This Article is written by Aditya Das pursuing B.Com LLB (Hons.) 2nd Year from NEF Law College, Guwahati, Assam. In this article, he has tried to explain the Classification of Company Securities and the allotment and transfer of securities.


In laymen’s language Securities refers to an investment made by an individual that is to be freely traded in the market (share market) and provides a right or claim on an asset of the issuing company and all future cash flows generated by that asset.

In Legal language as per Securities Contracts Regulation Act, 1956, “securities include shares, scripts, stocks, bonds, debentures, debenture, stocks or other marketable securities of a like nature in or of any incorporated company or other body corporate.”[1]

Company Securities

Company or corporate securities are the documentary media for mobilizing funds by joint-stock companies. The main motive of the company to issue such securities arises in the following two situations:

  1. Establishment of the business –at the initial stage.
  2. Growth of business – expansion (sudden flow of funds).

These are of two classes:

(a) Ownership securities, and

(b) Creditorship securities.

Share Capital:

 Company Securities (Shares) – Share capital is not a necessary condition of incorporation, also a greater number of Companies are registered with it than without it. In case share capital is thought necessary[2], the memorandum of the company under the Companies Act 2013 must state the amount of capital with which the company is desired to be registered and the number of shares into which it is to be divided.[3] The authorised share capital for the nominal capital means such capital is authorised by the memorandum of a company. Section 2(8) The meaning of share capital was explained by the Kerala High Court in SNDP Yogam, Quilon, re:[4]

Under this case an application was presented under section 397 of the Companies Act 1956 against “yogam” the raised question was whether the company was with or without share capital. Despite the memorandum of the association the liability of the members was limited and each member what’s required to take at least one share, but there was no authorised capital mentioned.[5]


Capital must be divided into shares of a fixed amount and all the shares may be of only one class for may be divided into two different classes of securities. For this purpose securities means securities defined in Section 2 (h), Securities Contracts (Regulation)Act,1956 Section 2(81) and includes “hybrids”.

The act permits only two kinds of shares that are to be issued :

1.Equity share capital,

2.Preference shares

The Companies Act 2000 introduced some other categories of share:

   I. Derivative includes—

1.  security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;

2. a contract which derives its value from the prices, or index of prices, of underlying securities;

   II. Hybrid – it means any security which has the characteristics of more than one type of security including their derivatives.

1. Equity Share Capital:

 As per the Companies Act, 2013 all share capital which is not preference share capital is called Equity share capital. Equity shareholders are those shareholders who are paid after the payment of preference shareholders. Even on the winding up of the company equity shareholders or to be said the ordinary shareholders are paid at last after the settlement of the preference shareholders is completed. Equity shares were proposed to be issued against preference share on the ground that no dividend was paid. There was no material to show that equity shares represented the fair value of dividend claimed. The court cancelled the proposal.[6] [7]

2. Preference Share Capital ( Section 43) :

Preference share capital which fulfils the following conditions-

  1. During the lifetime of the company, it is assumed of payment of dividend at a fixed rate for a fixed amount before anything is paid to equity shareholders. The preferential dividend may consist of a fixed amount for example rupees 70000 in one year payable to the preference shareholder to be calculated at a fixed rate for example 7% of the nominal value per share.
  2. In the event of winding up of the company, it carries a preferential right to be repaired the amount of capital paid up before anything is paid to equity shareholders.


Cumulative and non-cumulative

Cumulative preference shareholders have the rights to receive a dividend that was have been missed in the past that goes on accumulating unless it is paid. If there are no profits in one year and the arrears of the dividend are to be carried forward and paid out of the profits of subsequent years the preference shares are said to be cumulative. Whereas in case of non-cumulative preference shares the shareholders get nothing if no profit is available in any near moreover one cannot claim unpaid dividend in any subsequent year. Foster v Coles, Foster and Sons Ltd.[8]

Participating and non-participating:

In case the company makes a surplus profit in a given year the participating preference shareholders have the right to participate in the surplus profit after the dividend has been paid to equity shareholders vice versa in case of non-participating.Will v United Lanket Plantations Co Ltd.[9]

Redeemable and non- redeemable:

Under the Companies Act, 2013 a company has the power under Section 55 to issue share known as redeemable preference shares in the articles of the company may choose to pay the holders of such shares the pain back of these is referred to as redemption but there are also restrictions in regard to the fund out of the shares that are to be redeemed.

