Company - Meaning

A joint stock company is a voluntary association of persons with common capital, divisible into transferrable shares, formed for the purpose of doing some business to earn profit.

It posses corporate legal entity and a common seal.

It is a legal person created by a process of law and only by the process of law.

It can act by its own through its agents.

The company functions through individuals selected to manage the affairs who are known as Board of Directors.

The Board of Directors are appointed by the board, manages the affairs of the company.

Company - Definition

According to section 3(1)(i) of the Companies Act 1956,

“a company means a company formed and registered under the companies act or an already existing company. A company formed and registered under any of the previous companies act is called an existing company.”

Characteristics of a company

Company is an artificial person created by law.

It is a voluntary association of persons usually for profit.

The company has a legal entity with perpetual succession.

Ownership of a company is separate from management. i.e. separate legal entity

Company can buy and hold property on its name.

Company can sue and can be sued in its name.

Characteristics of a company

The common seal of the company is considered as the official signature of the company.

The owners of the company is called shareholders.

The liability of shareholders is limited only to the extent of the shares held by them.

Right to enter in to contracts.

Classification of companies

Companies under the Companies Act, 1956 may be classified on various grounds as under:  

1.Classification on the basis of formation

2.Classification on the basis of liability

3.Classification on the basis of public investment

On the basis of formation companies

Chartered companies

Registered companies

Statutory companies

On the basis of liability

Companies limited by shares

Companies limited by guarantee

On the basis of public investment

Private Companies

Public Companies

Basis of Distinction Private Company Public Company

Minimum No. of members

Two Seven

Max. No. of numbers Fifty No restriction

Min. no. of Directors Two Three

Capital It cannot invite the public to buy shares or

debentures of the company

It is free to invite the public to buy its shares and debentures

Prospectus It need not issue any prospectus

It has to issue prospectus

Difference between Private co. and Public co.

Basis of Distinction Private Company Public Company

Incorporation It is simple and quick It is quite complicated and time consuming

Commencement of business

It can commence business soon after

incorporation. It does not need any certificate to commence business

Business cannot be commenced after incorporation. It can be done only after the receipt of the certificate of commencement of business

Statutory meeting Need not to be held Must be held and the statutory report must be filed with the registrar

Basis of Distinction Private Company Public Company

Name The words ‘Private Ltd’. Must be used as part of

the name

The word ‘Limited’ must be used as the part of the name

Required quorum for meetings

Three members Five members

Top Private Sector Companies

Reliance Industries Limited Tata Consultancy Services (TCS)Infosys Technologies LtdWipro LimitedBharti Tele-Ventures Limited ITC Limited Hindustan Lever LimitedICICI Bank Limited Housing Development Finance Corp. Ltd. TATA Steel LimitedRanbaxy Laboratories LimitedHDFC Bank Ltd

Tata Motors LimitedLarsen & Toubro Limited (L&T)Satyam Computer Services Ltd.Maruti Udyog LimitedBajaj Auto Ltd.HCL Technologies Ltd.Hero Honda Motors LimitedHindalco Industries LtdReliance Energy LimitedGrasim Industries Limited Jet Airways (India) Ltd.Sun Pharmaceuticals Industries LtdCipla Ltd.

Public Sector Companies

Air India air transport service ltdIndian Oil Corporation limited (IOC)Bharat Heavy Electricals limited (BHEL)Hindustan Petroleum Corporation Ltd. (HPCL)National fertilizers ltdONGCUnited India Insurance company

SharesShare may be defined as “the capital of the company

can be divided into different units with definite value called shares”.

StockAs per section 94(1) (c) of the companies Act 1956,

when all the shares of a company have been fully paid up, they may be converted into stock if so authorized by the articles of association.

Conversion of shares into stock is made because it is a convenient method of denoting the capital of a company.

Statutory books are those which a limited company is under statutory obligation to maintain at its registered office. The main statutory books are

1.Register of Investment held and their names 2.Register of charges 3.Register of Members 4.Register of debentures holders 5.Annual returns 6.Minutes books 7.Register of contracts 8.Register of Directors 9.Register of shareholdings of the directors 10.Register of loans to companies under the same management 11.Register of Investment in the shares of other companies

Books of accounts

According to section 209 of the Companies Act, a company must keep proper books of account to record the following:

1.All sales and purchases of goods by the company2.The receipts and payments of the company3.The assets and liabilities of the company

the books must be preserved for atleast 8 years and have to be normally kept in the registered office of the company.

