UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part V

Concept of share and share capital

Shares : shares means allotted portion of share capital of company. Each share in a company is valued at rupees hundred. Investors are known as shareholders, who take risk of company operation and its performance. They get income on their investment on shares in terms of dividend from the company which is part of the profit of the company. Shares of a company may be classified as :

1.equity share :In general ,shares which are not preference shares, are equity shares. The holders of these shares have not preferential right in the payment of annual dividend and repayment of their investment. Equity shareholder having voting right in the election of the member of board of directors, therefore they can participate in the management of company.

2. preference share: preference shares are those shares, which carry a preferential right firstly as to payment of annual dividend and secondly as to the return of capital when company is wound up. These shares carry a preferential right of dividend at a fixed rate before any dividend paid to equity share holders. However ,preference shareholders having no voting rights in the election of board of directors.

Features of equity shares :

a. participation in management: Equity shareholder having voting right in the election of the member of board of directors, therefore they can participate in the management of company.            

b. fixed fund: Equity share capital is of fixed fund up to the existence of the company .therefore, the company can mobilize such fund in long term profitable projects.

c.no fixed dividend :The amount of annual dividend payable to the equity shareholder depends upon the volume of profit. If the company earned no profit ,there is no obligation to pay dividend .

d. transferability of shares: Equity shares of public limited company can easily transferable from one person to another without any pre-permission from the company management.

e. no collateral security to issue: For issue of equity shares ,it is not necessary for a company to keep it’s any assets  as a mortgage or security.

f. good scope of investment : the face value of equity share is only rupees hundred and there is also voting right vested to such share holder . therefore it is taken as a good scope of investment ,even to the small investors.

Difference between equity share and preference share

Basis	Equity shares	Preference shares
Concept	Ordinary shares means a share other than a preference share.	preference shares are those shares, which carry a preferential right firstly as to payment of annual dividend
Participation in management	The shareholder of equity shares have voting rights and participate in the management of company.	Preference shares have no voting right in the election of board member.
Payment of dividend	Equity shareholders will get annual dividend on the profit of company only after distribution to preference shareholders.	Preference shareholders have preferential right to get annual dividend before distribution to equity share holders.
Rate of dividend	There is no any fixed rate of annual dividend.	A fixed rate of annual dividend is paid to preference shareholder.
Conversion	These shares cannot be converted into converted into other securities.	On the basis of term of issue a preference shares may be converted into ordinary shares
Redemption	The amount of such shares will be repaid to investors only at the liquidation of the company.	In case of redeemable preference, capital investment will be repaid at the expiry of predetermined time.

Share capital : share capital is known as own capital and it is the primary source of collecting amount for the company. In other words, share capital means the capital raised by a company by issue shares. According company act 2063 share is the divided unit of share capital of the company. Share capital of company is divided into certain fixed number of units of hundred or rupees divisible of ten each. These units are known as shares which represents the shares in the capital of company. The person or institution holding some units of shares is called shareholders.

In the process of issue of shares the following terms should be taken into consideration

1.Authorized capital : it is also known by registered capital of the company. It is the nominal units of share capital which the company is authorized to issue by its memorandum of association. This is the maximum capital which company can have in its life time. For instance ,the share capital of A. ltd is rs 10,000,000 divided into 100,000 shares of 100 each.

2.Issued capital :it is the part of authorized capital that is offered to the public for subscription. A company does not issue all the authorized capital at a time but keeps unissued for future requirement. For instance , A ltd. issued 50,000 shares (i.e. 50% of 100,000 shares) of rs. 100 each

3.Called up capital : it is the part of issued capital which is actually called up from the public on installment. A company is not  allowed to collect all the issued value of shares at a time; it should be collected in the installment like as a share application, share allotment and shares calls. For instance , A ltd. Issued 50,000 shares of 100 each but called up capital value maybe be rs 25 on application, 50 on allotment and 25 on first and final call, as it is published in prospects.

4.suscribed capital :it is part of issued and called up capital which has been applied by the public for getting shares of the company. In subscribed capital there is three possibilities i.e. equal subscription, under subscription and over subscription. For instance , A ltd .issued 50,000 shares of 100 and if all shares are taken up by the public then subscribed capital will be equal to share capital.

5.Paid up capital :it is the part of called up capital which is actually receive in cash as a capital from shareholder. If all the called up capital has been received, paid up capital will be equal to called up capital. When any part of called up capital is not received that is known as calls in arrears and in such situation, paid up capital will be called up capital minus calls in arrear.

