At present, though the provisions of the Companies Act, 1956, are quite liberal regarding the face value of shares, an old circular required that shares be issued only if they have a face value of Rs 10 or Rs 100. In other words, one cannot issue shares of the face value of, say, Rs 5, Rs 50, or Rs 75. A shareholder seeking to invest Rs 1,000 would (assuming the issue is at par) buyeither 100 shares of Rs 10 or 10 shares of Rs 100. Hence, what would change is the number of shares that he would receive. One could make the analogy of a person seeking to keep Rs 1,000 in currency notes - he could either have 100 notes of Rs 10 or 10 notes of Rs 100. In either situation, the shareholder is entitled to voting rights of Rs 1,000 only. Further, he gets dividends on Rs 1,000 only. Assuming the shares have suffered depreciation in market value to the extent of 30 per cent, again, in either case, he would get only Rs 700 back by sale in the market.

Now, SEBI has announced that the rigid requirement of having shares of face value of Rs 10 and Rs 100 will be abolished. A company whose shares are traded in dematerialised mode would be free to issue shares having the face value of, say, Re 1, Rs 6, Rs 15, Rs 60, etc, as it thinks fit. The existing shares may be sub-divided or consolidated, if required, to bring them to the new par value. Let us first see what this announcement will not mean, ratherthan what it will mean, since some expectations have been raised which, as will be seen, will not be rewarded.

First of all, this will not mean that a company whose share has a market value of Rs 7 (face value Rs. 10), will be able to issue the same share at Rs 7 or lower, on the argument that the shareholder would be attracted if he is asked to pay only the market value of the shares. Even if the company makes the par value of the shares at Rs 7, it would result in the market value of such shares being proportionately reduced to 70 of Rs 7, that is, Rs 4.90. In other words, the shares would still be unattractive at even Rs 7. However, let us say that the company undergoes a reduction of capital under sanction of court and its share capital is reduced by 30 per cent. In other words, if, say, the capital was Rs 1 crore, it is now reduced to Rs 70 lakh. The shares would, assuming the par value is also reduced to Rs 7, thus have a face value of Rs 7 and a market value also of Rs 7. In such a case, the shares,if issued at Rs 7, may be attractive. But this is not what is permitted by the announcement. In fact, if the company in this example, after reduction of the overall capital by Rs 30 lakh, carried out a consolidation capital to 700,000 shares of Rs 10 each, the new shares having par value of Rs 10 would have had a market value of Rs. 10 and not Rs 7. In that case, the recent announcement would not help, as even without such relaxation, the company would have been able to achieve the purpose. Even after the announcement, the company would still have to undergo the tedious procedure of reduction, sub-division, consolidation, etc. Thus, contrary to expectations, a company will not be able to have parity of face value and market value of its shares.

Secondly, the announcement does not mean that the concept of share capital has been abolished, and now, the share capital and reserves will constitute one total mass called net worth. The share capital would still be separate from its reserves. Nor would it mean thatthere would be no concept of premium or discount on issue of shares. Thirdly, the rights of shareholders with regard to their shares would continue to remain connected with the paid-up value of the shares. This is particularly relevant as regards voting rights and dividends. Take an example. A company has a capital of Rs 1 crore, divided into 10,0000 shares of Rs 100 each. A person holds 10,000 shares, which would mean Rs 10,00,000 in terms of face value. This shareholder would thus be entitled to 10 per cent of the voting rights of the company, as well as 10 per cent of the dividends distributed on such shares. Say, now these shares are converted to a par value of Rs 50. The 10,000 shares of Rs 100 of the company would be exchanged for 20,000 shares of Rs 50. However, the increase in the number of shares would have no change in terms of his voting rights and rights to dividends, which will continue to be with reference to the total paid-up value of his shares, that is, Rs 10,00,000 which, obviously, isunchanged. The market value, too, will remain unchanged.

Thus, one can see that SEBI has removed just one small barrier in the direction of total effective removal of par value of shares and merging it with reserves. Such total change, however, would require substantial changes in the Companies Act, 1956.

(The author is a Mumbai-based chartered accountant)