assignment of share capital

Share Capital

The cash invested by shareholders and investors

What is Share Capital?

Share capital (shareholders’ capital, equity capital, contributed capital, or paid-in capital) is the amount invested by a company’s shareholders for use in the business. When a company is first created, if its only asset is the cash invested by the shareholders, the balance sheet is balanced with cash on the left and share capital on the right side.

Share capital is a major line item but is sometimes broken out by firms into the different types of equity issued. There can be common stock and preferred stock, which are reported at  their par value or face value.  Note that some states allow common shares to be issued without a par value.

Share capital is separate from other types of equity accounts. As the name “additional paid-in capital” indicates, this equity account refers only to the amount “paid-in” by investors and shareholders, and is the difference between the par value of a stock and the price that investors actually paid for it.

Share Capital and the Balance Sheet

Through the fundamental equation where assets equal liabilities plus equity, we can see that assets must be funded through one of the two. One method for a company to fund its assets is to create liabilities (borrow money or issue debt) and, therefore, create obligations that must be paid back. The other option is to issue equity through common shares or preferred shares. In exchange for an ownership interest claim to the company, the company receives cash from investors and shareholders.

Contributed Surplus and Additional Paid-in Capital

Share capital may also include an account called contributed surplus or additional paid-in capital .

Contributed Surplus is an accounting item that’s created when a company issues shares above their par value or issues shares with no par value. If a company raised $1 million from shares that had a par value of $100,000 it would have a contributed surplus of $900,000.  The par value of shares is essentially an arbitrary number, as shares cannot be redeemed for their par value.

Additional Paid-in Capital is the same as described above.

In summary, if a company issued $10 million of common shares with $100,000 par value, it’s equity capital would break down as follows:

• $100,000 Common Shares
• $900,000 Contributed Surplus (or Additional Paid-in Capital)
• $1,000,000 total share capital

More Resources

Thank you for reading CFI’s guide to Share Capital. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

• Balance Sheet Overview
• Debt Schedule
• Investment Methods
• Debt to Equity Ratio
• See all accounting resources
• See all capital markets resources
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• Corporations
• Definitions

Share capital (Best Overview: Definition, Types And Comparisons)

What is share capital ?

What are the different types of share capital?

How is it different from paid-up capital or authorized capital ?

In this article, we will break down the notion of “ share capital ” so you know all there is to know about it!

We will look at what is share capital , its accounting and legal definition , the different types of share capital, compare it with paid-up capital and authorized capital , see how it is reported on the balance sheet , look at concrete examples and more.

Be sure to read this entire post as we have amazing content in store for you!

We can’t wait to get started!

Are you ready?

Let’s dive right in!

Table of Contents

What is share capital

Share capital ( capital stock , contributed capital or equity capital ) represents the sum of money a corporation has raised by issuing common stock or preferred stock or other types of equity securities.

Most often, a company receives cash in exchange for issuance shares.

However, the share capital can represent the value of either cash or any other consideration received by the corporation.

Share capital does not include the value of redeemed shares , treasury shares or reserved stocks for future issuance.

It includes securities that have effectively been issued to shareholders and are in circulation and outstanding. 

Over time, the share capital of a company can increase or change as the company issues additional securities to shareholders. 

From an accounting perspective, companies must report how much money they received by issuing common or preferred stock on their balance sheet .

In the shareholder’s equity section of the financial statement, you will typically find the following line items or accounts:

• Common stock capital
• Preferred stock capital
• Additional paid-in capital 

These line items combined represent a company’s equity share capital.

The term “share capital” has a particular meaning to lawyers and a slightly different meaning to accountants.

Let’s look at the legal definition of share capital followed by the accounting definition.

Share capital legal definition

Share capital definition can be summarized as either:

• The total amount of money or consideration a company receives by selling securities
• The composition of the different types of securities outlined in a company’s constituting documents

From a legal point of view, a company’s share capital may be composed of:

• Common stocks
• Preferred stocks
• Other securities 

From an accounting point of view, share capital represents the amount of money a company receives for issuing securities as reported on its financial statements.

Share capital accounting definition

According to Investopedia, in accounting terms, share capital can be defined as follows:

It means the total amount raised by the company in sales of shares. Author

In accounting terms, share capital represents the total sum a company received in exchange for issuing equity securities to shareholders. 

Whenever a company sells stocks, it must record the amount it receives in its share capital.

The share capital is recorded in the company’s financial statements when the stocks are issued for the first time only. 

Future transactions on the same issued and outstanding stock will no longer be accounted for or recorded in the company’s financial statements.

Share capital types 

In this section, we will differentiate the following:

• Authorized capital
• Issued capital

Registered capital

Authorized capital .

The authorized capital (or authorized share capital ) represents the maximum amount of money a company can receive in issuing certain types of stock . 

For example:

Corporation A is authorized to raise up to a maximum authorized capital of $10,000,000 by issuing preferred stocks having a par value of $1 per stock. In other words, the company is authorized to issue up to 10,000,000 preferred stocks allowing it to raise up to a maximum of $10,000,000 in authorized capital. Author

• Issued capital 

Issued capital (or issued share capital ) represents the number of shares or stocks a company actually issued to shareholders.

Corporation A is authorized to raise up to a maximum authorized capital of $10,000,000 by issuing preferred stocks having a par value of $1 per stock. Company A issues 500,000 preferred stocks in total having a total par value of $500,000. In other words, out of the total authorized share capital of $10,000,000, the company has an issued capital of $500,000. Author

Registered capital is an alternative way of referring to authorized capital .

It represents the total amount of capital a company is authorized to receive by issuing stocks as permitted by its articles of incorporation.

Share capital vs paid-up capital 

What is the difference between share capital and paid-up capital?

This can be confusing to many so let’s clarify it.

Share capital represents the total value received by a company in exchange for issuing equity stocks to shareholders or investors. 

Paid-up capital is the value of the securities in excess of the par value (or premium) that is reported by a company in its financial statements.

Let’s look at an example to understand this.

Company A has sold 100,000 common stocks at a fair market value of $20 per share and having a par value (or nominal value) of $1 per share. For the issuance of the common stocks , Company A actually receives $2,000,000 in cash and for common stocks having a par value of $200,000. – Share capital common stocks: $200,000 – Paid-up capital common stocks: $1,800,000 Company A has also sold 20,000 preferred shares at a market value of $50 per share having a par value of $10 per share. For the issuance of the preferred stock , Company A actually receives $1,000,000 in cash for preferred stocks having a par value of $200,000. – Share capital preferred stocks: $200,000 – Paid-up capital preferred stocks: $1,800,000 In total, Company A will report the following on its balance sheet for all the securities issued (common stocks and preferred stocks in our example): – Common stock share capital: $200,000 – Preferred stock share capital: $200,000 – Total paid-up capital: $2,600,000 – Share capital : $3,000,000 Author

As a result, share capital represents the total funds raised by the company for issuing stocks and the paid-up capital represents the value received by the company in excess of the stock nominal value.

Authorized capital vs share capital 

A corporation’s authorized capital is the maximum value it can receive by issuing shares to shareholders in accordance with its articles of incorporation.

In legal terms , share capital represents the different types of securities a company is authorized to issue such as common stocks, preferred stocks, Class A stocks or other variations.

In accounting terms , share capital represents the total consideration or value received by a company by issuing shares or equity stock to shareholders.

Reporting of share capital 

Typically, companies report share capital on their balance sheet in the “ shareholder’s equity ” section.

When common shares are issued, the corporation will report the par value of the said shares in its financial statements to show the nominal value it received for issuing the shares.

The “ par value ” is an arbitrary amount that is allocated to the common shares (example: $1 or $10) and does not represent the “market value” or “fair market value”.

On the balance sheet (in the shareholder’s equity section), you are likely to see two line items :

• One line item showing the par value of the common stocks issued
• A second line item showing the par value of the preferred stocks issued.

You’ll also have a third line item for additional paid-up capital or contributed surplus .

“Additional paid-up capital” or “contributed surplus” is the difference between the actual value for which the common shares were issued and its par value.

Let’s look at an example to make sense of all of this.

Mary agrees to purchase 100 common shares of Company A at a total fair market value of $10,000. The par value of the common shares is $10 per share. On its balance sheet, the company will report: – $1,000 as “common stock share capital” ($10 par value per share X 100 shares purchased) – $9,000 as additional paid-up capital ($10,000 fair market value – $1,000 par value) Author

Share capital example

To enhance our understanding of share capital , it’s worth looking at a concrete example .

Let’s say Company ABC is looking to purchase a new production plant at a cost of $10,000,000.

Company ABC will issue preferred shares to fund the purchase of this plant.

As a result, it issues 100,000 preferred shares at $100 per share to investors representing the market value of the preferred shares. 

The preferred shares are assigned a par value of $10 per share.

The company will now need to report the $10,000,000 investment of cash on its balance sheet.

On the “ asset ” side of the balance sheet, the company records “ cash ” for $10,000,000.

On the “ equity ” side of the balance sheet, the company records “ share capital ” of $10,000,000 for this transaction composed of $1,000,000 in par value and $9,000,000 in contributed surplus or premium paid by investors over and above the par value of the shares.

Share capital FAQ

What does share capital mean

When stocks are issued, the par value is typically reported as a line item on the balance sheet and the difference between the actual issue price (or premium ) and the par value is reported as the additional paid-in capital.

Companies have an obligation to report the par value and additional paid-up share capital when the securities are first issued by the company ( primary market issuance).

Future transactions in the secondary market on the issued stocks are no longer recorded by the company in its financial statements.

What is paid-up capital

Paid-up capital or paid-in capital or even contributed capital is a measure of how much money shareholders have invested in a company since the company’s incorporation in exchange for an equity position.

A company needs $5,000,000 to expand its distribution capabilities. It raises $5,000,000 by issuing 100,000 common shares at $50 per share having a par value of $10. The company will record the receipt of $5,000,00 on its balance sheet as “cash” and will also record $5,000,000 in the share capital account. Within the share capital account, the paid-up capital will show a par value of $1,000,000 and an excess capital of $4,000,000. Author

What is authorized capital

Authorized capital is the total amount a corporation is authorized to receive in exchange for issuing shares to investors. 

For example, a company may be authorized to issue up to $10,000,000 of common shares to investors. 

If the company issues $2,000,000, then you can say that the company has a share capital of $2,000,000 and a remaining authorized capital of $8,000,000.

What is the difference between share capital and paid-up capital

Paid-up capital represents the value (or actual value) received by a company for selling its shares in the primary market in excess of the par value (or nominal value) of the shares issued. 

Share capital represents the value received by a company in exchange for issuing any type of equity stocks such as common shares or preferred shares.

Is share capital an asset

Share capital is not necessarily an asset but it is an accounting or reporting of share par value and premium received by a company.

When a company issues ordinary shares, common stocks or other forms of capital shares, the company typically receives cash in exchange for the securities issued.

For the company , the cash it receives from a shareholder is an asset that must be recorded in its financial statements in the ordinary share capital account.

For the shareholder , the stocks it receives is an asset as it represents a percentage of ownership in the corporation.

The share capital account is an important line item in a company’s financial statement which includes the par value of the securities issued along with the “paid-in capital” or premium paid by investors and shareholders over and above the par value of the securities issued.

To sum it up, share capital is not an asset per se but the “recording” or “reporting” of it.

What are the types of share capital

There are different types of shares that may potentially be in a company’s share capital such as:

• Authorized capital (registered capital or nominal capital)
• Unissued capital 
• Subscribed capital 
• Called up capital
• Uncalled up capital 
• Paid-up capital 
• Reserved capital (reserved liability)
• Fixed capital
• Circulating capital 

What is the difference between share and share capital

A share is a unit of ownership in a corporation such as “common” shares or “preferred” shares.

Share capital can mean different things in a different context, namely:

• The different types of classes of shares a company is authorized to issue in accordance with its articles of incorporation such as common shares, preferred shares or other types of equity shares
• How much money or value a company received for selling shares to investors as recorded on its balance sheet in the shareholder’s equity section (it includes the par value of the shares and the contributed surplus or the value received by the company in addition to the par value)

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Categories of Share Capital

Meaning of share capital:.

