Introduction To Issue Of Shares | Part 1 | Types Of Shares | Share Capital | Corporate Accounting

Main ideas / lessons (Part 1: Issue of Shares; Types of Shares; Share Capital; Corporate Accounting)

1) Meaning of shares (in corporate accounting)

• A company’s ownership (capital) can be divided into small equal units.
• Each unit of ownership is called a share.
• The number of shares a person holds determines their proportion of ownership in the company.
• Example concept:
  • If company capital is ₹1,00,000 and it is split into 10,000 shares each worth ₹10, then:
    • Total capital = 10,000 × ₹10 = ₹1,00,000.
• Buying shares means buying a corresponding ownership percentage (e.g., buying “2% shares” implies 2% ownership).

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2) Features / nature of shares (exam-oriented list)

All shares (as a general baseline) are explained with these characteristics:

• Unit of ownership
  • Shareholding represents ownership.
• Equal value
  • Shares of the same class have equal face value (not different values just because there are more shares).
• Transferable
  • Shares (especially of public companies) can be transferred to others.
  • Public companies offer shares to the public; private companies do not issue widely.
• Source of income (for shareholders)
  • Returns to shareholders mainly come as dividends (profit share).
• Risk bearing
  • Shareholders bear business risk; expected returns depend on performance.
• Capital nature
  • Shareholders’ investment becomes the company’s capital, generally repayable only under specific conditions (e.g., winding up for equity).
• Voting rights
  • Equity shareholders generally have voting rights (preference shareholders may not).

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3) Types of shares

There are two main categories introduced:

• Equity shares
• Preference shares

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3A) Preference shares (detailed concepts)

How preference shares work (core priority rules)

• Preference shareholders receive dividend at a fixed rate.
• Before dividend is paid to equity shareholders, preference dividend must be paid first.
• On winding up (return of capital):
  • Preference shareholders’ capital is returned before equity shareholders’ capital.
• If company still has surplus profit after meeting preference dividend obligations, remaining profit goes to equity (as discussed in relation to “excess/surplus profit” rights).

Key features of preference shares (as stated)

• Steady income
  • Dividend rate is fixed (timing depends on declaration, but the rate is predetermined).
• No voting right
  • Preference shareholders typically do not have voting rights (as explained).
• Preferential right of repayment
  • Priority over equity in repayment of capital during winding up.
• Risk is lower than equity
  • Dividends to preference shares are treated as prioritized relative to equity.

Preference share sub-types (by criteria)

(1) Basis: Arrears of dividend

• Cumulative preference shares
  • If dividend is not paid in a year, it accumulates and must be paid later.
  • Example:
    • If dividend of ₹10,000 for Year 1 is not paid, it carries forward and becomes ₹20,000 accumulated by Year 2, etc.
• Non-cumulative preference shares
  • If dividend is not paid in a year (due to lack of profit), it does not accumulate for future years.
  • Only the current year’s dividend is relevant when profit exists.

(2) Basis: Share in profit (excess profit)

• Participating preference shares
  • After paying the fixed dividend, preference shareholders get a right to participate in additional/excess profits.
• Non-participating preference shares
  • After fixed dividend, they do not share in additional/excess profits.

(3) Basis: Convertibility

• Convertible preference shares
  • Can be converted into equity shares (as per terms).
• Non-convertible preference shares
  • Cannot be converted into equity shares.

(4) Basis: Redemption (repayment)

• Redeemable preference shares
  • Company repays preference share capital before winding up after a specified period (as described).
• Irredeemable preference shares
  • Capital is repaid only at/after winding up, not earlier.

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3B) Equity shares (core concepts and features)

Meaning (ownership)

• Equity shares represent real ownership.
• Dividend to equity shareholders is paid only after preference dividend is paid.

Dividend and return logic (as explained)

• Equity dividend depends on profit remaining:
  • No fixed dividend rate like preference shares.
  • If profits are low or none, equity dividend may be low or zero.
• Higher risk → potentially higher return
  • Because equity shareholders face more uncertainty, they are said to receive higher dividend potential than preference shareholders.

Key features of equity shares (as stated)

• Voting rights
• Permanent capital
  • Equity capital is repaid only at winding up/liquidation.
• No charge on assets
• Higher risk
• Higher cost / returns potential
• Improves credit standing when company earns excess profit (as described in “credit uniformity” discussion).

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Equity vs Preference shares (comparison summary list)

• Meaning
  • Equity: ownership.
  • Preference: priority claim.
• Dividend
  • Equity: not fixed; depends on profits.
  • Preference: fixed dividend rate.
• Priority
  • Preference dividend first; equity later.
• Voting rights
  • Equity: yes.
  • Preference: no.
• Risk and returns
  • Equity: higher risk, higher return potential.
  • Preference: lower risk, lower return potential.
• Participation in profits
  • Equity: full participation in profits.
  • Preference: only if participating type; otherwise limited.
• Repayment of capital
  • Equity: at winding up.
  • Preference: before equity (higher repayment priority).
• Suitability
  • Equity: investors willing to take risk.
  • Preference: investors seeking stable income.

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4) Share Capital (components and definitions)

Definition

• Share capital is the capital a company raises by issuing shares.
• In balance sheet terms, it appears under equity and liabilities, specifically within Shareholders’ Funds.

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Share capital components (explained as separate “kinds/types”)

The video lists multiple related amounts:

(1) Authorized (registered/nominal) capital

• The maximum limit stated in the MOA (Memorandum of Association).
• Represents the ceiling up to which the company can issue shares.

