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There are two methods of increase of capital:

(A) Further issue of capital and

(B) Conversion of Govt. Loans into shares.

(A) Further Issue of Capital:

After the formation of a Co. further shares may be issued. The rules regarding such
issues are as follows- Sec.81 (1).

Where at any time after the expiry of two years from the formation of the co. or at any time after
one year from the first allotment of shares, whichever is earlier, it is proposed to increase the
subscribed capital of the co. by allotment of further shares, the following procedure must be
adopted:

1.Such new shares shall be offered to the persons who, at the date of the offer, are holders
of the equity shares of the co. in proportion, as nearly as circumstances admit, to the capital
paid up on those shares at that date.

2. The offer aforesaid shall be made by notice specifying the no. of shares offered and
limiting a time not being less than 15 days from the date of the offer within which the offer if not
accepted, will be deemed to have been declined.

3. The offeree of the shares may renounce the offer in favour of any other person, unless
the articles of the co. provide otherwise.

4. After the expiry of the time specified in the notice of aforesaid or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the shares
offered, the BODs may dispose of them in such manner as they think most beneficial to the
company.

Shares issued under this section are called ´Rightsµ shares.

Exceptions:

1.c Sec 81 (1A) provides that further shares may be offered to any person in any manner
whatsoever in the following cases:
 (a)c if a special resolution to that effect is passed by the company in general
meeting; or
(b)c if a proposal to that effect is passed by the majority of members in a general
meeting and the Central Govt. is satisfied that the proposal is most beneficial to
the company.
2.c Sec 81(3) provides that the rules contained in Sec. 81(1) shall not apply.
(a)c to a private co.
(b)c where the subscribed capital of a public co. is increased because debenture
holders or creditors were given an option (by a special resolution passed by the
co. in general meeting and approved by the Central Govt.) to convert the
debentures or loans into shares of the co.

(B) Conversion of Govt. loans into shares

When any debentures have been issued to, or loans have been obtained from, the Govt. by a
co., the Central Govt. may direct that such debentures or loans, or any part thereof shall be
converted into shares of the co.-Sec.81 (4) to (7).

The Govt. will issue such orders if, in its opinion, it is necessary in the public interest. The terms
and conditions of such conversion are to be determined by the Govt. due attention is to be
given to the financial position of the co., the terms of the debentures or loan etc. a copy of the
order is to be laid before Parliament. If the co. is dissatisfied with the terms of conversion, it can
appeal to the court whose decision will be final.

Share capital will be increased where an order is made under Sec. 81(4) ² Sec. 94A,
Companies (Amendment) Act.1974.

Prospectus

It is an invitation to the public to subscribe to its share capital. It usually states the no. of shares
offered by the co. to the public, the amount to be payable along with the application for each
share, the date when the shares will be allotted and the dates and mode of payment of various
calls. Thus it is merely a notice to the public for subscription for any shares or debentures and
not an offer of shares or debentures. It should be signed by all the directors and a copy of it
should be filed with the Registrar for publication. It depicts an overall picture about the co. and
helps the investors in their decision making process.

After getting the co. incorporated, promoters will raise finances. The public is invited to
purchase the shares and debentures of the co. through an advertisement. A document
containing detailed information about the co. and an invitation to the public subscribing to the
share capital and debenture is issued. This document is called ¶prospectus·.

Sec. 2(36) of the Companies Act defines a prospectus as , ´A prospectus means any
document described or issued as a prospectus and includes any notice , circular, advertisement
or other documents inviting deposits from public or inviting offers from the public for the
subscription or purchase of any shares or debentures of a body corporate.µ

Contents of the prospectus: The following matters are to be disclosed in a prospectus:

1.c Name and full address of the co.

2.c Full particulars about the signatories to the Memorandum of Association and the no. of
shares taken up by them.
3.c The no. and classes of shares. The interest of shareholders in the property and profits of
the co.
4.c Name, address and occupations of members of the BODs or proposed Directors.
5.c The minimum subscription fixed by promoters after taking into account all financial
requirements at the beginning.
6.c If the co. acquires any property from vendors, their full particulars are to be given.
7.c The full address of underwriters, if any, and the opinion of directors that the
underwriters have sufficient resources to meet their obligations.
8.c The time of opening of the subscription list.
9.c The nature and extent of interest of every promoter in the promotion of the co.
10.c The amount payable on the application, allotment and calls.
11.c The particulars of preferential treatment given to any person for subscribing shares or
debentures.
12.c Particulars about reserves and surpluses.
13.c The amount of preliminary expenses.
14.c The name and address of the auditor.
 15.c Particulars regarding voting rights at the meetings of th e co.
16.c A report by auditors regarding the profits and losses of the co.