Share capital is referred to as the capital that is raised by the company by issuing shares to investors. Share capital comprise of capital that is generated from funds generated by issuing of shares for cash or non-cash considerations.

Companies have a requirement of share capital for the purpose of financing their operations. The share capital of the company will increase with the issuance of new shares.

Share capital is of two types namely, equity share capital and preference share capital. Equity share capital is generated by raising of funds from the investors and preference share capital is obtained by the issuance of preference shares. 

Types of Share Capital:

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• TS Grewal Solutions for Accounting for Share Capital
• Accounting for Share Capital

Share capital can be classified as authorised, issued, subscribed, called up and paid-up share capital. From an accounting point of view the share capital of the enterprise can be categorised as follows :

• Authorised Capital: Authorised capital is the amount of the share capital in which a company is allowed to issue its Memorandum of Association. The company is not supposed to raise more than the amount of capital as mentioned in the Memorandum of Association. It is also known as Registered or Nominal capital. The authorised capital can be either decreased or increased as per the process furnished in the Companies Act. It should be understood that the company need not issue the complete authorised capital for public subscription at one time. Relying upon its necessity, it may circulate share capital but in any scenario, it should not cross more than the amount of authorised capital.
• Issued Capital: It is that portion of the authorised capital which is usually circulated to the public for subscription comprising the shares assigned to the merchants and the endorsers to the enterprise ’ s memorandum. The authorised capital which is not proffered for public consent is called as ‘unissued capital’.
• Subscribed Capital:  The subscribed capital is referred to as that part of issued capital that is subscribed by the company investors. It is the actual amount of capital that the investors have taken.
• Called up Capital :  The amount of share capital that the shareholders owe and are yet to be paid is known as called up capital. It is that part of the share capital that the company calls for payment.

The above mentioned is the concept that is explained in detail about Categories or Types of Share Capital for the Class 12 Commerce students. To know more , stay tuned to BYJU ’ S.

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Share Capital: Meaning, Factors & Advanatages

Share capital represents the funds raised by a company through the issuance of shares to its shareholders. It serves as the financial foundation upon which companies build their operations and pursue growth opportunities. As an investor, understanding share capital is essential for you. Because it allows you to assess a company’s financial strength and potential returns. 

In this blog, we will be shedding light on the intricacies of share capital and its role in shaping the financial landscape.

What is Share Capital?

Share capital in company law refers to the total value of funds raised by a company through the issuance of shares to its shareholders. Share capital is also known as shareholders capital, equity capital, contributed capital, or paid-in capital. 

Moreover, it is an essential component of a company’s capital structure. It plays a crucial role in determining its financial position and investment potential. The funds raised through shareholders’ capital can be used by the company to finance its operations, invest in new projects, acquire assets, or repay debts.

Why Do Companies Raise Share Capital?

Companies raise shareholders’ capital for several reasons, including:

• Expansion and Growth : One of the primary reasons for raising shareholders’ capital is to fund the expansion and growth initiatives of the company. The additional funds obtained through issuing new shares can be used to invest in new projects, expand operations, enter new markets, or acquire assets and resources.
• Capital Requirements : Companies may raise shareholders’ capital to meet their capital requirements. It allows them to raise funds without incurring debt, reducing their reliance on loans and interest payments. By increasing their shareholders’ capital, companies can strengthen their financial position and have more resources at their disposal.
• Funding Acquisitions : Companies can raise shareholders’ capital to finance acquisitions and mergers. When a company intends to acquire another business, a company may issue new shares to the shareholders of the target company as part of the consideration. This allows the acquiring company to use its shares as currency for the transaction.
• Debt Reduction : Companies may choose to raise shareholders’ capital to reduce their debt burden. By issuing new shares and using the proceeds to repay debts, companies can improve their financial stability, reduce interest expenses, and enhance their creditworthiness.
• Enhancing Investor Confidence : It can be seen as a positive signal by investors. As it indicates the company’s growth prospects and financial strength. It demonstrates the company’s ability to attract investments and can increase investor confidence in the business.

Types of Share Capital

There are multiple kinds of share capital that a company can have. Here is a list of various kinds of share capital.

• Authorized Share Capital : It refers to the maximum amount of shareholders’ capital that a company is authorized to issue as per its constitutional documents. This represents the total value of shares that can be issued by the company.
• Issued Share Capital : This type of share capital of the company is the portion of authorized shareholders’ capital that the company has actually issued. These are the shares that are in circulation and held by investors.
• Subscribed Share Capital : It refers to the part of issued capital subscribed by investors or agreed to be taken up by shareholders. This represents the shares that shareholders have committed to purchasing.
• Paid-Up Share Capital : It represents the portion of subscribed shareholders’ capital that has been paid by shareholders. It reflects the actual amount of money received by the company in exchange for the shares issued.

Features of Share Capital

Here is a list of several key features that may define its role and impact on investors.

• Divisibility : Shares, the units of share capital, are divisible. Investors can own part of a company through fractional shares, making ownership accessible to a wider range of investors.
• Limited Liability : Shareholders’ liability is limited to the amount of capital they have invested in the company. This means, they are not personally liable for the company’s debts beyond their investment.
• Voting Rights : Each shareholder is granted voting rights on every resolution concerning the company under Section 47 of the Companies Act, 2013. Shares often come with voting rights, allowing shareholders to participate in certain company decisions like dividend distribution or board member appointments. This empowers investors and ensures stakeholder involvement.
• No Charge : When issuing share capital, no charge is created on the company’s held assets.
• Bonus Shares : Companies may choose to reward shareholders by periodically offering them bonus shares at no cost.

Classes of Share Capital

Classes of shareholders’ capital are categories of shares that a company can issue. Here are two common classes:

1. Equity Share Capital 

2. Preference Share Capital 

Let’s understand these two classes in detail: 

What is Equity Share Capital? 

Equity Share Capital , also known as ordinary shares or common stock, equity shares represent ownership in a company. Equity shareholders have voting rights and are eligible for a share in the company’s profits in the form of dividends. They bear the highest risk but also have the potential for higher returns.

What is Preference Share Capital?

Preference shares have certain preferential rights over equity shares. They typically have a fixed dividend rate and are paid dividends before equity shareholders. Preferred shareholders have a higher claim on the company’s assets in case of liquidation. However, they usually do not have voting rights or have limited voting rights.

How to Calculate Share Capital?

To calculate the shareholders’ capital of a company, you need to consider the following components:

Authorized Share Capital : Determine the maximum value of shares that a company is legally allowed to issue as specified in its constitutional documents.

Issued Shareholders’ Capital: Identify the actual portion of authorized shareholders’ capital that has been allocated and offered to shareholders. This information is usually disclosed in the company’s financial statements.

Nominal Value Per Share : Determine the nominal or face value assigned to each share issued by the company. Thus, the maximum amount of share capital of a company is mentioned in Memorandum of Association (MoA).

Once you have the above information, you can calculate share capital using the following formula:

Let’s understand how to calculate shareholders’ capital with the help of an example. Suppose a company has issued 50,000 shares with a nominal value of Rs. 100 per share. 

In this case:

shareholders’ capital = 50,000 shares × Rs. 100 = Rs. 50,00,000

Therefore, the shareholders’ capital of the company would be Rs. 50,00,000

Balance Sheet of Share Capital

The inclusion of shareholders’ capital in a balance sheet holds utmost importance as it signifies the funds contributed by shareholders to the company. This crucial information aids investors in evaluating the financial stability of the company. Shareholders’ capital is subject to modifications as the company may issue new shares, repurchase existing ones, or declare a stock split . Such alterations are duly recorded in the share capital balance sheet, ensuring transparency regarding changes in the shareholders’ capital.

Representation of Share Capital in Balance Sheet

The shareholders’ capital amount is recorded as a separate line item under the liabilities section. It represents the total value of the company’s issued shares. 

The balance sheet also includes other liabilities, such as loans, long-term debts, and accrued expenses, which are recorded separately from share capital. The total liabilities section shows the sum of all liabilities.

Share Capital Structure

The structure of shareholders’ capital refers to the composition and arrangement of different types of shares issued by a company. It represents how the company’s capital is divided among shareholders and reflects the ownership and funding structure of the company. The capital structure represents structure of shareholders funds in balance sheet, typically consists of various types of shares, such as:

• Equity Shares (common shares) : These are the most common type of shares that a company issues. They represent ownership in the company and provide shareholders with voting rights and a share in the company’s profits through dividends.
• Preference Shares : These shares come with preferential rights and privileges over equity shares. Preference shareholders have a fixed dividend rate and receive dividends before equity shareholders. They also have priority in receiving capital in case of liquidation but usually do not possess voting rights.
• Cumulative Preference Shares : These shares carry a right to accumulate unpaid dividends if the company is unable to pay dividends in a particular year. The accumulated dividends must be paid to cumulative preference shareholders before any dividends are paid to equity shareholders.
• Redeemable Shares : These shares can be repurchased or redeemed by the company at a future date or upon meeting certain conditions. Redeemable shares provide flexibility to the company in managing its capital structure.
• Non-Voting Shares : Some companies issue non-voting shares, which do not carry voting rights. These shares are typically offered to investors who seek capital appreciation but are not concerned with voting in company matters.

Factors Affecting Share Capital of Company

When it comes to the shareholders’ capital, there are several factors that come into play. Let’s take a closer look:

• Company Size and Growth Prospects : The size of a company and its potential for growth have a direct impact on its share capital. Bigger companies with exciting growth prospects usually need more capital to fund their expansion plans. As a result, their shareholders’ capital tends to be higher.
• Capital Requirements and Funding Needs : Companies often have specific capital requirements, such as financing new projects, acquiring assets, or paying off debts. If a company requires a significant amount of funding, it may increase its shareholders’ capital to meet those requirements.
• Industry and Market Conditions : The industry and market conditions also come into play. Industries experiencing rapid growth or technological advancements tend to attract more investments, which can lead to higher shareholders’ capital. On the other hand, unfavourable market conditions may make it challenging to raise capital.
• Investor Expectations and Share Pricing : Investor expectations and the pricing of company shares can significantly impact shareholders’ capital. If investors have high expectations for a company’s future profitability, they are more likely to invest, which can increase share capital. Likewise, if the share prices are attractive to investors, it can draw more investors to contribute to higher share capital.

Alteration of Share Capital

Alteration of shareholders’ capital refers to the changes made to the existing share capital structure of a company. Thus, there are different kinds of alteration of share capital that can happen for various reasons.

Increase in Share Capital

A company may decide to increase its shareholders’ capital to raise additional funds for expansion, acquisitions, or other business purposes. Companies do this through the issuance of new shares to existing or new shareholders. The increase in share capital leads to an infusion of fresh capital into the company, enabling it to finance its growth plans.

Decrease in shareholders’ capital

In certain situations, a company may opt to reduce its shareholders’ capital. This could be due to reasons such as consolidation, restructuring, or eliminating accumulated losses. Shareholders’ approval and compliance with legal requirements are necessary for a decrease in shareholders’ capital.

Share Split or Subdivision

A share split involves dividing existing shares into a larger number of shares without changing the overall value of the share capital. For example, a company may split one share into multiple shares, such as splitting one share into two or three shares. Usually, companies do this to enhance liquidity, increase marketability, and make shares more affordable to investors.

Share Consolidation or Reverse Split

The opposite of a share split is a share consolidation or reverse split. It involves combining multiple shares into a smaller number of shares. For instance, a company may consolidate five shares into one share. Usually, companies do this to increase the share price, meet listing requirements, or attract a different class of investors.

Conversion of Securities

Alteration of share capital may also occur through the conversion of securities. For example, convertible preference shares or convertible debentures can be converted into equity shares based on predefined terms and conditions. This conversion leads to a change in the shareholders’ capital structure of the company.

Advantages of Raising Share Capital for Investors

Some of the advantages of raising shareholders’ capital for investors are as follows:

• Dilution of Risk : When a company raises shareholders’ capital, it allows investors to diversify their investment across a larger pool of shareholders. This can help reduce the risk associated with investing in a single company.
• Potential for Capital Appreciation : If the company successfully utilizes the raised capital to drive growth and increase its value, investors can benefit from capital appreciation on their shares.
• Voting Rights and Influence : Shareholders who participate in the increased share capital may gain voting rights. This can provide them with a voice in the company’s decision-making processes and influence its direction.
• Access to Future Offerings : By investing in the company during a shareholders’ capital raise, investors may gain preferential access to future offerings or investment opportunities, which can potentially offer additional benefits.

