In the world of corporate finance and investment, shares are at the top of the list because, through shares, an individual gets a share of ownership of a company. Individuals' contribution to the capital is made through shares, and these shares also give them rights in the profit and the growth of the company. Company law, which operates the corporate entity, stipulates in detail the provisions about shares, their categories, allotment, and transfer, among others. A career in company law can help avail jobs in legal firms, corporate sectors, and even entrepreneurial ventures.
This article tries to depict in depth the meaning and concept of shares within company law, their types, and the processes associated with their management.
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What are shares?
A share may be described as a fraction of interest in a company. A holder of shares is termed a shareholder, who, through these shares, acquires numerous rights. The shareholder shall have voting rights over some or all decisions made by the corporation and will also have the right to claim part of the profit realized by the company by way of dividends. These shares, therefore, present a fractional interest in company assets and are a big part of the capital composition of any firm.
A share in a company under company law is one of the legal ownership forms where the rights and liabilities lie with the shareholders. Rights, however, vary with the kind of share one holds and are regulated by the company laws prevailing in that jurisdiction.
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Kinds of Shares in Company Law
There are two broad categories of company shares: equity shares and preference shares. Both have different characteristics and rights, fulfilling otherwise quite different purposes for the company and the shareholders.
1. Equity Shares
Common shares are the most basic form of ownership in a company, which are referred to as equity shares. Equity shareholders are entitled to vote and participate in very important decisions taken by the company, including the election of the board of directors and any significant corporate change.
Key Characteristics of Equity Shares
Equity shareholders receive dividends, which is a portion of the profit made by the company distributed at its discretion.
They carry voting rights in matters of corporate governance.
Equity shares have high risk and high return because the return is strictly a function of the profitability of the company.
2. Preference Shares
Preference shares offer shareholders a fixed rate of dividend; hence, the preference share is more appealing to the investor looking for stable returns. The preference shareholders are usually not entitled to vote, but they have priority claims over company assets and earnings as compared to equity shareholders.
Key Characteristics of Preference Shares:
Dividend distribution over equity shareholders.
Limited or no voting rights.
They usually carry convertible and redeemable features
3. Other Kinds of Shares
Under the two categories, there can exist further subtypes, as per the specific terms decided by the company:
Redeemable shares: These are shares that can be repurchased by the company later.
Convertible shares: They are preference shares that are convertible into equity shares if certain conditions are met.
Bonus shares: Bonus shares are extra shares issued to existing shareholders without any extra cost.
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Share Allotment
Share allotment is the process through which shares are allocated to applicants who want to invest in the company. This is a well-structured process that has three stages: application, allotment, and issuance of shares. It is regulated by company law to avoid malpractice and ensure fair treatment of investors.
Steps involved in the Allotment Process:
Application: Prospective shareholders apply for shares in the course of a public offering or private placement.
Allotment Decision: The board of directors decides on the allotment based on the available shares and the company's capital requirements.
Issuance of Shares: Upon finalization of the allotment, the company issues share certificates to the shareholders, confirming ownership.
Transfer of Shares
Shareholders are generally allowed to transfer their shares unless restricted by the company policies or shareholders' agreements. Public companies have their shares traded on stock exchanges and, therefore, are easy to transfer. Private companies restrict the transfer process and usually require approval from the board.
Key Issues in Transfer Process
Agreement between Transferor and Transferee: The existing shareholder is the transferor who agrees to transfer some shares to the buyer, the transferee.
Transfer of Form: The transfer of form, commonly known as Form SH-4, is presented to the company
Board Approval: In the case of a private company, the transfer would require board approval.
Share Certificate Issuance: On the approval of the transfer, the new share certificate will be issued by the company in the name of the transferee.
Rights and Liabilities of Shareholders
Owning shares has to do with rights and corresponding responsibilities. Rights of equity shareholders vary according to the type of shares owned but tend to include:
Voting Rights: Shareholders on equity can vote on propositions such as the election of directors and significant decisions undertaken by the company.
Dividend Rights: Shareholders are granted dividends if declared by the company.
