Share Capital explained: this guide covers what Share Capital means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Share capital is the foundation of a company's financial structure. The Companies Act 2013 (Sections 43-70) comprehensively governs the types of share capital, procedures for issue, and mechanisms for reduction through buy-back.
Types of Share Capital
- Authorised Capital: Maximum capital a company can issue (as per MOA)
- Issued Capital: Portion of authorised capital that has been issued
- Subscribed Capital: Portion of issued capital that shareholders have agreed to take
- Paid-up Capital: Amount actually paid on subscribed shares
Classes of Shares
| Class | Rights | Key Features |
|---|---|---|
| Equity Shares | Voting, dividends (non-fixed), liquidation surplus | Residual claimants; most common |
| Preference Shares | Fixed dividend priority; usually no voting | Cumulative/Non-cumulative; Redeemable/Irredeemable |
Methods of Issue
- Private Placement (Section 42): Offer to selected persons ≤200 in a financial year; minimum investment Rs. 20,000; no public advertisement; prospectus replaced by PAS-3 filing
- Rights Issue: Offer to existing shareholders in proportion to holdings; notice period 15 days; shareholders can renounce rights
- Bonus Issue: Free shares to existing shareholders from free reserves; no cash received; taxable in buyer's hands only on sale (deemed cost = nil for pre-1 April 2018 bonus)
- IPO/FPO: SEBI ICDR Regulations apply
Buy-Back of Shares (Sections 68-70)
A company can buy back its own shares subject to conditions:
- Buy-back must not exceed 25% of paid-up capital + free reserves in a year
- Post-buy-back debt-equity ratio must not exceed 2:1
- Only from free reserves, securities premium, or proceeds of fresh issue
- Buy-back via: Open market, tender offer, odd lots, shareholders' holding
- Board resolution for up to 10% of paid-up capital; Special resolution for above 10%
- Listed company buy-back: Additional SEBI Buy-Back Regulations compliance
Buy-Back Tax
Buy-back by unlisted companies: Tax on distributed income at 20% in company's hands (Section 115QA). Shareholder receives proceeds tax-free. Buy-back by listed companies: Same provision applicable from 1 October 2024.
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