Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
DEFINITION
According to the Companies Act 1956, a company is a company formed and registered under
this Act
Justice Marshall has defined a company as, A Corporation is an artificial being, invisible,
intangible and existing only in the contemplation of law.
According to Lord Justice Hanay, A company is artificial person created by law with a
perpetual succession and a Common Seal.
CHARACTERISTICS OF A COMPANY
The characteristics of a company are:
Statutory Companies
These companies are created by special acts passed by State Legislature or Parliament, e.g., Life
Insurance Corporation, Reserve Bank of India. These companies are accountable to the State
Legislature or Parliament.
Government Company
As per Section 617 of the Companies Act, 1956, a Government Company means any company
in which not less than 51% of the paid-up capital is held by the Central Government, or by any
State Government or Governments, or partly by the Central Government and partly by one or
more State Governments and includes a company which is a subsidiary of a Government
Company.
Foreign Company
A foreign company is one that has its incorporation outside India but has business operations in
India.
Holding Company
According to Section 4 (4) of the Companies Act, 1956, a company is deemed to be a holding
company if the other company is its subsidiary company. A company becomes a subsidiary
company when the other company controls 51% or more of its paid-up share capital, has right to
appoint directors on its board or is a subsidiary of another subsidiary company.
Subsidiary Company
According to Section 4 (1), a company shall be deemed to be a subsidiary of another if, but only
if,
Example:
Registered Company
Companies that are registered under the Companies Act, 1956 are called registered companies.
Listed Company
A listed company is a public limited company. Its securities are listed in any recognized stock
exchange for trading purpose.
Unlisted company: An unlisted company is also a public limited company. But its securities are
not listed on any recognized stock exchange for trading purpose.
Limited Company
In limited companies, liability of shareholders is limited (i) by shares or (ii) by guarantee.
i. Companies limited by shares are the most popular ones. In this, liability of a member is
limited to the amount of shares, fully paid-up.
ii. In companies limited by guarantee, the liability of the member is limited to the amount he
guaranteed voluntarily to meet out the deficiency of assets of the company when it is wound
up.
Unlimited Company
In unlimited companies, liability of shareholders is unlimited. In general and in practice such
companies do not exist.
DOCUMENTS
Now, let us discuss some of the documents that are to be prepared and filed with the Registrar of
Companies:
1. Memorandum of Association
This is the most important document to be filed with the Registrar of Companies, while floating
a company. It contains the following six clauses:
i. Name: The name of the Company with Limited in case of public limited company or
Private Limited in case of private limited company.
ii. Place: The State in which the registered office of (situation) the company is to be situated.
iii. Objects: The objects of the company should be clearly stated. Only those stated in this clause
can be pursued by the company.
iv. Capital: Authorized capital and its divisions into various classes (shares).
v. Liability: A statement declaring that the liability of the members is limited.
vi. Declaration: A declaration of association stating that the company has been formed by the
signatories to the Memorandum of Association.
It lays down the limits or framework within which a company has to work.
The Memorandum of Association must be printed, divided into paragraphs, each numbered
consecutively. It must be signed by Atleast Seven persons who each agree to take one share at
least.
2 Articles of Association
It contains the rules and regulations to run the companys business.
3 Certificate of Incorporation
The Registrar, after perusal of the documentsthe Memorandum of Association and the
Articles of Associationgets satisfied that the requirements the Companies Act have been
duly complied with, will issue a certificate. This is called Certificate of Incorporation.
The Registrar will enter the companys name in the Registrar. The company comes into
existence.
A private company can commence business as soon as it receives this certificate. However, a
public limited company will have to get one more certificatethe Certificate of
Commencement of Business to commence its business.
Prospectus
According to Section 2 (36) Prospectus means [any document described or issued as a
prospectus and includes any] notice, circular, advertisement or other document [inviting deposits
from the public or] inviting offers from the public for the subscription or purchase of any shares
in, or debentures of, a body corporate.
A public limited company has to issue a prospectus (or prepare a statement in lieu of
prospectus) signed by every director before its publication and file a copy with the Registrar in
order to get the Certificate of Commencement of Business.
Its main objective is to invite the public to subscribe for the shares and debentures of the
company.
The prospectus must be dated and it should be issued within 90 days of that date.
Main clauses in prospectus:
The prospectus serves as a basis of contract between the company and the person who opts to
buy shares.
The Registrar may refuse to register a prospectus, if
On perusal and satisfaction, the Registrar issues a certificate called the Certificate of
Commencement of Business.
A public limited company can commence business only after getting this certificate.
SHARE CAPITAL
Company raises Capital by issue of shares, because it being an artificial person cannot have a
capital of its own. Such capital raised by issue of shares is called share capital. Share capital is
mentioned in the Memorandum of Association of Company. Share capital of a company is
divided into small units of a fixed amount. These units are called shares.
Types of share capital: The share capital of a company may be divided into the following
categories
2 .Issued Capital
The capital (part of authorized) offered to the public for subscription is called issued capital.
