Image source:

This article is written by Ms. Anjali Sharma pursuing B.A LL.B (Hons.) from Manipal University, Jaipur. The author discusses about Shares and Share Capital of the Company.


To begin with, let us understand what we mean by shares.

Section 2 (84) of the Companies Act, 2013 defines Share.

Download Now

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.

Why is Shares Issued?

Shares are issued by companies to raise money from investors who tend to invest their money. This money is then used by companies for the development and growth of their business.

What is Stock?

Stock is set of same category of shares put together which have same value. It is an aggregate of fully paid up shares.

Kinds of Share Capital

Section 43 of the Companies Act, 2013 defines Kinds of Share Capital.

The share capital of a company limited by shares shall be of two kinds, namely:

Equity Share Capital

Equity share capital with reference to any company limited by shares means all share capital which is not preference share capital. It refers to the portion of the company’s money which is raised in exchange for a share of ownership in the company.

Preference Share Capital

Preference shares are one of the special types of share capital having fixed rate of dividend and they carry preferential rights over ordinary equity shares in sharing of profits and also claims over assets of the firm People who buy preferential share capital gets priority in dividend declaration and at the time of winding up they are the first people to receive money. They have right to vote only when the matter directly or indirectly affects them. 

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:

  1. 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
  2. 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.
            Click Above

Kinds of Raising Capital

There are shares which are used to raise the capital of the company. Those shares are:

  • Sweat Equity Shares;
  • Employees Stock Option Scheme;
  • Bonus Issue;
  • Rights Issue.

Sweat Equity Shares: Section 2(88) & Section 54

These are the shares issued by company to the directors (except independent directors) or employees of the company at discount for consideration other than cash in order to encourage them to work better.

It is issued for the purpose of:

  • For the know-how of the company.
  • Contribution to intellect of the company.
  • Value addition to the employees.

Compliances to be made by the company to issue those shares:

  • Class of shares already issued.
  • Special resolution should be passed by the members and the proposal of issuing such shares comes from Board of Directors.
  • Class of shares/ Number of shares/ to whom such shares would be issued.
  • Price would be decided by Board of Directors.
  • For issuing such shares the company should have at least commenced business for 1 year.
  • Maximum of 15% of paid up share capital or 5crore whichever is higher.
  • Only sweat equity shares can be issued.
  • Notice to share holders before the issuing of sweat equity shares.

Employees Stock Option Scheme: Section 2(37) & Section 62(1)(b)

These shares are available to Employee and Directors of the company. They have an option/right to purchase these shares at a predetermined price. These are for the advantage of employees and directors. These shares cannot be equated for remuneration of the employee or directors.


  • Special Resolution by the members.
  • Not entitled to voting rights and dividends until one buy these shares.

Bonus Issue: Section 63

It is a fully paid-up share capital. It is the additional shares given to current shareholder. No money is charged from the shareholders as these shares are provided as bonus. It is issued when company has a lot of accumulated profits and they want to capitalize their reserve & surplus cash. It is determined by the debt-equity ratio which should not go below 2:1 because the debt should never be twice than the assets of the company. There should be no liabilities on the company. Bonus share is considered a good sign for the company because that way company is able to serve a large equity base and at the same time the net worth of the company stays intact.


  • It should be mentioned in the AOA (Articles of Association) of the company that bonus be allowed to shareholders if in case it is not mentioned in the AOA (Article of Association), it is altered by special majority.
  • Special resolution is passed by B.O.D (Board of Directors), Managers are & top level management where they see if there is profit made by the company.  If there is lot of accumulated profit in that case the resolution is passed and bonus is issued to all shareholders.
  • There should be no previous defaults in the payments of interest to the debenture holder and of dividend.
  • There should be no pending salaries or Provident funds of any employee, etc.  

Sources of Bonus Issue:

  • Free reserves: The accounts in which the dividend is saved.
  • Capital Reserve Redemption Accounts (CRRA): When the money of redeemable preference shares is to be redeemed, it can be redeemed through CRRA (the amount which is invested).
  • Securities Premium Account (SPA): it is an account in which the premium amount of shares is deposited. (Premium amount- it is the higher amount at which the shares are issued)

Restriction on Issuing Bonus Share:

As mentioned in sweat equity share there is a class of shares. A company can’t issue bonus shares if they have outstanding fully or partly convertible debt instrument at the time of issuing bonus share. Unless there is reservation made of equity shares of the same class in favor of such holders of convertible debt instrument on the same terms and proportion to the convertible part.

The equity shares reserved for the holder of the fully or partly convertible debt instrument shall be issued at the time of conversion of such convertible debt instrument on the same term or proportion on which the bonus shares were issued. 