Disadvantages of Raising Share Capital for Investors

Some of the advantages of raising share capital for investors are as follows:

• Dilution of Ownership : When a company issues new shares, the existing shareholders’ ownership percentage in the company may decrease. This dilution can impact their influence and control over the company’s affairs.
• Potential Decrease in Earnings Per Share : If the company’s earnings remain unchanged while the number of shares increases, it can lead to a decrease in earnings per share. This could affect the value proposition for investors.
• Oversupply of Shares in the Marke t: Raising shareholders’ capital can result in an oversupply of shares in the market, potentially leading to downward pressure on the stock price if demand does not match the increased supply.
• Increased Competition for Dividends : With more shareholders, the company’s profits may need to be divided among a larger pool of investors, resulting in a lower dividend per share.

To Wrap It Up…

It says a crucial role in the financial structure of a company. It represents the funds raised from shareholders and is an essential component of the balance sheet. Through shareholders’ capital, companies can raise capital for growth, expansion, and financing of their business activities.

Understanding share capital and its implications is crucial for both companies and investors. By comprehending the structure, benefits, and factors affecting shareholders’ capital, investors can make informed decisions, while companies can effectively manage their capital structure to support their growth and financial objectives.

Share capital meaning is the total value of common and preferred shares issued by a company to its shareholders.

The share capital represents a part of a company’s equity raised through the issuance of common or preferred shares, distinguishing it from other forms of equity accounts.

According to the SEBI regulations, companies must allot shares within 30 days of closing the subscription of a public issue.

Generally no. It’s permanent, providing stability for creditors and long-term sustainability. Exceptions like buybacks exist, but require careful procedures.

A broader term encompassing share capital, debt, and retained earnings, representing the total financial resources available to the company for operations and growth.

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Optimizing Startup Share Structure: A Brief Guide for Founders

Structuring your startup's shares optimally is a crucial step in setting the foundation for growth, investment, and future success. The share structure defines how ownership and equity are distributed among founders, employees, and investors. A well-thought-out share structure can attract investors, incentivize employees, and ensure a smooth decision-making process. In this article, we will explore effective strategies and best practices to help founders optimize their startup share structure, enabling them to build a strong and sustainable company.

Start with Clear Co-Founder Agreements

At the outset of your startup journey, it's essential to establish clear co-founder agreements. These agreements should outline the roles, responsibilities, and ownership percentages of each co-founder. Discuss and agree upon vesting schedules, exit scenarios, and how decisions will be made in the company. A well-defined co-founder agreement prevents potential disputes and provides a solid framework for the share structure.

Consider Issuing Preferred and Common Shares

Startups often issue both preferred and common shares. Preferred shares offer certain rights and privileges to investors, such as priority in receiving dividends or liquidation preferences. Common shares, on the other hand, are typically issued to founders and employees, carrying voting rights and representing ownership in the company. Carefully balance the issuance of preferred and common shares to ensure a fair and equitable structure.

Implement Vesting Schedules

Vesting schedules are essential for aligning incentives and retaining key team members. Founders and employees should earn their shares over time based on continued service and performance. Standard vesting periods are usually four years with a one-year cliff, meaning the individual earns 25% of their shares after the first year and the remaining 75% vest monthly over the following three years.

Allocate Employee Stock Options (ESOs) Strategically

Employee Stock Options (ESOs) are a powerful tool to attract and retain top talent in startups. ESOs provide employees with the opportunity to purchase shares at a predetermined price. Allocate ESOs strategically, taking into account the roles and contributions of each employee. Consider a vesting schedule for ESOs to encourage long-term commitment.

Understand Dilution and Anticipate Future Rounds

Dilution refers to the reduction of ownership percentage as additional shares are issued. As your startup seeks further funding rounds, understand how each round will impact dilution and the overall share structure. Anticipate future funding needs and ensure your current share structure leaves room for future investors.

Avoid Overcomplicating the Structure

While it's essential to design a share structure that aligns with your startup's goals, avoid overcomplicating it. A complex structure can confuse stakeholders and make future fundraising challenging. Keep the structure simple, transparent, and easily understandable for all parties involved.

Use Equity as an Incentive for Growth

Equity can be a powerful incentive for employees and advisors to contribute to your startup's growth. Offer equity to key team members based on their impact on the company's success. Transparently communicate the potential value of equity to motivate and reward employees.

Consider Safeguarding Founder Control

As your startup grows and attracts investors, consider mechanisms to safeguard founder control. You can issue different classes of shares with different voting rights, giving founders more voting power. This approach allows founders to make critical decisions and maintain the startup's vision.

Seek Professional Legal and Financial Advice

Structuring your startup's shares optimally is a complex process with legal and financial implications. Seek professional advice from experienced startup attorneys and financial advisors. Their expertise can help you navigate legal requirements, tax considerations, and other complexities related to the share structure.

Establish a Shareholders' Agreement

A shareholders' agreement is essential for setting out the rights and obligations of shareholders. This agreement covers important topics such as voting rights, restrictions on share transfers, and how decisions will be made in the company. A well-drafted shareholders' agreement provides a framework for smooth governance and resolution of disputes.

Consider Using a Cap Table Management Tool

As your startup attracts more shareholders and investors, managing the cap table can become challenging. Consider using cap table management tools to keep track of ownership percentages, equity grants, and changes in the share structure. Cap table tools ensure accuracy and provide transparency for all stakeholders.

Revisit and Adjust as Your Startup Grows

Startup share structure is not set in stone. As your startup grows, revisit and adjust the share structure to accommodate new investors, key hires, and changes in the company's direction. Flexibility is crucial in adapting the share structure to the evolving needs of the business.

Optimizing your startup's share structure is a foundational step in building a successful and sustainable company. Begin with clear co-founder agreements and consider issuing both preferred and common shares. Implement vesting schedules to align incentives and allocate employee stock options strategically. Understand dilution and anticipate future funding rounds. Avoid overcomplicating the structure and use equity as an incentive for growth. Safeguard founder control and seek professional legal and financial advice. Establish a shareholders' agreement and consider using cap table management tools. Revisit and adjust the share structure as your startup grows. By following these strategies and best practices, founders can optimize their share structure, attract investors, and foster a culture of alignment and success in their startups.

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• Companies Act 2013
• Corporate Law
• The Companies (Share Capital and debenture) Rules

Share capital in Company Law 

This article is written by Aadrika Malhotra . It talks about the concept of share capital in a company with a detailed analysis of how share capital helps raise company profits. Share capital is typically divided into equity share capital and preference share capital, depending on factors such as voting rights and dividends. This article delves into each type, outlining their characteristics and the associated liabilities for shareholders. 

Table of Contents

Introduction 

The Companies Act, 2013 (‘the Act’) details all laws related to companies and their functioning in India, including shares and share capital. A company is a form of organisation whose capital is contributed largely by its shareholders, who are the real owners of the company. This capital is the amount that is invested in the company to carry out the company’s activities. Since a company is an artificial person, all operations of the company are dependent upon its AOAs and MOAs that are signed with it. It has a corporate legal entity distinct from its shareholders and members, which means that the liability of the shareholders for the company depends a lot on shares. All companies limited by shares must have a share capital, and this share capital cannot be generated by the company on its own and has to be collected by several people. Although the issuance of share capital is not necessary for a company to be incorporated, it is crucial for running the business based on capital.   

An overview of shares

Shares in a company show the percentage of ownership of a person or member in that company, which is a single unit that is further divided into several units with their own price. All of these units are of a specific amount, and when someone purchases these units, they also purchase certain defined units of the share capital of the company, which makes that person a shareholder in the company. The term share has been defined under Section 2(84) of the Act, which means a share in the share capital of the company and includes stock. It signifies the interests of the shareholders in the company, measured for the purposes of liability and dividends. A share, debenture, or any interest held by a member of a company is deemed movable property and can be transferred as stipulated in the company’s articles of association. A member has the option to transfer any “other interest” in the company following the procedures outlined in the articles.                                                    

Certificate of shares

A share certificate is a document that is attested by the company and acts as legal proof of the ownership of shares. There is a difference between the share that makes up the share capital and the share certificate. This certificate can either be a part of the company’s share capital or be owned by the shareholder while still being part of the company. Section 44 of the Act mentions that shares are movable properties and are transferable. This differs from a share certificate which under Section 46 is stated as a certificate under the common seal that specifies the shares held by members of the company. It is issued under the company’s seal, signed by two directors, a managing director and a company secretary. It is the prima facie evidence that the title acts as estoppel to the title and an estoppel to the payment. 

Estoppel to the title 

A share certificate, after it is issued to the shareholders, binds the company in two ways: either as a declaration by the company to the entire world about whose name the certificate is made under or to whom the certificate is given. The company here is thereby estopped from denying the title of the shares under the share certificate to the shareholder.  

Estoppel to the payment 

If the certificate states the shareholder has paid in full for all shares under that particular share certificate, the company is estopped as against a bona fide purchaser of the shares, i.e., the shareholder, from alleging that the shareholder has not paid the shares in full. If the statement in the certificate is not true, there will be no estoppel against the company.      

Section 56(4) states that every company, unless prohibited by law, must deliver all certificates within a period of two months from the date of incorporation for the subscribers to the memorandum of the company and within two months from the date of allotment if any shares are allotted by the company. The issuance of share certificates shall be done in pursuance of a resolution issued by the Board, and if the letter of allotment is lost, the company may register the transfer of those on terms of indemnity as the Board may deem fit. Such certificate shall be issued with the company seal and shall be affixed by either two directors duly authorised by the Board of Directors or the secretary as authorised by the Board.

The share certificate shall contain particulars such as the name of the person and the date of issue, which shall be recorded in the registrar of members. These share certificates and documents have to be maintained as per the following requirements:  

• All blank forms that are used for the share certificates are to be printed by the board in a resolution. The form shall be machine-numbered, and the engravings on the forms will be kept under the custody of the secretary and the board. 
• The committee of the board, the company secretary, or the director assigned by the board shall be responsible for the maintenance and safe custody of the documents related to the issuance of share certificates and blank documents.  
• All of these documents shall be preserved with care for at least thirty years, and they should be preserved forever if any of these cases are disputed before the Board. All share certificates that were surrendered by the shareholders are supposed to be destroyed within three years, as passed by the resolution by the Board. 

Issuance of duplicate certificates 

Section 46 of the Act, read with Rules 6 of the Companies (Share Capital and Debentures) Rules, 2014, states that duplicate share certificates can be issued to the shareholders if the original share certificate is lost or misappropriated. If the share certificate has been lost or misplaced, the shareholder must inform the company of the loss through a letter sent at the email address of the company or by post. The letter must detail the name, address, folio number and share certificate number. 

Once the company receives the letter, it should freeze the transfer of shares for at least thirty days to avoid fraud. After the company registration procedure is completed, the shareholder will be guided to issue a duplicate certificate once the identity of the shareholder is established. The following documents are required to issue a duplicate share certificate:

• Agreement to guarantee out-of-court stamp paper, 
• Affidavit on non-judicial stamp paper, 
• FIR with the complete data about the lost share certificate, including the name of the shareholder, folio number, share certificate number, and the number of shares.
• Advertisement about the lost certificate. 

Penal provision

Section 447 of the Act provides the penalty for the issuance of false shares by the company with an intention to defraud the public. The fine for such fraud shall be imprisonment for a term not less than six months extending to ten years with a fine of not less than the amount involved in the fraud.

Share capital in Company Law : an overview

Share capital refers to the capital raised by the company by issuing common or preferred stock, as the case may be. It is not important for a company to have a share capital; the case might be that it is a company limited by guarantee. The amount contributed by the shareholders is dependent on them, and they can buy shares divided into equal amounts. Simply put, share capital is the total value of funds raised by a company through the issuance of shares to its shareholders.

Authorised capital 

The Memorandum of Association of a company states the amount and division of share capital in the company. This amount is called the authorised or nominal capital of the company as per Section 2(8) of the Act. 

