What are Shares in Company Law?
Shares form the foundation of corporate structure and capital formation. They represent the means through which individuals contribute to the capital of a company and, in return, acquire ownership rights. In company law, shares are not merely financial instruments but legal rights that define the relationship between the company and its members. The Companies Act, 2013 lays down detailed provisions governing the nature, types, allotment, transfer, and regulation of shares to ensure transparency and protection of stakeholders.
This article explains the meaning, nature, types, and legal framework relating to shares in company law in a structured and simplified manner.
The capital of a company is divided into small units of a fixed value. Each such unit is called a share. According to Section 2(84) of the Companies Act, 2013, a “share” means a share in the share capital of a company and includes stock.
A share does not merely represent a sum of money. It represents an interest in the company measured in terms of money. The Supreme Court, in CIT v. Standard Vacuum Oil Co. [1966] Comp. LJ 187, clarified that a share is an interest made up of diverse rights conferred upon its holder under the articles of association, which operate as a contract between the shareholder and the company.
Further, in Bucha F. Guzdar v. Commissioner of Income-tax, Bombay LR 617 (SC), it was observed that a share is a right to participate in the profits of the company while it is a going concern and in its assets upon winding up.
Thus, a share represents a bundle of rights and obligations. It reflects both ownership in the company and the legal relationship between the shareholder and the company.
The concept of a share extends beyond ownership and includes several legal characteristics. These aspects explain the true nature of shares in company law.
A share embodies a collection of rights and liabilities. It entitles the shareholder to participate in profits, vote on corporate matters, and claim a share in the assets during winding up. At the same time, it imposes obligations, such as payment of unpaid amounts on shares.
In Borland’s Trustees v. Steel Bros. & Co. Ltd. [1901] 1 Ch. 279, it was explained that a share is not a sum of money but an interest measured by money, consisting of mutual covenants among shareholders.
A share is regarded as a chose-in-action, meaning it represents a right that can be enforced through legal action rather than physical possession. It does not exist as a tangible object but as a legal right attached to a member of the company.
Section 44 of the Companies Act, 2013 provides that shares are movable property and are transferable in the manner prescribed by the articles of association. This characteristic enables shareholders to transfer their ownership interest, subject to legal and contractual restrictions.
Under Section 2(7) of the Sale of Goods Act, 1930, goods include movable property, including stocks and shares. Therefore, shares are treated as goods in law. However, they differ from ordinary goods because they are intangible and created through legal processes.
A share is intangible in nature. It does not have physical existence and cannot be equated with ordinary movable property like goods or commodities. In Vishwanathan v. East India Distilleries [1957] 27 Comp. Cas. 175, it was held that a share is incorporeal and consists merely of a bundle of rights and obligations.
A share is not a negotiable instrument. Its transfer requires compliance with statutory provisions and the articles of the company, and it does not pass by mere delivery.
A share reflects a proprietary relationship between the shareholder and the company. In CIT v. Associated Industrial Development Co. [1969] 2 Comp. LJ 19, it was recognised that a share represents ownership interest in the company.
The nature of a share can also be understood through its stages. In Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.), it was observed that a share may exist in different phases:
- As part of the authorised capital before allotment
- As a recognised interest once allotted to a member
- As stock when converted
This analysis highlights that a share evolves from a mere unit of capital to a legally recognised proprietary interest.
A share certificate is only evidence of ownership and not the share itself. It serves as prima facie proof of title but does not constitute the share.
Shares are broadly classified into two main categories under company law, each serving different purposes and offering different rights.
Equity shares represent the basic form of ownership in a company. Equity shareholders are the real owners and enjoy voting rights in matters relating to corporate governance.
Equity shareholders receive dividends depending on the profits of the company. The return is not fixed and varies based on the performance of the company. As a result, equity shares carry higher risk but also offer the possibility of higher returns.
They also have the right to participate in the surplus assets of the company after all liabilities have been settled during winding up.
Preference shares provide certain preferential rights over equity shares. These shareholders receive a fixed rate of dividend and have priority in payment of dividends and repayment of capital.
Generally, preference shareholders do not have voting rights, except in specific circumstances. These shares may be redeemable or convertible, depending on the terms of issue.
Companies may issue different forms of shares based on their requirements:
- Redeemable shares: These shares can be repurchased by the company after a specified period.
- Convertible shares: Preference shares that can be converted into equity shares under certain conditions.
- Bonus shares: Additional shares issued to existing shareholders without any consideration, usually out of accumulated profits.
Share allotment is the process by which a company allocates shares to applicants. It marks the creation of a legal relationship between the company and the shareholder.
The process generally involves:
- Application: Individuals apply for shares through public offerings or private placement.
- Allotment decision: The board of directors decides the allocation of shares based on availability and company requirements.
- Issue of shares: After allotment, the company issues share certificates or records ownership in dematerialised form.
The process is regulated to ensure fairness and transparency.
Shares, being movable property, are generally transferable. In public companies, shares are freely transferable, while private companies may impose restrictions through their articles.
The transfer process involves:
- Agreement between transferor and transferee
- Execution of transfer instrument (such as Form SH-4)
- Approval by the board in case of private companies
- Entry of the transferee’s name in the register of members
Transferability ensures liquidity and flexibility in ownership.
Ownership of shares grants several rights and imposes corresponding obligations.
- Voting rights: Equity shareholders can vote on important corporate matters.
- Right to dividend: Shareholders are entitled to dividends when declared.
- Right to inspect records: Members can access certain company records.
- Right to sue: Legal action may be taken against mismanagement or breach of duty.
- Right to share in assets: On winding up, shareholders have a residual claim over assets.
Shareholders are liable to pay any unpaid amount on shares held by them. Their liability is generally limited to the extent of their shareholding in a company limited by shares.
They are also expected to act in a manner that does not harm the interests of the company.
Companies raise capital through the issue of shares. The main methods include:
- Initial Public Offering (IPO): First offer of shares to the public.
- Follow-on Public Offer (FPO): Additional issue of shares after IPO.
- Rights issue: Offer of shares to existing shareholders at a concessional price.
- Private placement: Issue of shares to a selected group of persons.
These methods help companies raise funds for expansion and operations.
Shares may be forfeited when a shareholder fails to pay the required amount. The company must follow due procedure, including issuing a notice.
After forfeiture, the company may reissue the shares to other investors, often at a price determined by the company.
Buyback refers to the repurchase of shares by the company from its shareholders. This reduces the number of outstanding shares and may increase the value of remaining shares.
It is often used to return surplus funds to shareholders and must comply with statutory provisions and approval requirements.
Conclusion
Shares are a fundamental concept in company law, representing both ownership and legal rights in a company. They are not merely financial instruments but complex legal constructs that embody a bundle of rights and obligations. The Companies Act, 2013 provides a comprehensive framework governing their nature, classification, and management.
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