These mare some of the contents which every prospectus must include. Any information given
in the prospectus must be true, otherwise the subscriber can be held guilty for
misrepresentation.

Allotment of shares

´Allotment means the appropriation to an applicant by a resolution of the directors of a certain

no. of shares in response to an application. Shares so allotted are not, in general. specific
shares identified by a number; the numbering is left till later.µ

After the acceptance of applications, the directors will proceed to allot shares and
communicate the matter to the applicants by issuing a letter called letter of allotment. Through
this letter they ask them to pay the allotment money.

Rules regarding allotment:

1.c Application Form: The prospectus is an invitation to the public for purchase of shares.
Persons intending to purchase shares have to apply in a form prescribed in the prospectus for
the purpose and called the ´application formµ. The prospectus also fixes the time when the
application will be opened and the allotment of shares to the applicants will be made.
2.c Result of a contract: Membership of a co. by purchase of shares is the result of contract.
The application by the intending shareholder is the ´offerµ for the purchase of shares. Allotment
by the directors is the ´acceptance of the offerµ. The notice of allotment is the ´communication
of the acceptanceµ. Each of these stages in the formation of the contract must conform to the
rules laid down in the Contract Act.
3.c Conditional offers and acceptance of shares: Conditions are usually printed on the
application form. One very common condition is that in case of over-subscription, the number
of shares allotted to each shares subscriber will be proportionately less than the number of
share applied for.
4.c By the proper authority: The allotment of shares is to be done by the BODs of the co.
Allotment can be delegated to some persons or a Committee, provided there is a provision in
the Articles of the co.
5.c Within a reasonable time: The allotment must be made within a reasonable time, otherwise
the applicant is not bound to take the shares.
6.c Application in a fictitious name: Any person who (a) makes in a 777fictitious name an
application to a co. for acquiring, or subscribing for, any shares therein, or (b) otherwise
includes a co. to allot, or register any transfer of, shares therein to him, or any other person in a
fictitious name shall be punishable by imprisonment up to 5 years. This provision must be
printed in every prospectus and application form-Sec 68A.
Define Shares

In finance a share is a unit of account for various financial instruments including stocks, mutual
funds, limited partnerships, and REIT's. In British Eng lish, the usage of the word share alone to
refer solely to stocks is so common that it almost replaces the word stock itself.

In simple terms, shares represent claims on the assets and earnings of a company and reflect
part ownership of the company. Depending on where in the world you are, shares may be more
commonly referred to by other terms such as "stocks" or "equities".

While owning shares in a company grants part-ownership in the company and reflects a claim
on the assets and earnings of such a company, in reality, most shareholders would rather not
have to exercise that right, since the claim on assets only becomes relevant in the event that a
company goes bankrupt. Even then, in the event of liquidation, the claims of those who hold a
company·s shares are merely residual claims on the assets of the company. That is,
shareholders only get to lay their hands on whatever is left after all creditors have been paid off.

Viewed in this way, the risk inherent in investing in shares becomes apparent. This brings us to
the key characteristics of stocks and shares.

What are the defining features of stocks and shares?

Decision-making and voting rights: holding shares grants voting rights, so shareholders have a
say in the election of the members of the Board of Directors;

Limited liability for shareholders: for each individual share holders, the maximum value at risk
is the total value of their investment in the shares of the company. This means that, unlike in a
partnership, ordinary shareholders are not personally liable for the debt of a company in the
event of bankruptcy;

Loss absorption for other (debt) investors and other creditors: it is important to understand that
shares come last in the ranking of a company·s capital structure and shareholders only hold a
residual claim. This means that in a liquidation, shareholders only get back their money if there
is anything left over after creditors have been settled. In most cases, the shares are usually
worthless in the event of bankruptcy or liquidation;

Uncertain returns: while many companies pay out dividends to shareholders, there is no
obligation on companies to do so. Indeed, there is no guarantee of returns in any form to
shareholders. However, in return for this degree of uncertainty and risk, shares carry higher
expected returns over the long term than most investments. This forms the basis of the
relationship between risk and return for investors in stocks and shares.

