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Shares and Its Types

  • Share is a unit or portion of capital of company.
  • Investments made in any company are divided in numbers of units and each of such units is called share of a company.
  • Section 2(n) of the Companies Act of Nepal has defined the share as the divided portion of the share capital of company.
  • The capital of company is divided into small parts & each part is known as share.
  • Boreland Trustees v. Steel Bros Co. Ltd. 1901 1 ch 297 (Company Law: 12th edi; Ashok K Bagrial P 7 )‘’A share is the interest of shareholder in the company measured by a sum of money for the purpose, of liability in the first place, and of interest in second, but also consisting of series of covenants entered in to by all shareholders inter se.’’
  • An interest measured by sum of money and made of various rights contained in MoA and AoA.
  • Vishwanathan v.East India Distilleries 1857 -27. (Company Law: 12th edi; Ashok K Bagrial P 2o7)-‘’Share is merely a bundle of rights and obligations which are regulated by the articles.’’

Nature of Shares

  • The shares are movable property. Shares can be transferred in the manner provided by the articles.
  • Section 42 of the Companies Act states that ‘’ the shares or debenture of a company may be sold or pledged like a movable property, subject to this Act as per the provisions of the Memorandum of Association and articles of association

Types of Shares

  • In simple word, share is a part of share capital of company.
  • Share is divided portion or part of share capital of company.
  • The types or kinds are determined on various bases. So, to say particular type is not easy. It depends on the basis of determination.
  • Company can issue different types of share for its capital formation. As per section 30 of the Act, the company may, by making provisions to that effect in its memorandum of association and articles of association, issue various classes of shares with different rights attached thereto. Section 18 also.
  • So, inherent rights and obligations determine the types of share. The types of share are based on different types of inherent rights and power of shareholders in such shares.
  • Such inherent rights may be rights to get dividend, right to refund invested amount in case of liquidation, right to get remaining amount after repayment of loan and other liabilities.
  • Section 30 of the Act gives permission to public company for issuing of shares with different rights. Types are determined by such different rights.
  • Generally, public company issues different types of share offering for subscription. In case of private company there is no meaning to say the types of share.
  • Mainly there are two types of share in practice, as per Nepalese legal provision. Which are;
    • Ordinary or equity share
    • preference share

Ordinary or equity shares

  • Equity or ordinary shares are those which actually are not preference shares, equity or ordinary shares do not enjoy any preferential rights. There is no any preference on right; by the name & nature this is ordinary type of share.
  • The term ‘share’ denotes ordinary share in general conversation. Ordinary share is not defined in detail in the Companies Act. Section 2 (P) of the Act defines ordinary share as a share other than a preference share. This classification is made especially for public company. In case of private company there is no such various categories of share, only the term share is enough for private company.
  • Though, there is no long definition of ordinary or equity share in our company Act, but it is understood that all shares other than preference shares are ordinary or equity share.
  • The shareholders of ordinary shares are entitled to get dividend from the net profits of company after the fixed dividend on preference share has been paid – up.
  • So, there is no preference for ordinary share, ordinary means ordinary.
  • If there is no profits remain after paying the dividend on preference share, ordinary shareholders will receive no dividends.
  • Therefore, this type of division of ordinary & preference share is based on the factor of priority of receiving dividend and getting back of capital.
  • Similarly, ordinary shareholders will get back their capital only after repaying the capital of preference shareholders, when company goes for winding –up.
  • For the purpose of dividend and repayment of capital, the ordinary shares rank after the preference shares. Generally, the rate of dividend is not fixed in ordinary share. In ordinary share dividend may vary from year to year depending upon profit balance sheet of the company. If huge profit, there is higher dividend, if no profit, there may be no dividend. The board determines the rate of dividend for ordinary shareholders on the basis of profit as per defined legal procedures.
  • There are so many ways to obtain the ordinary or equity shares. On the basis of such obtaining ways, ordinary share again can be divided in following types;

Promoter Share

  • When the promoters of company do accept to subscribe some quantity of share at the time of formation or incorporation by mentioning the same in MoA & AoA, these types of shares are known as promoter shares of company.
  • The share of promoters, subscribed at the time of incorporation, is the promoter share.
  • The term promoter is defined in section 2(i) of the companies Act, as per this definition “promoter means a person who, having consented to the matters contained in memorandum of association & articles of association to be furnished in the Office for the incorporation of a company, signs the same in the capacity of promoter.’’
  • The person who promotes the company by taking particular quantity of share is the promoter and such promoters’ share is promoter share.
  • Promoter shares are allotted in the name of promoter and promoters never pay premium value to subscribe share.
  • Promoter shares cannot be sold mortgaged or pledged unless the first general meeting held and entire call amount on share is fully paid. – sub section 2 of section 42 of the Act.

