Introduction

We often see that there is a lot of confusion in understanding the concept of authorised share capital and share capital in general. This article looks to clarify the concept and throw some light on the idea of share capital. The authorized capital of a company (referred as authorized share capital or nominal capital) is the maximum amount of share capital that the company is authorized by its constitutional documents to issue and allocate to shareholders. Part of the authorized capital can remain unissued. The authorized capital can be changed with shareholders‘ approval. The part of the authorized capital which has been issued to shareholders is referred as issued share capital of the company.

The authorised capital of any company is mentioned in the capital clause of Memorandum of Association (MOA) of the company under the laws of India.

Authorized share capital is often not fully used by management in order to leave room for future issuance of additional securities in case the company needs to raise capital quickly.

What is Share Capital?

Share capital consists of all funds raised by a company in exchange for shares unless issued at a premium. Authorised share capital is usually divided into the following three categories.

  • Issued Capital: The amount of capital for which shares have been issued.
  • Subscribed Capital: The amount of issued capital which has been subscribed for.
  • Paid up Capital: Paid-up capital is the amount of money a company has received from shareholders in exchange for shares.

There can also be partly paid up shares as well.
By now we understand that the funds are raised by a company in exchange for shares. The shares are usually issued at a certain price. The price at which the Company is willing to issue its shares is called share price. Shares can be issued at par value and premium.

What is the difference between par value and issuance of shares at a premium?

  • Par value: The par value is the nominal value of a share which appear on share certificates and other chartered documents of the company. A company cannot issue shares below the nominal value as this will amount to issue of shares at discount.
  • Shares issued at premium : When a company issues shares at a price higher than the face value (also called par value or nominal value), it is called an issue of shares at a premium. Companies that are financially strong, well- managed and have a good reputation in the market issue their shares at a premium.

What are the various kinds, classes of shares?

Understanding the different classes of shares which a company can issue is critical as each of them confers different rights to shareholders, such as voting power and the right to dividends or capital:

  • Ordinary shares: Most companies only have one kind of shares, called ordinary shares. Ordinary shares represent the company’s basic voting rights and reflect the equity ownership of a company.
  • Preference shares: Shares in this category receive a fixed dividend, which means that a shareholder would not benefit from an increase in the business’ profits.
  • Cumulative preference shares which give holders the right that, if a dividend cannot be paid one year, it will be carried forward to successive years. Dividends on cumulative preference shares must be paid, despite the earning levels of the business, provided the company has profits that can be distributed.

Subclassification of aforesaid share can be done and can be labelled with alphabet letters (like A, B, C, D, etc), depending on the number of subgroups, a company wishes to create, each class conferring different voting rights, rights to dividends and rights to capital. Thus it enable companies to enhance or restrict certain shareholders’ rights. For example, ”A shares” can have a greater rate of dividend than ”B shares”, so that for the same number of shares, owners of A shares receive more than owners of B shares.

Various rights attached to shares

In common parlance and pursuant to the concepts under the Indian law’s, preference shares can be seen issued to the investors with the following rights:

  • Rate of Dividend: Preference shareholders are paid fix rate of dividend whereas for equity shareholder’s dividend may vary depending upon the profits.
  • Arrears of Dividend: Preference shareholders get accumulated for cumulative preference shares whereas for equity shareholder there is no accumulation.
  • Preferential Rights: Preference shareholders have preferential rights before equity shareholders.
  • Winding up: Preference shareholders have a right to return of capital before equity shares. This means Preference shareholders are safer whereas equity shareholders are paid only when preference share capital is paid fully.
  • Anti- Dilution: Anti-Dilution provision is a clause that gives an investor the right to maintain the same percentage ownership of a company by purchasing a proportional amount of shares in the future when securities are issued. In venture capital, dilution is a concern for preference shareholders, as a later issue of share at a price lower than their current shares would dilute their total ownership. Anti-dilution clauses prevent this from occurring by adjusting the conversion price between preference shares and equity shares.
  • Liquidation preference: A liquidation preference allows preference shareholders on priority to recover their investment if the company is sold or undergoes some other exit event. It is a security measure to mitigate the investor’s risk of financial loss as compared to other shareholders. Basically, the investors get paid ahead of other shareholders. A liquidation preference clause is usually incorporated into a shareholder’s agreement by an investor (such as a business angel or venture capital firm) as a risk reduction tool in case the business fails but still has value in it.