Classification of Share

The company Act of 1956 provides that after the commencement of the act there can be only
two types of shared capital

ë c Equity Shares

Equity share capital is also referred to as ordinary shares and in Indian context it is defined
by section 85 (2) of the companies act 1956. They are the real risk-takers and care-takers of
the company and they enjoy the right of votingEquity shares are the shares which carry
voting rights. They do not carry a fixed rate of dividend. Their dividend depends upon the
volume of profits available for distribution. They get high dividend when the company
makes good profits but they do not get anything when the profits are inadequate. They do
not get their dividend or refunds of share capital before preference share holders are paid.

2. Preference share capital

"Preference share capital" means, with reference to any company limited by shares, whether
formed before or after the commencement of this Act, that part of the share capit al of the
company which fulfils both the following requirements, namely :-

(a) that as respects dividends, it carries or will carry a preferential right to be paid a fixed
amount or an amount calculated at a fixed rate, which may be either free of or subject to
income-tax; and
(b) that as respect capital, it carries or will carry, on a winding up or repayment of capital, a
preferential right to be repaid the amount of the capital paid-up or deemed to have been paid up,
whether or not there is a preferential right to the payment of either or both of the following
amounts namely :-

(i) any money remaining unpaid, in respect of the amounts specified in clause (a), up to the date
of the winding up or repayment of capital; and

(ii) any fixed premium or premium on any fixed scale, specified in the memorandum or articles
of the company.

What's good about preference shares

1. You are assured of a dividend

If you own ordinary shares, you are not automatically entitled to a dividend every year. The
dividend will be paid only if the company makes a profit and declares a dividend. This is not the
case with preference shares. A preference shareholder is entitled to a dividend every year.

What happens if the company doesn't have the money to pay dividends on preference shares in
a particular year?

The dividend is then added to the next year's dividend. If the company can't pay it the next year
as well, the dividend keeps getting added until the company can pay. These are known as
cumulative preference shares.

Some preference shares are non-cumulative -- if the company can't pay the dividend for one
particular year, the dividend for that year lapses.

2. They get priority over ordinary shares

Ordinary shareholders get a dividend only after the cumulative preference shareholders get
theirs. Preference shareholders are given a preference over the rest. That's why it is called a
preference share.

3. Preference shares are safer

In case the company is wound up and its assets (land, buildings, offices, machinery, furniture,
etc) are being sold, the money that comes from this sale is given to the shareholders.
Preference shareholders' get the money first. Their accounts are settled before that of the
ordinary shareholders, who are the last to get paid.

There are various categories of preference share:

ù Cumulative: If a dividend is not paid in one financial year (e.g. due to lack of p ), it will
accumulate until the profits are sufficient to pay the dividend The accumulated dividends must
be given priority over distributions to other shareholders

ù Non-Cumulative: Do not carry an accumulative right .If a dividend is not paid, not made up on
subsequent years fi the right to receive a dividend depends on the amount of profit in that year

ù Participating :Carry the right to a dividend at a nominated rate, and a right to participate in any
further distribution if and only if there are any surplus of profits

ù Presumption that preference shares are not participating shares, and if the participating
shares are to participate in the surplus profits, this right must be expressly stated.

Preference Shares can be classified as stated below.

1. Cumulative or Non-Cumulative: In the case of cumulative preference shares, if the profit made
by the company in a particular year is not sufficient to pay dividend at the prescribed rate, the
shortage must be made up out of the profits of succeeding years. The dividends accumulated.
In non-cumulative preference shares such shortage are not required to be made up. Dividends
which are not paid, do not accumulate but lapse.

2. Participating Preference Shares or Non-Participating Preference Shares: In the former type of

shares the shareholders gets a part of the surplus profits beyond the amount or rate prescribed
for them, if such surplus profits are available. In the other type of preference share, the
shareholders cannot participate in the surplus profits or in the assets in liquidation.

3. Convertible Preference Shares or Non-Convertible Preference Shares: The former types of the
shares can be converted into equity shares, provided there is a provision of such conversion in
the Articles of a company. The later types of shares do not have the right of such conversion.

4. Redeemable or Irredeemable: A preference share may be redeemable or irredeemable. The

former could be redeemed i.e., purchased back by the company, subject to the conditions laid
down in the articles and in the Act. All irredeemable preference shares are one which cannot be
purchased back.

Rights Of Shareholders:

The Companies Act gives various rights to the shareholders of a company. The important rights
are mentioned below.
1. A shareholder can attend and vote in the general meetings of the company. He is entitled to
receive notice of all such meetings.

