Nature and Classes of Shares

Nature and Classes of Shares

A financial instrument in which the total share capital of a company is divided is known as Shares. A company issues its authorized capital in the form of shares to raise funds from public. It also refers to the unit of ownership which is an equal part of a company’s share capital. The persons who invest money through shares in the company are called shareholders. When a person buys shares of a company, he becomes one of its owners. Shareholders have the power to choose the person who runs the company.

As per the Companies Act, there are two types of shares a company can issue

  • Preference Share
  • Equity Shares

1. Preference Shares

Section 43 of Companies Act, 2013 says that a preference share carries a preferential right to dividend to be paid either as a fixed amount payable to preference shareholder or an amount which is fixed percentage of the nominal value of each share before any dividend paid to equity share holders. Preference shares are the shares which has a preferential right to claim dividend during the existence of a company and to claim repayment of capital at the time of winding up. These shares can be cumulative and non cumulative and redeemable or irredeemable.

Cumulative preference shares

Cumulative Preference Share refers to shares having right of dividend even for those years for which company has failed to make profit.

Non Cumulative Preference Share

In case of Non cumulative preference shares, shareholders may received dividend from a year’s profit. Dividends are paid to the preference shareholders only from the net profit every year.

Redeemable Preference Shares

Redeemable share are those for which a company has the right to buy them back from its holder for its own use on a fixed date or by giving a prior notice to the shareholder.

Irredeemable Preference Shares

Irredeemable Preference Shares can only be redeemed at the time of winding up. Before that company has no right to buy them back from its shareholder.

2. Equity Shares

As mentioned in Section 43 of The Companies Act, 2013, equity share refers to a share which is not a preference share or we can say those shares which do not have the preferential right in the payment of dividend or repayment of capital are treated as equity or ordinary shares. These share are the long term financing sources of a company which are issued to public and are non redeemable in nature.

The value of these shares can be signified in terms like, face value, par value, book value etc. The dividend on equity shares is not fixed and it may vary from year to year depending upon the profit available for distribution. Investors who want to take high risks for more returns may prefer equity shares.

Issue of Shares

Issue of shares is the process of a company in which new share are allotted to shareholders. These shareholders can be anyone either individuals or corporate. Company has to follow the rules under the Companies Act, 2013 for issuing the shares. Amount of shares can be collected in easy installments from shareholders. These Installments are generally known as Application Money, Allotment Money, First Call, Second Call and so on, Final Call. Company divides the share amount in small installments and collects whenever it needs funds for business in future.

Application Money

First installment is called application money as the amount collected along with the applications for shares.

Allotment Money

The second installment can be collected from shareholders at the time of allotment of shares to them.

First Call, Second Call and so on

Remaining amount of the installments can be demanded in terms of First call, Second call. Sometimes company can increase calls according to need of funds in future then it can be third call, fourth call and so on if needed.

Final Call

The word final call refers to the last installment of the shares purchased by a shareholder. Final call means company is not going to entertain late payment after final call and the shares of the shareholders may be forfeited by the company for reissue.

Lets understand with the help of example:

Question: A company has decided to issue 12000 shares of Rs.100 each which are payable at Rs.30 at the time of application, Rs.40 at the time of allotment, Rs.20 on first call and Rs.10 on second & final call. Find out

  • Application Money
  • Allotment Money
  • First Call
  • Second and Final Call

Application Money

application Received for 12000 shares at Rs.30 per share then money would be Rs.3,60,000 (12000 X 30)

Allotment Money

Company allotted 12000 shares at Rs.40 per share then the amount of Allotment money will be Rs.4,80,000 (12000 X 40)

First Call
Company wants to collect 12000 shares at Rs.20 on first call the amount for which will be Rs.2,40,000 (12000 X 20)

Second and Final Call

The balance amount has been collected for 12000 shares at Rs.10 and the amount for final call will be Rs. 1,20,000 (12000 X 10)

Total Authorized Capital Issued in terms of shares = 12000 X100 = 12,00,000
Application Money = 12000 X 30 = 3,60,000
Allotment Money = 12000 X 40 = 4,80,000
On First Call = 12000 X 20 = 2,40,000
On Second and Final Call = 12000 X 10 = 1,20,000
Total price of shares Collected (30+40+20+10) = Rs.100
Total amount on 12000 shares collected (3,60,000+4,80,000+2,40,000+1,20,000) = 12,00,

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