Issued capital 

Section 4(1)(e)(i) of the Act mentions that this share capital is present in the capital clause of the memorandum, which can be issued depending upon the requirements. The portion of this share capital that is issued to the public is known as the ‘issued capital,’ which is distributed from time to time through subscriptions. 

Subscribed capital 

The part of the issued capital that is subscribed by the public is called the ‘subscribed capital’, which, as per Section 2(86) of the Act, is the part of the share capital that is subscribed by the members for the time being. The minimum subscription requirement presently is ninety percent of the issued capital, and the company has flexibility in calling the subscribed capital. 

Paid-up capital 

The actual amount that the company receives from the subscribed capital is called the ‘paid-up capital’ as per Section 2(64) of the Act, and the capital that forms the ‘uncalled share capital’ can be set aside as ‘reserve share capital.’ 

Called-up capital 

The part of the subscribed capital that the company calls up for payment is called the ‘called-up capital’ as per Section 2(15) of the Act. 

The simple formula for this paid-up capital can be: 

Paid-Up Capital = Number of Equity Shares Issued * The Face Value Called Up 

For example, let’s say that ABC has an authorised share capital of Rs 10 lakh, which is divided into equity shares worth Rs 1 lakh with a face value of Rs 10 per share. Here, let’s assume that the shareholders fully pay for 50,000 equity shares at the decided face value. To calculate the paid-up capital, we would have to follow the formula as follows: 

Paid-up capital = 50,000 shares * 10 rupees per share 

Paid-up capital= Rs 5 lakh 

This capital is reported in the balance sheet of companies in the shareholders’ equity section in separate line items depending upon the sources, like common stock, preferred stock, and additional paid-in capital. Common stock and preferred stock shares are reported in accounts at their par value at the time of sale, and the amount received in excess of this par value is called the additional paid-up capital. The share capital amount reported by a company includes only those payments made directly by the company and later sales and purchases or the rise or fall of these shares have no effect.    

Kinds of share capital in Company Law

Section 43 of the Act mentions the two types of share capital that a company can have: 

• Equity share capital 
• With voting rights 
• With differential rights as in dividends, voting, or any other in accordance with the rules prescribed.
• Preference share capital ,unless otherwise specified by the company’s Articles of Association (AOA) or Memorandum of Association (MOA). 

Equity shares 

Equity share capital means all share capital that is not preference share capital, which represents ownership in a company. All equity shareholders are eligible to voting rights in the company and are eligible for a share of the company’s profits, thus bearing a high risk with the possibility of higher returns as well. The dividend that the shareholders get is not fixed in equity shares, and the company might not give any profits to its equity shareholders even if it has them. Though, as per Section 43(a) and Section 50(2) , all equity shareholders get a right to vote on every resolution that is passed in the company, and their voting can be determined by the pool of paid-up capital until otherwise provided by the AOA and MOA.  

Equity share capital is divided on the basis of differential (dividend) and voting rights, with the former providing the shareholders with much fewer voting rights. Long term, small investors can reduce their voting power to make up for the difference and seek higher dividends. Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014 lays down the conditions for the issuance of equity shares: 

• The AOA of the company is responsible for the issuance of equity shares with differential rights, such as dividends. 
• The shares are issued by the passing of a resolution at a general meeting of the shareholders, where if the equity shares are listed on a stock exchange, the issuance of shares will be decided upon by the shareholders through a postal ballot. 
• The equity shares that provide differential rights should not exceed more than 26 percent of the total post-issued paid-up capital shares. 
• The company giving out the equity shares must have a consistent track record of distributable profits for at least three years and should not have defaulted in filing facial statements or returns for those three years and the three years preceding the year the shares are issued. 
• The company should not have defaulted on the payment of its dividends, repayment, or redemption of preference shares to its shareholders.
• The company should not have defaulted on the payment of dividends, preference shares, and the repayment of loans taken from a public or private institution or a bank that requires statutory payments. 
• The company should not have been penalised by any court or tribunal for at least the last three years under the Companies Act passed by the Central Government or SEBI that pose sectoral restrictions. 

Companies that have their equity shares listed on a stock exchange can have their shares issued by postal ballot with the shareholders’ approval. Section 102 talks about the statement to be annexed to a general meeting talking about the issuance of these shares. Though the company cannot cover its existing differential rights for its shares with voting rights or the other way around.

Preference shares 

Preference shares are the shares where the shareholders get preferential rights related to the capital they hold and a dividend over equity shares. Preference shares are shares with a fixed rate of dividend and preferential rights over ordinary equity shares. People who buy preferential share capital get priority in dividend declarations, and at the time of winding up, they are the first ones to receive money. They have the right to vote only when the matter directly or indirectly affects them. This dividend may be a fixed amount that is payable to the shareholders to give them preference over the equity shareholders and to give them a higher claim over the assets of the company without the privilege of voting rights. 

Preference shareholders can only vote on resolutions that directly concern them or affect their rights as preference shareholders or the winding up of the company. If the preference dividend is not paid for two years or more, the preference shareholders will get the right to vote on every resolution. 

In summary, preference share capital with reference to any company limited by shares means that part of the issued share capital of the company that carries or would carry a preferential right with respect to:

• Payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may either be free of or subject to income-tax; and
• Repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid-up or deemed to have been paid-up, whether or not there is a preferential right to the payment of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company.

Kinds of preference shares  

Preference shares can be categorised into:

• On the basis of rights to dividends :  Cumulative and Non-cumulative preference shares 
• On the basis of convertibility: Convertible and Non-Convertible preference shares 
• On the basis of maturity period : Redeemable and Irredeemable preference shares 
• On the basis of participations in surplus profits: Participating and Non-Participating preference shares 

Cumulative and non-cumulative preference shares 

In circumstances where the company cannot generate profits or fails to give dividends. In this case, the cumulative preference shareholders can get paid from their profits made in the subsequent years for the current year’s dividends in arrears, which until fully paid will lead to the fixed dividend keep on accumulating. 

Non-cumulative preference shares give the shareholder the right to obtain a fixed amount of dividends from the profits each year. If there are no profits or dividends available, the preference shareholders will not get anything and neither can they claim unpaid dividends as well in the next few years. 

Convertible and non-convertible preference shares

Convertible preference shares are the shares of the company that are issued on the terms liable to be converted to certain ordinary shares or cash at a certain time. These shares may be converted on the sale of initial public offering of the company or at a set conversion price. The number of ordinary shares given to the shareholders will depend on the conversion method used. Non-convertible preference shares are shares that cannot be converted into equity shares. Shareholders with non-convertible preference shares get preferential benefits during the distribution of dividends and the dissolution of the company. 

Redeemable and irredeemable preference shares

As per Section 55 of the Act, Preference shares can be either redeemable or irredeemable as mentioned earlier. Redeemable preference shareholders are repaid after an estimated period of time which is known as redemption of preference shares. This amount will be repaid to them after the completion of the stipulation period, which on the contrary the ones that cannot be paid are known as irredeemable preference shares. 

Section 55 of the Act states that a company cannot issue irredeemable preference shares and can issue shares that are supposed to be redeemed in a period not exceeding twenty years. There are certain conditions for this redemption that have been stated in the Act: 

• Profits that would be available for dividend 
• Proceeds of the issue of shares 
• Shares that are not fully paid cannot be redeemed. 

In case a company redeems the shares out of the profits of the company, a sum equal to the nominal amount of the shares as to be set aside as reserve amount that is to be redeemed with the Capital Redemption Reserve Account. If the Capital Redemption Reserve Account was the paid-up share capital of the company, the provision relating to the reduction of share capital of the company of this Act, i.e Section 66 will apply. The capital reserved can be utilised by the company to pay up unissued shares to be paid up as bonus shares. 

The preference shares can be redeemed if the class of companies comply or if its accounting statements are up to the standards as prescribed by Section 133 of the Act.  

If there is any premium payable on redemption, it will be provided for out of profit from the company before the shares are redeemed. 

Rule 10 of the Act states that a company that deals with infrastructure projects may issue preference shares for a period exceeding twenty years but not thirty years which would be subject to a redemption of a minimum of ten percent from the preference shares per year after the twenty years have expired. 

Participating and non-participating shares 

Participating preference shares are entitled to a fixed preferential dividend and they have a right to participate in the surplus profits of the company along with the equity shareholders once the certain dividend amount has been paid to them. If there is still some surplus left after paying both the equity and preference shareholders during winding up of the company, then the participating shareholders will get the share of the additional surplus of the company. These shareholders only get the fixed preferential dividend and the return of capital during winding up after meeting all external liabilities. The rights to these shareholders should be set down in the AOA and MOA of the company or in the terms of issue.         

Other types of share capital in Company Law 

There are shares which are used to raise the capital of the company. Those shares are:

Sweat Equity Shares

• Employee Stock Option Scheme

Bonus Issue

Rights issue.

According to Section 2(88) of the Act, sweat equity shares are issued by a company to its directors or employees at a discount with some other consideration that does not include cash, like the know-how for getting rights to intellectual property or some other value additions from them. It is a mode of payment of shares to the employees of a company that allows it to retain the employees as well as reward them for their services by giving them incentives for their contribution to aid the development of the company.  

As per Section 102 of the Act, the special resolution passed for the sweat equity share should contain: 

• The date of the board meeting at which consideration for the shares was brought on;
• The rationale behind the issuance of the shares;
• The class under which these shares would be issued;
• The total number of shares to be issued;
• The class of employees or the directors to whom these shares would be issued;
• The terms and conditions, along with the valuation for the insurance of these shares;
• The time period of employment or association of the concerned shareholders;
• The names of the employees or directors to whom these shares will be issued;
• The price at which these shares will be issued;
• The consideration at which these shares will be issued;
• The ceiling on the remuneration received at a managerial level, and if disputed, the procedure for how it would be dealt with;
• The statement of effect by the company acknowledging the accounting standards;
• The value of the diluted earnings per share for the securities calculated according to the accounting standards. 

After the sweat equity shares are issued, this resolution will cease to exist after twelve months from the authorisation. The company cannot issue sweat equity shares for more than 15% of the total paid-up capital of the company. The total amount of these shares should also not exceed more than 5 crores, or 25% of the total paid-up capital of the company. The directors of the company also get issued sweat equity shares, and those shares will be non-transferable to anyone for 3 years, during which they would be in a lock-in period. 

Sweat equity shares are valued at a fair price by a valuer who will give a fair determination of the price and the valuation of any intellectual property rights. The valuation also includes the know-how of the employees or the directors. The price of the sweat equity shares shall be fixed by the valuer after the submission of a proper report to the board of directors with the proper justification, which would be sent to the shareholders after holding a general meeting. Any non-cash consideration in a depreciable asset will be carried into the balance sheet of a company in accordance with the applicable accounting standards. If those considerations do not meet accounting standards, they will be expensed for other financial activities.    

It is issued for the purpose of:

• Contribution to the financial activities of the company.
• Contribution to the intellect of the company.
• Value addition to the employees.

According to Section 54 of the Act, whatever limitations on profits and dividends are applicable to equity shares are applicable to sweat equity shares as well. Section 53 of the Act voids any other shares provided at a discount except for sweat equity shares and lays down the punishment for the company as a fine, which shall not be less than 1 lakh rupees and might extend to 5 lakhs and imprisonment for six months for each individual responsible for that penalty. The preliminary requirements for the issue of sweat equity shares are as follows:

• It should be authorised by a special resolution passed by the company. 
• The resolution must specify the number of shares, the class of directors, and the current market price valuation.
• If the equity shares of a company are listed on a recognised stock exchange board, the issue of sweat equity shares shall be looked over by the SEBI ( Securities and Exchange Board of India) and its rules. 
• For the issuance of sweat equity shares, an employee must be a permanent employee of the company who might be working for the Indian office or a foreign one and/or a director of the company. 

Employee’s Stock Option Scheme

According to Section 2(37) of the Act, an employees stock option is a scheme or option given to the employees, directors, or officers of a company along with the holding or subsidiary companies that gives these people a benefit or the right to purchase or subscribe to the shares of the company at a future date at a predetermined price. SEBI, in its guidelines, clarifies that it is a right and not an obligation that is granted to all permanent employees of the company. 

