding-up In case of winding-up, preference shareholders get preference over equity share holders with regard to the payment of capital. In case of winding-up, equity shareholders get payment of capital after the payment of capital to preference shareholders.
Cumulativeness Dividend on preference share may be cumulative. Dividend on equity shares is not cumulative.
Voting rights Voting rights of preference shareholders are restricted. As per Section 47(2), a preference shareholder can vote only in following cases:

(a) When his special rights as a preference shareholder are being varied.

(b) Any resolution for the winding-up of the company or for the repayment or reduction of its equity or preference share capital.

(c) If preference dividend has not been paid for a period of 2 years or more.

An equity shareholder can vote on all matters affecting the company.
Bonus & right shares No bonus shares/right shares are issued to preference share holders A company may issue rights shares or bonus shares to the company’s existing equity shareholders.
Redemption Preference shares are liable to be redeemed within a period 20 years from the date of issue. Equity shares cannot be redeemed except under a scheme involving reduction of capital or buy-back of its own shares.

FAQ 9. An unlisted public company was incorporated in the year 2015 to manufacture domestic pressure cookers. In the year 2017, the company issued six-years, 7%, non-convertible, cumulative preference shares for ` 15 Crore to another company. Due to intense competition in the home appliances market, the company was just able to break even. The company did not declare any dividend (both on equity shares and preference shares) since incorporation and unable to redeem preference shares during the year 2023 on maturity.

Referring to the provisions of the Companies Act, 2013 explain the way for redemption of unredeemed preference shares and how the outstanding preference dividend can be discharged, as the profit is not available for the redemption of preference shares and payment of outstanding dividend.

As per section 55(3) of the Companies Act, 2013, where a company is not in a position to redeem any preference shares or to pay dividend, if any, on such shares in accordance with the terms of issue (such shares referred as unredeemed preference shares), it may, with the consent of the holders of 3/4th in value of such preference shares and with the approval of the Tribunal on a petition made by it in this behalf, issue further redeemable preference shares equal to the amount due, including the dividend thereon, in respect of the unredeemed preference shares, and on the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

While giving approval, the Tribunal shall order the redemption forthwith of preference shares held by such persons who have not consented to the issue of further redeemable preference shares.

Explanation: The issue of further redeemable preference shares or redemption of preference shares shall not be deemed to be an increase or a reduction, in the share capital of the company.

Thus, if profit is not available for redemption, an unlisted public company can redeem its preference share and preference dividend as per provisions stated above.

3. Issue of Shares at Premium

FAQ 10. Securities premium shall be utilized only for certain specific purposes only. Comment.

A company may issue securities at a premium when it is able to sell them at a price above face value. The Companies Act, 2013, does not stipulate any conditions or restrictions regulating the issue of securities by a company at a premium. However, it imposes conditions regulating the utilization of the amount of premium collected on securities.

Securities Premium Account [Section 52(1)]: Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the aggregate amount of the premium received on those shares shall be transferred to a “securities premium account” and the provisions of the Act relating to reduction of share capital of a company shall, except as provided in this section, apply as if the securities premium account were the paid-up share capital of the company.

Conditions relating to utilization of securities premium [Section 52(2)]:

Securities premium can be used by the company for the following purposes:

(a) Issuing fully paid bonus shares.

(b) Writing off the preliminary expenses.

(c) Writing off commission or discount or the expenses on issue of shares or debentures.

(d) Writing off premium on redemption of redeemable preference shares or debentures.

(e) Buy-back of face value of shares and writing off premium on buy-back.

Conditions relating to utilization of securities premium in case of prescribed class of companies [Section 52(3)]:

In case of prescribed class of companies whose financial statement comply with the accounting standards prescribed under section 133, securities premium account can be used for the following purposes:

(i) Issuing fully paid-up bonus shares.

(ii) Writing off expenses or commission or discount on any issue of equity shares.

(iii) Buy-back of face value of shares and writing off premium on buy-back.

FAQ 11. In view of provisions of the Companies Act, 2013 relating to ‘securities premium’, state whether the amount lying in securities premium account of a company can be used:

(i) For issuance of Bonus shares; and

(ii) For payment of dividend declared by the company at its General Meeting.

In view of above provisions, answer to given case is as follows:

(i) Company can use the amount laying in securities premium for issuance of bonus shares.

(ii) Company cannot use the amount laying in securities premium for payment of dividends declared by the company at its general meeting.

FAQ 12. A company has utilized the securities premium during the financial year 2016-2017 as follows:

(i) ` 15 lakh against expense of foreign travelling of directors.

(ii) ` 5 lakh for writing-off the balance of preliminary expenses of the company.

(iii) ` 10 lakh distributed as dividend for the financial year ending 31st March, 2017.

Being the secretarial Auditor of the company, referring to the provision of the Companies Act, 2013 relating to securities premium account, what is the validity of the above?

