Share and Share Capital – Definition | Types | Legal Framework

Shares—often referred to as stocks or equities—are units of ownership in a company. When you purchase shares, you become a shareholder and gain specific rights such as the ability to receive dividends and, in many cases, voting power at shareholder meetings. Companies issue shares to raise capital (known as share capital), which helps fund their operations and growth. The two primary types are equity shares (which typically grant voting rights and share in residual profits) and preference shares (which offer priority in dividend payments and asset distribution). Shares can be bought and sold on stock exchanges (for publicly listed companies), allowing investors to potentially profit from capital appreciation if the share price rises over time. Essentially, shares provide a way for individuals and institutions to invest in and participate in a company’s financial success.

Share capital is the total amount of money a company raises by issuing shares to investors. It represents the ownership interest that shareholders hold in the company, entitling them to certain rights—such as dividends or voting—depending on the type of shares issued. In many jurisdictions (including India under the Companies Act, 2013), share capital is typically divided into equity and preference shares. Each share has a nominal or face value, and the sum of all issued shares forms the company’s share capital. This funding not only provides the financial foundation for the company’s operations but also signifies the core relationship between a company and its shareholders.

Table of Contents

1. Meaning and Nature of a Share
2. Share v. Share Certificate
3. Share v. Stock
4. Kinds of Shares
5. Raising of Capital/Issue of Shares
6. Public Issue of Shares

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1. Meaning and Nature of a Share

1.1 Meaning

The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as ‘shares’. According to section 2(84) of the Companies Act, 2013, a share is a share in the share capital of a company, and includes stock. The Supreme Court of India in CIT v. Standard Vacuum Oil Co. [1966] Comp. LJ 187 observed

“By a share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holders by the articles of the Company which constitute a contract between him and the Company”.

In another case Supreme Court defined a share as “a right to participate in the profits made by a company, while it is a going concern and declares a dividend, and in the assets of the company when it is wound up [Bucha F. Guzdar v. Commissioner of Income-tax, Bombay LR 617 (SC)].

In short, a ‘share’ does not merely represent an interest of a shareholder in a company, it carries with it certain rights and liabilities while the company is a going concern or while the company is being wound up. It thus represents a ‘bundle of rights and obligations’¹.

1.2 Nature of a Share

A ‘share’ is not a sum of money but 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 in the second, but also consisting of a series of mutual ‘covenants’ entered by all the shareholders inter se [Borland’s Trustees v. Steel Bros. & Co. Ltd. [1901] 1 Ch. 279 (Ch.D.)]

A share is a chose-in-action. A chose-in-action implies the existence of some person entitled to the rights, which are rights in action as distinct from rights in possession, and until the share is issued no such person exists.²

In India, a share is regarded as ‘goods’. Section 2(7) of the Sale of Goods Act, 1930 defines ‘goods’ to mean any kind of movable property other than actionable claims and money and includes stock and shares. However, section 44 of the Companies Act, while recognising shares as movable property, suggests that they shall be transferable only in the manner provided by the articles of the company.

In Vishwanathan v. East India Distilleries [1957] 27 Comp. Cas. 175, it was observed –

“A share is undoubtedly movable property but it is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to a totally different category or property. It is incorporeal in nature, and it consists merely of a bundle of rights and obligations.”

A share is not a negotiable instrument

A share is an expression of proprietary relationship between a shareholder and the company [CIT v. Associated Industrial Development Co. [1969] 2 Comp. LJ 19].

Certain interesting and comprehensive observations were made regarding nature of a share in Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.). The learned Judge observed –

The statutory meaning of share covers the three phases of the share, share when it is a part of the share capital still remaining unexploited by the company; share when it is exploited by the company finding a shareholder and lastly, when the share is converted into stock. The first phase arises because under the company law every company limited by shares has nominal or authorised or registered share capital. This capital is one of the essential features in the company’s constitution. It is to be mentioned in the memorandum of association and the capital so mentioned is to be divided into shares of a fixed amount. The capital is usually fixed at some round figures according to the requirements of the company assessed by the promoters of the company. Therefore, it seems that the first part of the definition of the word ‘share’ refers to the share in this limited sense when the share is still in the womb of the company or in the shell of the company and has no shareholder. The second phase arises when it attracts section 44. Therefore, the share when it becomes associated with a member becomes a movable property. It is, however, not a movable property whose transfer is solely regulated by the Sale of Goods Act. Its transfer is also governed by the Companies Act and/or Articles of the Company. Each share again bears a distinguishing number. It may be noticed that certificate of shares is not the shares or a share. Under section 46 a certificate, under the common seal of the company, specifying any share or stock held by any member, shall be a prima facie evidence of the title of the member to the shares or stock therein specified. Hence, a share certificate is not the share; it is only a prima facie evidence of the title to the share. Therefore, it is necessary to consider what the character of a share is? Section 44 says it is a movable property. It is, however, not a tangible property for it is not the share certificate; it only consists of a bundle of rights and obligations. A share can be either in the first phase or stage or in the second phase or stage. It remains either in its shell as a part of the capital or resides in a shareholder. It cannot be suspended in any intermediate phase or stage.

