ACCOUNTING FOR SHARE CAPITAL

SHARE CAPITAL OF A COMPANY: -  Share Capital means the amount that a company receives towards Share Capital from issue of shares, both Equity Shares and Preference Shares.

The Capital of a company is divided into units of smaller denominations (say ₹ 5, ₹10, or ₹100) and each such unit is called a Share. For example, in a company total capital of Rs 50,00,000 is divided into 5,00,000 units of 10 each, then each unit of 10 is called a share of 10 each. Thus, in the above case the company will be said to have 5,00,000 shares of 10 each. 10 is known as the nominal (face) value of the share.

KINDS OR CLASSES OF SHARES:- Section 43 of the Companies Act, 2013 prescribes that Share Capital of a company broadly can be of two types or classes:

1. Preference Shares; and

2. Equity Shares.

 1. Preference Shares [Section 43(b) of the Companies Act, 2013]

Preference Shares are the shares which carry the following two preferential rights:

1.     Preferential right to receive dividend, to be paid as fixed amount before it is paid to Equity Shareholders, and

2.     2. Return of capital on the winding up of the organization earlier than that of equity shares.

Classes of Preference Shares:- Preference Shares can be broadly classified as follows:

·       With Reference to Dividend;

·       With Reference to Participation in Surplus Profit;

·       With Reference to Convertibility; and

·       With Reference to Redemption

With Reference to Dividend-:Cumulative Preference Shares and Non-Cumulative Preference Shares.

Cumulative Preference Shares: - Cumulative Preference Shares are those Preference Shares which carry the right to receive arrears of dividend before dividend is paid to the Equity Shareholders. For example, a company has 10,000; 7% Preference Shares of 100 each and dividend for the years ended 31st March, 2017 and 2018 has not been paid. The company earns adequate profits for the year ended 31st March, 2019. In this case, the company shall pay 2,10,000 as dividend for three years to the Preference Shareholders before dividend is paid to the Equity Shareholders.

Non-Cumulative Preference Shares: - Non-Cumulative Preference Shares are those Preference Shares which do not carry the right to receive arrears of dividend.

With Reference to Participation in Surplus Profit: - Participating Preference Shares and Non-Participating Preference Shares.

Participating Preference Shares: The Articles of Association of a company may provide that after dividend has been paid to the Equity Shareholders, the holders of Preference Shares will additionally have a right to take part in the last profits. The Preference Shares carrying this right are referred to as Participating Preference Shares. 

Non-Participating Preference Shares: Preference Shares which do not carry the right to participate in the profits remaining after Equity Shareholders have been paid dividend are Non-Participating Preference Shares.

With Reference to Convertibility: Convertible Preference Shares and Non-Convertible Preference Shares.

Convertible Preference Shares: - Convertible Preference Shares are these Preference Shares which elevate a right to be transformed into Equity Shares.

Non-Convertible Preference Shares: - Non-Convertible Preference Shares are these Preference Shares which do no longer elevate a right to be transformed into Equity Shares.

With Reference to Redemption: Redeemable Preference Shares and Irredeemable Preference Shares.

Redeemable Preference Shares:  Redeemable Preference Shares are those Preference Shares which are redeemed by the company at the time specified (not exceeding 20 years from the date of issue) for their repayment or earlier. The repayment of amount is termed as Redemption.

Irredeemable Preference Shares: Irredeemable Preference Shares are those Preference Shares the amount of which can be returned by the company to the holders of such shares when the company is wound up. The Companies Act, 2013 does not permit issue of Irredeemable Preference Shares.

Equity Shares [Section 43(1) of the Companies Act, 2013] Equity Shares are those shares which are not Preference Shares. Equity Shares are the most commonly issued class of shares and carry the maximum ‘risks and rewards' of the business the risks being losing part or all of the cost of shares if the enterprise incurs losses; the rewards being charge of greater dividends and understanding in the market value.

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