This article has been written by Mr. Aman Mishra, a 5th year student studying BALLB, from at IMS Unison University, Dehradun.
Introduction: –
Net worth of a company is the value of the assets a company owns, minus the liabilities they owe. It is an important metric to gauge a company’s health and value, providing a useful snapshot of its current financial position. The concept of Net worth becomes more relevant in ascertaining transactional values in an amalgamation, specifically when one must arrive at the swap ratios.
In any case, whether the Preference shares form part of Net worth, is an issue that gains relevance whenever one must ascertain a company’s Net worth for the purpose of any transaction whatsoever. In this Article we will see the way the Companies Act, 2013 included convertible Preference shares into Net worth.
The Section 2(57) of the Companies Act, 2013, characterized net worth as-
“Net worth it means the aggregate value was the paid-up share capital and all to reserves it created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation;”
Now, having seen the definition of Net worth (which stresses upon the term paid-up share capital) let’s see how the Section 2(64) of the Companies Act, 2013, defines paid-up share capital-
“Means such total measure of cash acknowledged as settled up as is comparable to the sum gotten as offered up in appreciation of offers gave and furthermore incorporates any sum credited as offered up in appreciation of portions of the company, yet incorporates no other sum got in regard of such offers, by anything that name called;” Subsequently we can say that the companies Act, neither in “net worths and nor in ‘settled up share capital’, explicitly prohibits “inclination share capital or incorporates just ‘value share capital. The settled-up share capital, would mean a sum got as offered up in appreciation of offers gave by the organization. The term shares had been characterized under Segment 2(84) of the Companies Act, 2013, as-“share implies an offer in the offer capital of a Companies and incorporates stock;”
The term all the total share capital had not been defined under the Companies Act, 2013 but, the Central Government had in they exercise of the powers conferred under sub clause (ix) of clause (76), sub-clause (i) of clause (77) of section 2, read with sub-sections (1) and (2) of section 469 of the Companies Act, 2013, had made the Companies (Specification of definitions details) Rules, 2014. Definitions contained herein are applicable towards all terms under the Act unless the context otherwise requires. As per Rule 2(1)(r) of the said Rules, Total Share Capital, “means the aggregate of the
(a) paid-up equity share capital, and
(b) convertible preference share capital;”
This standard explicitly brings convertible preference share capital inside the meaning of Offer Capital, and further under the meaning of Offers, _paid up share capital and the ‘net worth”.
Presently strangely, the Clarification (i) to section 43 of the companies Act, 2013 characterizes the term. Preference shares as-
Preference share Capital, concerning any organization restricted by shares, implies that piece of the gave share capital of the organization which conveys or would convey a particular right.”
As currently seen over the settled-up share capital is a sum gotten as offered up in appreciation of offers gave by the company. Consequently, thusly too the preference share Capital (regardless of whether convertible) is essential for Settled up share Capital and subsequently part of net worth of the organization.
Going by the above examined legal remedy under the companies Act, 2013, we can say that the Demonstration explicitly incorporates (Rule 2(1)(r) of the Particular of Definitions subtleties Rules, 2014) ‘convertible preference offers’ inside the meaning of Net worth, and inferably incorporates (Clarification (il) to area 43) a wide range of preference share capital inside the net worth.
Preferably, it had been a training to securely prohibit the inclination share capital external the net worth of the company, yet in presence of these legal solutions under the Demonstration clearly in coming time we might see Revisions or explicit legal proclamations (as to consideration/rejection of inclination share capital into net worth).