2. Share v. Share Certificate³

A common man uses ‘share’ and ‘share certificate’ to mean one and the same thing. It is, therefore, important to note the exact difference between the two. Section 44 of the Companies Act, 2013 in this regard describes a share as a movable property transferable in the manner provided by the articles of the company. Section 46, on the other hand, describes a ‘certificate of shares’, to mean a certificate, under the common seal³ of the company, specifying any shares held by any member. Section 46 further suggests that a share certificate shall be prima facie evidence of title of the member to such shares. Thus, whereas ‘share’ represents property (movable), ‘share certificate’ is an evidence (prima facie) of the title of the member to such property.

Thus, the share certificate being prima facie evidence of title, it gives the shareholder the facility of dealing more easily with his shares in the market. It enables him to sell his shares by showing at once marketable title⁴.

Also, a share certificate serves as an estoppel as to payment against a bona fide purchaser of the shares from alleging that the amount stated as being paid on the shares has not been paid. However, a person who knows that the statements in a certificate are not true cannot claim an estoppel against the company [Crickmer’s case [1875] 46 L.J. Ch. 870].

An elaborate distinction between ‘share’ and ‘certificate of shares’ was made out in the case of Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.). The learned Judge observed –

“It may be noticed that ‘Certificate of shares’ is not the shares or a share. Under section 46 a certificate, under the common seal of the Company, specifying any share or stock held by any member shall be prima facie evidence of the title of the member to the shares or stock therein specified. Hence, a share certificate is not the share; it is only a prima facie evidence of the title to the share. Therefore, it is necessary to consider what the character of a share is? Section 44 says it is a movable property. It is, however, not a tangible property for it is not the share certificate; it only consists of a bundle of rights and obligations.

Each share bears a distinctive number and it is not the same as share certificate number; the two are different. In fact, a single certificate may be an evidence of many shares, say 50, 100 or even 1 lakh. Thus, whereas there will be only one number as the share certificate number for one certificate, there will be as many distinctive numbers⁴ in respect of shares as are evidenced by the share certificate.”

3. Share v. Stock

Once again, these two expressions need to be distinguished for clarity. As already noted, a share represents a unit into which the capital of a company is divided. Thus, if the share capital of the company is Rs. 5 lakhs divided into 50,000 units of Rs. 10, each unit of Rs. 10 shall be called a share of the company.

The term ‘stock’ on the other hand may be defined as the aggregate of fully paid-up shares of a member merged into one fund of equal value. It is a set of shares put together in a bundle. The ‘stock’ is expressed in terms of money and not as so many shares. Stock can be divided into fractions of any amount and such fractions may be transferred like shares.

A company cannot make an original issue of the stock. A company limited by shares may, if authorised by its Articles, by a resolution passed in the general meeting, convert all or any of its fully paid-up shares into stock [Section 61]. On conversion into stock, the register of members must show the amount of stock held by each member instead of the number of shares. The conversion does not affect the rights of the members in any way.

Following are the main points of difference –

4. Kinds of Shares

As per the Companies Act, 2013, only two kinds of shares can be issued by a company. Section 43 of the Act provides that the share capital of a company limited by shares shall be of two kinds only*, namely –

• equity share capital—

1. 1. with voting rights, or
   2. with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed⁶;

• preference share capital.

4.1 Preference Shares or Preference Share Capital

Preference share capital means that part of the share capital of the company which fulfils both the following requirements –

• During the life of the company it must be assured of a preferential  The preferential dividend may consist of a fixed amount (say, one lakh rupees) payable to preference shareholders before anything else is paid to the equity shareholders. Alternatively, the amount payable as preferential dividend may be calculated at a fixed rate, e.g., 10% of the nominal value of each share.
• On the winding-up of the company it must carry a preferential right to be paid, e., amount paid up on preference shares must be paid back before anything is paid to the equity shareholders.