In view of above provisions, answer to given case is as follows:

(i) Balance in securities premium cannot be utilized for writing-off expenses of foreign travelling of directors.

(ii) Balance in securities premium can be utilized writing-off preliminary expenses of the company.

(iii) Balance in securities premium cannot be utilized for payment of dividend.

4. Issue of Shares at Discount

FAQ 13. What is the Issue of shares at a discount?

Prohibition on issue of shares at discount [Section 53]: Except as provided in Section 54 [issue of sweat equity shares], a company shall not issue shares at a discount.

Any share issued by a company at a discount price shall be void.

However, a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the RBI under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.

Penalty: Where any company fails to comply with the provisions of this section, such company and every officer who is in default shall be liable to a penalty which may extend to an amount equal to the amount raised through the issue of shares at a discount or ` 5 lakh, whichever is less.

The company shall also be liable to refund all monies received with interest  at the rate of 12% p.a. from the date of issue of such shares to the persons to whom such shares have been issued.

5. Sweat Equity Shares

FAQ 14. What is Sweat Equity Shares?

Sweat Equity Shares [Section 2(88)]: Sweat equity shares means equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Issue of sweat equity shares [Section 54]: A company can issue sweat equity shares, of a class of shares already issued, if the following conditions are satisfied:

(a) The issue has been authorized by a special resolution passed by the company in the general meeting.

(b) Such special resolution should clearly specify:

Number of shares
Current market price
Consideration and
Classes of directors or employees to whom such equity shares are to be issued.

(c) At least 1 year should have elapsed from the date on which the company was entitled to commence business. [Deleted by the Companies (Amendment) Act, 2017]

(d) A company whose shares are listed on a recognized stock exchange issuing sweat equity shares should comply with the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021.

(e) A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014.

Rights, limitations, restrictions applicable to sweat equity shares [Section 54(2)]: The rights, limitations, restrictions and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued and the holders of sweat equity shares shall rank pari passu (on an equal footing) with other equity shareholders

FAQ 15. The share capital of a company is ` 30 Crore.  The managing director is appointed by the company and the company wants to compensate him by issuing shares for supplying technical know-how without any cost. In this context, answer the following:

(i) Whether the company is allowed to allot such shares?

(ii) Is approval of shareholders required for issuing such shares?

(iii) If found eligible to allot such shares, what will be the quantum (value) of shares that can be allotted?

(iv) Can managing director sell such allotted shares in the market?

(v) Will the amount that he receives on the sale of his shares be considered a part of his remuneration?

Considering provisions of Section 2(88), Section 54 of the Companies Act, 2013 read with the Companies (Share Capital & Debentures) Rules, 2014 relating to Sweat Equity Shares, answer to given case is as follows:

  1. Sweat equity shares can be issued by a company to its directors or employees for providing know-how or making available rights in the nature of intellectual property rights or value additions. Thus, the company can compensate its managing director by issuing to Sweat Equity Shares for providing technical know-how.
  2. The special resolution is required to be passed for issue of sweat equity shares. Such resolution is valid for making the allotment within a period of not more than 12 months from the date of passing of the special resolution.
  3. The company shall not issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the issue value of ` 5 Crore, whichever is higher.
    As the paid-up share capital of the company is ` 30 Crore. The company can allot sweat equity shares of ` 4.5 Crore (30 Crore × 15%) or ` 5 Crore, whichever is higher.
    Thus, Raney Ltd. can allot maximum ` 5 Crore value of sweat equity shares to its directors and employees.
  4. Sweat equity shares issued to directors or employees shall be locked-in/non-transferable for a period of 3 years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.
    Hence, the sweat equity shares allotted to the managing director can be sold in the market only after the expiry of the lock-in period of 3 years.
  5. The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purposes of Sections 197 & 198 of the Companies Act, 2013, if the following conditions are fulfilled –

(a) Sweat equity shares are issued to any director or manager; and

(b) They are issued for consideration other than cash, which does not take the form of an asset which can be carried to the balance sheet of the company in accordance with the applicable accounting standards.

In simple words, amount of sweat equity shares issued shall be treated as part of managerial remuneration only if it is expensed in the books of the company.

FAQ 16. A company intends to issue sweat equity shares to its employees for a non-cash consideration. The Managing Director believes that the sweat equity shares can only be issued for consideration received in cash. Do you agree?

Sweat Equity Shares [Section 2(88)]: Sweat equity shares means equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

As per Section 54 of the Companies Act, 2013, a company may issue sweat equity shares of a class of shares already issued, if the issue is authorized by a special resolution passed by the company. Such resolution specifies the number of shares, the current market price, consideration and the class or classes of directors or employees to whom such equity shares are to be issued.

Further, as per Rule 8(9) of the Companies (Share Capital & Debentures) Rules, 2014, company can issue sweat equity shares for non-cash consideration on the basis of valuation report in respect thereof obtained from a registered valuer.

