Share Capital of the Company

Capital means the amount with which the business is started. In the context of Nepal, share capital means the shares which are subscribed by the promoters as per the Memorendum of the Association. The registration fee for the incorporation of the company and the limit of liability is also determined by the share capital of the company.

Types of Share Capital

There are mainly 3 types of share capital in the company:

1. Authorized Share Capital

It is the maximum amount which can be raised from the members of the company as per the Memorendum. When the authorized capital is fully issued and paid up, amendment in the memorendum has to be made for raising the share capital of the comapy.

2. Issued Share Capital

Issued share capital is that amount which is called and issued to the members of the company. The company may not necessarily raise all the capital at once and it may think of issuing when the business grows gradually. So, the authorized capital may be issued at once or it can be issued in portions to the promoters/shareholders of the company as per the need. Issued share capital is always equal or less than the authorized share capital of the company.

3. Paid Up Capital

Paid Up Capital is that amount which is paid by the shareholders of the company to the accounts of company. The running capital of the company is generated only through the paid up capital. It is always equal or less than the paid up capital of the comapny.

If a company is registered with Authorized Capital of Rs. 25,00,000/-. The Authorized Capital i.e. the maxximum amount which can be called through this memorendum is Rs. 25,00,000/-. The registration fee is determined through this capital clause.

The Issued Capital can either be Rs. 25,00,000/- or any amount below that (say Rs. 10,00,000/-). This amount determines the limit of liability of members/promoters/shareholders of the company. The members sign in the memorendum subscribing to these amount of shares and the limit of liability is same.

The Paid Up Capital is the amount which is deposited by the promoters which they have subscribed for in the memorendum to the accounts of the company. This amount may be Rs. 10,00,000/- if all the promoters fully pay to the issued shares or anything below this amount.

Meaning of Share and its Type

The capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as ‘shares’. The main types of shares are:

1. Preference Shares
2. Ordinary / Equity Shares
3. Preference Shares

Preference shares of company are those shares which fulfills these two conditions:

• Preferential dividend is assured throughout the life of the company. The preferential dividend may consist of a fixed amount payable to preference shareholders or fixed preferential dividend percentage which shall be paid before anything is paid to the ordinary shareholders.
• On the winding-up of the company, the preference shares must be paid back before anything is paid to the equity shareholders.

Types of Preference Share

• Participating or Non-participating preference shares
  • 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 ordinary shareholders after dividend at a certain rate has been paid to equity shareholders.
  • For example, after 20% dividend has been paid to equity shareholders, the preference shareholders may share the surplus profits equally with equity shareholders.
  • Similarly, 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.
  • These two rights must either be mentioned in Memorendum or Article by virtue of which these are issued.
  • If there is doubt whether the share is participating or non-participating preference shares, it shall be deemed that the share is non-participating preference share.
• Cumulative or Non-cumulative preference shares
  • Preference shares can be divided into cumulative or non-cumulative based on the payment of dividends.
  • 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.
  • For instance, A company has issued cumulative preference shares with a fixed dividend of 9%. If the company is unable to earn profit to provide the dividends for the fiscal year of 2079/080, then the dividend is cumulated for next fiscal year and ordinary shares does not get dividend until the cumulated divided is paid off.
  • 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 year. However, if no profits are available in any fiscal year or no dividend is declared, the preference share holders get nothing, nor can they claim unpaid dividend in any subsequent year.
  • Preference shares are cumulative unless expressly stated to be non-cumulative.
• Redeemable or Irredeemable Preference shares
  • Redeemable preference shares are those shares which can be repurchased or redeemed by the issuing company at a fixed rate and date.
  • Company has the power under Section 65 of the Act to issue redeemable preference shares. The authority to issue such shares shall be mentioned clearly in the articles of the company. The option of redemption lies with the company. Paying back the preference share holders is called redemption of preference shares.
  • The preference shares to be redeemed must be fully paid up and these shares can be redeemed only out of profits of the company which would otherwise available for dividends or out of the proceeds of a fresh issue of shares made by the company for the purposes of the redemption.
• Convertible or Non-convertible Preference shares
  • The holders of convertible preference shares have a right to get their preference shares converted into ordinary / equity shares within specified period or a specified date.
  • The preference shares which do not carry with them such a right are known as non-convertible preference shares.