4.1.1 Types of Preference Shares

• Participating or non-participating – Participating preference shares are those shares which are entitled to a fixed preferential dividend and, in addition, carry a right to participate in the surplus profits along with equity shareholders after dividend at a certain rate has been paid to equity  For example, after 20% dividend has been paid to equity shareholders, the preference shareholders may share the surplus profits equally with equity shareholders. Again, in the event of winding-up, if after paying back both the preference and equity shareholders, there is still some surplus left, then the participating preference shareholders get additional share in the surplus assets of the company. Unless expressly provided, preference shareholders get only the fixed preferential dividend and return of capital in the event of winding-up out of realised values of assets after meeting all external liabilities and nothing more. The right to participate may be given either in the memorandum or articles or by virtue of their terms of issue.
• Cumulative and non-cumulative shares – 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 dividend fixed at a sum or a percentage for the past and the current years out of future profits. The fixed 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 dividend out of the profits of each  If no profits are available in any year or no dividend is declared, the preference shareholders get nothing, nor can they claim unpaid dividend in any subsequent year. Preference shares are cumulative unless expressly stated to be non-cumulative.* Dividends on preference shares, like equity shares, can be paid only out of profits and on declaration of dividend for preference shares.
• Redeemable and Irredeemable Preference shares – As per Section 55 of the Companies Act, 2013 –

1. 1. No company limited by shares can issue any preference shares which are irredeemable.
   2. A company limited by shares may, if so authorized by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue.

However, a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders. Rule 10 of the Companies (Share Capital and Debentures) Rules, 2014, in this regard, provides that a company engaged in the setting up of infrastructure projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum 10% of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.

4.1.2 Conditions for Issue and Redemption of Redeemable Preference Shares

• No such shares shall be redeemed except out of the profits of the company which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of such redemption;
• no such shares shall be redeemed unless they are fully paid;
• where such shares are proposed to be redeemed out of the profits of the company, there shall, out of such profits, be transferred, a sum equal to the nominal amount of the shares to be redeemed, to a reserve, to be called the Capital Redemption Reserve Account;
• the capital redemption reserve account may be applied by the company, in paying up unissued shares of the company to be issued to members of the company as fully paid bonus shares.
• The premium, if any, payable on redemption shall be provided for out of the profits of the company, before the shares are redeemed.
• the issue of further redeemable preference shares or the redemption of preference shares shall not be deemed to be an increase or, as the case may be, a reduction, in the share capital of the company.

Rule 9 of the Companies (Share Capital and Debentures) Rules, 2014, inter alia, provide –

• A company having a share capital may issue preference shares only if so authorized by its articles.
• A special resolution in the general meeting of the company must have been passed authorizing the issue.
• The company, at the time of such issue of preference shares, must not have any subsisting default in the redemption of preference shares issued earlier or in payment of dividend due on any preference shares.
• The Register of Members maintained under section 88 must contain the particulars in respect of such preference shareholder(s).
• A company intending to list its preference shares on a recognized stock exchange shall issue such shares in accordance with the Securities and Exchange Board of India (Issue and Listing of Non-convertible Redeemable Preference Shares) Regulations, 2013.
• A company may redeem its preference shares only on the terms on which they were issued or as varied after due approval of preference shareholders under section 48 of the Act. The preference shares may be redeemed –

1. 1. at a fixed time or on the happening of a particular event;
   2. anytime at the company’s option; or
   3. anytime at the shareholder’s

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 hereinafter referred to as unredeemed preference shares), it may, with the consent of the holders of three-fourths 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. On the issue of such further redeemable preference shares, the unredeemed preference shares shall be deemed to have been redeemed.

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

It may be further noted that notice of redemption of preference shares must be sent to the Registrar under Section 64 of the Act.

4.2 Equity Shares [Sec. 43]

The equity shares are those shares which are not preference shares. In other words, shares which do not enjoy any preferential right in the matter of payment of dividend or repayment of capital, are known as equity shares. After satisfying the rights of preference shares, the equity shares shall be entitled to share in the remaining amount of distributable profits of the company. The dividend on equity shares is not fixed and may vary from year to year depending upon the amount of profits available. The rate of dividend is recommended by the Board of directors of the company and declared by shareholders in the annual general meeting.

