Name: Muhammad Islam

Roll No: 200918

Submitted to: Sir Iftikhar Ahmad
Assignment No: 01
Topic: Share capita & loan capital
Date: 27-June-2024
Introduction:

A company is an artificial person and therefore they are unable to generate their own
capital and that capital has to be collected from different persons. The persons from whom
the capital is collected are called the shareholders and the amount that they contribute
towards the business is referred to as the share capital.

The number of shareholders being too many makes it impossible to open different capital
accounts for each of the members. Therefore, the different contributions of capital from the
shareholders are considered under a common capital account which is known as the
Share Capital Account.

Meaning:

The capital means the amount of money by which a business is started. In a company,
share capital is the amount of money raised by the issue of shares. The share capital of a
company is the money subscribed by the shareholders.

Kinds of Share Capital

The following are different kinds of share capital:

1. Authorized Capital

Authorized capital means such capital as is authorized by the memorandum of a company

to be the maximum amount of share capital of the company. It is the maximum amount of
share capital that a company is authorized to issue. [Sec. 2(1)(5))

2. Issued Capital

The part of share capital which is issued for subscription is called issued capital. A
company may not issue all its authorized capital for subscription.

3. Subscribed Capital

The part of issued capital for which the company has received applications from investors
is called subscribed capital. All capital issued by a company may not be subscribed

4. Paid-up Capital
The part of subscribed capital which is received by the company in the form of cash is
called paid-up capital.

5. Called up Capital:

It is referred to as that part of the subscribed capital for which the company has asked
shareholders to pay. The company can decide to ask the shareholders to pay in full or just
a part of the face value of the shares

5. Uncalled Capital:

It is that part of the subscribed capital that hasn’t yet been called upon by the company.
The company reserves the right to collect this amount when there is a requirement for
funds.

6. Reserve Capital:

It is that part of the uncalled capital that a company may keep as a reserve which is only
used in the event of winding up of a company. The creditors have the access to such capital
in case the company is winding up.

Share
Share means share in the share capital of a company. A share is a part of the share
capital. The capital of a company is divided into several small units and each unit is called a
share. The shareholders are owners of the company. (Sec. 2(1)(63)] A company having a
share capital shall issue only fully paid shares which may be of different kinds and classes
as provided by memorandum and articles.

The following are kinds of shares:

1. Ordinary Shares

The ordinary share represents basic voting right in a company. Ordinary shareholders are
entitled to dividend after payment of fixed dividend to preference shareholders. Similarly,
upon winding up of the company, ordinary shareholders get their share in surplus amount
after the preference shareholders.

2. Preference Shares

The shares which have a right to receive a fixed dividend before ordinary shares are called
preference shares. The preference shareholders get their share in surplus amount before
ordinary shareholders upon winding up of a company: They can be divided into the
following kinds:

a. Cumulative and Non-cumulative Shares

In cumulative preference shares, if profit is not enough in any year, the right to dividend
accumulates and is paid from the profit of next year

In non-cumulative preference shares, if no profit is available for distribution as a dividend

in a particular year, the preference shareholders cannot claim the unpaid dividend in later
years.

b. Participating and Non-participating Shares

The participating preference shareholders are entitled to surplus profit in addition to a

fixed dividend. On winding up of the company, the participating preference shareholders
are entitled to the surplus.

The non-participating shareholders only get a fixed dividend. They are not entitled to the
surplus in profit or on winding up.

c. Convertible and Non-convertible

The convertible preference shareholders have the right to convert the shares into any
other kind of shares according to the articles of the company.

The non-convertible preference shareholders do not have the right to convert their shares
into any other kind of shares.

d. Redeemable and Irredeemable

The shares which will be bought back by the company within a fixed period are called
redeemable preference shares.

The shares which will not be bought back by the company are called irredeemable
preference shares.

e. Stepped Preference Shares

The stepped preference shares have a dividend which increases annually by a specified
amount.

f. Zero Dividend Preference Shares

The zero dividend preference shares receive no dividend throughout the entire period up to
maturity at which a fixed lump sum amount is paid.

3. Deferred Shares

Deferred shares are also called founders or management shares. They are generally
issued to the promoters of the company in consideration of their Share Capital services in
forming the company. The holders of these shares get dividend after other shareholders.

Issue of Shares
The rules of issue of share are as follows:

1. Shares at Par

When a company issues shares for subscription at a price equal to the face value, it is
called the issue of shares at par.

