Introduction

Share capital is the fundamental financial structure of a company, representing the funds raised by issuing shares to investors. Shareholders, as the owners of these shares, hold certain rights and responsibilities within the corporate framework. The legal framework governing share capital and shareholders is primarily outlined in the Companies Act, 2013, along with judicial precedents that shape corporate governance and shareholder rights.
This detailed analysis explores the concept of share capital, its types, the rights and obligations of shareholders, legal provisions, and significant case laws.

Share Capital: Meaning and Classification

Definition of Share Capital
Share capital represents the funds raised by a company through the issuance of shares to investors. It forms the foundation of a company’s financial structure and determines the extent of ownership of shareholders. The concept of share capital is essential for understanding corporate financing, governance, and investor rights.
According to Section 2(84) of the Companies Act, 2013, a “share” means a share in the share capital of a company. This definition signifies that each share represents ownership in the company and entitles the shareholder to certain rights, including dividends, voting rights, and a claim over the company’s assets in the event of liquidation.
Companies issue shares to raise capital for various purposes such as expansion, working capital requirements, acquisitions, or new investments. Share capital plays a crucial role in distinguishing between the ownership and control of a company. It ensures that shareholders contribute financially to the company’s operations while retaining their proportionate ownership and decision-making rights.
The classification of share capital is necessary to understand the financial position of a company, its obligations towards shareholders, and its ability to raise funds. The Companies Act, 2013, categorizes share capital into various types, each serving a specific function in corporate finance and governance.

Types of Share Capital

The Companies Act, 2013, provides a structured classification of share capital based on legal and financial considerations. The different categories of share capital help in determining the company’s financial obligations and the rights of shareholders.
Authorised Share Capital
• Defined under Section 2(8) of the Companies Act, 2013.
• It refers to the maximum amount of capital that a company is legally allowed to raise by issuing shares, as specified in its Memorandum of Association (MOA).
• The authorized capital sets an upper limit on the funds that can be raised through equity and preference shares. However, the company is not required to issue its entire authorized capital immediately.
• If a company needs additional capital beyond its authorized limit, it must seek shareholder approval and amend its MOA accordingly.
• Example: If a company’s authorized share capital is ₹10 crores, it cannot issue shares exceeding this amount unless it increases the authorized capital through proper legal procedures.
Issued Share Capital
• Defined under Section 2(50) of the Companies Act, 2013.
• It refers to the portion of the authorized share capital that a company has offered to investors for subscription.
• Not all authorized capital is necessarily issued at once; companies may choose to issue shares in multiple stages based on their financial needs.
• The issued capital represents the number of shares available for investors to purchase in the stock market or through private placements.
• Example: If a company has an authorized capital of ₹10 crores but has issued only ₹5 crores worth of shares to the public, its issued share capital is ₹5 crores.
Subscribed Share Capital
• Defined under Section 2(86) of the Companies Act, 2013.
• It represents the portion of the issued share capital that investors have agreed to purchase and have subscribed to.
• Subscribed capital may be fully paid-up or partly paid-up, depending on the payment terms agreed upon by the shareholders.
• Since all issued shares may not necessarily be subscribed to, the subscribed share capital is generally lower than or equal to the issued capital.
• Example: If a company issues 10 lakh shares of ₹10 each, but investors subscribe to only 8 lakh shares, then the subscribed share capital is ₹80 lakhs.
Paid-up Share Capital
• Defined under Section 2(64) of the Companies Act, 2013.
• Paid-up share capital refers to the actual amount received by the company from shareholders against the subscribed share capital.
• Companies may issue shares with partial payment requirements, meaning investors are required to pay only a portion of the share price initially, with the remaining balance payable in future calls.
• The paid-up capital is always equal to or lower than the subscribed share capital, as it reflects the amount actually received by the company.
• Example: If a company has a subscribed capital of ₹80 lakhs but has received payments worth only ₹60 lakhs, the paid-up capital is ₹60 lakhs.
Uncalled Capital and Reserve Capital
Uncalled Capital
• Uncalled capital refers to the portion of subscribed share capital that has not yet been called for payment by the company.
• Companies have the discretion to demand unpaid amounts from shareholders in future installments as per their capital requirements.
• This system provides companies with flexibility in raising funds while ensuring that shareholders contribute gradually rather than making full payments upfront.
• Example: If a company issues shares worth ₹10 crores but has called for payments of only ₹7 crores, the remaining ₹3 crores constitute uncalled capital.
Reserve Capital
• Defined under Section 65 of the Companies Act, 2013.
• Reserve capital refers to a portion of the subscribed capital that can only be called up in the event of the company’s liquidation.
• It serves as a financial safeguard, ensuring that a company retains a portion of its capital specifically for settling liabilities upon dissolution.
• Once a company declares a portion of its capital as reserve capital, it cannot use it for regular business operations.
• Example: A company with ₹50 crores in subscribed capital may designate ₹10 crores as reserve capital, ensuring it remains untouched unless liquidation occurs

