Understanding Share Capital and Shares

Share Capital of the Company

The amount with which the business is started is called capital. Considering in the Nepalese context, the share which is subscribed by the promoters according to Memorendum of the Association (MoA), is called the share capital of the company. The fee to be paid for registering the company as well as the limit of liability is also determined by the share capital of the company.

 

Types of Share Capital

Basically, the company has 3 types of share capital existing in it:

1. Authorized Share Capital

The maximum limit up to which the share capital of the company can be raised by its members according to the MoA is known as authorized share capital. When the authorized capital is fully issued and paid up, amendment in the MoA has to be done for raising the share capital of the comapy

2. Issued Share Capital

The issued share capital is that amount which is called and issued to members. The company need not raise the whole of the authorized capital at one time but can think of issuing gradually as and when the growth of business warrants.  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. The amount of issued capital always constitutes a value which is either equal or less than the authorized share capital of the company.

3.     Paid Up Capital

The paid-up capital is the amount a shareholder pays into the company's account. Only with the help of paid-up capital can running capital come to the company. It is always less than or equal to the issued share capital of the company.

 

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 variously known as 'shares'. The main types of shares are:

1.      Preference Shares

2.      Ordinary / Equity Shares

1.      Preference Shares

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

1. 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

1. Participating or Non - participating preference shares

Participating preference shares : These carry a fixed preferential dividend and in addition, have the right to participate in surplus profits along with ordinary shareholders after the rate of dividend is given to the equity shareholders.

Also, in the case of winding up, once the repayment against preference as well as equity shareholders has been made and if in case any surplus amount is remaining then such remaining amount is distributed amongst the participating preference shareholder.

The presence of these two rights may be there in the Memorendom or Article, by virtue of which these are issued.

If any doubt arises about a share being participating or non-participating preference share, then the preference share shall be treated as a non-participating preference share

2. Cumulative or Non-cumulative preference shares

According to the payment of its dividend, the preference shares may be distinguished in cumulative or non-cumulative.

A Cumulative preference share is one upon which a dividend fixed at a sum or a percentage for the past and the current years can be claimed out of future profits. The fixed dividend keeps on accumulating until it is fully paid.

For instance, an organization has issued cumulative preference shares with a fixed dividend of 9% if the organization is unable to earn a profit to provide the dividend for the fiscal year 2080/081, then the dividend is cumulated for the next fiscal year and ordinary shares do not get a dividend until the cumulated dividend 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 it is specifically expressed to be non-cumulative

3. Redeemable or Irredeemable Preference shares

The redeemable preference shares are those shares which can be re-purchased or redeemed by the issuing company at a pre-defined rate and date.

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 be available for dividends or out of the proceeds of a fresh issue of shares made by the company for the purposes of the redemption.

4. 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

The shares of the company other than the preference shares are called as ordinary/equity shares. These shares do not have any preferential right in the matter of payment of dividend or repayment of capital. These are the usual 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.

Board of Directors of the company is elected by ordinary shareholders and they take all the responsibilities regarding management as well as operation of the company. However, in the winding up cases, they come last to get the payment as per the shares.

 

Comparison between Preference Shares and Equity Shares

 

 

Rights of Equity Shareholders

The rights of the shareholder can be divided into two categories :

1.      Contractual Rights

A shareholder is in contract with the company and other shareholders through the Memorandum 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 dividend 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

The statutory rights are those which are 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 the general meeting
• Right to have name in the Share certificate /Shareholder register
• Right to sell/ transfer or pledge the shares
• Right on 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.

Even though some sections indicate towards sweat equity shares, in reality, the Act has not taken special provisions concerning the issue and problems of sweat equity shares.

2.      Rights Shares

These rights shares are issued by the companies when they are in need of further capital. Normally, the companies 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 in order to satisfy statutory requirements. The right shares could be bought only by the existing members of the company.

3.     Bonus Shares

Bonus share means an additional share issued to the shareholders by capitalizing the saving earned from the profits or the reserve fund of the company. It also includes increasing the paid-up value of a share by capitalizing the saving or reserve fund.

A company may, by passing a special resolution in the general meeting, distribute bonus shares to its shareholders, out of the amount available for the distribution as dividend.

Frequently Asked Questions

Find answers to common questions about share capital and shares in Nepal

1. What is share capital?

Share capital refers to the money a company raises from its shareholders by issuing shares. In Nepal, this capital is specified in the company's Memorandum of Association and determines the company's registration fees and the limit of liability for shareholders.

2. What is the difference between authorized and issued share capital?

Authorized share capital is the maximum amount of capital a company is allowed to raise, as stated in its Memorandum of Association. Issued share capital is the actual amount of capital that has been called and issued to the shareholders. Issued capital can never exceed the authorized capital.

3. What are preference shares?

Preference shares are a class of shares that give their holders priority in the payment of dividends and capital repayment. They may have fixed dividends and come with various features, such as cumulative, participating, or redeemable characteristics.

4. How do ordinary shares differ from preference shares?

Ordinary shares do not have preferential rights. They are typically issued with voting rights and variable dividends based on the company's profits. Preference shares, on the other hand, offer fixed dividends and priority during liquidation but often have limited or no voting rights.

5. What are sweat equity shares?

Sweat equity shares are issued to employees as a reward for their services or contribution to the company. These shares are generally given at a discounted value or as part of an employee incentive scheme.

6. What are the rights of equity shareholders?

Equity shareholders have voting rights, right to receive dividends when declared, right to participate in company decisions, and right to receive return of capital on winding-up. They also have statutory rights like limited liability and access to company documents.

7. Can preference shares be redeemed?

Yes, redeemable preference shares can be repurchased or redeemed by the issuing company at a pre-defined rate and date. However, they must be fully paid up and can only be redeemed out of profits or proceeds of fresh share issues.

8. What are bonus shares?

Bonus shares are additional shares issued to shareholders by capitalizing the savings earned from profits or reserve funds of the company. They are distributed without any additional cost to shareholders and increase the total number of shares held.

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This information is provided for educational purposes only and should not be construed as legal advice. FinLex Associates retains exclusive rights to the content.