Based on above provisions, we can conclude that the view of the Managing Director is not correct.

FAQ 17. ABC Limited is a subsidiary company of XYZ Limited. XYZ Limited passed an ordinary resolution in its general meeting to issue Sweat equity Shares to the executive director of ABC Limited for providing his professional services. The Company Secretary in XYZ Ltd., objected the following:

(i) Sweat equity shares cannot be issued to an executive director in Subsidiary company i.e., ABC Limited.

(ii) Special resolution is required to be passed in the general meeting, of XYZ Ltd. Examine the validity of objection of Company Secretary of XYZ Limited under the provisions of Companies Act, 2013.

As per section 2(88) of the Companies Act, 2013, sweat equity shares means equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Sweat equity shares can be issued to director who may be whole time or part time i.e. executive or non-executive.

As per section 54(1), a company can issue sweat equity shares, of a class of shares already issued, if the issue has been authorized by a special resolution passed by the company in the general meeting.

As per Rule 8(1) of the Companies (Share Capital & Debentures) Rules, 2014, employee means:

(a) A permanent employee of the company who has been working in India or outside India.

(b) A director of the company, whether a whole time director or not.

(c) An employee or a director of a subsidiary, in India or outside India, or of a holding company of the company.

Considering above provisions, answer to given case is as follows:

(i) XYZ Limited can issue sweat equity shares to executive director of ABC Limited (Subsidiary of XYZ Limited).

(ii) XYZ Limited will have to pass special resolution for issuing sweat equity shares. Such shares cannot be issued by passing ordinary resolution.

FAQ 18. Draft a specimen resolution for allotment of sweat equity shares to the Chairman & Managing Director (CMD) of a listed company. What is the type of meeting and kind of resolution to be passed under the provisions of the Companies Act, 2013?

Type of meeting: General Meeting

Kind of resolution: Special Resolution

Specimen resolution:

RESOLVED THAT subject to the provisions of Section 54 of the Companies Act, 2013 read with Rule 8 of the Companies (Share Capital & Debentures) Rules, 2014, in accordance with the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021, the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 consent of the members be and is hereby accorded to allot        Equity Shares as Sweat Equity Shares of `               each to Mr Chairman & Managing Director of the Company holding DIN      , for the value addition he continues to create in 4 years while in employment of the Company, in such tranches as may be decided from time to time within the time permissible under relevant regulation, at `                per share on the basis of the valuation reports dated                   from (SEBI Category-I Merchant Banker) & from                                    Registered Valuer.

RESOLVED FURTHER THAT the Equity Shares to be allotted shall rank pari passu with the existing Equity Shares of the Company.

RESOLVED FURTHER THAT the price of the same shall be determined as prescribed under Regulation 33 of the SEBI (Share Based Employee Benefits & Sweat Equity) Regulations, 2021.

RESOLVED  FURTHER THAT Mr                       (Company  Secretary) and Mr                    (Director) be and are hereby authorized to do all such acts and deeds as may be deemed necessary for giving effect to the aforementioned resolution.

6. Shares With Differential Voting Rights

FAQ 19. The board of directors of a company decides to issue equity shares of a company with differential voting rights. Examine the provision of the Companies Act, 2013. What are the conditions to be complied with by the company in this regard?

Shares with differential rights: Shares with differential rights means shares issued with differential rights as to dividend, voting or otherwise in accordance with Section 43(a)(ii) of the Companies Act, 2013.

Conditions for issuing shares with differential rights: Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 provides that no company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions:

1. Authorization from AOA: The article of association authorizes the issue of shares with differential rights.

2. Resolution: The issue of shares is authorized by an ordinary resolution
passed at a general meeting of the shareholders.

However, in case of listed company the issue of such shares shall be approved by the shareholders through postal ballot.

3. Limit on voting power: Voting power in respect of shares with differential rights of the company shall not exceed 74% of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.

4. Track record of profits: The company having consistent track record of distributable profits for the last 3 years.

5. No default in financial statements & annual returns: The company has not defaulted in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it is decided to issue such shares.

6. No subsisting default in certain matters: The company has no subsisting default in following:

(a) Payment of a declared dividend to its equity shareholders.

(b) Repayment of its matured deposits.

(c) Redemption of its preference shares or debentures that have become due for redemption.

(d) Payment of interest on deposits or debentures.

(e) Payment of preference dividend.

7. No defaults in respect of dividend, term loans etc.: The company has not defaulted in following:

(a) Dividend on preference shares.

(b) Repayment of any term loan from a public financial institution or State level financial institution or scheduled bank that has become repayable or interest payable thereon.

(c) Dues with respect to statutory payments relating to its employees to any authority.

(d) In crediting the amount in Investor Education & Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial Year in which such default was made good.

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