Par or No Par, Which Is More Useful in Modern Day Companies

Topics: Stock, Stock market, Shareholder Pages: 5 (1779 words) Published: December 14, 2012
Since the start of the use of shares to divide a company’s monetary assets has been used, the system of shares with a par value has been use. However, as the business world is developing and prospering, issues have been raised as to the usefulness of a system of shares with a par value in determining a company’s share capital. A share with a par value or nominal value is where a shareholder must pay a minimum at the requisition of a share. The par value is usually a very small amount of money, for example $1. Any payment requirement above the par value is called a share premium, practically this is where the par value for example is $1, but the shareholder need to pay $3 to buy the share. Some people are argued that a system of shares with par value, does not effectively serve its purpose anymore in the modern markets, which namely was to allow creditors to assess the credit worthiness of a company by measuring the amount of share capital that was available for the company. The most common problem has mentioned by academics is that par value is misleading for investors, whether sophisticated or not. Par value is misleading in that it does not reflect the true market value of the shares. Another problem that par value creates where a company is trying to raise new capital, because company’s are not allowed to issue shares at a discount according to Section 50 of the Companies Ordinance (CO), a company cannot issues shares at a discount even if the true market value of a share is below that of the par value. The company needs to either seek the sanction of the courts or create a new class of shares where the par value in lower. The current regime of par, forces companies to have separate accounts for share capital which is the amount paid as par value and share premium which is money paid over the par value. The money in the share premium account cannot be used for dividends however it may be used for the operations of the company. A system of shares with no par was first introduced in the 19th century, with the aim of simplifying what par value shares has complicated. When issuing shares with no par, it essential means that there will be no separate accounts for share premium and share capital. This means that all money paid by a shareholder will fall into share capital. The advantages of this is that it allows for creditors to assess the real situation of the company as it’s share capital will include what would previously be called share premium. This essay will explore the arguments against the use of par value and why a system of no par would be better in the operations of a company.

In order to completely understand how par value works, a share must be understood at its roots. A share represents a fraction of a company’s net worth. In a companies constitution, it will be stated what the share capital will be usually in the way, “the share capital is $x divided into y shares of $z each”. $x would represent the share capital, y would represent the number of shares that can be issued, and $z would be the par value (nominal value) of the share. As explained above shares may not always issued at par value, and in most cases would not be issued at par. This is because company will issue their shares in relation to the market value of the shares at the time of issue. The amount paid over the par value would be the share premium. For example currently, PCCW holds 36726857 ordinary shares, PCCW’s ordinary shares have a par value of HK$0.25 per a share. Therefore the share capital available to PCCW in relation to ordinary shares would be HK$9181714.25. However in the stock markets, the market value of a share is currently HK$2.82 per a share. Prospective share holders would have to pay the market value of the shares they purchase from PCCW, for example if A buys 1000 ordinary shares from PCCW he would have to pay HK$2820, of this amount HK$250 would go into the share capital account and the remainder of HK$2570 would be paid...
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