Types of Shares

Shares are primarily categorized into equity shares and preference shares under Section 43 of the Companies Act, 2013.
Equity Shares
Equity shares represent ownership in a company and provide shareholders with voting rights in important corporate decisions, such as electing directors and approving mergers. They are the most common type of shares issued by companies to raise capital.
Equity shareholders are entitled to dividends, but these payments depend on the company’s profitability and discretion of the board. Unlike preference shares, equity shareholders receive dividends only after all obligations to preference shareholders have been met.
Equity shares carry higher risk, as shareholders are last in line to receive payments in the event of liquidation. However, they also offer the potential for higher returns, as they benefit from capital appreciation and increasing dividends when a company performs well.
Preference Shares
Preference shares provide shareholders with priority over equity shareholders regarding dividend payments and capital repayment in case of liquidation. However, they typically do not carry voting rights, unless specified in the Articles of Association (AOA).

Types of Preference Shares:

• Cumulative vs. Non-Cumulative – Cumulative shares allow unpaid dividends to accumulate, whereas non-cumulative shares forfeit unpaid dividends.
• Redeemable vs. Irredeemable – Redeemable shares can be repurchased by the company, while irredeemable shares remain indefinitely.
• Participating vs. Non-Participating – Participating shares provide additional dividends beyond fixed returns, while non-participating shares receive only the fixed dividend.
Shareholders: Rights and Responsibilities
Shareholders, as owners of shares in a company, play a crucial role in corporate governance. Their rights ensure their interests are protected, while their responsibilities help maintain corporate integrity and compliance with legal norms. The Companies Act, 2013, along with regulatory frameworks such as SEBI regulations, defines these rights and obligations.

Rights of Shareholders

Shareholders have both statutory and contractual rights, along with special protections for minority shareholders.
Statutory Rights
Statutory rights are legally mandated and cannot be overridden by the company’s internal policies or agreements. These include:
• Right to Vote: Under Section 47 of the Companies Act, 2013, equity shareholders have the right to vote on corporate matters, including board appointments and mergers. Preference shareholders, unless otherwise specified, do not have voting rights.
• Right to Dividend: According to Section 123 of the Companies Act, 2013, shareholders are entitled to receive dividends once declared by the company. However, dividend payment is subject to company profits and board approval.
• Right to Inspect Books of Accounts: Under Section 136 of the Companies Act, 2013, shareholders have the right to access financial statements and reports to ensure corporate transparency.
• Right to Transfer Shares: As per Section 56 of the Companies Act, 2013, shareholders can freely transfer their shares, subject to any restrictions imposed by the company’s Articles of Association (AOA).
Contractual Rights
Contractual rights stem from agreements between the company and shareholders. These may include:
• Preferential Rights: Certain shareholders may have priority over others in receiving dividends or liquidation proceeds.
• Decision-Making Authority: Shareholders may have special voting privileges on key business decisions, as per the terms agreed in shareholder agreements.
Minority Shareholder Protection
The Companies Act, 2013, safeguards the interests of minority shareholders, who may be vulnerable to oppressive actions by majority shareholders.
• Protection from Oppression and Mismanagement (Section 241): If minority shareholders believe company affairs are being conducted in a prejudicial manner, they can seek redress under this provision.
• Class Action Suits (Section 245): Minority shareholders can file a class action lawsuit to challenge decisions that harm their interests or the company’s financial health.
Case Law: Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965 AIR 1535)
In this landmark case, the Supreme Court emphasized that oppression must be continuous and substantially prejudicial to minority shareholders to seek legal intervention. This case set a precedent for protecting minority interests against unfair corporate decisions.