  1. Redeemed shares must be fully paid.
  2. The redemption must be made from the profit.
  3. A sum equal to the amount paid on redemption shall be transferred to a reserve fund to be known as capital redemption reserve account.

Whereas, according to Section 55 of the Companies Act 2013 no company can issue any irredeemable preference share.

Allotment of securities

The allotment of the securities is made on the application forms which are to be supplied by the company. The application once accepted, it is an allotment.[10]Termed as the first allotment is generally not more no less than acceptance by the company of the offer to take shares.[11]Broadly speaking it is an appropriation by the directors of shares to a particular person.[12]it is an appropriation out of the previously unappropriated capital of the company.[13]Consequently where forfeited shares are issued it is not the same thing as an allotment. A valid allotment has to comply with the requirements of the act and principles of the law of contract relating to the acceptance of offers.[14]

General principles as to allotment

Firstly, the allotment is to be made by a proper resolution of the board of directors and allotment is a duty primarily following up on the directors and this duty cannot be delegated to others if otherwise mentioned in the articles of association.

Secondly, the allotment is to be made within a reasonable time period, if not done application labs there must be an interval to about six months between application and allotment.

Thirdly, the allotment of the shares must be communicated properly as well as address and stamped letter of the allotment can be defined as a communication even somehow the letter is delayed or lost in the course of post.

Lastly, the allotment must be absolute and unconditional and in accordance with the terms in the conditions of the application if mentioned.

Transfer of shares

When the joint-stock companies were incorporated the objective was the shares are to be easily transferable. Section 44 of the Companies Act 2013 states that the shares are debentures or other interest of a member in a company shall be movable property capable of being transferred in the manner provided by the articles of the company.[15]Regulations of the company may impose restrictions upon the right of transfer but in the absence of restrictions in the articles, the shareholder has by virtue of the statute the right to transfer his shares without the consent of anybody to any transferee even though he is a man of straw provided it is a bonafide transaction in the sense that it is an out and out disposal of the property without retaining any interest in his shares.[16]


Through this article bringing the light upon the topic that is the classification of company securities. The entire article deals with the types of the corporate securities their meaning the way of allotment of the securities general way of allotment of shares and transfer of shares. Statutes followed in this article as follows: The Companies Act 1956; The Companies Act 2000; The Companies Act 2013; The securities contracts regulation Act 1956.


[1] Securities Contracts Regulation Act, 1956.

[2] Avtar Singh, Company Law, Pg. no. 223, 17th Edition.

[3] S.4(1)(e).S.44 says that the shares or debentures or other interest of a member in the company shall be movable property transferable in the manner provided in the companies articles.

[4] (1970)40Comp Cas 60:ILR 1969 Ker 516:(1970)1Comp LJ 85.

[5] Avtar Singh, Company Law, Pg. No.223,17th edition.

[6] Tin Plate Dealers Assn (P) Ltd v Satish Chandra Sanwalka,(2016)10SCC 1: (2016)199Comp Cas205.

[7] Avtar Singh, Company Law Pg. no. 225, 17th edition.

[8] (1906)22TLR 555.

[9] (1912) Ch571:107 LT 360 (CA):1914 AC 11 (HL).

[10] Sri Gopal Jalan and Co v Calcutta Stock Exchange Assn Ltd , AIR 1964 SC 250 ,251:(1963)33 Comp Cas 862.

[11] Chitty J in Florence Land and Public works Ltd,re(1885)

[12] Stirling J in Spitzel v Chinese Corpn Ltd,1899

[13] Sarkar J in Shri Gopal jalan and Co vs Calcutta stock exchange association limited 1964 SC 250

[14] Avtar Singh, Company Law,,17th edition.

[15] The requirements of the articles must be satisfied. Where are the articles required that transfer fee and the share certificates must be deposited in the office court did not compare the company to register a transfer which did not satisfy the requirements and held that depositing them in the court would not do. Malabar and Pioneer Hosiery(P)Ltd,re,1985

[16] Avatar Singh Company Law Pg.no151 17th edition.

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