2. Ordinary / Equity Shares

• Equity shares are those shares which are not preference shares. The shares which do not enjoy any preferential right in the matter of payment of dividend or repayment of capital, are known as equity shares.
• These are the most common and standard form of 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. Thus, Ordinary shares have the highest risk and opportunity for the highest gain as well.
• Every ordinary shareholder shall have a right to vote on every resolution placed before the company and the voting rights shall be in proportion to his share in the company.
• Ordinary shareholders form the Board of Directors and they have control over the management and running of the company, however they are at the bottom to get paid off if the company is wound up.

Comparison of Preference Shares and Equity Shares

• 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 which is not constant each year.
• Preference shares have preference to the dividends compared to the equity shares. Preference shares have preference to the repayment of capital on winding-up compared to equity shares.
• Preference shares may be cumulative or non-cumulative, equity shares are non cumulative only.
• Redeemable preference shares are redeemed by the company on expiry of the stipulated period, but equity shares cannot be redeemed.
• 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 on the matters which is connected to his special rights as a preference share.
• 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.

Rights of Equity Shareholders

The rights of shareholders can be divided into two categories:

1. Contractual Rights

A shareholder is in contract with the company and other shareholders through the Memorendum and Articles. Some of the contractual rights are:

• Right to have name on the record of the shareholder
• Right to vote
• Right to receive the dividends when declared
• Exercise the right of pre-emption
• Right to receive return of capital on winding-up or on reduction of share capital

2. Statutory Rights

Statutory rights are the rights provided by the Companies Act for the shareholders. These are:

• Limited Liability
• Right to file the suit against amendment of the public company
• Right to get the copies of the company documents and minutes of general meeting
• Right to have name in the Share certificate / Shareholder register
• Right to sell / transfer or pledge the shares
• First right over the rights shares of the public company
• Right to receive notice specifying the place, date and agenda of the general meeting
• Right to vote on the general meeting
• Right to vote through proxy
• Right to vote for election of director
• Right to initiate a case on behalf of the company
• Right to inspect the books of account of private company
• Receive Bonus Shares

Other Types of Shares

Besides these two ordinary and preference shares, there are other forms of shares too:

1. Sweat Equity Shares
2. Rights Shares
3. Bonus Shares

1. Sweat Equity Shares

• Sweat equity shares are the shares issued by the company for their employees as a reward for their hard work in the company. Nepalese Companies Act has provisions regarding sweat equity shares, however it is not defined under the Section 2.
• The Act does not have detailed provisions regarding the issue of sweat equity shares. However, certain sections have grounds which allows for the issuance of such shares. Section 9(1) of the Act mentions that the maximum number of shareholders in private company shall be 101. However, any employee who has purchased a share of a company under scheme of selling shares to employees or any employee who has already purchased a share under such scheme but is not in service of the company shall not be counted as a shareholder and the provision of Section 9(1) shall not be applicable. (Section 9(3)).
• The Memorendum of a company should mention if there is provision for issue of shares to the promoters or other persons in consideration other than cash. (Section 18(2)(a))
• If the shares are sold below the par (face) value of the share, then the shares are sold at discount. Section 64(1) restricts the company for selling shares at discount. However, the sweat equity shares maybe issued in discount. (Section 64(2)(c)).

2. Rights Shares
   • Rights shares are issued by the companies when they are in need of further capital. The companies generally do not issue the whole of its authorized capital at once. When the directors feel the need for additional funds for expansion, or due to the statutory mandatory, they may issue further shares.
   • The power to issue further shares need not be used only when there is a need to raise additional capital, it can also be used to comply with statutory requirements. Rights shares can be purchased by only the existing shareholders of the company.

3. Bonus Shares
   • Bonus share means a share issued as an additional share to shareholders, by capitalizing the saving earned from the profits or the reserve fund of a company, and this term includes the increase of the paid up value of a share by capitalizing the saving or reserve fund.
   • A company may, by adopting a special resolution in the general meeting, issue bonus shares to its shareholders, out of the amount available for the distribution as dividend.

Difference between Rights Shares and Bonus Shares