Responsibilities of Shareholders

Shareholders are not only entitled to rights but also have specific obligations that contribute to corporate governance and ethical business practices.
• Payment of Calls on Shares: When a company issues shares in installments, shareholders must pay the remaining amount as and when called upon by the company.
• Compliance with Company Policies: Shareholders must abide by the Memorandum of Association (MOA) and Articles of Association (AOA), which define the company’s operations and governance framework.
• Abstaining from Insider Trading: Shareholders with access to confidential company information must refrain from insider trading. This is strictly regulated under the SEBI (Prohibition of Insider Trading) Regulations, 2015, which imposes penalties for trading based on unpublished price-sensitive information.
By understanding their rights and responsibilities, shareholders can actively contribute to corporate governance while protecting their financial and legal interests.

Legal Provisions Governing Share Capital and Shareholders

The Companies Act, 2013 lays down various provisions regulating share capital issuance, shareholder rights, and corporate transactions:
• Section 52 – Governs the application of the securities premium account for purposes like issuing bonus shares and writing off expenses.
• Section 55 – Regulates the issuance and redemption of preference shares, ensuring compliance with financial guidelines.
• Section 62 – Provides for the rights issue of shares, allowing existing shareholders to purchase additional shares.
• Section 68 – Permits companies to buy back their shares under prescribed conditions.
• Section 123 – Governs the declaration and payment of dividends to shareholders.
• Section 236 – Grants minority shareholder buyout rights, ensuring fair treatment in corporate acquisitions.

Judicial Precedents on Share Capital and Shareholder Rights

Judicial decisions play a crucial role in interpreting laws related to share capital and shareholder rights. Courts have established fundamental principles governing majority rule, share transfer restrictions, minority shareholder protection, and directors’ fiduciary duties. The following key judgments have shaped corporate law in these areas.

Foss v. Harbottle (1843) 67 ER 189
Principle: This case established the “majority rule”, stating that a company, as a separate legal entity, is the proper plaintiff in cases of corporate misconduct. Individual shareholders cannot sue for wrongs done to the company unless:
1. Fraud on the minority – Where the majority abuses its power to commit fraud.
2. Ultra vires acts – When actions exceed the company’s legal authority.
3. Violation of shareholder rights – If a decision violates statutory or contractual rights.
This case prevents unnecessary litigation and respects corporate democracy while ensuring minority protection in exceptional circumstances.

Bajaj Auto Ltd. v. N.K. Firodia (1971 AIR 321)
Principle: The Supreme Court ruled that a company has the right to refuse share transfers if done on reasonable and bona fide grounds. However, such refusal must:
• Not be arbitrary, unfair, or discriminatory.
• Align with the company’s interest and Articles of Association.
This case balanced corporate discretion and shareholder rights, ensuring transparency in share transfer decisions.

Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan (2005 1 SCC 212)
Principle: This case reinforced minority shareholder protection against abuse of majority power. The Supreme Court held that:
• Allotment of shares should not be used to dilute minority interests.
• Directors owe a fiduciary duty to act in good faith for the benefit of all shareholders.
This judgment emphasized fairness in corporate decision-making and the need to prevent majority shareholders from misusing their power.

LIC v. Escorts Ltd. (1986 AIR 1370)
Principle: This case affirmed that shareholders have the fundamental right to transfer shares freely, subject to legal restrictions. The Supreme Court ruled that:
• Share transfers should comply with legal requirements.
• Regulatory scrutiny should not interfere with genuine transactions.
This case strengthened market integrity by ensuring fairness and transparency in share transactions.

Reference

Taxmann’s Company Law and Practice