The objective behind the issuance of this scheme is to provide incentives and reward the employees of the company to make the company more profitable. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014, lays down certain requirements of this scheme: 

• The issuance of the scheme would need the approval of the shareholders through a special resolution.
• This option is not transferable to any other person who was not previously entitled to it.
• There should be a minimum period of one year between the grant of the scheme and its vesting, and after this period, the exercising limit of this scheme will be decided by the company. 
• Any amount payable by the employee during the grant of the scheme will be returned or refunded.
• Any company that does not comply with the SEBI rules, apart from a listed company, cannot issue the scheme.
• The company that is granting the scheme has to maintain a separate register that contains all the details about these shares.
• An employee who is a promoter of the company is not eligible for this scheme, nor is any director who already owns 10% of the company’s equity shares. 

Bonus shares are issued to existing members according to Section 63 of the Act, where the company can issue paid-up bonus shares to its members in the following manners: 

• Free reserves: These reserves must be built out of only genuine profits or shares premium collected in cash.   
• Securities premium account: It is a reserve account made from a company’s profits made by issuing shares of a certain face value for a higher price. 
• Capital redemption reserve account: It is an account made when the company redeems its redeemable preference shares out of profits kept for paying dividends.  

Capitalising reserves that were created by the revaluation of assets will not be the parameters for the issue of bonus shares, nor can they be issued in lieu of dividends. 

Conditions 

• The AOA of a company should mention that bonus shares can be alloted to the shareholders. If such is not mentioned in the AOA, it is altered by a special majority resolution.
• A special resolution is passed by the Board of Directors, managers, and top level management, where they see if there is profit made by the company. If there is a lot of accumulated profit, in that case, the resolution is passed and a bonus is issued to all shareholders.
• There should be no previous defaults in the payments of interest to the debenture holder or of dividends.
• There should be no pending salaries or provident funds for any employee, etc. 

If the board passes a resolution declaring the bonus shares will be issued, it cannot withdraw the resolution. 

Restriction on Issuing Bonus Share

As mentioned in the sweat equity share, there is a class of shares. A company can’t issue bonus shares if they have outstanding fully or partly convertible debt instruments at the time of issuing bonus shares. Unless there is a reservation made of equity shares of the same class in favour of such holders of convertible debt instruments on the same terms and proportion to the convertible part.

The equity shares reserved for the holder of the fully or partly convertible debt instrument shall be issued at the time of conversion of such convertible debt instrument on the same terms or proportions as the bonus shares were issued. 

In the case of Standard Chartered Bank and Anr. Etc. v. Custodian and Anr. Etc. (2000) , the court held that bonus shares are a distribution of capitalised undivided profits of the company. Bonus shares lead to an increase in the company’s capital because they transfer the amount from the company’s reserve towards its capital, which results in the issuance of extra shares to its shareholders.  

Section 62 of the Act talks about rights issues, which is an easy way of procuring finance for a company. The previous shareholders of the company have the right to subscribe for the new shares of the company. There is no prospectus or offer for sale of shares issued in rights issue, and equity shareholders of the company are given the offer through an application form, which entitles them to take up shares at a price way below the listed price. Shareholders who do not want to keep their rights to the shares can sell them to other third parties at a specified price. Shareholders can also renounce their rights to the company and sell the shares to the public in a manner prescribed by the board of directors. 

Compliance with rights issue

• It has to be mentioned in the articles of association of the company.
• A notice to the shareholders regarding the same has to be sent.
• This offer should be available for 15-30 days.
• The existing shareholders may renounce or accept this offer.
• The number of shares and the price of such shares have to be mentioned. 

Voting rights 

Section 47 of the Act states that every equity shareholder has a voting right in the company, which is proportionate to the number of shares they hold in the paid-up equity share capital of the company. Preference shareholders of a company have the right to vote on the following: 

• Resolutions passed before the company which directly affect the rights attached to their preference shares. 
• Resolutions passed for the winding up of the company. 
• Repayment for the reduction of the share capital. 

These voting rights are in proportion to the shares held by the shareholders in the paid-up preference share capital of the company. The proportion of the voting rights of the preference shareholders and equity shareholders will depend upon the proportion of the paid-up share capital of each. Preference shareholders have the right to vote on every resolution passed by the company if the dividends held in those preference shares are in arrears for 2 years or more. 

Issue of shares at premium

When a company issues shares at a premium, a sum equal to the amount of premium received on those shares will be transferred into a securities premium account. According to Section 52 of the Act, the provisions for the reduction of shares of a company apply on this premium account as well as if it is a part of the paid up share capital of the company. These shares can be applied by the company: 

• Towards the issuance of unissued shares of the company in the form of fully paid bonus shares. 
• Towards writing off the preliminary expenses of the company. 
• Towards writing of the expenses or discounts allowed on the issuance of any shares or debentures of the company. 
• Towards providing the premium payable for the redeemable preference shares of the company. 
• Towards the purchase of more shares and other securities. 

The companies classifying under Section 133 of the Act can also utilise this premium account in the following manner: 

• Paying up unissued equity shares to the members of the company in the form of bonus shares. 
• Writing off the expenses incurred on the insurance of equity shares. 
• Purchase of its own shares or other securities. 

Allotment of shares 

Allotment of shares is the procedure followed by a company to give its shares to the investor in an exchange for a purchase offer to signify the act of allotting. The investors make the offer through application forms or prospectus supplied by the company for these shares, and the acceptance of this application by the company amounts to the allotment of the shares. 

The court in the case of Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd, (1964 ) defined the allotment of shares as the appropriation of the unappropriated capital of the company by giving a certain number of shares to certain people. 

Procedure for allotment of shares 

• Before allotting the shares to new shareholders, the company must take into account the shares allotted to the existing shareholders and analyse how much more shares it should give out;
• The board of directors will hold a meeting to pass a resolution for the allotment of shares; 
• The company has to sign the Form MGT-14 and the special resolution passed with the register of the companies;  
• The secretary then makes the necessary arrangements with company’s bank for collecting the money to issue the letters of allotment to the investors, mentioning the shares allotted to them;
• If necessary, the company has to file a return of allotment form within 30 days of the allotment along with the name and address of the allottees, value of shares, amount paid, and amount payable; 
• The company needs to prepare the register of members in accordance with Section 88 of the Act;
• The person either gets issued a share certificate or they can see the allotment of their shares in their Demat account.   

Calls and forfeiture of shares

If a member of the company fails to provide a valid call within the stipulated period of time, the company can sue that member for the recovery of the amount of the call after waiting for a reasonable period of time. The articles of association of a company generally provide for the forfeiture of shares for non-payment of any calls. Power for forfeiture of shares is enacted bona fide and in the interest of the company and should not be collusive or fraudulent. All shareholders cease to be members when this forfeiture takes place, as per the liabilities provided under clause 1 of Schedule 32 of the Act. These forfeited shares become the property of the company, which also involves a reduction in the share capital until these shares are reissued. The company can also reissue these shares at any point in time at a discounted price, provided that the total amount paid by the previous owners of the shares and the reissued amount are not lesser than the par value. If the shareholders do not pay the amount for the shares in the stipulated time, the directors of the company can pass a resolution for the forfeiture of those shares with  proper notice.  

Calls on shares 

The company collects the unpaid balance of the allotted shares after the application and allotment amounts in accordance with the terms and conditions of the shares by making calls: 

• First call: The unpaid balance is supposed to be collected with the first call itself, which would also be treated as the final one. 
• Second call: If the call amount is collected in instalments, the other call is known as a second call. 
• Last call : The last instalment is collected in the final call, known as the last call. 

This amount is part of the issue price of the share or debenture issued by the company to its shareholders or members that has not yet been paid. The board of directors has the party make these calls in accordance with resolutions passed in the general meetings, which can be made anytime during the timeline of the company and its winding up as well. Non payment of these calls will render the shareholders or members an interest payment of 10% per annum. 

Calls in advance 

Articles of association corresponding to the shares of the company authorise it to accept the money remaining on the shares, irrespective of the calls not made by the company. Companies can accept a part or the whole payment made by the shareholders even if the calls are not made, and they can pay an interest agreed upon by the board and the members for the sum of the shares set at a maximum rate of 12% per annum. The amount received for calls in advance is not refundable, and it has to be paid along with the interest. 

Calls in arrears 

Shareholders may not pay the called amount on the due date, which is known as calls in arrears or unpaid calls. These represent the debit balance of all the calls in arrears and appear as notes to account for in the balance sheet. The directors, through the articles of association of the company, can charge interest on these calls in arrears, which shall not exceed more than 5% per annum and shall be paid on all unpaid amounts on these shares. When the call amount is received, the amount of interest received will be credited into the interest account, and the call money will be credited into the call’s arrears account. 

Reduction of share capital and dematerialization 

Reduction of share capital refers to the reduction of the issued, paid-up, and subscribed share capital of the company as laid down under Section 66 of the Act. The buyback and redemption of preference shares are also considered as the reduction of capital and do not require approval from the Tribunal. The reduction of the share capital for the company is subject to confirmation by the National Company Law Tribunal (NCLT).  

Dematerialisation is a process by which the physical share certificate of an investor is taken back by the company in exchange for an equivalent amount of securities in electronic form. The investor opens an account with the depository participant, who then requests the dematerialisation of the share certificate so that the dematerialised holdings can be credited into the investor’s account. This process is optional, and the investor can still hold his shares in physical form. Though the investor will still have to demat the shares if he wishes to sell them through the same stock exchange. If an investor purchases shares, he will get the delivery of those shares in the form of a demat.    

Investors have to trade in a dematerialised form to trade in the shares of a listed company, and the company enlists its shares with the depositories. The Depositories Act, 1996 , set up two depositories in India: 

• National Securities Depository Limited (NSDL)
• Central Depository Services (India) Limited (CDSL)  

There are several advantages to a depository system: 

• Paper forms of shares that are held can be lost, damaged, or stolen easily, which can be avoided through the depository system. 
• Shares under this system are held in electronic form, similar to bank accounts, which makes trading for these shares easier.  
• Trading in the shares of a company has also been mandated by SEBI under the compulsory Demat segment. 
• Banks prefer dematerialised securities to provide credit facilities because demat securities attract lower margins and rates of interest compared to physical securities. 

Transfer and transmission of shares

A transfer of shares is done when a shareholder transfers shares to another person in the form of a gift or sale. This transfer, when done by law, particularly by inheritance, is known as the transmission of shares, which is caused by either death or insolvency of the shareholder. Section 56 of the Act lays down the procedure for the transfer of shares and states that a deceased shareholder’s shares can be transmitted through a legal representative even if he is not a member. 

The basic difference between the transfer and transmission of shares is that the former is a voluntary act and the latter is an operation of the law. Transfer of shares requires the existence of a stamp duty, unlike the transmission of shares, which even a private listed company cannot refuse. The transferee does not have the same amount of liabilities that the transferor will have in the process of transferring shares, though in the transmission of shares, the original liabilities apply. While the transfer of shares is not permitted during a lock-in period, the transmission of shares takes place even during lock-in because it is an operation of the law. Transmission of shares does not require any operation or interference of the court of law, though the transfer of shares cannot be possible without an official liquidator.     

Buy-back of shares

Buy-back is a tool for the financial reengineering of the company to purchase or buy back its shares from its existing shareholders when the company has sufficient cash balance with it, and the market price of the securities is much lesser than their face value. Section 68 of the Act permits the buy-back of shares by a company, either public or private, as listed. Section 68(1) lays down the sources for such buy-back: 

• Free reserves: These are the reserves the company has as per the last audited balance sheet available for distribution and share premium but not available for the share application amounts. 
• Securities Premium Account : It is a reserve account that is made from the profits earned by the issuance of shares at a premium. 
• Proceeds of any shares or other securities, though the buy-back of the shares will not be made out of the proceeds of an earlier issue of shares of the same kind of shares or securities. 
• The maximum buy-back limit of the aggregate paid-up capital or reserves of the company is 25%, which requires a specific balance amount with the company to accommodate the total value of the buy-back of shares.  

