When a company wishes to raise capital, it may do so by bringing a fresh issue of shares in the market. The people who wishes to purchase the shares of the company may apply for the number of shares desired by them in an application form accompanied by some money called ‘application money’. After a specified time, the company therefore issue shares, scrutinizes all the applications and ‘allots’ the shares to the eligible applicants. Hence Allotment of Shares takes place. In this article the process of Allotment of Shares and kinds of shares explained.
Allotment of Shares
A company however raises its capital allotting its shares. Therefore the company uses this money to meet its requirements by way of acquiring business premises and stock-in-trade, called the fixed capital and the circulating capital respectively. Allotment of Shares takes place when company therefore in need for capital and hence allots shares to eligible applicants.
Application of shares
After invitation, application can submitted through prescribed form along with application fee before closing date mentioned in prospectus. Thus Allotment of shares should done with the selected applicants and rest of applicants receive regret letters. However Share certificates issued after the allotment of shares.
Kinds of Share Capital
The share capital of a company limited by shares shall be of two kinds, therefore as follows:
- equity share capital
- preference share capital
- Equity share capital may thus with similar rights or equity shares with different voting rights as described in Rule 4 of Companies (Share Capital and Debentures) Rules, 2014.
- Rights of preference shareholders who thus entitle to participate in proceeds of winding up before commencement of this Act.
The Difference between “Preference Share” & “Equity Share” under The Companies Act, 2013
|Basis for Comparison||Equity Shares||Preference Shares|
|Meaning||Equity shares are however ordinary shares of the company representing the part ownership of the shareholder in the company.||Preference shares are the shares that therefore carries preferential rights on the matters of payment of dividend and repayment of capital.|
|Payment of dividend||However the dividend is paid after full payment of all liabilities.||Here priority is considered in payment of dividend over equity shareholders.|
|Repayment of capital||In the event of winding (a type of legal procedure) up of the company, equity shares thus are repaid at the end.||In the event of winding up of the company, preference shares are thus repaid before equity shares.|
|Rate of dividend||Fluctuating||Fixed|
|Voting rights||Equity shares hence carries voting rights.||Normally, preference shares do not carry voting rights. However, in special circumstances, they get voting rights.|
|Convertibility||However Equity shares can never converted.||However Preference shares can converted into equity shares.|
|Arrears of Dividend||Equity shareholders have no rights to get arrears of the dividend for the previous years.||Preference shareholders generally get the arrears of dividend along with the present year’s dividend, if not paid in the last previous year, except in the case of non-cumulative preference shares.|