Company Accounts Accounting for Share Capital Class 12
Issue of Shares
Meaning of a Company:
Section 2(20) of the Companies Act 2013 defines the term 'company' to mean “a company incorporated under the Companies Act 2013 or any previous company law.” A company, abbreviated as co., is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise.
Characteristics of a company:
- Separate Legal Entity: The company is distinct and different from its members in law. It has its own seal and its own name, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, having a bank account, entering into contracts and suing and being sued separately in its own name.
- Limited Liability: The total liability of the members of the company is limited upto the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him.
- Perpetual Succession: Insolvency or Death of member does not affect the existence of the company. A company does not cease to exist unless it is specifically wound up. Membership of a company may keep on changing from time to time but that does not affect life of the company.
- Separate Property: A company is a distinct legal entity.
- Transferability of Shares: The Capital of the company is divided into parts, called Shares. When a member transfers his shares to another person, the transferee acquires all the rights of the transferor in respect of those shares.
- Common Seal: A company is an artificial person and does not have a physical presence. Thus, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force.
- Capacity to sue and being sued: A company can sue or be sued in its own name.
- Separate Management: A company is administered and managed by its managerial personnel i.e. the Board of Directors.
- One Share-One Vote: The principle of voting in a company is one share-one vote i.e. if a person has 5 shares, he has 5 votes in the company.
Types of Companies on the basis of Liability
- Unlimited Company
- Company limited by Guarantee
- Company Limited by Shares:
- Unlimited Company: As per section 2 (92) of the companies act 2013, a company having no limitation on the liability of its members is an unlimited company. Hence members required to meet the needs of the company without any limit over their liability at the time of liquidation. They are liable to cover its debts fully. Therefore the personal property of members can be used for recovering the debts of the company.
- Company limited by Guarantee: A company which does not have share capital is a company limited by guarantee. The profits that are earned are again re–invested.
- Company Limited by Shares: Companies limited by shares are defined under section 2(22) of the companies act 2013. The members have their liability limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them. No member of a company limited by shares can be called upon to pay more than the nominal value of the shares held by him. They can be further divided into 3 categories:
- Public Limited Company: A Public Limited Company under Company Act 2013 is a company that has limited liability and offers shares to the general public. It’s stock can be acquired by anyone, either privately, through (IPO) initial public offering or via trades on the stock market. A Public Limited Company is strictly regulated and is required to publish its true financial position to its shareholders.
- Private Limited Company: Section 2(68) of Companies Act, 2013 defines private companies. According to that, private companies are those companies whose articles of association restrict the transferability of shares and prevent the public at large from subscribing to them. This is the basic criterion that differentiates private companies from public companies.
- One Person Company: Section 2(62) of Companies Act defines a one person company as a company that has only one person as its member. So, an OPC is effectively a company that has only one shareholder as its member.
Difference between Private Company and Public Company:
|
BASIS |
PRIVATE COMPANY |
PUBLIC COMPANY |
|
Meaning |
A private company is a company which is owned and traded privately. |
A public company is a company which is owned and traded publicly |
|
Minimum members |
2 |
7 |
|
Maximum members |
200 |
Unlimited |
|
Minimum Directors |
2 |
3 |
|
Public subscription |
Not allowed |
Allowed |
|
Suffix |
Private Limited |
Limited |
|
Transfer of shares |
Restricted |
Free |
MEANING OF SHARES
Total Capital of the company is divided into units of small denominations. Each such unit is called a 'share'. A unit of ownership that represents an equal proportion of a company's capital. It entitles its holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the company's debts and losses.
Types of Shares:
According to Section 43 of the Companies Act, 2013, the share capital of a company is of two types:
- Preferential Share Capital
- Equity Share Capital
- Preferential Share Capital:
The preferential share capital is that part of the Issued share capital of the company carrying a preferential right for:
- Payment of Dividend – A fixed amount or amount calculated at a fixed rate.
- Repayment – In case of a winding up or repayment of the amount of paid-up share capital, there is a preferential right to the payment over Equity shareholders.
Types of Preference Share Capital:
i) Cumulative preference shares:
A preference share is said to be cumulative when the arrears of dividend are cumulative and such arrears are paid before paying any dividend to equity shareholders.
(ii) Non-cumulative preference shares:
In the case of non-cumulative preference shares, the dividend is only payable out of the net profits of each year. If there are no profits in any year, the arrears of dividend cannot be claimed in the subsequent years. The dividend of a year lapses if the dividend on the preference shares is not paid by the company during a particular year.
(iii) Participating preference shares:
Participating preference shares are those shares which are entitled, in addition to preference dividend at a fixed rate, to participate in the balance of profits with equity shareholders after they get a fixed rate of dividend on their shares. The participating preference shares may also have the right to share in the surplus assets of the company on its winding up.
(iv) Non-participating preference shares:
Non- participating preference shares are entitled only to a fixed rate of dividend and not a share in the surplus profits. The preference shares are presumed to be non-participating, unless expressly provided in the memorandum or the articles or the terms of issue.
(v) Convertible preference shares:
Convertible preference shares are those shares which can be converted into equity shares within a certain period.
(vi) Non-Convertible preference shares:
These are those shares which do not carry the right of conversion into equity shares.
(vii) Redeemable preference shares:
A company limited by shares, may if so authorised by its articles, issue preference shares which are redeemable. Shares may be redeemed either after a fixed period or earlier at the option of the company.
(viii) Irredeemable Preference shares:
An Irredeemable Preference Share is a kind of preference share which have no maturity period to be redeemed. Means the investors of such shares will not get their capital back unless the company is liquidated (or wound up).
The Companies Act, 2013 does not allow any company to issue irredeemable preference shares. All preference shares issued by a company in India must be redeemable and should be redeemed within a period of 20 years from the date of its issue.
- Equity Share Capital (Equity Shares):
All share capital which is not preferential share capital is Equity Share Capital.