No company shall purchase its own shares unless: 

• The buy-back is authorised by its articles of association, which can be altered to authorise the buy-back. 
• A special resolution needs to be passed at a general meeting or the buy-back of shares, depending on the quantum of the buy-back. In a listed company, the approval of the directors can only be obtained by a postal ballot. The board of directors can approve the buy-back of shares up to 10% of the total paid-up capital and free reserves of the company. Shareholders can approve a buy-back of 25% through a special resolution of the total equity capital, reserved, or paid-up capital. 
• The ratio of the aggregate secured and unsecured debts that the company owes after the buy-back should not be more than twice the paid-up capital and the free reserves of the company (2:1). The central government can notify a higher ratio for certain classes of companies so that the shares are fully paid-up. 
• The buy-back of the shares and securities listed on a recognised stock exchange will adhere to the rules specified by the SEBI, and the buy-back in respect of the shares of other specified securities other than the other listed securities is in accordance with the rules specified in Chapter IV of the Act.  
• No offer of buy-back stands that is made within a period of 1 year from the date of the closure of the preceding buyback.  
• The company, after the completion of the buyback, shall file it with the register of the SAPI in a matter of 30 days.  If the company buybacks securities, it shall extinguish its securities within 7 days of the completion of the buyback.
• If a company purchases its own shares out of the free reserves during the buyback, the amount equal to the nominal value of the shares will be transferred to the share redemption reserve, and the details of this transfer shall be included in the balance sheet with no other issues until after 6 months of the buy-back.  

The notice of the meeting at which the special resolution for the buyback is passed will be accompanied by an explanatory statement consisting of: 

• Full and complete disclosure of material facts;
• necessity for buy-back; 
• the class of the shares and securities to be purchased; 
• amount to be invested;
• time limit for the completion of the said buy-back. 

Section 70(1) of the Act prohibits the buy-back of shares in certain circumstances: 

• Any subsidiary company that has its own subsidiary companies;
• any investment company or group of investment companies; 
• a default made by the company in the repayment of the deposits made by it either before or after the initiation of the Act on any interest payment, debenture, redemption of preference shares; or the payment of dividends, loans, or other interests still owed to pay to any financial institution. Though if the company remedies this default within three years, it can still issue buy-backs.    

Advantages and disadvantages of buy-back 

There are several advantages and disadvantages of buy-back for a company depending upon the shares and securities withheld: 

• The company can use its unutilised surplus cash if there are no other proper investment opportunities. 
• Buy-back of shares and securities can improve the return on capital, net profitability, and earning per share of the company. 
• Buy-back can also be used to enable settlement amongst the dissatisfied members of the company. 
• The company can buy the shares of the retiring employees, and the existing management can also keep control over the company because there would be less shares to sell. 
• The remaining shareholders of the company can also be satisfied because of the increased amount of dividend and the increased market value of shares. 
• Buy-back brings liquidity to the investors, and it rationalises the capital structure of the company.  

The disadvantages of buy-back are as follows: 

• Buy-back can also be misused by the companies by endangering the investors through insider trading.  
• The promoters before the buy-back of shares may understate the earrings by manipulating the valuations and accounting policies of the company which would lead to a fall in the price of shares and the promoters would buy them at the lowest prices. 
• The insiders would be able to make more money when the company buy-backs these shares at a higher price. 
• Buy-back of shares can lead to the artificial manipulation of stock prices and also weaken the position of the minority shareholders because buy-back enables the management to increase their control over the company. 

Rights of shareholders 

Shareholders and members of companies enjoy the following rights: 

• Section 47 of the Act gives all the equity members the right to vote pertaining to their shares in the company on every resolution passed by the board. That voting right will be in proportion to the amount of shares they hold in the paid-up share capital of the company. The preference share capital holders will only get the voting rights on the resolutions that directly affect the amount of shares they hold in the company. If the dividend on a specific class of preference shares is not paid-up for 2 years or more, those preference shareholders will get to vote on every resolution passed by the company. 
• If a company accepts the unpaid share capital which is not yet called up, the shareholders will not be entitled to any voting rights of that share capital paid by them. 
• Every equity shareholder has the right to obtain dividends and interim dividends declared by the directors of the company yearly as stated in Section 143 of the Act.  Every preference shareholder has the right to obtain the preferred dividend as per the terms of the issue of their preference shares. Participating preference shareholders will have the right to obtain extra dividends from surplus profit of the company which may be in proportion to the amount of the paid-up capital on its shares if its articles authorise it to do so. 
• Every shareholder of the company has the right to uniform calls on shares when the calls are made by the company for a class of shares for the unpaid capital. 
• Every shareholder of the company has the right to be paid during the winding up of the company for their shares. Preference shareholders of the company have the right to be paid for their preference shares or repayment of the capital and participating preference shareholders have the right to participate in surplus capital as well. Equity shareholders have the right of payment from the capital that is left after repaying the creditors and the preference shareholders.  
• Section 48 of the Act, restricts the variation in the shareholders’ rights Except with the consent of the shareholders of not less than three fourths of the total issued shares whose rights are being modified. Such modification can be made through a special resolution through a shareholders meeting if such modification can be kept according to the memorandum of association and the articles of the company. If the variations in one class of shares affect the other class of shares as well, the three-fourth consent of that other class has to be obtained as well. Descending shareholders holding not less than 10% Of the issued shares of the class which Is under variation shall apply with the restriction of the variation. 
• Every shareholder of the company has the right to participate in the Annual General Meeting along with a notice, financial statements, auditors report, and directors report of the meeting. 
• Every shareholder of the company will have the right to transfer the shares and securities or other interest of the company to other members and shareholders. As per  Section 44 of the Act, shareholders of a public company can easily transfer their shares without any restrictions. Shareholders in private companies need the approval of the board for transfer of their shares. Securities holders have the right to nominate people to whom the securities would be vested after their death. If the nominee of the securities is a minor, the holder has to appoint a person who will be responsible for those securities during the minority period of the nominee. 
• Every equity shareholder of the company has a pre-emptive right to be offered shares when the company further issues capital under Section 62 of the Act.     

Liabilities of shareholders

The liabilities and duties of shareholders of a company are subjected to terms and conditions stated in the articles of the company. The members are obligated to take part in the meetings of the company and vote on resolutions that they have the power to vote on. Shareholders of the company have to take an active interest in decision-making and the appointment of directors, auditors, alteration of memorandums and articles of the company. The shareholders also have to pay the full amount of their shareholding and if required, pledge or mortgage their shares since they are movable property. Share certificates in physical forms can be pledged to raise loans and securities can be pledged to retain the loan amount. If some rights or shares are  transferred to the creditor, it amounts to the mortgage of shares and where shares are in dematerialised form with the depositories, the pledge and mortgage have to be registered with the depository.        

Shares are the cornerstone of any major financial activity taking place in a company, and a company’s share capital is the total number of shares that it has. Every business organisation needs funds for its business activities that it has to raise through several means. The company can raise this cash either internally, through external sources, or by issuing shares and raising capital. Share capital not only helps in getting investment from investors but also helps the company in re-investing in itself. Shares are divided into equity shares and preference shares, which are further divided into other subcategories based on dividends and voting rights. Every shareholder of a company has certain rights and liabilities towards the company that they have to adhere to. A company that wants to increase its share capital and increase its equity can do so by obtaining authorisation from the company’s board of directors for issuing and selling additional shares. Understanding share capital comprehensively is crucial for both companies and their investors to make smart business choices. Companies, on the other hand, can manage their capital structure better and improve their finances in the long run.  

Frequently asked questions (FAQs) 

Are share capital and equity the same.

Share capital is a part of the company’s equity that is raised from issuing equity or preference shares which makes it different from other types of equity accounts. Capital is a subcategory of equity that includes assets and property, and both the company and investors find it highly profitable. 

What is the time limit for share allotment? 

According to the SEBI regulations, companies have a time frame of thirty days to allot shares before closing the subscription of public issues. 

Can the share capital be withdrawn? 

The share capital issued cannot be withdrawn because it provides stability and sustainability for the creditors. Though, buy-back allows the company to withdraw these shares for capital reduction and re-allotment. 

Can a company issue more shares than its authorised share capital? 

A company cannot issue more shares than its authorised share capital if it wishes to do so, it first has to increase its authorised capital through a special resolution passed by the board of directors. 

What is the difference between share and stock? 

Shares in the consolidated form bear distinct numbers, whereas stocks are the consolidated value of the share capital. A share comes into existence before the stock and forms a part of the share capital of the company. 

What is the difference between reserve capital and capital reserve? 

Reserve capital is the part of the uncalled capital of a company which the company decides not to call for the winding up of the company. Capital reserve is created out of capital profit and can be written off for capital losses of the company.    

References 

• https://epgp.inflibnet.ac.in/epgpdata/uploads/epgp_content/law/04._corporate_law/05._share_capital,_its_nature,_kinds,_rights_and_liabilities_of_shareholders/et/8137_et_et.pdf  
• https://www.smallcase.com/learn/what-is-share-capital/  
• https://lawcorner.in/types-of-shares-and-share-capital-under-companies-act-2013/#Introduction  
• https://ncert.nic.in/ncerts/l/leac201.pdf  
• https://www.taxmann.com/post/blog/a-comprehensive-guide-on-capital-of-the-company/  
• https://www.thkjaincollege.ac.in/onlineStudy/commerce/2ndSem/CompanyLaw-2ndSem-AnuOjha.pdf  
• https://wbsche.wb.gov.in/assets/pdf/commerce/GCC&BA_SUPR_Share-capital-1_Sushita-Chakraborty_UG(R1).pdf  
• https://umeschandracollege.ac.in/pdf/study-material/company-law/Share%20Capital%20&%20Debenture.pdf  
• https://www.icsi.edu/media/portals/0/SHARE%20CAPITAL%20AND%20DEBENTURES.pdf  

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• Types of Share Capital

What are the Types of Share Capital?

As you progress through the multiple disciplines of commerce, you will become familiar with how companies raise their capital. Raising capital is perhaps the most challenging task for any company. Most private and public limited enterprises increase their corpus via share capital. 

There are several different types of share capital. At first glance, it might seem complicated. But here – at Vedantu – we will try and highlight these technical issues in lucid language.

You will have to first understand what share capital means.

Meaning of Share Capital

Simply put, share capital is the total sum raised by any organisation by issuing shares. All organisations need a steady flow of capital to continue their expanding business. Remember that a company is an artificial person with its own legal identity.

When people voluntarily contribute money to an entity’s owned corpus, they automatically become co-owners of that entity. Keeping this in mind, the total capital collected by any organisation is its share capital, and its contributors are shareholders.

When modern business structures first started, share capital and its types were limited and easy to understand. Shareholders were co-owners of a company whose shares they had bought.

As businesses evolved, share capital types increased. Since the ownership of an organisation also amounts to bearing responsibility, sharing day-to-day operations and passing around losses incurred, individual shareholders backed away. They buckled under the added pressure.

Others stepped in. They were rewarded with preferred shares. Promoters of large companies were also offered extra advantages. Thus, the kinds of share capital became complicated.

The Companies Act (2013) has specific guidelines for all existing companies and the various ways they issue shares.

When it comes to organisations, the terms ‘capital’ and ‘share capital’ are practically synonymous. 

When a company is registered, its papers, including the Articles & Memorandum of Association, must reflect the total capital.

Break Down of Share Capital 

The shareholders equity section on the balance sheet has a report of the share capital by the firm. The same is bifurcated in different sections and line items based on the source of funds. There are usually three different line items as follows: 

Common stock line 

Preferred stock 

Additional paid-in capital

On a balance sheet, the stock sales are listed at nominal par value. Whereas, the additional paid-in capital is listed at the actual price paid over par for the shares. 

When a company publishes the amount of share capital it would contain only the payments which are made directly from the company of acquisitions. The share capital of the company is not impacted later by the sales and acquisitions of the securities or even the rising and falling rates of the same on the open market. 

It is the company’s choice to have more than one public offering after the initial public offering also known as IPO. The later sales would have an impact and increase the share capital on the balance sheet. 

The term share capital has a different context and could mean different things. A company can legally raise an amount of money on selling the shares and hence there are few contexts to the term as it could mean several types of share capital. 