Every member of a company limited by shares and holding equity share capital therein, shall have –

• a right to vote on every resolution placed before the company; and
• his voting rights, on a poll, shall be in proportion to his share in the paid-up equity share capital of the company.

As compared to this, the holders of preference shares can vote only on such resolutions which directly affect the rights attached to the preference shares and, any resolution for the winding up of the company or for the repayment or reduction of its equity or preference share capital. However, if the preference dividend is not paid for two years or more, the preference shareholders shall also get voting right on every resolution placed before the company (Section 47).

Voting rights of a preference shareholder, on a poll, shall be in proportion to his share in the paid-up preference share capital of the company.

4.3 Preference Shares Compared with Equity Shares

1. Preference shares are entitled to a fixed rate/amount of dividend. The rate of dividend on equity shares depends upon the amount of net profit available after payment of dividend to preference shareholders and the fund requirements of the company for future expansion etc.
2. Dividend on the preference shares is paid in preference to the equity  In other words, the dividend on equity shares is paid only after the preference dividend has been paid.
3. The preference shares have preference in relation to equity shares with regard to the repayment of capital on winding-up.
4. If the preference shares are cumulative, the dividend not paid in any year is accumulated and until such arrears of dividend are paid, equity shareholders are not paid any dividend.
5. Redeemable preference shares are redeemed by the company on expiry of the stipulated period, but equity shares cannot be redeemed.
6. The voting rights of preference shareholders are restricted. An equity shareholder can vote on all matters affecting the company but a preference shareholder can vote only when his special rights as a preference shareholder are being varied or their dividend is in arrears for at least two
7. A company may issue rights shares or bonus shares to the company’s existing equity shareholders whereas it is not so allowed in case of preference shares (Section 62).

4.4 Non-voting Shares

‘Non-voting shares’ as the term suggests are shares which carry no voting rights. These are contemplated as shares which may carry additional dividends in lieu of the voting rights. Section 43 allows issue of equity shares without voting rights.

4.5 Par Value of Shares

SEBI Regulations permit the companies to issue shares of any par value subject only to the value being not less than Re. 1 or being other than multiple of Re. 1. Thus, different companies may now issue shares of different par value. For instance, XYZ Ltd. can issue shares to the public at say, Rs. 3, while ABC Ltd. can issue at Rs. 5.

Further, companies whose shares are dematerialised or who have applied for it would be eligible to alter the par value of shares indicated in the Memorandum and Articles of Association.

However, at any given time there shall be only one denomination for the shares of a company.

5. Raising of Capital/Issue of Shares

According to section 23 –

(1) A public company may issue securities—

• to public through prospectus (herein referred to as “public offer”); or
• through private placement; or
• through a rights issue or a bonus issue in accordance with the provisions of this Act and the provisions of the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder.

(2) A private company may issue securities—

• by way of rights issue or bonus issue in accordance with the provisions of this Act; or
• through private placement

Further, as per the Companies (Amendment) Act, 2020, the Central Government may allow certain class of public companies to issue such class of securities for the purposes of listing on permitted stock exchanges in permissible foreign or other prescribed jurisdictions.

5.1 Private Placement of Shares [Section 42 Read Along With the Companies (Prospectus and Allotment of Securities) Rules, 2014 as Amended vide Second (Amendment) Rules, 2020 and vide Amendment Rules dated 5 May 2020]

Explanation I to section 42 defines “private placement” to mean any offer or invitation to subscribe or issue of securities to a select group of persons by a company (other than by way of public offer) through private placement offer-cum- application.

If a company, listed or unlisted, makes an offer to allot or invites subscription, or allots, or enters into an agreement to allot, securities to more than the prescribed number of persons, whether the payment for the securities has been received or not or whether the company intends to list its securities or not on any recognised stock exchange in or outside India, the same shall be deemed to be an offer to the public and shall be governed accordingly.

A private placement may be made subject only the following conditions –

• A company may, subject to the provisions contained in section 42, make a private placement of securities.