This includes shares offered to vendors for subscription other than cash. Issued capital can never
be more than nominal capital. The shares may or may not be fully subscribed by the public.
Difference between issued capital and nominal capital is termed as unissued capital. This can
be offered to the public later at any time.
3. Subscribed Capital
It is the nominal value of shares subscribed by the public. Shares issued for public may or may
not be fully subscribed. If all the shares are fully subscribed by the public, issued capital will be
the same as the subscribed capital.
The balance of issued capital not subscribed by the public is known as unsubscribed capital.
4 Called-up Capital
This is the part of the subscribed capital which has been called-up. The Board of Directors may
decide to call the entire amount of the face value of the share of part by part in two or more calls.
It is not necessary to call for the entire amount on shares subscribed by the shareholders at one
and the same time.
5 Paid-up Capital
The amount of called-up capital that has been actually paid by the shareholders is known as
paid-up capital. If all the called-up capital has been received, then paid-up capital will equal to
the called-up capital. That part of called-up capital which has not received is termed as calls-in-
arrears.
6 Uncalled Capital
This is the remaining part of the issued capital which has not yet been called.
7 Reserve Capital
Sometimes, the company, by a special resolution, may decide to keep a certain portion of the
uncalled capital till liquidation. That portion is called reserve capital.
SHARES OF A COMPANY
Meaning
Total capital of company is divided into units of small value. Each such unit it called a share.
A share is a fractional part of the share capital of a company. By purchasing a share, one attains
ownership rights in a company. Such persons who part away money through shares are known as
shareholders. They, thus, become part owners of the company. A share is the interest of a
shareholder in the company measured by a sum of money, for the purpose of liability in the first
place and of interest in the second, but also consisting of mutual covenants entered into by all the
shareholders in terms of the Act and the Articles.
Classes of Shares
According to Section 86 of the Companies Act, 1956, share capital of a company formed after 1
April 1956 shall be of only two kinds: (i) preference shares and (ii) equity shares.
Preference Share
U/S 85 of the Companies Act, 1956, a preference share is one which fulfils the following
conditions:
In simple words, these preference shareholders have (i) the right to receive dividend and (ii) to
return of capital in preference to other shareholders.
A fixed rate of dividend payable is mentioned before the name, i.e., prefixed. For example,
12% reference shares mean that dividend is payable on these shares at the rate of 12% p.a.
The rights are shown in the Articles of Association.
Types or Kinds of Preference Shares
1. Cumulative preference shares: The holders of these shares have a right to receive the
arrears of dividend. They are entitled to receive the arrears of dividend before any
dividend is paid on equity shares. For example, if dividend has not been paid for the
accounting years 2008-09 and 2009-10 on 15% cumulative preference shares and the
company wants to distribute dividend on equity shares for the year 2010-11, dividend
on preference shares for three years, i.e., 2008-09; 2009-10; 2010-11 at 15% p.a., 45%
for three years in all, will have to be first paid on preference shares before any
dividend is paid on equity shares for the year 2010-11. Unless specifically mentioned
otherwise, preference shares shall be construed to be cumulative.
2. Non-cumulative preference shares: The holders of these shares will not have rights
to receive any arrears of dividend. In the above example, if the preference shares are
non-cumulative, the company will pay 15% preference dividend only for 2010-11
before paying dividend on equity shares. They are not entitled to receive arrears for the
years 2008-09 and 2009-10. Hence, for non-cumulative preference shares, dividends
for the previous years do not accumulate. If no dividend is declared in a year, the right
to receive such dividend for that year expires automatically.
1. Redeemable preference shares: A company may issue shares on the condition that
the company will repay after a fixed period or even earlier at companys discretion.
The repayment on these shares is called redemption. This is governed by Section 80 of
the Companies Act, 1956. Now, only this category of preference shares can be issued
by a company.
2. Non-redeemable preference shares: In this category of shares, the amount of capital
will never be paid back before winding up of the company. According to Section 80
(5A), no company limited by shares shall issue irredeemable preference shares for
preference shares redeemable after the expiry of 20 years from the date of issue.
1. Convertible preference shares: These shares give the rights to the holders to get them
converted into equity shares at their option as per the stipulated terms and conditions of
their issue.
2. Non-convertible preference shares: If a preference share cannot be converted into
equity shares, such a share is called non-convertible preference share. Unless otherwise
stated, preference shares are non- convertible.
EQUITY SHARES
According to Section 85 of the Companies Act, 1956, An equity share is a share which is not a
preference share.
Holder of equity shares is entitled to:
i. Dividend
ii. Repayment of capital only after the claims of preference shares are paid off.
According to Section 86 (A), equity share capital may be (i) with voting rights or (ii) with
differential rights to voting, dividend or otherwise in accordance with such rules and subject to
such conditions as may be prescribed.
Generally, equity shareholders control the affairs of the company.
