A company limited by shares is an entity whose shares are available to the public domain. They can issue shares to the general public. Such entities are also known as Public limited companies in India. In the United States, such companies are being referred to as ‘Inc’. One can find shares of such entities listed on the stock exchange.
Company Limited by Shares: The Concept
As per Section 2(22) of the Companies Act, 2013[1], such companies refer to an entity that has the members’ liability limited by such an amount that is unpaid on their respective shareholding amount.
The company can address this liability while the entity is running or as it is on the brink of closure. The term “limited by shares” refers to the shareholders’ liability to the business’s creditors for the fund that was invested originally.
As per the Companies Act, 2013, if the company members’ liability is limited by a sum not paid on shares they hold. This type of structure is known as a company limited by shares.
The shareholders must discharge the company’s debts only to the extent that is unpaid on their shares, and no tangible asset can be utilized to fulfil the debt. Such a company shall divide the share capital into fixed shares amount that can then be provided to shareholders. Such allocation of shares allows them to become the company owners.
A company limited by shares has ample funding options, including loans, equity, and grants.
A company limited by shares is broadly categorized into two major types:
- Limited Company by Guarantee: The shareholding concept does not exist in such a company. The limited company by Guarantee comprises members who make small amounts to discharge the outstanding debt in case the liquidation.
- Public Limited Company: Such companies are typically listed on stock exchanges. The extent of liability of a shareholder of a public limited company is limited to their shareholding amount.
Key Facts around the Company Limited by Shares
- The company’s ownership is limited by shares and includes the members of the public domain. Any individual from the public domain can acquire a share in the company by purchasing via the stock exchange.
- The liability of the company’s shareholders is limited to the nominal valuation of the given shares.
- Shareholders are not obligated to confront losses that tend to exceed the nominal value of the shares. The company limited by shares is governed by the Ministry of Corporate Affairs and other regulators of their respective nations.
- To stay compliant, the companies should also furnish periodical reports to the governing regulators and other concerned departments.
- The reports must enclose financial statements, a statement from the BODs, and an auditor’s report.
- A company limited by shares can operate as a public limited company or issue shares to the public domain to procure capital for serving business objectives.
- Such companies have the leverage to procure funding from portfolio entities, institutional investors, and mutual funds. (Note: Portfolio Entity refers to a direct investment company in which a fund of funds (FoFs) makes an investment)
- Therefore, the company can procure ample funding to serve various objectives, including expansion and capacity building.
- The company can discharge ongoing liabilities that exist in the form of debts, restructure debts, perform R&D, & acquiring small or rival companies.
- A company limited by shares is liable to hold an annual general meeting (AGM) of the company’s shareholders.
- The company should share the key financial documents and other key particulars before shareholders to secure their approval.
- The company is liable to pass resolutions for bringing the meeting’s agenda into effect.
What is the nominal value of shares?
The nominal value of a share refers to the face value of the share that a company assigns at the time of its issuance. The mathematical expression for calculating the Nominal value of a share is given below:
The nominal value of a share = paid-up share capital/ number of shares outstanding till date.
In simple terminology, the Nominal value of a share refers to the share that stays around a specific value assigned by the company during the issuance of a share. One can understand it as a minimum or exact valuation of a share. Simply put, the nominal value is an overall worth of a single share that an investor has to pay during its purchase.
It is worth noting that the valuation of such shares remains static regardless of the market dynamics. However, the same cannot be said in the event of a stock split.
The paid-up share capital in the above expression denotes the money that has been paid in exchange for the company’s shares.
On the other hand, the total no. of shares outstanding refers to a no. of shares issued to shareholders till the given date.
Conclusion
For the sake of transparency, a company limited by shares should make relevant disclosures relating to material events in their filing before concerned shareholders and the stock exchange. Also, the listing is not a mandate on all exchanges. But, a company might opt to list to facilitate liquidity to its shareholders and improved access to the capital market.
Read our Article:Annual Compliance of a Public Limited Company: Rules and Procedures