2. Shares at Premium

When a company issues shares for subscription at a price higher than the face value, it is
called the issue of shares at a premium. When a company issues shares at a premium, the
amount equal to the share premium shall be transferred to the share premium account.
The share premium account shall be used for preliminary expenses, expenses to issue
shares, commission to redeem shares and issue bonus shares. [Sec. 81]

3. Shares at Discount

The issue of shares at a price less than the face value is called the issue of shares at
discount. A company may issue shares at discount under the following conditions: [Sec. 82]

a. The issue must be authorized by a special resolution passed in a general meeting of the
company.

b. The resolution must specify the number of shares, rate of discount and price per share.

c. In the case of listed companies, a discount shall be allowed only if the market price is
lower than the par value of the shares for a continuous period of the past 90 trading days.

d. The issue must be approved by the Commission. Such approval is not required by a
listed company if the discounted price is up to 10% of par value.
e. The Commission shall not approve the resolution if the offer price is less than the price
calculated according to law.

f. The directors and sponsors of listed companies shall subscribe to their portion of the
issue.

g. At least 3 years have passed since the date on which the company was entitled to
commence business.

h. The shares must be issued within 60 days after approval by the Commission or such
extended time as the Commission may allow.

1. The issue of shares at a discount shall not be deemed to be a reduction of capital.

j. Every prospectus and statement of financial position shall contain particulars of the
discount allowed on the issue of shares.

Purchase of Shares
The following are the rules: According to [Sec. 88]

1. A company can purchase its shares.

2. The shares purchased by the company may be cancelled or held as treasury shares. The shares purchased
by an unlisted or private company cannot be held as treasury shares and shall be cancelled.

3. The treasury shares shall be subject to the following conditions:

 Voting rights of these shares shall remain suspended.

 No cash dividend shall be paid, and no assets shall be distributed on winding up for these shares.
 Bonus shares can be allotted to the treasury shares.
 Payment on the redemption of treasury shares shall be made.

4. The board shall specify the number of shares to be purchased, purpose of purchase, purchase price, period
of purchase, source of funds, justification for purchase and effect on the financial position of the company.

5. The purchase of shares shall be made by passing a special resolution.

6. The purchase of shares shall be made within a specified period.

7. The proposal to purchase shares shall be communicated to the Commission and concerned securities
exchange.

8. The purchase shall be made in cash and out of distributable profits and reserves.
9. The purchase shall be made through the securities exchange.

10. The company may dispose of the treasury shares in a manner as may be specified.

11. Where a purchase of shares is made, the company shall maintain a register of shares so purchased and
enter the following particulars:

 Number of shares purchased.

 Consideration paid for the shares purchased.
 Mode of the purchase...
 Date of cancellation or re-issuance of such shares.
 Number of bonus shares issued in respect of treasury shares.
 Number and amount of treasury shares redeemed, if redeemable.

12. Any violation of this law shall be an offense liable to a penalty of level 3.

Change in Share Capital

A change in share capital can occur in the following ways.

1. Alteration of Share Capital

A company having a share capital may alter its memorandum by a special resolution, if
authorized by its articles, to: [Sec. 85]

 Increase its authorized share capital.

 Consolidate and divide its share capital into shares of a larger amount.
 Sub-divide its share capital into shares of a smaller amount
 Cancel shares which are not taken by any person and diminish the share capital by
the amount of the shares so cancelled. In consolidation or sub-division of shares,
the rights of new shares shall be proportional to the rights of previous shares,
provided that the shares are of the same class as the previous shares. The
cancellation of shares shall not be considered a reduction of share capital. The
company shall file a notice with the registrar within 15 days of such alteration.

2. Reduction of Share Capital

A company may reduce its share capital in the following ways: [Sec. 89]

 Cancel any paid-up share capital which is lost or unrepresented by available assets.

Share Capital

 Pay off any paid-up share capital which is more than the needs of the company

The procedure for reducing the share capital of a company is as follows:

 Special Resolution

A company limited by shares, if authorized by its articles, shall pass a special resolution to
reduce its share capital. It shall apply to the Court for an order confirming the reduction

 Objection of Creditors

Every creditor of the company can object to the reduction where the proposed reduction
involves payment of paid-up share capital to any shareholder and in any other case if the
Court directs.

The Court shall settle a list of creditors who can object. The Court shall ascertain the
names of creditors and the nature and amount of their debts. The Court may fix a period
within which creditors can claim that their names be entered or excluded from the list.
[Sec. 90]

 Consent of Creditor

Where a creditor does not consent to the reduction, the Court may ignore the creditor if the
company secures payment of his debt or claim. The amount of claim is the following: [Sec.
91]

Here are 5 cases related to share capital in company law in Pakistan:

Case 1:

Sindh Bank Ltd v. Ghulam Faruque (2011)

The Supreme Court of Pakistan held that a company's share capital can be increased by
issuing new shares, but only if the company has sufficient authorized share capital and the
issue is made in accordance with the Companies Ordinance, 1984.