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part IV

Memorandum of Association

The memorandum of association is one of the most important document for company formation. It is just like charter or constitution of the company. It defines all the rules and regulation of the company for legal formalities and procedures. It is also provides information of capital ,liability of shareholder , a nature of business, objectives and other external rules and regulations. Section 18 of company act 2063 contains the following matter in the memorandum of associations.

a. name of company

b. the address of the registered of the company

c. objectives of the company

d. the acts to be carried out to accomplish the objectives of the company

e. the figures of authorized capital and the figure of share capital to be issued by the company for the time being and the figure of capital undertaken to be paid by the promoter of the company

f. the types of shares of the company, the rights and power inherent in such shares, value of each share and number of different types

g. the restriction ,if any on the purchase or transfer of shares

h. terms and condition of payment of share amount

i. provision of limited liabilities of share holders

j. other necessary documents

Article of association

Articles of association are the document of the internal management of the company. the contain rules ,regulations  and bye-laws of the company for its systematic management. The company should manage the business activities, internal structure and internal control system on the basis of rules and regulations mentioned in articles of associations. They are subordinate to memorandum of association. It provides framework to maintain internal control to gain defined objectives.

According to section 20(ii) of company act 2063, the company articles of association contain the following contents :

1.procedure of convening the general meeting of the company and notice to be given for such meeting

2.proceeding of general meeting

3.number of directors, provision of alternative director ,if any and tenure of directors

4.provision relating to the minutes of decisions of the general meeting and the board of directors and duplicate copies and inspection thereof

5.if a person has to subscribe shares to become a director of a company , minimum number of shares

6.in the case of public company, qualification and number of independent directors

7.power and duties of board of directors and the managing directors

8. authority of directors and delegation of authority

9.lien of shares

10.different class of shares and the rights , power and restrictions attached to such shares

11.provision relating to calls on shares and forfeiture of shares

12.provision relating to transfer of shares

13.use of company’s seal in its transaction , if it is to be used

14.matters on the buying back of shares by the company

15.appoinment of a company secratery

16. amalgamation of the company

17.accounts ,books of account and audit of the company

Prospects

Prospectus is the profile of public limited company and provides past and present information and also future policies and programs of the company. Generally it is issued to the public while issuing shares and debentures. In other words , it is an invitation to the general public to subscribe the shares and debenture s of the company.

According to section 23 (1) of the company act 2063 ,the prospects should involve the following contents.

a.The objectives of the company, the main point mentioned in the memorandum and articles of association, and the place where such memorandum and articles of association can be obtained.

b.minimum number of shares must be subscribed in order to qualify for the post of directors and salaries,allowances

c.particulars of cash payment obtain or to be obtained by the promoters or directors of the company in form of remuneration

d.arrangement relating to bonus shares

e. arrangement ,if any, for reserving shares for shareholder employee or any other person.

f. a biographic introduction of directors

g. reasons and justification for adding premium

h. arrangement relating to representation in the board of directors of shareholders

i. reasons for obtaining loan by debenture

j. brokerage on shares and debenture

h. amount needed for business and the estimated

k. the balance sheet and profit and loss account of the company and the place where these can be inspected

l. in case of new company ,particulars of preliminary expenses incurred in case of its establishment

m. specific rights of preference shareholders and restriction them

n.  other necessary documents 

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part III

Advantages and privileges of public limited company
1.Adequate capital :

comparatively , capital investment in company is more than partnership firm and sole trading concern. The company can collect capital by issuing shares or debentures among unlimited peoples for subscription. With large capital , it can operate large scale business. The large scale production and distribution minimizes per unit cost or services.

2.Limited liability:

 The liability of shareholders of the company is limited up to their capital investment .The company can borrow loan for expansion and diversification of business or purchase good on credit during regular business , but in its own name.

3.Perpetual existence :

company is an artificial person created by law. As a corporate body its existence is perpetual. The death, retirement, lunacy of shareholders or promoters do not affect in regular function of the

company. Similarly , it performs function without any interruption even if any change in management , member of board of directors , working procedure etc.

4.Transferability of shares :

shares of joint stock company, especially shares of public limited company are easily transferable from one person to another . such transfer of shares does not affect the regular function of the company and prior permission from management is not required.

5.Effective management :

Management is the back bone of an institution and success of it depends upon its management system. In company for the function of management, members of board of directors elected. They are the representatives of the shareholders and responsible for management of the company.

6.Easy to obtain loan :

 for the expansion of the business ,the company can obtain loan in easy manner. It performs business in large scale with the investment of maximum capital and, as perpetual existence; it also performs business for long duration of time

7.Accountilibity:

8.social value :

company performs activities which are directly or indirectly beneficial to the society . it provides employment opportunities to skilled or unskilled people according to their ability.

