No Par Share or Stock | Meaning | Merits | Limitations

What is No Par Share or Stock?

No par stock or share means that share or stock which does not have any face value or par value.

Recently in U.S.A. and Canada, many companies have been formed with stock without par value. The total owned capital of the Corporation is divided into a certain number of shares by a particular holder and does not mention the face value of the shares. The dividends on such shares are paid at the rate of a certain dollar per share instead of a certain percentage of the par value of each share.

According to Indian Companies Act, the shares issued by a company must have a definite face value. The face value of the share indicates the extent of interest in and the liability of the shareholder to the company.

Hence, it is clear that Indian Companies cannot issue no par shares. In U.K. also, the Cohen Committee suggested to legalize the issue of no par shares. But the Gedge Committee strongly opposed this suggestion and hence the move was dropped. Therefore, no par stocks cannot be issued in U.K. also.

Merits of No par Stock

Par value is a nominal figure or the face value of a security. But it does not reflect the amount which a stock holder may actually realize either in the event of sale or in the case of liquidation of the company.

Business, in fact, is dynamic in character and the value of the business enterprises changes constantly in response to the gains and losses earned by them. Par value is static and fails to record these variations. It is based on the fact that valuation is a difficult process and the nature and extent of the variations cannot be known on the face of the certificate itself. Hence, no par stocks came into being.

The advocate of no par stock claims the following points to their credit.

1. The balance sheet will show a true and correct position of the company.

2. The holders of the no par stock always know the real value of the stock as it is not fixed but related to the earnings.

3. The stockholders should pay the entire amount at the inception of the company. Hence, they are not required to pay further calls.

4. The value of the no par stock is fixed by the condition prevailing in the capital market. Therefore, such shares need not be marketed at a discount. This avoids a lot of legal formalities.

5. The directors, will not manipulate the accounts and artificially push up the value of the stock or shares.

6. No reduction of capital is needed as the value of the stock is automatically adjusted with its earning capacity. As such. the question of over capitalization shall not arise.

Limitations of No Par Stock

No par stock has not become popular in other countries of the world.

This is due to the following limitations:

1. No par stock may be used to deceive the ignorant investors. Since it does not have any definite value, it is difficult to have a standard on the basis of which it should be valued.

2. The company cannot prepare its financial plan on a scientific basis. Faulty financial plan may lead to wrong capitalisation.

3. Dishonest management may manipulate the accounts and declare dividend out of capital.

4. Since the capital account remains fluctuating from time to time, the promoters may be attracted to pay unduly excessive remuneration to themselves.

5. The existence of such shares shall make the balance sheet unduly complex and difficult to understand. Ordinary investors and creditors cannot follow it properly.

6. The creditor does not get the additional security of uncalled capital as the whole amount of the share is paid at the beginning itself.