Classification of Share Capital

There are two different classes of share capital. They are:

Equity Share Capital

Consisting only of equity shares and sans preference shares, this class carries the maximum benefits and also maximum losses. If a company’s shares are doing well on the Stock Exchange, shareholders will benefit as their company will pay extra dividends. Plus, their shares will also have higher resale values.

However, if an organisation loses money, its equity shareholders have to bear the burden of losses. At times, they might even have to sell their shares at below-par values. It is this risk factor that many prospective shareholders cannot stomach. 

Note that those who hold equity shares are eligible to vote at every organisation’s Annual General Meetings or AGMs.

Preference share capital 

It consists only of preference shares. As the name suggests, those who hold preference shares receive preferential treatment. These extra advantages are laid out clearly under Section 43(b) of the Companies Act (2013).

Preferential shareholders have the right to receive dividends before an equity shareholder. They are, indeed, treated differently. Note that if a certain company is running in losses and is unable to issue dividends, preferential shareholders will also receive no extra bonuses.

Furthermore, preference shareholders are eligible to receive their share of a company’s capital if the organisation winds up. 

Tasks for advanced commerce students: Now that you know of Stock Exchanges, find out the details of some of the world’s largest exchanges. You will be surprised by the wide range and how various exchanges operate. Then, you can look up on NASDAQ, FTSE, Tokyo Stock Exchange and other entities.

In India, the BSE and NSE are the largest exchanges. Did you know that every day, a brass bell is rung to announce the commencement of operations?

Different Types of Share Capital

There are several types of shares capital. Follow this list carefully and try and differentiate what each kind entails.

Authorised or Registered Capital: Also known as ‘nominal capital’, it is the maximum share capital, which any company can legally issue. When a company is registered, it has to provide its Memorandum of Association, as previously mentioned. This MoA indicates how much capital a specific company can raise via the issue of shares.

This type of share capital indicates an organisation’s maximum amount of share capital. If it is a Limited company, its MoA will also have details on how much capital is being used to start that enterprise besides how many shares it intends to issue.

If the authorised share capital is increased under any situation, the concerned regulators must be notified. 

Issued Capital: Whenever shares are floated for general consumption, only part of the total authorised share capital is perused. This portion of the total share capital is issued capital. Issued capital will always be much lower than an entity’s authorised or registered capital. 

In extraordinary situations, a company may decide to issue its entire share capital. Such situations arise when a market is in a bear-hug. Only then will issued capital be equal to registered capital.

Find out what the words ‘bear’ and ‘bull’ mean when it comes to stock markets. You can also use the Internet to see the famous sculpture of a bull standing menacingly near New York’s Wall Street. 

Fun Fact: It is popularly called ‘Charging Bull’ and was installed following the 1987 stock market crash.

Subscribed Capital: Once the issued capital is put up for shareholders, the total subscribed part – that which is booked by potential stakeholders – is termed as subscribed capital.

Of note here is the fact that not the entire issued capital may be lapped up immediately. Some companies may have difficulties finding buyers. The performance of a share issue depends on its subscribed capital. If this percentage (subscribed/issued capital) falls too low, that organisation may have to sell another round of shares.

Called-up Capital: It must be kept in mind that shareholders may be unable to pay the total sum of the shares they buy in one episode. They require time to settle the full amount outstanding. Therefore, terms like ‘First Call’ and ‘Final Call’ are used in every stock exchange.

Companies do not like waiting, however. Shareholders will be asked to pay a certain amount whenever they purchase shares. The total amount thus collected constitutes a company’s called-up capital.

Uncalled Capital: Remember called-up capital? Well, the unpaid portion that all shareholders will have to pay later, and which will then be regarded as subscribed capital, is uncalled capital.

A company may set a fixed date by which all outstanding dues are to be settled. Note that the terms mentioned during the share issue is final and no organisation can breach those pre-set conditions. 

One reason why every share issue has terms and conditions is to ensure that companies do not resort to mala fide practices while a certain amount is yet to be paid by a shareholder. Usually, uncalled capital constitutes a large portion of share capital.

Paid-up Capital: The amount which shareholders pay as soon as they buy shares of an entity is known as paid-up capital. It is shown on the asset side of a balance sheet. The greater the paid-up capital, the higher the sum raised during the share issue. The amount thus generated is channelled into an organisation’s cash flow.

Reserve Capital: Reserve capital is defined as that uncalled capital owned by an enterprise that can be issued only in the event of that company’s dissolution of business – regardless of the reason. If a certain firm is not going ‘under’, it cannot issue its reserve capital.

This concept of reserve capital is governed by The Companies Act’s Sec. 99.

Under existing law, no company can turn reserve capital into ordinary capital, save for a court’s orders. This reserved portion cannot be put up by an enterprise as collateral for any loans. Also, if a firm decides to reduce its core capital, it cannot cancel its portion of reserve capital.

Fixed Capital: A company’s existing assets constitute its fixed capital. Such assets may include land, machinery, Intellectual Property, plants or mills and any similar unmovable assets. 

Knowing these topics will give up an edge over your competitors in exams! Refer to Vedantu’s website to read up on more such topics. You can also go through study materials for senior secondary commerce and attend live interactive classes for difficult topics.

Advantages of Raising Share Capital

Raising capital through sales of shares has many advantages to the company raising capital through sales of shares. The company does not have to pay any interest on the raised capital nor it has any repayment terms that have to be adhered to by the company. In case of loans from banks or investors the company will be entitled to regular repayments and will be charged interest as well depending upon the current market and lender terms. 

There are payments of dividends to shareholders that have to be paid but the same is not a compulsion and can be halted if necessary. Hence, the company gets more flexibility over its financial management. 

There are no set rules or obligations attached to the share capital raised through sales of shares. Whereas, a creditor can have certain terms of usage of the capital invested or loaned. This will restrict the company from taking relevant and quick decisions related to finance. 

Raising capital through equity shares can be controlled by the company. The number of shares to be released to the public is decided by the company. The amount per share is decided by the company too. In case, there is any further requirement of capital the company can again decide to release more shares to the public for buying and raising more capital. 

The risk of bankruptcy subsides as well as shareholders cannot force a company into bankruptcy unlike banks and creditors if the company fails to pay the interest or repayments. 

Disadvantages of Raising Share Capital

Every share sold to the public to raise share capital is losing a bit of ownership of the company. It effectively reduces the control over the company as shareholders have the right to vote on business deals and decisions. The corporate policy and even the management of the company would have interference by the shareholders. In the event, the shareholders have the majority of the shares of the company, they can decide to change the current leadership and bring their choice of management into the company. 

Shareholders take more risk than creditors as they can not force a company into bankruptcy and hence demand higher ROI (Return on Investment) from the company. 

FAQs on Types of Share Capital

1. What is the Difference Between Share and Share Capital?

A share is an investment unit bought by a shareholder that entitles part ownership with limited liabilities of a particular company to the holder of shares. Whereas, the funds raised by the company by sales of share is called Share capital. Whenever a company needs capital, one way to do it is by issuing shares. Shareholders can then buy these shares and own a part of that firm. The total sum raised post selling these shares is termed share capital. The latter term applies to companies only. 

2. How can I get Share Capital?

As an individual, you cannot ‘raise’ share capital. You can purchase shares of a certain company and have ownership to the extent of shares bought. Share capital is raised by companies that have the legal rights to raise capital through investment from the public. Share capital can also be raised through creditors. On sales of shares to the public, the shareholder is entitled to dividends upon the investment whereas, creditors have their own payment terms. Creditors have to be paid interest and the investment amount has to be paid as well. 

3. What is the Minimum Share Capital?

There are three different types of share capital categories - Authorised Capital, Paid-Up Capital and Subscribed Capital. Under the Companies Act 2013, any private limited company had to authorise or release a minimum of Rs. 1 Lakh as minimum share capital. For public limited companies, that sum was Rs. 5 Lakh. Now, the Companies Amendment Act, 2015, has removed that requirement for private limited enterprises only. Hence, the minimum amount of share capital depends solely on the nature of the business and its requirements. 

4. Can a company alter its share capital? 

Alteration of share capital could be an increase or decrease of share capital. As per section 61 of the companies act of 2013, there are about five different ways for a company to alter their share capital. 

Alter capital clause in Memorandum of Association (MOA) by increasing the authorised share capital 

Increasing the per-share price by consolidating a larger amount of shares 

Subdivide the price of the share by converting all paid-up capital 

Cancel the shares that have not been subscribed

5. What is the surrender of shares? 

When a shareholder decides to return the shares owned by a particular company it is called the surrender of shares. The returned shares or the surrendered shares are then cancelled by the company. The shareholder has to voluntarily forfeit the shares held to the company. It is not mandatory for the company to accept the surrender of shares unless specified in the Articles of Association. Mostly, only partly paid-up shares are accepted by the company. The shares can be cancelled and reissued by the company.  

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Short Put Assignment – How To Avoid It & What To Do If Assigned

posted on April 28, 2023

You probably sold a Put Option thinking the market would go up.

But now your Short Put is In-the-Money (ITM) and you’re either in danger of getting assigned, or you may have already been assigned the shares.

If you’ve already been assigned, you may be panicking now.

That’s because the unexpected assignment of the shares made your cash balance negative and you could be in danger of a margin call.

In both cases what do you do?

How do you avoid getting assigned if your Short Put is now ITM?

What do you do if you’re already been assigned the shares?

And what do you do if you get a margin call?

What To Do If You Get A Margin Call?

So the most urgent matter to address is if you get a margin call.

If you get a margin call, you want to deal with it immediately.

That’s because if you don’t do anything, your broker can liquidate your positions to meet their margin requirement.

That could mean closing out other positions other than your Short Put position.

So if you have multiple positions, the broker could randomly close positions in your account.

At this point, you have two choices.

The first choice is to add more funds to meet the margin requirement.

The second choice is to close out positions on your own to meet the margin requirement.

According to FINRA (Financial Industry Regulatory Authority), you have two to five days to meet the call:

That should be more than enough time to transfer funds into your account (if you still have more funds), or to close out positions in your account to meet the margin call.

What To Do If Your Short Put Is Assigned

If your Short Put is already assigned, that means you’re now Long 100 shares per Put Option.

In this case, to reverse the assignment and reinstate your original Short Put position, you need to do two things:

• Sell the shares.
• Sell a Put at the same strike but with a longer DTE.

And you do these two things simultaneously in a single order ticket:

By doing it in a single ticket, you do not have any spreading risk because they will move in tandem.

So when you do this, you will reinstate the same Short Put strike but with a longer DTE.

With a longer DTE, there will be more extrinsic value in your Option, which reduces the chances of getting an early assignment.

When You’re In Danger of Early Assignment

The next thing to know is exactly when you’re in danger of getting assigned.

It doesn’t mean that if your Put is ITM, you’d automatically be assigned.

In fact, it’s very rare to get assigned.

The only time you’re likely to get assigned is if the following happens:

• Short Put is ITM.
• And extrinsic value is very little.
• And very few DTE (days to expiration).

The biggest factor that determines whether you have a likelihood of getting assigned is if your extrinsic value is very little.

That’s because when the extrinsic value of the Put is very little, it may not benefit the Put buyer to hold on to the Option.

But as long as there’s still a decent amount of extrinsic value left, you’re unlikely to get assigned even if your Put is ITM.

Understanding The Mindset of Put Buyers

To understand this a little better, we need to get into the mindset of Put buyers and see when they would likely exercise.

Let’s assume you sold a Put on AMZN at the strike price of 120 for $2.00.

Now, let’s switch to the Put buyer’s perspective.

That would mean that the Put buyer bought a Put at the strike price of 120 for $2.00.

The next step is to understand why did this person buy a Put Option.

In general, there are two main reasons why someone would buy a Put Option:

• To speculate a move to the downside (either as a single Option or part of a spread trade ).
• To protect their Long stock position.

Next, we want to map out the different scenarios that can happen and see if the Put buyer would actually exercise their Option in each of the scenarios.

Scenario 1: The stock drops to $115.

Let’s say the stock drops to $115 and the Put Option is now worth $6.00.

So that’s a $4.00 increase in the Put’s value.