Right to inspect records: Shareholders have the right to inspect such records of the company.
Right to Sue: The shareholders have the right to sue the company's directors if they feel that directors are not performing their responsibilities.
The shareholders also have various obligations. They cannot act in their own interest that may hamper the profitability of the company.
Issue of Shares
Issuance of shares is a means of raising capital. There are companies that issue share to raise funds, which attracts investors and increases its business volume. The Process of issuance includes:
Initial Public Offering/IPO: This is the first or main issue of the share to the public
Follow-on Public Offerings/ FPO: Issue of more shares after an IPO.
Rights Issue: It is a situation where the company issues share among existing shareholders at the Offerings/rate below its market price
Private Placement: When shares are offered and sold to a particular class of people and not issued to the public.
Forfeiture and Reissue Of Shares
In some situations, a company can forfeit shares if shareholders do not pay for the amount arising on shares. After the notice of forfeiture, the firm can reissue its forfeited shares to any other investors.
Key Information Regarding Forfeiture and Reissue
Notice: A company must give notice first before forfeiture
Forfeiture Procedure: Shares are susceptible to forfeiture if the shareholder does not respond to the notice.
Re-issuance: The company can re-issue the shares to other investors at an issue price less than its original issue price.
Buyback of Share
There are some situations when a company repurchases shares from the open market or existing shareholders. This process is called buyback. The primary purpose behind the process is to give back the surplus cash to shareholders or boost the value of the shares remaining in the company's hands.
Important Characteristics of Buyback:
It reduces the outstanding shares and causes an increase in the price of remaining shares.
It is often a tax-efficient way of rewarding the shareholders compared to dividends.
It requires compliance with the legal guidelines and approval by the shareholders.
Importance of Shares in Company Law
Shares form the backbone of any company in terms of structure and performance. They can be described as a means through which capital is raised, distribution of ownership, and profits can be shared among people involved. They are also of paramount importance for a proper distribution of power between the management and shareholders to prevent exploitation in any way.
Aspects of shares fall under company law to ensure the following:
Fair issuance and transfer
Protection of the rights of shareholders
Easy capital formation for companies
Conclusion
Shares are part of the major corporate structure that bridges the interests of investors and companies. The history of company law in India reflects the economic development of the nation. Under company law, allotment, transfer, and the other aspects that come along with shares are all cautiously regulated to provide for fair and transparent dealings. The same is important to companies as well as to shareholders for safeguarding their investments and contributing to the growth of the company. A share, with a clear legal framework in place, remains dynamic and vibrant within corporate finance, providing an open pathway whereby any individual can participate and benefit in the growth of businesses.
Shares in Company Law FAQs
1. What are shares in company law?
Shares are a form of ownership in a company. This share gives its owner an ownership right over the assets, profits, and sometimes even the voting rights of a company. In order to keep the corporations' practice regulated and everything fair, there is the governance of issuance, transfer, and rights pertaining to shares through company law.
2. What are the major types of shares?
Equity shares are the most basic form of ownership and grant the owner voting rights.
Preference shares: They provide fixed dividends and preference over equity shares in dividends but are usually without voting rights. Other varieties include redeemable, convertible, and bonus shares that have particular conditions and advantages.
3. What is share allotment?
Share allotment refers to the process of granting shares to applicants. It involves submission of application, a decision of the board regarding allotment, and issuing share certificates to the confirmed shareholders.
4. Can shares be transferred?
Yes, shareholders can transfer shares but the method of transferring shares differs between public and private companies whereby the share of a public quoted company are transferred freely on the stock exchange; however, shares of a private company are usually subjected to the approval of the board of directors.
5. What am I entitled to as a shareholder?
Equity shareholders are entitled to common rights such as:.
Check company records and sue in case of failure by directors to perform their duties.
6. What are the differences between equity shares and preference shares?
Equity shares give ownership with voting rights and profit sharing in the form of dividends as per the performance of the company. Preference shares provide fixed dividends and priority in repayment but are usually devoid of voting rights.