Capital refers to the amount invested in the company so that it can carry on its activities. In a company capital refers to "share capital".

The capital clause in Memorandum of Association must state the amount of capital with which company is registered giving details of number of shares and the type of shares of the company.

A company cannot issue share capital in excess of the limit specified in the Capital clause without altering the capital clause of the MA.

Nominal, authorised or registered capital means the sum mentioned in the capital clause of Memorandum of Association. It is the maximum amount which the company raise by issuing the shares and on which the registration fee is paid. This limit is cannot be exceeded unless the Memorandum of Association is altered.

Issued capital means that part of the authorized capital which has been offered for subscription to members and includes shares allotted to members for consideration in kind also.

Subscribed capital means that part of the issued capital at nominal or face value which has been subscribed or taken up by purchaser of shares in the company and which has been allotted.

Called-up capital means the total amount of called up capital on the shares issued and subscribed by the shareholders on capital account. i.e if the face value of a share is Rs. 10/- but the company requires only Rs. 2/- at present, it may call only Rs. 2/- now and the balance Rs.8/- at a later date. Rs. 2/- is the called up share capital and Rs. 8/- is the uncalled share capital.

Paid-up capital means the total amount of called up share capital which is actually paid to the company by the members

Conversion of shares into stocks : Conversion of fully paid shares into stock may likewise be affected by the ordinary resolution of the company in the general meeting. Notice of the conversion must be given to the Registrar within 30 days of the conversion, the stock may be converted into fully paid shares following the same procedure and notice given to the Registrar in Form no 5.

1.Only fully paid shares can be converted into stocks 2.Direct issue of stock to members is not lawful and cannot be done. 3.The difference between shares and stock is that shares are transferable only in complete units so that transfer of half or any portion of share is not possible whereas stock is expressed in terms of any amount money and is transferable in any money fractions. 4.Articles may be give the Board of Directors authority to fix minimum amount of stock transferable. 5.Since stock is not divided into different units it is not required to be numbered. Shares on the other hand must be numbered.

Basis of distinction Shares Stock

Nominal value A share has a nominal value or face value

Stock does not have a face value or nominal value

Issue Shares can be directly issued to the public.

Stock cannot be issued directly.

Payment Shares may be fully paid up or partly paid up.

Only full paid up shares are converted into stocks

Numbering Shares are serially numbered

Stock are not numbered

Shares - Types

1.Preference shares

A preference share is one which enjoys certain preferential rights. 1. Fixed dividend is guaranteed before any payment of dividend made to equity shares. 2. P.share holder are paid back their capital while winding up of the company.

Cumulative preference sharesNon-cumulative preference sharesParticipating preference sharesRedeemable preference sharesGuaranteed preference shares – by bank, financial institutions

2. Equity Shares

Carries no special rights in respect of annual dividends and return of capital after the company goes into liquidation.

Rate of dividend is not fixed

ESOP: Employee Stock Option plan

It is recognized that

“Man works best when he works for himself"

An Employee Stock Option Plan is when the company offers its shares to the employees.

An ESOP is nothing but an option to the employee to buy the company's share at a certain price.

Either be at the market price (price of the share currently listed on the stock exchange), or At a preferential price (price lower than the current market price).

BUY BACK OF SHARES

The re-purchase of shares by a company in order to reduce the number of shares in the market. Companies will buy back shares to increase the value of shares still available (reducing supply). i.e. reduction of share capital

A company may purchase its own shares or other specified securities out of :-

its free reserves; or the securities premium account; or the proceeds of any shares or other specified securities:

Conditions for buy back of shares

1.The buy-back is authorized by its articles;

2.A special resolution has been passed in general meeting of the company authorizing the buy-back;

3.The buy-back is of less than 25% of the total paid-up capital and free reserves of the company:

4.the ratio of the debt owned by the company is not more than twice the capital and its free reserves after such buy-back.

5.All the shares or other specified securities for buy-back are fully paid-up;

5. the buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by the SEBI (Securities and Exchange Board of India) in this behalf;

The buy-back may be :-

1. From the existing security holders on a proportionate basis;

2. From the open market or

3. From odd lots

4. By purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Pro rata actually means 'in proportion'. Pro - rata allotment of shares is opted by the Company when there is an over-subscription.

Sweat Equity SharesDefinition/Meaning

“Sweat Equity Shares” means equity shares issued by the company to employees or directors 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.

In India, the concept of SWEAT EQUITY SHARES was started by Infosys.

Sweat Equity Shares are given to the employees at a discounted rate of market value.