Of the $6.00, the value is divided into intrinsic value and extrinsic value:

• Intrinsic value = $5.00
• Extrinsic value = $1.00

When the Put buyer bought the Put, it was just $2.00 of extrinsic value (no intrinsic value because it’s OTM).

After the stock dropped to $115, it gained $5.00 of intrinsic value and lost $1.00 extrinsic value.

Here’s a question for you:

If you were the Put buyer, would you exercise your Put Option?

To know the answer, we want to compare the two choices a Put buyer has at this point.

The first choice is to exercise the Put Option.

By exercising, the Put buyer would either be Short 100 shares at $120, or if the Put buyer already has 100 shares of the stock it would be sold away at $120.

In both cases, when exercising, the Put buyer immediately forfeits the extrinsic value of $1.00.

So if he became Short 100 shares at $120 and immediately sold at $115, his profit would be $5 per share minus the $2 he paid for the Put, which equals $3 profit per share.

If he initially already had 100 shares of the stock, he would be saving $3 loss per share.

The second choice is to just sell off the Put Option.

By selling the Put Option, the Put buyer would have made $4 (bought for $2 and sold for $6).

So in this scenario, it would make more sense for the Put buyer to simply sell off his Put Option than to exercise it.

Scenario 2: The stock drops to $105 with 30 DTE.

In this scenario, the stock has dropped significantly but there’s still 30 DTE left in the Put Option.

The value of the Put has now ballooned to $15.05:

• Intrinsic Value = $15.00
• Extrinsic Value = $0.05

The Put is now deep ITM and there’s very little extrinsic value left.

However, there are still 30 DTE left in the Put Option.

If you were the Put buyer, would you exercise the Put?

In this scenario, it still is unlikely that you’d get assigned because there are still many days left to the Put’s expiration.

If the Put buyer anticipates the stock to fall further, it still makes sense to hold on to the Put until it’s closer to expiration before making a decision to exercise or not.

And if he exercises it, he will forfeit the $0.05 in extrinsic value (which is an additional $5 in profit).

Furthermore, exercising can incur further charges.

So in general, Put buyers would rather just sell off the Put than exercise it.

Scenario 3: The stock drops to $105 with 7 DTE.

In this scenario, the stock also drops to $105 but there’s 7 DTE left.

The value of the Put is now $15.01:

• Extrinsic Value = $0.01

In this case, if you were the Put buyer, would it make sense for you to exercise the Option?

The answer is yes.

That’s because there are not that many days left to the Put’s expiration.

And there’s pretty much no extrinsic value left.

So if your Put doesn’t have much extrinsic value left and there are not many days left to expiration, then it’s highly likely you’d get assigned.

So how do you avoid early assignments?

How To Avoid Early Assignment

The best way to avoid any early assignments is by simply rolling your Short Put .

There are two ways to do this:

• Defensive Method: This method is to proactively roll your Short Put out & down the moment it gets breached to avoid getting ITM. This way you will always keep the delta below 50 so there’s no chance of an early assignment.
• 21 DTE Method: Since we already know that it’s unlikely for an Option to be exercised when there’s still more than 21 DTE left, we only look to roll around the 21 DTE mark. Oftentimes, the Put could be ITM before the 21 DTE mark but is OTM by the time it’s 21 DTE. So if at 21 DTE the Put is ITM, we roll. If it’s OTM, we do nothing and let Theta do its work.

When you use these two methods, the chances of getting assigned on your Short Put get reduced significantly.

Reader Interactions

January 5, 2024 at 3:37 AM

so if you’re somewhere in the middle ie your neutral on the stock. and the put you sold had a strike of 145 and the stock is say 142 what about taking ownership of the stock at the 142 and selling say a 144 call for 3$ getting it called away and then start over selling puts ?

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Documentary Stamp Tax on Shares of Stock in the Philippines

Documentary stamp tax in the Philippines is imposed on the issuance and transfers of shares of stock in the Philippines, whether a par value shares of stock (with minimum fixed value for issuance in the Articles of Incorporation in the Philippines) or a no par value shares of stock. Documentary stamp tax on shares of stock in the Philippines is imposed upon any party – the issuer corporation / seller stockholder, or the buyer stockholder, based on the subscription of such shares, regardless of the issuance of stock certificates.

Documentary stamp tax on original issuance of shares in Philippines

On every original issue, whether on organization, reorganization or for any lawful purpose, of shares of stock by any association, company or corporation, there shall be collected a documentary stamp of One peso (P1.00) on each Two hundred pesos (P200) , or fractional part thereof based on the following:

• Par value, of such shares of stock.
• Actual consideration for the issuance of such shares of stock  in the case of shares of stock without par value,
• On the actual value represented by each share in the case of stock dividends.

Original issuance of shares of stocks in the Philippines refers to the issuance of shares of stocks of a corporation to the stockholders. This applies in the following instances:

• Approval of the application for registration of stock corporation with the Securities and Exchange Commission (SEC) with respect to the pre-incorporation subscription, e.g. minimum subscription of 25% based on authorized capitalization;
• Increase of authorized capitalization with the SEC requiring a minimum subscription of 25% based on authorized capitalization also;
• Issuance of unsubscribed authorized capitalization requiring an application for confirmation of Securities Regulation Code (SRC) exemption under SRC Rule No. 10.1 with  with the SEC;
• Issuance of shares of stock through declaration of stock dividend in the Philippines

 Sample computation of DST on original issuance of shares

C Corporation applies for SEC registration with an authorized capitalization of P10M, subscribed and paid-up capitalization of P3M worth of par value shares divided among the five (5) incorporators. Upon approval of the Articles of Incorporation and By-laws, its documentary stamp tax in the Philippines shall be computed as follows:

Par value of original issue of shares         PhP 3M

Divided by                                                           P  200

DST due in the Philippines                            PhP15k

In the above illustration on how to compute DST on original issuance of shares, C Corporation shall be liable for P15k DST in the Philippines.

Documentary stamp tax on sale or transfer of shares in Philippines

On all sales, or agreements to sell, or memoranda of sales, or deliveries, or transfer of shares or certificates of stock in any association, company, or corporation, or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the benefit of such stock, or to secure the future payment of money, or for the future transfer of any stock, there shall be collected a documentary stamp tax of:

• Seventy-five-centavos (P0.75) on each Two hundred pesos (P200), or fractional part thereof, of the par value of such stock, or
• Twenty-five percent (25%) of the documentary stamp tax paid upon the original issue of said stock in the case of stock without par value

Only one tax shall be collected on each sale or transfer of stock from one person to another, regardless of whether or not a certificate of stock is issued, indorsed, or delivered in pursuance of such sale or transfer. For purposes of the transfer by the Corporate Secretary in the Stock and Transfer Book (STB) of such shares of stock from the seller to the buyer, a Certificate Authorizing Registration (CAR) shall be secured with the Bureau of Internal Revenue (BIR) . DST in the Philippines shall be paid upon such transfer of shares and the DST returns is required by the BIR for the issuance of CAR.

Documentary Stamp Tax on Listed Shares

Under Section 199(e) of the Tax Code of the Philippines, as amended, sale, barter, or exchange of shares of stock listed and traded through the local stock exchange are exempted from documentary stamp tax in the Philippines.

Filing and payment of documentary stamp tax on shares in Philippines

DST on shares of stock in the Philippines is required to be filed and paid not later than the 5th day of the month following the month of issuance or transfer of such shares of stock in the Philippines. BIR Form No. 2000 is normally used for the original issued of shares, while  BIR Form No. 2000-OT for sale or transfer of shares and used as a requirement is securing BIR Certificate Authorizing Registration. Alternatively, electronic filing and payment system (EFPS) filers may do it under online filing.

Disclaimer : This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.  For comments, you may please send mail at  in**@ta************.org .

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MC 2013-04 | Clarificatory Policy on Share Capital

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Section 8. Articles 72, 73, 74, 75, 76, 77, 78, 79 and 80 of Chapter VIII on Capital, Property, and Funds of the same Code are hereby renumbered and amended to read, as follows:

"CHAPTER VIII "Capital, Property, and Funds "ART. 71. Capital. — The capitalization of cooperatives and the accounting procedures shall be governed by the provisions of this Code and the regulations which shall be issued. "ART. 72. Capital Sources. — Cooperatives registered under this Code may derive their capital from any or all of the following sources: "(1) Members' share capital; "(2) Loans and borrowings including deposits; "(3) Revolving capital which consists of the deferred payment of patronage refunds, or interest on share capital; and "(4) Subsidies, donations, legacies, grants, aids and such other assistance from any local or foreign institution whether public or private: Provided, That capital coming from such subsidies, donations, legacies, grants, aids and other assistance shall not be divided into individual share capital holdings at any time but shall instead form part of the donated capital or fund of the cooperative.

"Upon dissolution, such donated capital shall be subject to escheat.

"ART. 73. Limitation on Share Capital Holdings. — No member of a primary cooperative other than a cooperative itself shall own or hold more than ten per centum (10%) of the share capital of the cooperative.

"Where a member of a cooperative dies, his heir shall be entitled to the shares of the decedent: Provided, That the total share holding of the heir does not exceed ten per centum (10%) of the share capital of the cooperative: Provided, further, That the heir qualify and is admitted as member of the cooperative: Provided, finally, That where the heir fails to qualify as a member or where his total share holding exceeds ten per centum (10%) of the share capital, the share or shares in excess will revert to the cooperative upon payment to the heir of the value of such shares.

"ART. 74. Assignment of Share Capital Contribution or Interest. — Subject to the provisions of this Code, no member shall transfer his shares or interest in the cooperative or any part thereof unless:

"(1) He has held such share capital contribution or interest for not less than one (1) year; "(2) The assignment is made to the cooperative or to a member of the cooperative or to a person who falls within the field of membership of the cooperative; and "(3) The board of directors has approved such assignment.

"ART. 75. Capital Build-Up. — The bylaws of every cooperative shall provide for a reasonable and realistic member capital build-up program to allow the continuing growth of the members' investment in their cooperative as their own economic conditions continue to improve.

"ART. 76. Shares. — The term 'share' refers to a unit of capital in a primary cooperative the par value of which may be fixed at any figure not more than One thousand pesos (P1,000.00). The share capital of a cooperative is the money paid or required to be paid for the operations of the cooperative. The method for the issuance of share certificates shall be prescribed in its bylaws.

"ART. 77. Fines. — The bylaws of a cooperative may prescribe a fine on unpaid subscribed share capital: Provided, That such fine is fair and reasonable under the circumstances.

"ART. 78. Investment of Capital. — A cooperative may invest its capital in any of the following:

"(a) In shares or debentures or securities of any other cooperative; "(b) In any reputable bank in the locality, or any cooperative; "(c) In securities issued or guaranteed by the Government; "(d) In real estate primarily for the use of the cooperative or its members; or "(e) In any other manner authorized in the bylaws.

"ART. 79. Revolving Capital. — The general assembly of any cooperative may authorize the board of directors to raise a revolving capital to strengthen its capital structure by deferring the payment of patronage refunds and interest on share capital or by the authorized deduction of a percentage from the proceeds of products sold or services rendered, or per unit of product or services handled. The board of directors shall issue revolving capital certificates with serial number, name, amount, and rate of interest to be paid and shall distinctly set forth the time of retirement of such certificates and the amounts to be returned."

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Assignment: Definition in Finance, How It Works, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

• The transfer of an individual's rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
• In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.

Key Takeaways

• Assignment is a transfer of rights or property from one party to another.
• Options assignments occur when option buyers exercise their rights to a position in a security.
• Other examples of assignments can be found in wages, mortgages, and leases.

Uses For Assignments

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, or other asset of value. to another entity through a written agreement.

Assignment rights happen every day in many different situations. A payee, like a utility or a merchant, assigns the right to collect payment from a written check to a bank. A merchant can assign the funds from a line of credit to a manufacturing third party that makes a product that the merchant will eventually sell. A trademark owner can transfer, sell, or give another person interest in the trademark or logo. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of the object.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker's paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy . Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

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Philippine Legal Forms

Deed of assignment of shares of stock sample.

Philippine Legal Forms Tags: Deed of Assignment , Deed of Assignment of Shares of Stock , Deed of Assignment Sample