Case 2:

Messrs Shaheen Air International Ltd v. Securities and Exchange Commission of Pakistan
(2018)

The Islamabad High Court ruled that a company cannot issue shares at a discount without
the approval of the Securities and Exchange Commission of Pakistan (SECP), as required
under Section 83 of the Companies Ordinance, 1984.

Case 3:

Azam Textile Mills Ltd v. Azam Weaving Mills Ltd (2005)

The Lahore High Court held that a company's share capital can be reduced by a scheme of
arrangement under Section 205 of the Companies Ordinance, 1984, even if it results in a
reduction of capital below the company's minimum share capital requirement.

Case 4:

Pakistan Petroleum Ltd v. Commissioner Inland Revenue (2015)

The Supreme Court of Pakistan ruled that the issue of bonus shares by a company does not
constitute income taxable under the Income Tax Ordinance, 2001, as it is merely a
capitalization of reserves and does not result in any distributable profits.

Case 5:

Mobilink Pakistan Pvt Ltd v. Pakistan Telecommunication Authority (2013)

The Islamabad High Court held that a company's share capital can be transferred to a
foreign company through a scheme of arrangement under Section 208 of the Companies
Ordinance, 1984, subject to the approval of the SECP and the fulfillment of all legal
requirements.
 Loan Capital
Loan capital refers to the amount of money required to manage the business’s operations
raised from external sources such as financial institutions, issuing debentures, etc. It is
one option of raising funds as it only includes long-term funds that the company can utilize
for business by bearing some interest or charge.

• Loan capital means the money needed to manage the business’s operations
received from external sources like financial institutions, issuing debentures,
etc.
• It is one praising funds option as it only includes long-term funds that the
company may use for business by paying some interest or charge.
• Loan capital has three types: debentures, bank overdrafts, and bank loans.
• The loan capital market includes but is not limited to borrowing and lending
funds to the borrower from one lender to another for earning interest income.

Loan capital is considered where the business requires funds for a longer period, i.e., they
are not preferable for a shorter duration, carry periodic payment of interest or some
charges, and are not involved in the company’s profits. They are of various types amongst
all of the debentures are considered the safest and less riskiest way to provide funds as
one can see that bank overdraft or bank loan does not secure the lender fully, by taking the
funds from loan capital and timely repayment of such amounts will create the goodwill in
the eyes of bank and the lender which helps the business in the long run so that we get the
funds as and when required.
 Types
The loan capital may be divided into three categories: –

1. Debentures

These instruments are liabilities to the company and must be repaid along with fixed
interest payments. The debenture-holders will earn a fixed interest on the amount
advanced to the company, and they did not have any decision-making right in the company.

2 – Bank Overdraft

These are the agreements entered into by the banks and the person seeking such a facility.
After examining the person’s or entity’s creditworthiness, the bank grants them a fixed
limit, and the person can use such limit funds. In return, they have to pay a fixed interest on
the amount they have used from the limitation.

3 – Bank Loan
A bank loan is the most commonly used type of raising funds through industry grants by
taking something valuable as collateral. The funds are used to cost the company some
fixed rate of interest, which is usually lower than the other two sources of raising funds.

Loan Capital Markets

The loan capital market includes but is not limited to borrowing and lending the funds to
the borrower from one lender to another to earn interest income.

In providing such facilities, the following instruments are included: –

• Both operating lease and financing lease.

• Loan against mortgaging some property or asset of the borrower
• Providing advisory services to the person who needs funds and providing
intermediary services to provide the funds to the borrower.
• These markets also allow the lender to underwrite the loans already granted by
some other borrower to reduce such borrowers’ liability.

Advantages

• The company gets funds to use in business without transferring the ownership of
assets, i.e., funds on pledging such investments to the bank.
• It does not give any ownership or decision-making rights to the fund provider or
the lender as granted under the option of equity.
• As the repayment of interest and the principal amount is prefixed, one could
easily plan their expenses and funds accordingly.

Disadvantages

• The first and foremost disadvantage of loan capital is that the repayment of
interest and the principal amount is to be made on the date prefixed whether the
business is in a good situation or not.
• As the funds are taken on pledging the company’s assets to the lender, then in
this situation, if the company wants to sell off the assets to some other third
party, they cannot do so until the loan amount is repaid.

Conclusion
Loan capital is one option the business uses to raise funds, as every business needs funds.
One may either raise funds required through the equity option (internal source such as
shareholders, retained earnings, surpluses, etc.) or raise it through external sources such
as debentures, etc. Part of the company’s capital is taken through external sources by
bearing some cost such as interest or some other cost such as issuing shares for
redeeming the debentures issued, etc.