(1A) A company shall not make an offer or invitation to subscribe to securities through private placement unless the proposal has been previously approved by the shareholders of the company, by a special resolution for each of the offers or invitations.⁷ However, in case of offer or invitation of any securities to qualified institutional buyers, it shall be sufficient if the company passes a previous special resolution only once in a year for all the allotments to such buyers during the year.⁸

• A private placement shall be made only to a select group of persons who have been identified by the Board (herein referred to as “identified persons”), whose number shall not exceed fifty or such higher number as may be prescribed, 200, as per the Rules, [excluding the qualified institutional buyers⁹ and employees of the company being offered securities under a scheme of employees stock option in terms of provisions of clause (b) of sub-section (1) of section 62], in a financial year subject to such conditions as may be prescribed –

Provided that no offer or invitation of any securities shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attached the same with the private placement offer cum application letter.

Where offer of unsecured Fully Convertible Debentures (FCDs) was made only to shareholders of company and none else, it was not a private placement.

In Canning Industries Cochin Ltd. v. Securities and Exchange Board of India, Mumbai [2020] 115 taxmann.com 379 (SAT-Mumbai) an unlisted company sought to raise Rs. 4.82 crores. Company had passed a special resolution under section 62(3) read with section 71 in respect of issuance of Fully Convertible Debentures(FCDs). Prospectus and explanatory statement clearly stated that only members holding equity shares of company were eligible for allotment. It was clear that offer of FCDs was made to existing shareholders of company. Held company was required to ensure compliance with respect to limit of allottees, i.e., 200 persons, as applicable in case of private placement of securities.

• A company making private placement shall issue private placement offer and application in such form and manner as may be prescribed to identified persons, whose names and addresses are recorded by the company in such manner as may be prescribed –

However, the private placement offer and application shall not carry any right of renunciation.

In Mrs. Proddaturi Malathi v. SRP Logistics (P.) Ltd. [2018] 96 taxmann.com 565 (NCLAT), respondent directors increased share capital of company and further allotted shares of company to R2-director and to outsider at par by preferential allotment/private placement without following necessary procedure, said increase in share capital and subsequent allotment of shares was held to be invalid and thus same was to be set aside.

• Every identified person willing to subscribe to the private placement issue shall apply in the private placement and application issued to such person along with subscription money paid either by cheque or demand draft or other banking channel and not by cash –

Provided that a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar in accordance with sub-section (8).

• No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or that offer or invitation has been withdrawn or abandoned by the company –

Provided that, subject to the maximum number of identified persons under subsection (2), a company may, at any time, make more than one issue of securities to such class of identified persons as may be prescribed.

1. Vishwanath v. East India Distilleries [1957] 27 Comp. Cas. 175

2. See Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp. Cas. 862 (SC).

3. As per Companies (Amendment) Act, 2015, share certificate may be issued under the signatures of two directors and the company secretary, if the company has appointed a
company secretary.

4. Cockburn, C.J in Bhia & Sons Francis Co. Rly. In re, [1868] L.R. 3 Q. B. 584 (Ch.D)

5. Section 45 which requires each share to bear a distinctive number will have no application to shares held with a depository.

* Memorandum of Association or Articles of Association of a private company may provide for any other kind of shares to be issued.—Vide MCA Notification dated 5 June, 2015.

6. With respect to issue of shares with differential voting rights, the Ministry of Company Affairs has notified the Companies (Share Capital and Debentures) Rules, 2014. As per Rule 4 of these rules, no company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with, inter alia, the following conditions –

(a) the articles of association of the company authorizes the issue of shares with differential rights;
(b) the issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders –
Provided that where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
(c) As per Notification dated 16th August, 2019, the voting power in respect of shares with differential rights of the company shall not exceed seventy four per cent of total voting power including voting power in respect of equity shares with differential rights issued at any point of time.
(d) omitted;
(e) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
(f) the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;
(g) the company has not defaulted in payment of the dividend on preference shares or 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 or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;
A company may, however, issue equity shares with differential voting rights upon expiry of five years from the end of the financial year in which such default was made good#. #MCA Notification No. G.S.R. 704(E) dated 19.7.2016
(h) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies are being regulated by sectoral regulators;
(i) the company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice versa.

*Henry v. Great Northern Rly. Co. [1857].

*As amended by the Companies (Amendment) Act, 2017

7. Inserted vide the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2018 w.e.f. 7-8-2018.

8. * Vide MCA Notification dated 16.10.2021

9. “Qualified institutional buyer” means the qualified institutional buyer as defined in the
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018.