Conditions1. Such issue is authorised by a special resolution of the company in the general meeting.

2. Such resolution specifies the number of shares, current market price, consideration, if any, and the class or classes of the directors or employees to whom such shares are to be issued.

3. Such issue is after an expiry of one year from the date on which the company was entitled to commence business.Price of sweat equity shareThe price of sweat equity shares shall be at a fair price calculated by an independent valuer. Ceiling LimitThe total sweat equity shares issued during the year should not exceed 15% of the total paid-up equity share capital in a year or shares of the value of Rs.5 crores of rupees.Lock-in periodThe shares shall be locked in for a period of 3 years from the date of allotment.

1. Sweat Equity is grant of shares at discount or without monetary considerations whereas Employee Stock  Option Plan (ESOP) / is grant of option to purchase share at predetermined price given to employees.

2. Sweat Equity can be issued to the promoters of the Company whereas ESOS/ESOP cannot be issued to the promoters or promoter group.

3.Minimum lock in period of 3 years for Sweat Equity whereas no such lock in period for ESOP and lock in period of 1 year for Employee stock purchase scheme (ESPS).

Difference between ESOP and Sweat equity

Contents :Contents :

What are SHARES. Kinds of Shares :

Equity Shares Preference Shares Deferred Shares

Kinds of Preference Shares

What are SHARES?What are SHARES?Definitions:

Sec 2(46) of THE COMPANIES ACT,1956:“A share is a share in the share capital of a Company.”

Boreland Trustees v/s Steel Bros. & Co. Ltd.:

“A share represents the interest of a share holder in the capital of the Company & this interest is measured by the number of shares he is holding & the amount paid by him to the Company on shares.”

Thus, the amount of capital to be raised by a Company is always divided into small parts or units of equal value & these units are called SHARES

Kinds Of Shares :Kinds Of Shares :

The different kinds of shares which can be raised by Companies are :

EQUITY SHARES PREFERENCE SHARES DEFERRED SHARES

Equity Shares :Equity Shares :The equity shares or ordinary shares are those shares on which the dividend is paid after the dividend on fixed rate has been paid on preference shares.

Characteristics: No fixed rate of dividend. Dividend is paid after dividend at a fixed rate is paid on preference shares. At the time of liquidation, capital on equity is paid after preference shares have been paid back in full. Non redeemable. Equity shareholders have voting rights & thus, control the working of the Company. Equity shareholders are the virtual owners of the Company.

Preference shares :Preference shares :Preference shares are those shares which carry with them preferential rights for their holders, i.e, preferential right as to fixed rate of dividend & as to repayment of capital at the time of winding up of the Company.

Characteristics : Fixed rate of dividend. Priority as to payment of dividend. Preference as to repayment of capital during liquidation of the Company. Generally preference shareholders do not have voting rights. According to The Companies (Amendment) Act, 1988, the preference shares are redeemable & the maximum period for which they can be issued is 10 years.

Kinds of Preference Kinds of Preference Shares :Shares : On the basis of cumulation of dividend :

Cumulative Preference Shares:They are those shares on which the dividend at a fixed rate goes on cumulating till it is all paid. Non Cumulative Preference Shares:These are those shares on which the dividend does not cumulate.

On the basis of participation : Participating Preference shares:This type of shares are allowed to participate in surplus profits during the lifetime of the company & surplus assets during winding up. Non Participating Shares:These shares are not entitled to participate in surplus profit. Dividend at fixed rate is given.

Kinds of preference shares : On the basis of conversion :

Convertible preference shares:The owners of these shares have the option to convert their preference shares into equity shares as per the terms of issue. Non-convertible preference shares:The owners of these shares do not have any right of converting their shares into equity shares.

On the basis of redemption: Redeemable preference shares:These are to be purchased back by the company after a certain period as per the terms of issue. Irredeemable preference shares:These are not to be purchased back by the company during its lifetime.

Status of Preference Shares, if Articles of Association are silent :

Preference shares will be presumed to be:

Cumulative Non-Participating Irredeemable and Non-Convertible.

Deferred Shares :Deferred shares are those shares on which the payment of dividend and capital (at the time of winding up of a company) is made after money is paid in full on preference shares and equity shares.As per the provisions of the COMPANIES ACT,1956, no public company can issue deferred shares.Characteristics: Rate of dividend is not fixed. It depends upon the availability of profits & the discretion of the Board of the Directors. Dividend is paid after payment of dividend on equity & preference shares. At the time of liquidation, capital on these shares is returned after capital is repaid on both preference & equity shares.