Primary share

  • After incorporation of a company, public company can invite general public to join the company as its share member as an invitation to offer for purchasing its share, such share is allotted or primary share.
  • Allotted or primary share is that the company makes selling or distributing process at first and makes an invitation for subscribing from issued shares.
  • Public company have to publish the prospectus to invite public to subscribe its shares (section 23 (1) ), but a private company cannot invite or call on public to subscribe its shares. Section 10 (c). Private company mange the allotment privately as per MoA & AoA or unanimous agreement.
  • Public company cannot call for more than 50% amount of face value of share with application section 27(3). Therefore, we see the primary share of 100 rupees in practice, but such restriction will not apply for those companies, which are in operation previously by publishing audited fiscal statement of last 3 years.( provision of section 27 (3))

Right Shares

  • No separate definition of right share in Act.
  • But legal provision about right shares is mentioned in section 56(5) ,(6), 7, 8 & 9.
  • Certain preemptive rights to existing shareholders.
  • In case of increase in share capital of company.
  • The shares issued with such preemptive right to only the existing shareholders.
  • Existing shareholders have 1st right to subscribe.

Existing shareholders are given pre- emption at favorable price as per the numbers of their shares.

Bonus Share

  • A share, which is issued as an additional share to existing shareholders by capitalizing the surplus from the profit and reserve fund of company.
  • Section 2(q) of Act—‘’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 the term includes the increase of paid –up value of a share by capitalizing the saving or reserve fund.’’
  • Issuing bonus share is the means of capitalizing profit or reserve fund instead of distributing cash dividend to company’s shareholders.
  • It must be issued to the company’s shareholders. Section 179(1) (2).
  • It has to increase the paid- up capital of company.
  • It has to capitalize the profit or reserve fund & should not be issued from revaluation of existing other property of company. Section 56 (10).
  • Special resolution of G.M. & information to CRO is the most for issuing bonus share. Section 179 (1) (2) & 83 (e).

Debenture Share

  • Debenture is credit obtained by company.
  • Sometime, in some situation, company can convert its debenture in to shares. Such shares are known as debenture shares.
  • If there is such provision on MoA & AoA, if there is agreement between debenture trustee & company, if such matter is published in prospectus, at these situations company can issue debenture share.
  • The terms ‘debenture’ and ‘debenture trustee’ are defined in section 2( s) and 2(t) respectively.
  • Section 34 includes the provisions relating to debenture. Similarly sub section 4 of section 35 is related with conversion of debenture into debenture share.

Premium Shares

  • Shares having some additional price more than face value of shares.
  • Definition is in 2 (z 2) of Act— value in excess of its face value.
  • Legal provision in section 29.

Forfeited Shares

  • Sometime there may be a situation where company has to forfeit the shares on the grounds of nonpayment of installment on time.
  • Legal provision- Section 53(3)

Preference Share

  • The preference shares are those which have preferential rights than ordinary shares.
  • Section 2 (o) of Act defines preference share.
  • Types of share should be mentioned in MoA of company. Section 18(f).
  • Section 65 states about preference shares of company. Especially section 65 (2) mentions the grounds of issuing the preference shares, by that preference shares can be easily understood.
  • A preference share must have following preferential rights; a) a preferential right as to the payment of dividend b) a preferential right as to the repayment of capital.
  • Preference may be on; dividend, rate of dividend, repayment of share amount in the situation of liquidation, having voting right or not, redeemable or non-redeemable after certain period of time and if redeemable redeemed with premium or not etc.
  • Types of preference shares are; 1). Cumulative and non-cumulative 2).Participating and non- participating 3) Convertible and non- convertible. 4). Redeemable Preference shares.
  • Cumulative preference shares are those which are assured of dividend every year even if there are no profits in a particular year.
  • Non-cumulative preferences are those which are assured of dividend only in the situation of profit.
  • Participating and non- participating preference share; in such shares, shareholders are entitled to participate to surplus profit or surplus assets. Surplus profit means the balance of profit which is left after paying the fixed amount of dividend. Surplus assets means the balance of assets which is left after paying back both the preference and equity shareholders. Voting right also may be basis of participating or non- participating. The participating shareholders participate in both surplus profits and surplus assets. But in non-participating share, shareholders are not entitled to participate. If Mo A is silent about this, it is presumed that all shares are non-participating preference share.
  • Convertible and non- convertible shares; Convertible preference share can be converted in to equity shares within a certain period, non- convertible cannot be converted into equity shares.
  • Redeemable preference shares are those the amount of which can be paid back to the shareholders. The capital raised through issue of redeemable shares can be paid back to the shareholders by the company to such shareholders. Company can issue such shares only if it has been authorized by MoA & AoA. Section 65 (5).

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