KASNEB · IntermediateCompany LawBETA — flag if wrong

Company Finance

This topic focuses on the financial aspects of companies, including share capital, debentures, and financial reporting requirements.

3objectives

3revision lessons

12practice questions

What you’ll learn

Aligned to the KASNEB Company Law syllabus.

CI21.5.A Define share capital and its types.
CI21.5.B Explain the process of issuing shares and debentures.
CI21.5.C Outline the financial reporting obligations of companies under the Companies Act.

Defining share capital and its types in company finance

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Share capital refers to the funds raised by a company through the issuance of shares to shareholders. It represents the ownership interest of shareholders in the company and is crucial for financing operations and growth. Under the Companies Act 2015, share capital is categorized primarily into two types: authorized capital and issued capital.

Authorized Capital: This is the maximum amount of share capital that a company is allowed to issue as specified in its memorandum of association. It may be increased or decreased by following the procedures outlined in the Companies Act.
Issued Capital: This is the portion of authorized capital that has actually been issued to shareholders. It can be further divided into:
- Paid-up Capital: The amount of money that shareholders have paid for their shares. This reflects the actual funds received by the company.
- Unpaid Capital: The portion of issued capital for which payment has not yet been received from shareholders.
Ordinary Shares: These shares represent ownership in the company and entitle the holder to vote at general meetings and receive dividends, which are paid out of profits. However, dividends on ordinary shares are not guaranteed.
Preference Shares: These shares provide holders with preferential rights over ordinary shareholders, particularly regarding dividend payments and capital repayment upon liquidation. Preference shares may be cumulative, non-cumulative, redeemable, or convertible, depending on the terms set by the company.

Understanding these types of share capital is essential for effective company finance management and compliance with the Companies Act 2015.

Key points

Share capital is funds raised through issuing shares.
Authorized capital is the max share capital allowed.
Issued capital is the actual amount issued to shareholders.
Ordinary shares provide voting rights and dividends.
Preference shares have preferential rights in dividends.

More on this topic

CI21.5.B Issuing Shares and Debentures in KenyaBETA — flag if wrongAI 100

Issuing shares and debentures is a critical process for companies seeking to raise capital. Under the Companies Act 2015, a prospectus must be issued when offering shares or debentures to the public. This document serves as an invitation for potential investors to subscribe, rather than a direct offer. It must include specific information as outlined in the Act, ensuring transparency and compliance.

When a company prepares a prospectus, it must contain essential details such as the company’s financial statements, the purpose of the issue, and the risks involved. The prospectus must also include an application form for investors. Companies can opt for direct invitations or engage underwriters to mitigate risks associated with the issue. An underwriter guarantees to purchase any unsold shares, which helps ensure the success of the capital raising effort.

It is important to note that companies cannot finance the purchase of their own shares, as established in the case of Trevor v. Whitworth. However, they can redeem redeemable shares or debentures under specific conditions. This ensures that the integrity of the capital structure is maintained while allowing companies to manage their financing effectively.

CI21.5.C Financial Reporting Obligations Under the Companies ActBETA — flag if wrongAI 100

Under the Companies Act 2015, companies in Kenya have specific financial reporting obligations that ensure transparency and accountability. These obligations include:

1. Preparation of Financial Statements: Every company must prepare annual financial statements that comply with International Financial Reporting Standards (IFRS). These statements should include a statement of financial position, statement of profit or loss, and cash flow statement as per IAS 1.

2. Books of Account: Section 162 of the Companies Act mandates that every company must keep proper books of account that reflect the company’s financial position. These records must be maintained at the registered office or another location as specified by the directors.

3. Annual Returns: Companies are required to file annual returns with the Registrar of Companies within a specified period after the end of the financial year. This includes details about the company’s financial performance and position.

4. Audit Requirements: Public companies and certain private companies must have their financial statements audited by a registered auditor as per Section 167 of the Companies Act. The auditor's report must be included in the financial statements.

5. Disclosure of Directors’ Interests: Companies must disclose any interests held by directors in the company’s shares and any contracts with the company, ensuring compliance with Section 192 of the Companies Act.

Failure to comply with these obligations can result in penalties, including fines for the company and its officers, as well as potential legal action from shareholders or creditors.

Sample KASNEB-style questions

3 of 12 questions. Beta-flagged questions are AI-drafted and pending CPA review — flag anything that looks wrong.

Q1 · MCQ · easyBETA — flag if wrongAI 100

What is the primary purpose of share capital in a company?

A.To pay dividends to shareholders
B.To finance the company's operations and growth✓ correct
C.To provide a basis for corporate governance
D.To determine the company's credit rating

Q2 · MCQ · mediumBETA — flag if wrongAI 80

Which of the following is NOT a type of share capital?

A.Ordinary shares
B.Preference shares
C.Debenture shares✓ correct
D.Convertible shares

Q3 · SHORT ANSWER · mediumBETA — flag if wrongAI 93

Define share capital and name its two main types.

Model answer

1. Share capital is the total amount of money that a company raises by issuing shares to shareholders. 2. The two main types of share capital are ordinary shares and preference shares.

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Common questions

Define share capital and its types.

Share capital is funds raised through issuing shares.

Explain the process of issuing shares and debentures.

A prospectus invites public subscription for shares/debentures.

Outline the financial reporting obligations of companies under the Companies Act.

Companies must prepare annual financial statements per IFRS.