Calls on Shares

Share capital forms the backbone of a company’s financial structure. When a company issues shares, the total issue price is not always collected at once. Instead, the company may receive the amount in stages such as application, allotment, and subsequent calls. The unpaid portion of the share capital is recovered through what is known as “calls on shares.”

Calls on shares represent a crucial mechanism that allows companies to manage their capital requirements efficiently while providing flexibility to shareholders in making payments. The concept also reflects the contractual relationship between the company and its shareholders, where shareholders undertake an obligation to pay the unpaid amount when demanded.

Meaning of Calls on Shares

Calls on shares refer to the demand made by a company on its shareholders to pay the unpaid portion of the issue price of shares. After receiving application and allotment money, the company may require the remaining amount to be paid in instalments. These instalments are known as calls.

The unpaid amount forms part of the total issue price of shares or debentures issued by the company. Shareholders are legally bound to pay this amount when called upon by the company.

The concept is based on the principle that shareholders, by subscribing to shares, agree to pay the full value of those shares. However, the company may choose to collect the amount in stages for practical and financial reasons.

Nature and Characteristics of Calls on Shares

Calls on shares possess certain defining characteristics that distinguish them from other financial transactions:

• Part of Share Capital: Calls represent the unpaid portion of the share capital that becomes payable upon demand. It is not a separate liability but forms part of the agreed issue price.
• Contractual Obligation: The obligation to pay calls arises from the contract between the company and the shareholder. Once shares are allotted, the shareholder is bound to comply with the terms of payment.
• Discretion of the Company: The company, through its Board of Directors, has the discretion to decide when and how calls are to be made, subject to the provisions of the Companies Act and the Articles of Association.
• Uniform Application: Calls must generally be made on a uniform basis for all shareholders holding shares of the same class, ensuring fairness and equality.
• Enforceability: Non-payment of calls gives the company the right to take legal action, charge interest, or even forfeit shares, depending on the governing provisions.

Types of Calls on Shares

Calls on shares are generally classified based on the stage at which the demand is made. These include:

First Call

The first call is usually made to collect the unpaid balance remaining after application and allotment. In many cases, the company may demand the entire remaining amount in the first call itself.

Where the entire balance is collected at this stage, the first call effectively becomes the final call. This simplifies the process and ensures that the shares become fully paid at an early stage.

Second Call

If the company chooses to collect the unpaid amount in instalments, additional demands are made after the first call. These subsequent demands are referred to as second calls.

The second call represents an intermediate stage of payment and allows the company to stagger its capital collection based on financial needs.

Last Call

The last call refers to the final instalment demanded by the company to fully realise the unpaid share capital. Once this call is paid, the shares become fully paid-up.

The last call marks the completion of the shareholder’s financial obligation in respect of the shares.

Legal Framework Governing Calls on Shares

Calls on shares are governed by the provisions of the Companies Act, 2013 and the Articles of Association of the company. While the Act provides the broad legal framework, the detailed procedures are typically specified in the Articles.

Role of Articles of Association

The Articles of Association play a significant role in regulating calls on shares. They generally provide:

• The authority of the Board to make calls
• The manner and timing of calls
• The amount payable on each call
• The notice period to be given to shareholders
• The rate of interest on unpaid calls
• Consequences of default

The Articles ensure that the process of making calls is structured and transparent.

Statutory Principles

Although the Act does not prescribe detailed procedural rules for calls, certain principles are well recognised:

• Calls must be made in good faith and for the benefit of the company
• They must be in accordance with the provisions of the Articles
• Shareholders must be given proper notice
• The demand must be reasonable and not arbitrary

Authority to Make Calls

The power to make calls on shares lies with the Board of Directors. This authority is exercised through resolutions passed by the Board.

Role of the Board of Directors

The Board is responsible for:

• Determining the necessity of making a call
• Deciding the amount to be called
• Fixing the due date for payment
• Issuing notices to shareholders

The Board must act in accordance with the Articles of Association and in the best interests of the company.

Role of General Meetings

While the Board primarily exercises the power to make calls, the overall authority is derived from the governance structure of the company, including resolutions passed in general meetings. The Board’s actions must align with the policies and decisions approved by the shareholders.

Procedure for Making Calls

The process of making calls on shares involves several steps to ensure compliance and transparency:

Passing of Board Resolution

The first step is the passing of a resolution by the Board of Directors authorising the call. The resolution specifies:

• The amount of the call
• The class of shares affected
• The due date for payment

Issuance of Call Notice

A notice is sent to shareholders informing them of the call. The notice generally includes:

• The amount payable
• The due date
• The place and mode of payment

Adequate notice must be given to allow shareholders to make the payment.

Payment by Shareholders

Shareholders are required to pay the call amount within the specified time. Payment completes the obligation in respect of that instalment.

Calls During the Lifetime and Winding Up of the Company

Calls on shares can be made at any time during the existence of the company. This includes:

• During the normal course of business
• At times of financial requirement
• Even during the process of winding up

Calls in Winding Up

During winding up, calls may be made to recover unpaid capital in order to meet the company’s liabilities. This ensures that creditors are paid and the company’s obligations are fulfilled.

Unpaid share capital is treated as a potential asset of the company, which can be realised through calls during winding up.

Consequences of Non-Payment of Calls

Failure to pay call money results in several legal and financial consequences for shareholders.

Liability to Pay Interest

Where a shareholder fails to pay the call amount within the stipulated time, interest may be charged on the unpaid amount. The rate of interest is typically specified in the Articles and may be up to 10% per annum.

This provision acts as a deterrent against default and compensates the company for the delay.

Loss of Rights

Non-payment of calls may result in the suspension of certain rights of the shareholder, such as voting rights or the right to receive dividends, depending on the company’s rules.

Forfeiture of Shares

In cases of persistent default, the company may have the power to forfeit the shares. Forfeiture results in the termination of the shareholder’s interest in those shares.

Legal Action

The company may also initiate legal proceedings to recover the unpaid amount. The shareholder remains liable for the amount due.

Calls on Shares and Corporate Governance

Calls on shares play an important role in corporate governance and financial management.

Ensuring Capital Discipline

By allowing capital to be collected in stages, calls help in maintaining financial discipline. The company can raise funds as and when required rather than collecting the entire amount upfront.

Protecting Shareholder Interests

The structured process of making calls ensures that shareholders are treated fairly. Uniformity in calls prevents discrimination among shareholders of the same class.

Enhancing Financial Flexibility

Calls provide flexibility to both the company and shareholders. The company can align its capital requirements with its business needs, while shareholders can manage their financial commitments over time.

Distinction Between Calls and Other Share Payments

It is important to distinguish calls on shares from other related concepts:

• Application Money: Paid at the time of applying for shares.
• Allotment Money: Paid when shares are allotted.
• Calls on Shares: Paid after allotment to collect the remaining unpaid amount.

This distinction helps in understanding the stages of share capital collection.

Conclusion

Calls on shares constitute an essential aspect of company law and corporate finance. They represent the mechanism through which a company recovers the unpaid portion of its share capital in a structured and regulated manner. By allowing payments to be made in stages, calls balance the financial needs of the company with the convenience of shareholders.

The authority to make calls rests with the Board of Directors, subject to the provisions of the Articles of Association and the broader legal framework. Proper procedures, including the passing of resolutions and issuance of notices, ensure transparency and fairness in the process.