2. The holder of a Share Warrant does not ordinarily posses the right to vote, but the article of a
company may give him that right.

3. A shareholder has certain rights in respect of accounts. A shareholder must be given a copy
of the balance sheet and the ´statutory reportµ in the case of the ´statutory meetingµ.

4. A shareholder is entitled to inspect the minutes of the proceedings of any general meeting
without any charge.

5. A shareholder has the right to inspect the register and index of numbers and debenture
holders and the annual returns, without any charge.

6. If the name of any member is, without sufficient cause, omitted from the register of members,
he can apply to the court for rectification of the register.

7. A shareholder can transfer his share, subject to any restrictions that may be contained in the
articles.

8. A shareholder can apply for winding up of the company under certain circumstances.

9. If surplus assets are available after winding up, they are to be distributed among
shareholders.

10. Preference shareholders are entitled to get dividends.

11. Shareholders have the right to apply to Central Govt. for relief and redress under certain
circumstances.
12. A shareholder, jointly with certain other members, can call an Extraordinary General Meeting
on Requisition.

13. A shareholder can avoid the contract of shares and claim damage, if there is any
misstatement or deliberate secrecy of a material fact in the prospectus.

14. The Articles of Association of a company may give various other rights and privileges to the
shareholders.

Liabilities And Duties Of Shareholders:

Liabilities: The liability of a shareholder depends on the type of the company.

In a Company Limited by Shares, the shareholder is not liable to pay anything more than the
nominal value of the share, whatever may be the liabilities of the company.

In a Company Limited by Guarantee, the shareholder is liable to up to the amount of the

guarantee and the nominal value of the share.

In an Unlimited Company, the shareholder is liable to an unlimited extent for the debts of the
company.

Duties and Obligations: A shareholders has certain duties and obligations. They are
summarized below:

1. A shareholder must pay the unpaid amount due on the share, when calls are made.
2. In case of liquidation of a company the shareholders are to be placed in the list of
contributions-Sec. 426.

3. In certain cases a transferor of a share is still liable for the unpaid shares of a company.

4. The memo and the articles constitute a binding contract between the shareholder and the
company.-Sec. 36.

5. All the shareholders are bound to follow the decision of the majority of the shareholders,
unless the majority is guilty of mismanagement and oppression.-Sec.397, 398.

7. Cases of unlimited liability-(a) Under the Articles, directors and managers can be made liable
to an unlimited extent.

(b) If the member of membership of the company falls to below 7 in public companies and below
2 in private company, the exiting members become liable for the debts of the company to an
unlimited extent-Sec 45.

Definition of ´Memberµ

According to Section 41 of the Act, the term ´memberµ of a company means-

(1)c the subscribers of the memorandum of the company, and

(2)c every other of the memorandum of the company, and whose name is entered in its
register of members.

How is membership created?

A person can become member of a company in any one of the following ways-

1. Signature: By signing the memorandum of association before it is presented for registration.

2. Allotment: By getting an allotment of shares and having his name included in the register of
members.

3. Transfer: By getting transfer of shares from an existing member and having the transfer
recognized by the company.

4. Transmission: By obtaining shares by inheritance from a decreased member and getting his
name included in the register of members.

5. Acquiescence

Who can be a member?

Minor: An agreement by a minor is void in India. Therefore, a minor cannot apply for and be a
member of a company. But where a minor was made a member and, after attaining majority, he
received and accepted dividends, he will be stopped from denying from denying that he is a
member.

Company: A company can be a member of a company. But a subsidiary company cannot be a

member of its holding company, except where the subsidiary company comes in as the legal
representative of a decreased member.-Sec. 42.

Creditor: A person, to whom shares have been transferred by the way of security, becomes a
member of the company and is liable as such.

Fictitious person: It is a punishable offence to apply for allotment of shares, or for the
registration of transfer of shares, or for the registration of transfer in a fictitious name.

-Sec. 68A.

Trustee: A company will not register notice of any trust. A trustee who buys shares will be
treated as a member in his individual capacity.-Sec. 153.

How membership ceases?

The membership of a person in a company may terminate in any one of the following ways -
1.c By death.

2.c By insolvency.

3.c By rescission.

4.c By forfeiture.

5.c By a surrender.

6.c By transfer.

7.c By sale.

8.c By power of lien.

9.c By a mortgage.

10.c By redemption.

11.c By winding up.