What is a Share?
You have a pizza, and you decide that all of you will share it in the evening. There are four of you.
You decide that each friend owns one fourth of the pizza. But Ramesh thinks you will cheat. To pacify him, you make 4 chits and write on each chit “The holder of this chit owns one fourth of the pizza.” You take your own chits and go home happily.
You have just created share certificates for the pizza!
A share is nothing but a share of ownership of a company. A share certificate is proof of that ownership.
Shareholding and Shareholders
Suppose, now, that you create a small library. You need 2000 rs to start the library. Aman gives 200 rs, Babita brings 500, Charu has 400, Danish has 100, and Easwar has the remaining 800. You decide that everyone must own the business in the same ratio as the money they bring in. So, Aman owns 10% (200/2000 *100), Babita owns 25%, Charu owns 20%, Danish owns 5%, and Easwar owns 40%.
You are all shareholders of the company now. Shares are also called stock. The amount of ownership you have in a company is called your stake.
Private Limited Company
You folks decide that you will not let anyone else come into the business. Only you and your friends.
This is a private limited company.
The shares of a private company are not openly traded in the Stock Exchanges. This means that only you and other people who have put money in the business need to know how the business is doing. No one outside this group needs to know anything about money made, money spent, number of employees, etc.
Because of this, private companies need to share very little information compared to public limited companies.
Majority and Minority Stake
Easwer already owns 40% of the company. He goes to Charu and offers to pay her 500 rs, if she will stop being an owner. Charu is happy, because she only put in 400 rs. Now, Easwer owns 60% of the business.
Any owner who owns more than 50% of a company or entity has the majority stake.
Any owner who has less than 50% ownership has a minority stake.
Small shareholders who own very few shares and individually, have no control over the management of the company are called minority shareholders.
IPO and Public Limited Company
But after a few months, a lot of the colony children say they love the library business idea and want to share in it. They all want to buy ownership of the library company.
Then, you give in and tell them, Ok, they can buy and sell their ownership freely.
Why do you do this?
The money that you collect from the colony children will help you buy more books and also advertise for your library. When you take money from a bank, you have to pay them a fixed interest. But in this case, there is no fixed outflow. You only have to share a part of your profits.
So, you create chits of 1 share of the library, and tell the colony children that on Friday, from 4 to 6 p.m., they can come and give money to buy the ownership of the library.
What you have just done, is Initial Public Offering – the first time that a company offers ownership or shares to members of the public. After that, the colony children and buy and sell chits from and to each other – you don’t need to be involved.
Anyone, whether they are from your gang or not, can buy and sell ownership of the library. Whoever brings you the chit of ownership will get a share of the profits of that month.
Your company has now become a public limited company.
Once a company becomes a public limited company, it has to publish all its information for everyone to read. Why is that? Because anyone can buy shares of the company. So, everyone must know how the company is doing, whether it is making profits or losses, and where it is spending money.
The Board of Directors
The Board of Directors of a company are the highest level of control and governance of a company. The Board is expected to ensure that the company is run well and acts in the interests of the shareholders).
The stock exchange
Where do you go to buy vegetables? Why, the vegetable market, of course! And where do you go to buy clothes? The clothes market. Like that, there is a special market where people buy and sell stocks. That market is called the Stock Exchange – a place where stock in companies is exchanged.
Holding Company
Did you know that one company can own another company? Yes! The company that holds all or most (more than 50%) shares of another company is called the holding or parent company.
NCLT and NCLAT
Companies Act is the law that governs all the companies in India. What if we think someone has done something that is against the Company law? We can file a case in the National Company Law Tribunal (NCLT).
Now, suppose we take a case there and we are not happy with the decision. Then?
No problem! We can file an appeal in the National Company Law Appellate Tribunal (NCLAT).