Rights Issue: Section 62(1)

When the company thinks of increasing the capital it issues these shares which are first offered to existing shareholders on priority. The existing shareholders have right of pre-emption. Although it helps in raising the capital it is not mandatory to issue rights issue.

Compliance of Rights Issue:

  • It has to be mentioned in the articles of association of the company.
  • A notice to the share holders regarding the same has to be sent.
  • This offer should be available for 15-30 days.
  • The existing share holders may renounce or accept this offer.
  • Number of shares and price of such share has to be mentioned.

Nature of Shares:

  • Part of share capital.
  • Exploited by the shareholder (ownership of shares by shareholders).
  • Defines shares as right to participate i.e., through profit when it is a going concern and through assets when company goes into winding up.

Share Certificate and Warrant

Share Certificate: Section 46

It is a document that certifies the fact that a person or an individual is owner of certain amount of shares. It is issued under the company’s seal signed by 2 directors, a managing director and a company secretary. It is the prima facie evidence of title. It acts as estoppels to the title and estoppels as to the payment.

Share Warrant

It is a bearer document and it is transferable by delivery. It is not dealt in companies’ act 2013. It is issued only on public company by the permission of the central government.

Buy-Back: Sections 67, 69 & 70

When a company who issued the shares decides to take back its share from the market and buys its own share (i.e. the company buys its own shares) by paying the shareholders the market value per share it is known as/refers to buy-back. A stock buy-back is a way for a company to re-invest in itself. Liability of a company decreases when they do the buy-back process. Companies usually buy-back its share when they have extra surplus cash; a company either invests the surplus cash in its new venture or by buying back its own share.

Objectives of Buy-Back

  1. Surplus cash accountability: Directors are accountable for what they are doing with the surplus cash to shareholders. The idea behind it is that money should keep on flowing, excess of surplus cash on balance sheet is not a good sign. Money should be invested and the flow of money should keep on rotating.
  2. Increase in current share price of the company.
  3. Increase in earnings per share.
  4. Discourage the unwelcome takeover bids.

Buy-Back Takes Place Out of

  • Free reserve;
  • Securities premium account;
  • Proceeds of any issue.


  1. It should be permissible by articles of association.
  2. Maximum buyback can be of 25% of paid-up share capital & free reserve.
  3. Special resolution has to be passed by the shareholders.
  4. Declaration of solvency has to be signed by 2 directors. Out of which 1 has to be managing director. They have to sign a declaration that company is in a sound position and that after buy back their company will not be affected and that for 1 year they will be in a strong financial position and their company will not suffer insolvency.
  5. Buy-backs can be from the existing shareholders only.

Prohibition of Buy-Back

  1. Company cannot buyback through their Subsidiary Company or Investment Bankers or Investment Company.
  2. No buy -can be made if there is any kind of default in payment of dividend, loans, or repayment. 
  3. There should be no liability on the company because buy-back in itself means that only surplus money can be used which means there should be no liability on the company.

Failure to Comply

  • Fine up to 1-3 hundred thousand on Company.
  • Fine up to 1-3 hundred thousand for every independent officer.
  • Imprisonment up to 3 years.

Raising of Capital

  1. Private Placement: Company doesn’t offer the share to everyone or to public. They offer it to particular group or particular people. The limit is 200 shares only. Private company can do the private placement. They have prohibited public issue. They can only invite 200 people in a financial year for private placement. Share has to be allotted within 60 days of payment. When a company wants to make private placement they are prohibited to advertise it in newspaper. They directly contact the people they want to make shareholders.
  2. Offer for Sale: It is a method for raising capital. Here, the company appoints an issuing house that issues the share on behalf of the company. Here, the capital provided to issuing house is allotted by the company and not by issuing house (i.e. capital belongs to company).
  3. Rights Issue: (Same as discussed above).
  4. Inviting Public through Prospectus: it can be done only by a public company. There are two ways/mechanisms by which company invite public through prospectus. The 2 ways are:
  • Fixed Price: Here, the price of the share is already fixed from the beginning. 
  • Book Building/Price discovery: Here, Red Herring Prospectus is used. 

A Red Herring Prospectus contains most of the information pertaining to the company’s operations and prospects but does not include key details of the security issue, such as its price and the number of shares offered. In this type of IPO, the company involves a financial institution which decides the price range of the shares.


This article sums up the basic need to issue share and raising capital and its importance in a company. Every business organization needs funds for its business activities. It can raise funds either internally or through external sources. It can further be concluded that issuing share and raising capital is an integral part of any business/company. It not only helps in getting investment from investors/shareholders but also helps the company in re-investing in itself. It can be seen that when a company is in sound position it can take care of its employees, directors & shareholders and motivate them to do better. 

LawSikho has created a telegram group for exchanging legal knowledge, referrals and various opportunities. You can click on this link and join:

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.


Please enter your comment!
Please enter your name here