Distinction Between Preference Share and Equity Share
The following table gives the differences between preference share and equity share:
Basis of Preference Share Equity Share
Distinction
1. Right to Dividend on preference shares is Only if there is profit and that too after
dividend paid first. paying to preference shares, are the
(Preference) dividend is paid.
2. Rate of dividend Rate of dividend is pre-determined Rate of dividend is not pre-determined
and fixed in Articles of Association. and is also not fixed.
3. Refund of On dissolution of the company, Only if there is any balance, that the
capital preference share capital is returned capital may be refunded.
(refunded) first.
4. Right to vote In general, they do not have right to They have full right to vote.
vote.
5. Management They have no role in management They have right to participate in
participation participation. management.
MINIMUM SUBSCRIPTION
At this stage, one has to understand the meaning of minimum subscription. Let us discuss it.
Minimum subscription means the amount which, in the opinion of the Board of Directors, is
the minimum to be raised by the issue of shares so as to provide for the following:
For any new company issuing shares for the first time, this should be strictly adhered to. In
case the newly incorporated companies are unable to raise the minimum subscription amount, it
will not be able to get Certificate of Commencement of Business. The time limit to raise the
minimum subscription is 120 days from the date of first issue of prospectus. If the company fails
to do so, it has to refund the entire amount received from application within the next 10 days,
i.e., within 130 days from the date of issue of prospectus.
Norms imposed by SEBI: If a company does not receive 90% of the issued amount from
public subscription PLUS accepted development from underwriters or from other sources in case
of under-subscribed issues, within 60 days from the date of closure of the issue, the company
must refund the subscription amount in full. This condition is applicable to all the public and
rights issue of shares.
CALLS-IN-ARREARS
Sometimes, shareholders may fail to pay the amount due on CALLS. The amount not received
on calls (as per terms and conditions) by the company is termed calls-in-arrears.
An interest (5% p.a.) is charged on calls-in-arrears till such amount is paid. The directors are
empowered to waive the interest charge. This amount is shown as deduction from the called-up-
capital to arrive at the paid-up share capital in the balance sheet.
Accounting Treatment:
The following are the two methods for dealing with calls-in-arrears:
CALLS-IN-ADVANCE
When a company accepts money, paid in advance for calls, for which they are not yet DUE, such
amount is called calls-in-advance. For this, the Articles should permit to do so. This amount is
adjusted when the respective call is made. It may occur at the time of pro-rata allotment also. In
such a case, if surplus application money is treated as calls-in-advance, interest will be paid with
effect from the date of allotment only.
Usually, 6% interest is allowed on calls-in-advance. Such interest is a charge against profit.
Balance of calls-in-advance A/c is shown as a separate item on the liabilities side of the balance
sheet, under the head Current Liabilities.
Illustration
Model: Calls-in-advance
Jasemine & Co. Ltd. issued to the public 1,00,000 shares of 10 each payable as:
On Application
3
On Allotment
3
On First & Final Call
4
All the shares were subscribed for and all money due was received. A shareholder who paid
for 1,000 shares paid the call money along with allotted money.
Pass the necessary journal entries in the books of Jasemine Ltd.
Solution
Note: Paid call money along with allotted money means that it was paid in advance.
This calls-in-advance was paid along with allotment money. So, when money paid on
allotment, this has to be credited.
When the money is paid on call, this has to be adjusted with that.
Illustration
Solution
YTo whom 100 shares were allotted did not pay in due date.
He paid allotment money and first call only along with final call.
Problem
On 1 January 2010, X Ltd. makes an issue of 20,000 equity shares of 10 each payable as:
On Application
2
On Allotment
3
On First & Final Call
5 (three months after allotment)
Applications were received for 25,000 shares. The directors made in full to the applicants
demanding ten or more shares and rejected and returned money to the applicants for 5,000
shares. One shareholder Mr. A, who was allotted 50 shares, paid first and final call with
allotment money. Another shareholder Mr. B did not pay allotment money on his 100 shares but
he paid with first and final call. Directors have decided to charge and allow interest, as the case
may be.
Journalize the transactions.
Problem
The accounting treatment will differ in each approach. Let us discuss one after one as follows:
Securities premium account has to be used only for the following purposes:
a. To write off preliminary expenses of the company
b. To issue fully paid bonus shares to the members
c. To write off the expenses of, or the commission paid or discount allowed, on any issue of
shares or debentures of the company
d. To pay premium on the redemption of preference shares or debentures of the company
In case the company wants to utilize the securities premium account for any other purpose, it
will have to obtain permission from the Court to do so.
Issue of Shares at a Discount
When shares of a company are issued at a price less than its face value (nominal value), it is
known as shares issued at a discount.
Example: When a share of the face value of Rs.10 is issued at Rs. 9, it is issued at a discount of
Re 1.
According to Section 79 of the Companies Act, a Company can issue only if the following
conditions are satisfied:
Accounting Treatment:
Journal Entry
Share Allotment A/c Dr.
Discount on Issue of Shares A/c Dr.
To Share Capital A/c
(Amount Due on Allotment of Shares @ per Share and Discount on Issue Brought
into Account).