Section 43 of Companies Act – Kinds of Share Capital: “The share capital of a company limited by shares shall be of two kinds, namely: —

(a) equity share capital—

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

(b) preference share capital:

Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are entitled to participate in the proceeds of winding up before the commencement of this Act.

Explanation. —For the purposes of this section, —

(i)                 “equity share capital”, with reference to any company limited by shares, means all share capital which is not preference share capital;

(ii)              “preference share capital”, with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to—

(a)  payment of dividend, either as a fixed amount or an amount calculated

at a fixed rate, which may either be free of or subject to income-tax; and

(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company;

(iii)            capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the following rights, namely: —

(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to the preferential right aforesaid;

(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up, of the amounts specified in sub-clause (b) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital not entitled to that preferential right in any surplus which may remain after the entire capital has been repaid”.

An Introspection of Section 43 of Companies Act

Share capital is the fundamental nature of any firm, representing funding and ownership. It is crucial for investors and businesses to understand the various kinds of share capital and the regulations that govern them. Therefore, we will emphasise Section 43 of the Companies Act, 2013, which lays the foundation for share capital in Indian companies.

Before diving deeper into the examination of share capital, we need to understand what a share is. Section 2(84) of the Companies Act, 2013 defines shares. “[“Share” means a share in the share capital of a company and includes stock. It can also be said that ‘share is just part of securities’.] “Shares are issued by the companies to raise money from investors who tend to invest their money.

The two main players: Equity and Preference Shares

The share capital is classified into two main groups in this section:

1) Equity Share Capitals [Section 43 of Companies Act ]

The shareholders of such a company are real owners. It is a significant source of long-term financing. Equity shareholders do not have the right to claim dividends before preference shareholders.

2) Preference Share Capitals

The shareholders of such shares receive fixed dividends every year. The shareholders have the right to capital on the winding up of the company before anything is paid to equity holders. The shareholders of such shares always receive profit first; however, they do not receive voting rights.

These offer specific advantages over equity shares, such as:

2.1) Fixed or cumulative dividends:

An income stream that is more reliable is provided to preference shareholders, who receive a fixed or predefined amount of dividend before any distribution to equity shareholders.

2.2) Priority in repayment:

Preference shareholders have the right to receive their capital payback prior to equity owners after liquidation.

2.3) Limited voting rights:

Preference shares are usually much more restricted than equity shares, despite the fact that some may have voting rights.

Diving Deeper in Section 43 of Companies Act : Sub-Categories and Variations

Section 43 further allows for variations within each category:

1. Equity Shares: These can be issued with differential rights, which allow certain shares in the same class to have distinct rights to vote, dividends, or other benefits; nevertheless, certain restrictions and conditions must be met in order to maintain equity and avoid undue influence by a small number of people.

2. Preference Shares: These can be further classified based on their specific features, such as:

• Redeemable preference shares: After a predetermined amount of time, the firm may buy these back.
• Convertible preference shares: There are circumstances under which they can be converted into equity shares.
• Participating preference shares: These grant holders the right to share in gains over their predetermined dividend, frequently upon fulfilling certain requirements.

Key Considerations and Compliance Requirements

Companies can raise capital more easily and customise ownership structures by issuing different kinds of share capital, but there are a few key variables that should be taken into account, such as: –

• Compliance with the Act and relevant rules: Regarding the issue, rights, and redemption of various share classes, companies are required to abide by the comprehensive requirements set forth in the Act and related rules.
• Impact on company governance and control: The way voting rights are allocated among various share classes can have a big impact on internal decision-making and control.
• Investor expectations and communication: To attract and keep investors, companies need to make sure that the rights and benefits associated with each share class are communicated clearly.

Beyond the Basics: Practical Implications and Recent Developments

Understanding Section 43 goes beyond mere technicalities. It has practical implications for various stakeholders:

• Companies: It enables them to create capital structures that support their ownership objectives and finance requirements.
• Investors: It assists clients in selecting shares that best meet their investing goals, whether they be capital growth, income production, or voting rights.
• Regulators: They ensure fair and transparent capital structures, protect investor interests, and promote healthy corporate governance.

The ambiguity has been resolved, and the procedure has been streamlined through the recent development that came in the form of the Companies (Share Capital and Debentures) Amendment Rules, 2018.

Conclusion: A Dynamic Framework for Capitalization

With recent developments in the corporate sector and with dynamic time, Section 43 of the Companies Act, 2013 will continue to play a crucial role in forming the financial structures and governance of companies operating in the nation. With the help of the provisions of the Act, any corporate stakeholder can make their own decisions to meet their needs while also luring investors’ confidence in them. 

FAQs

Q1) What are the kinds of shares in company law?

There are two kinds of share capital, namely: –

1)      Equity Share Capital

2)     Preference Share Capital

Q2) What is share capital?

The total amount a company generates after issuing a number of shares to its investors is referred to as share capital. There are two ways through which an investor can be the owner of the share:

1) Issued share capital

2) Subscribed share capital

Q3) What is a share and its kinds?

Equity and preference shares are two common forms of shares that give the firm funds and give shareholders a partial ownership interest in the company. A share is defined as a unit reflecting a partial ownership stake in the company. Investors who possess them are referred to as shareholders.

Q4) What is the difference between an issued share and a subscribed share?

·       Issued share capital: The value generated by the company after actually selling the shares to investors.

·       Subscribed share capital: The number of shares that are committed to be purchased by the investor before the actual sale of shares is known as subscribed share capital.

Q5) What are the types of equity shares?

Following are the different types of equity shares:

·         Ordinary shares

·         Bonus shares

·         Rights shares

·         Sweat Equity

·         Employee stock options.

Q6) Why is share capital used?

The corporate firm’s share capitals is usually used to fulfil the following objectives: –

• Raise capital

• Establish ownership

• Transfer ownership from one party to another.

It is a crucial part of a limited company’s framework.

Q7) Is share capital an asset?

If a company’s main asset at creation is the cash invested by its shareholders, then cash is on the left side of the balance sheet and share capital is on the right. Share capital is a significant line item that is occasionally separated out by corporations into the various types of equity issued.

Q8) Can share capital be withdrawn?

Member share capital, which is only removed upon a member’s departure from the cooperative, signifies each individual member’s commitment to the cooperative form of business and indicates their respective financial stake.

Q9) What type of asset is share capital?

A firm’s share capital is the actual money put into those shares, which equals the whole worth of the company. The term “shares” is commonly used interchangeably with “stock.” They can be a financial asset guaranteeing an equitable distribution of earnings inside a corporation.

10) Who decides share capital?

The shareholders of the company are the real owners of the corporations; therefore, the authority to decide share capital lies with them, along with the promoters and board of directors consent.