9.Based on democratic management :

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part II

Types of company 

Joint stock company may be classified into various types from different angles .They are

A.On the basis of corporation/formation

a.charterd company

a charter company is established by the special royal charter or sanction by the head of nation. Before the enactment of the company act the procedure of forming a company is by means of royal chartered. The special privilege and right of company are granted in the charter. East india company, the bank of England are the example of chartered company

b.statuory company :

a company, which is formed or incorporated by a special act of parliament is known as  statutory companies. such company is governed by their respective acts and do not have any memorandum or articles of association. Nepal rastra bank, Nepal airlines are the example of it.

c.Registered company :

a company registered according to the provision of the company act is known as registered company. The procedure of establishment ,right, duties ,working area and procedures of winding up such company are cleared at the time of incorporation. In the context of Nepal , a registered company should be incorporated according to the provision of company act 2063.

B.On the basis of liability

i.Limited company :

this type of company is registered with certain number of shares; the liability of shareholder is limited up to the extent of the face value of shares held by each of them. It means shareholders have no extra burden for the payment of debt.

ii.Unlimited company:

it is just like an ordinary partnership. Under this type of company, shareholders are liable for all liabilities of the company. The company of unlimited liability is rarely found in present world.

iii.Company limited by guarantee :

under this type of company, the liability of shareholder is limited to a specified amount as mentioned in the memorandum of association. The amount of guarantee may differ from shareholder to shareholder

C.On the basis of members :

1.Private limited company:

It is one of the registered companies incorporated according to the company act in the concern department. According to the company act 2063 ,the minimum number of shareholder may be one and maximum shareholders should not be exceed fifty .A private limited company cannot issue shares to the public for subscription and remain limited to some limited number of shareholders .For quick identification of such company the word “pvt. ltd” is written after the name of company.

2.Public limited company :

 Companies other than private ltd. comes under public ltd.  Company. According to section 2 of the company act 2063 , public company means any company incorporated according to this act. The minimum numbers of the shareholders are seven and maximum is unlimited for the registration of a public limited company. A public ltd. Company can issue shares for public subscription and shares are easily transferable.For quick identification of such company the word “ ltd” is written at the end followed by the name of company.

D.On the basis of ownership :

a.Government company :

In this type of company ,government has minimum 51% of the paid up value of share capital of the company. The management of the company is taken by the government authority. In context of Nepal Janakpur cigarette factory, Birjung sugar mill ltd. Are the example of government company.

b.Non-government company :

 this type of company is established under private ownership .government has no involvement in the ownership of the company, if involvement is there that is less than 50% of total paid of share capital. Government do not interrupt in the regular business activities of the company, only completion of the few rules of government is sufficient.

E.On the basis of domicile

i.National company

ii. Foreign company

iii. Multinational

F. On the basis of control

a. Holding company

b.Subsidiary company

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UNIT-1 Company :Conceptual and theoretical foundation Meaning and concept Part I

Meaning and concept

A company is an association of persons for economic gain having incorporated according to law, a separate legal existence and common seal.Capital of the company is raised by issuing transferable shares and managed by the representatives of the shareholders .In Nepal ,a joint stock company must be registered in accordance of provision of Nepal Company act 2063.The regular activities of company would not be affected due to change in management ,shareholders, board of directors and other internal factors. It can be dissolved only after completing legal procedures.

Characteristics/Features of a company:

The common features of a joint stock company are as follows

1.Legal personality: a joint stock company is an artificial person and enjoys the facility of natural person in certain aspects. It has a separate legal entity independent from its member. It can hold property, borrow debts, can carry on business and enter into contract in its own name.

2.Perpetual succession:joint stock company is corporate body. It is not affected by death, retirement or insolvency of its shareholders. Similarly, it performs business without any interruption even if change in management, change in members of BOD, change in method of operation and internal system.

3.limited liability : company is an artificial person and as such its members are not liable for the debts of the company. The liability of shareholders of the company is limited upto their capital investment.

4.Formation : public ltd. Company can start business only after getting certificate of commencement, along with registration certificate. for formation of a company , promoters group of shareholders have played major role and later on its membership increased by sale of shares.

5.Common seal : as an artificial persons, a company can not act or sign itself in official documents. Thus, it has common seal which is engraved name emblem of the company.

6.Management by representative : although all shareholders are the real owner of the company. but in practice , it is not possible that all the shareholders should involve in management of company. The management of the company is done by the representative of shareholders, known as members of BOD.

7.Transferability of shares :the shares of public ltdcompany are easily transferable from one person to another without prior permission from company management.

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