(2) Issued capital

• Portion of authorized capital that the company actually offers to the public.

(3) Subscribed capital

• Portion of issued shares that the public/holders actually subscribe.

Within subscribed capital, two sub-heads (as described):

• Subscribed and fully paid-up
  • Subscribers have paid the full amount due on shares.
• Subscribed but not fully paid-up
  • Subscribers have paid partly; remaining amount is unpaid.

(4) Called-up share capital

• Amount that the company calls from shareholders.
• Example logic used:
  • If shares of face value ₹100, and a call is made for ₹50, then called-up value corresponds to ₹50 per share (times number of shares).

(5) Paid-up share capital

• The portion actually received from shareholders after calls.
• Example logic used:
  • If called-up is ₹50 but shareholders paid ₹30, paid-up = ₹30 per share (times number of shares).

(6) Unpaid share capital

• The remaining amount not yet paid out of called-up value.

(7) Reserve capital

• Portion of uncalled share capital that the company keeps reserved for emergencies.
• Example:
  • If face value is ₹10 and the company has called only ₹8, then the remaining ₹2 uncalled portion is reserve capital.

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5) Reserve capital vs Capital reserve (and capital reserve sources)

Reserve capital (as explained)

• A reserve of uncalled share capital kept for emergencies.
• Treated as not an “actual reserve” available in normal operations.

Capital reserve (capital profit reserve)

• Created from capital profits arising from non-recurring activities (not from regular business profits).
• Sources/examples mentioned:
  • Profit on sale of fixed assets (non-recurring).
  • Profit on re-issue of forfeited shares.

Differences highlighted (key points)

• Source
  • Capital reserve: from capital profits (non-recurring).
  • Reserve capital: from uncalled/partly called share capital saved for contingencies.
• Nature / availability
  • Reserve capital: contingent/emergency-related; not a readily usable “actual reserve.”
  • Capital reserve: an actual reserve arising from capital profit; treated as liable item in balance sheet.
• Use
  • Capital reserve: can be used even to manage capital loss in some situations (as stated).
  • Reserve capital: used during liquidation/winding up.
• Creation
  • Capital reserve requires a special resolution.
  • Reserve capital is treated as a reserved part of uncalled shares (special resolution mentioned in the contrast context).

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6) Issue of Shares: ways to issue (methods introduced)

The video states three ways to issue shares:

• Private placement
• Public subscription
• Issue for consideration other than cash

(Details follow for the first two; third is mentioned as a category to be covered later.)

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6A) Private placement (detailed points)

• Company issues shares to selected persons/investors (not general public).
• No public advertising and no prospectus (as stated).
• It’s described as a faster and less expensive method.
• Key idea: shares are offered to a specific group/institution chosen by the company.

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6B) Sweat equity shares (detailed points)

Meaning

• Shares issued to directors or employees at a discount or for consideration other than cash.
• Typically linked to valuable contribution (skills, expertise, innovation, intellectual property, technical solutions).

Conditions and issuance basis (step-like rules stated)

• Issue is allowed only by passing a special resolution.
• The resolution should specify:
  • number of shares to be issued,
  • basis/value (market price reference discussed),
  • and whether consideration is cash or non-cash.
• Sweat equity shares are subject to lock-in period (as stated: immediate sale not allowed).
• Valuation and non-cash consideration must be done properly.

Purpose / motivation logic given

• Rewards directors/employees for special skills and performance.
• Helps retain talent and motivates employees.

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6C) Employee Stock Option Plan (ESOP) (concept and example)

Meaning

• A scheme where employees get the option/right to buy a specified number of shares in the future at a pre-decided price.

How it works (instructional logic used)

• Company offers employees rights to buy shares later (after a specified period, e.g., 1 year, 3 years, 5 years as mentioned).
• Employees are not given shares immediately—only the right/option.
• Even if market price increases later, employees buy at the promised (exercise) price.

Example idea included:

• Employee gets right to buy at ₹50 even if future market price becomes much higher.

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6D) Public subscription of shares (detailed points)

Meaning / process

• Company raises capital by offering shares to the public.
• Requires a prospectus to the public with details.

Steps (as described)

1. Company issues a prospectus.
2. Public submits applications.
3. Company allots shares based on applications/desired subscription basis.

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7) Preliminary expenses (introduced)

• Expenses incurred at the time of formation of a company.
• Occur before commencement of business operations.
• Treated as deferred revenue expenditure (benefit in future, no tangible asset created).

Examples mentioned:

• Legal charges for forming MOA/AOA.
• Registration fees, stamp duty (paid before operations start).

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8) Book building (price discovery method) (detailed process)

Meaning

• A method where issue price is discovered based on bids from investors during the IPO process.
• Price is not fixed in advance; it is discovered using demand signals.

Process steps (bulletized from the described flow)

• Appoint a book runner.
• Decide a price band (example given: between 90 and 100).
• Investors submit bids (demand is recorded).
• Determine the cut-off price.
• Allot shares to investors at/above the cut-off price as applicable.
• Key goal emphasized: demand-driven price discovery / controlling issue price.

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9) Closing remarks in the video

• The speaker recaps that the introductory content covered:
  • shares (meaning, features, types),
  • equity vs preference,
  • share capital components,
  • and started issue of shares methods.
• Notes availability on Telegram/Twitter links and references to the next video (channel workflow details, not accounting instruction).

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Speakers / sources featured

• Speaker: “Purnima” (host/creator; intro: “Hey everyone, this is me Purnima…”)
• Course/channel reference: Chapter Commerce (channel name mentioned)