Shares are a fundamental concept in corporate and securities law. They represent a unit of ownership in a company and confer certain rights and obligations on the shareholder. In India, shares are governed by several legislations, most notably the Companies Act, 2013, and regulated by authorities such as SEBI and stock exchanges.
What are Shares? – Legal Meaning and Definition
In legal terms, a share is defined under Section 2(84) of the Companies Act, 2013 as:
“A share means a share in the share capital of a company and includes stock.”
Shares represent the ownership interest of a person in a company. Shareholders are partial owners and are entitled to receive dividends, vote on company matters, and share in the residual assets upon winding up.
Types of Shares under Indian Law
1. Equity Shares (Ordinary Shares)
- Represent basic ownership in a company.
- Carry voting rights.
- Dividend depends on company profits and Board’s discretion.
- Traded in the stock market.
2. Preference Shares
- Get priority in dividend payments and repayment of capital during winding up.
- Usually come with fixed dividend rates.
- Typically do not have voting rights, except in specific situations.
- Can be:
- Cumulative or Non-cumulative
- Participating or Non-participating
- Convertible or Non-convertible
- Redeemable or Irredeemable
3. Bonus Shares
- Issued free of cost to existing shareholders out of reserves.
- Do not affect a shareholder’s proportion of ownership.
4. Rights Shares
- Offered to existing shareholders at a discounted price.
- Allows existing investors to maintain their ownership percentage.
Legal Framework Governing Shares in India
- Companies Act, 2013 – Primary law governing issue, allotment, transfer, buyback, and shareholder rights.
- SEBI Regulations – Oversee listed companies and protect investors.
- Depositories Act, 1996 – Regulates dematerialisation of shares.
- Income Tax Act, 1961 – Applies to dividends and capital gains from shares.
How are Shares Issued?
Private Companies
- Issue shares via private placement or rights issue.
Public Companies
- Raise capital through Initial Public Offerings (IPO) and Further Public Offerings (FPO).
- Must comply with SEBI (Issue of Capital and Disclosure Requirements) Regulations.
Shareholder Rights
- Right to vote in general meetings (Equity shareholders).
- Right to dividends when declared.
- Right to transfer shares (subject to Articles of Association).
- Right to inspect company records.
- Right to receive surplus assets during liquidation.
- Right to participate in rights and bonus issues.
Share Capital Structure
| Type of Capital | Meaning |
|---|---|
| Authorized Capital | Maximum capital a company can issue (as per MoA). |
| Issued Capital | Portion of authorized capital offered to investors. |
| Subscribed Capital | Portion accepted by investors. |
| Paid-Up Capital | Actual amount paid by shareholders to the company. |
Taxation on Shares in India
- Dividend Income: Taxed in hands of the shareholder at applicable slab rates.
- Short-Term Capital Gains (STCG): 15% tax if sold within 12 months.
- Long-Term Capital Gains (LTCG): Exempt up to ₹1 lakh; 10% tax thereafter (without indexation).
Transfer and Dematerialization of Shares
- Shares are now held in Demat form through NSDL or CDSL.
- Transfer of shares is faster and safer in electronic form.
- Companies must follow SH-4 procedure for physical transfers (rare now).
Relevant Case Law:
Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan (2004)
Supreme Court held that allotment of shares must be made bona fide and in the interest of the company, not to manipulate control.