The authorised share capital can be therefore accordingly be reclassified into equity and preference capital.

Concept of reclassification of share capital

Reclassification of shares is the process of converting issued shares from one class into another. A reclassification of shares is also frequently accompanied by an alteration or variation of the rights of the newly re-classified shares. For example, newly created A & B shares may, going forward have different voting rights, rights to dividends or capital on a winding up. The process of altering the rights attaching to shares requires the company to obtain relevant class (shareholder) consent. Reclassification can be done by conducting board meetings, resolutions, class consents, new articles of association.

Certain fees which are directly connected to the authorized share capital:

We understand that there are various fees to be paid at the time of incorporation and further for increase in authorised share capital of the company such as:

MOA registration fee:

For company other than One Person Company (OPC) and Small Companies minimum amount to be paid for the registration of MOA is Rs. 5,000 and maximum Rs. 2, 06,000 + Rs. 75 for every Rs. 10,000 or part thereof.

For OPC and Small Companies minimum amount to be paid for the registration of MOA is Rs. 2,000 and maximum Rs. 2,000 + Rs. 200 for every Rs. 10,000 or part thereof;  Note: At the time of increasing the authorized capital, if fee payable on increased authorized capital is exceeding Rs. 2,50,00,000/- (Rupees Two Crore and Fifty Lakhs) then the fee applicable will be limited to Rs. 2,50,00,000/- (Rupees Two Crore and Fifty Lakhs).

For increasing the authorized share capital, the difference between fee applicable on the increased share capital and fee applicable on existing authorized capital, at the rates prevailing on the date of filing the notice, will be payable.

However, in case of ‘OPC’ or ‘Small Company’ increasing the paid-up capital beyond Rs. 50,00,000 (Rupee Fifty Lakhs), the fee payable will be equal to the difference of fee applicable on increased authorized capital as per normal company rates and fee applicable on existing authorized capital as per fee rate applicable to OPC or Small Company.

ROC filing fees:

Depending on the nominal capital ROC filing fees varies such as:

  • For filing annual return minimum amount charged by ROC is Rs. 200 and maximum Rs. 600 depending on the authorized capital of the Company;
  • For filing PAS-3 minimum amount charged by ROC is Rs. 200 and maximum Rs.1,000 depending on the authorized capital of the Company.
  • Whereas in case of company does not have share capital filing fees is Rs. 200 for both annual return and PAS-3.

There are different thresholds for determining the filing fees.

Stamp duty:

For enhancement of authorized capital or for registration of a new company, an additional stamp duty will be paid, which varies from state to state. However, the rate of stamp duty is lowest in Delhi and Highest in Punjab, which varies on the condition if companies having share capital or not having share capital.

Conclusion:

Today majority of the Startups are unable to pay significant amount of fee to the Ministry of Corporate Affairs for incorporation of a company with an authorised capital commensurate to the investment in the company. Once, the private limited company starts scaling-up operations, authorised capital of the company is raised, and additional shares are issued. The minimum requirement of the paid-up capital has been omitted w.e.f. May 29, 2015. Accordingly, no minimum paid-up capital requirements will now apply for private limited registration as well as public companies in India. There is no minimum capital requirement and hence no burden of putting in such a large amount, as previously required, into the company bank account. This amount can be introduced as per the convenience of the business owners.

This material and the information contained herein prepared by Algo Legal is intended to provide general information on a subject or subjects and is not an exhaustive treatment of such subject(s). Algo Legal is not, by means of this material, rendering professional advice or services. The information is not intended to be relied upon as the sole basis for any decision. Algo Legal shall not be responsible for any loss whatsoever sustained by any person who relies on this material.

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