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S.R.

M UNIVERSITY
HARYANA

SHARE CAPITAL AND


DEBENTURES
SUBMITTED BY

HARIOM {SEMESTER:6}[BBA LLB-45415210007]


SUBJECT: COMPANY LAW
SUBMITTED TO PROFESSOR MR. AZAD KHAN
ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude
to my PROFESSOR MR.AZAD KHAN who gave me the
golden opportunity to do this assignment on the topic
“SHARE CAPITAL AND DEBENTURES”, which was
completed with a lot of research which in turn helped
me gain knowledge about many facts.
Secondly I would also like to thank my friends who
helped me a lot in finalizing this assignment within
the limited time frame.
HARIOM [BBA LLB-45415210007]
INDEX
1.INTRODUCTION
2.NATURE AND DENOMINATIONS OF SHAR
CAPITAL
3.TYPES OF SHARE CAPITAL
4.THREE TYPES OF PREFERENCE SHARE CAPITAL
5.OTHER INSTRUMENTS
6.DEBENTURES
7.TYPES OF DEBENTURES
8.ISSUE OF DEBENTURES
9.CONCLUSION
Introduction
Before beginning any business, an entrepreneur will need to raise resources, or capital, as
investment, and the amount of capital will depend on the size of the project or business,
and since it may become cumbersome to provide the money by himself or herself, or
procure it even from friends and relatives, it has been recognized that money needs to be
raised from the public, and SEBI has fixed guidelines to this end, which, if abided by, allows
money to be raised from the public legally, and this environment from which financial
requirements are raised, is known as the capital market. The capital market is divided into
two types- the primary market, where shares, bonds or debentures are offered to the public
for the purpose of raising the required capital, and this is what the paper will work around
while discussing share capital and its denominations, while the secondary market refers to
the trading avenue where pre-existing securities are traded among investors.

In this paper, the researcher intends to deal with the concept of Share Capital and its
denominations, or, types of Share Capital. She intends to begin with an understanding of
‘shares’ and ‘capital’, and then move on to the different denominations of share capital. The
paper will then proceed to discuss the different types of shares, as they existed before
enactment of the Companies Act, 1956 (hereinafter the Act unless otherwise specified) and
as they exist now after the enactment of the Companies Act, 1956. Previously, shares were
of three kinds- Ordinary shares, Preference shares and Deferred shares, but now there only
two kinds of shares can be issued by the company, namely, Equity share capital and
Preference share capital. She will then briefly deal with debentures, and finally, the various
instruments of shares and investment. All of this will be extensively covered in the following
portions.

PART A: NATURE AND DENOMINATIONS


Share is defined in Section 2(46) of the Companies Act, 1956 as, “‘share’ means share in the
share capital of a company, and includes stock except where a distinction between stock
and shares is expressed or implied." Shares are considered as goods under S 2(7) of the Sale
of Goods Act, 1930, and are moveable property, but are transferable only in the manner
provided by the Articles of Association of the Company, as per Section 82 of the Companies
Act, 1956. The meaning of ‘capital’ is also to be understood in this context. Though the word
has a lot of meanings generally, in the context of company law it is used in a restricted
sense, and refers to the “value of the assets contributed to the company by those who
subscribe for its shares." It’s the value that matters in this case rather than the assets
because the assets will change form in the course of business. A landmark case in which the
meaning of share has been clearly postulated is CIT v. Standard Vacuum Oil Co. where the
Supreme Court of India said that “by a share in a company is meant not any sum of money
but an interest measured by a sum of money and made up of diverse rights conferred on its
holders by the articles of the Company which constitute a contract between him and the
company." In another case, Bucha F. Guzdar v. Commissioner of Income Tax, Bombay, the
Supreme Court defined share as “the right to participate in the profits made by a company
while it is a going concern and declares a dividend, and in the assets of the company when it
is wound up." Therefore, a share, or share capital, is not a sum of money, and not just the
interest of the shareholder in a company, but also represents a set of rights and liabilities.

Prior to the enactment of the Companies Act, 1956, there were three kinds of shares.

Ordinary Shares- An ordinary share basically represents the equity ownership of a company,
which would, simply put, entitle the shareholder to a certain portion of the company's
profits. Other privileges include receiving quarterly accounts and annual reports, and
participating at Annual General Meetings, but such shareholders are at a more
disadvantageous position in case there is liquidation of the company or the company is
wound up, because they have the last call on the assets of the company, after all the other
liabilities of the company have been met. Ordinary shares were held by a class of carefully-
monitored members who would generally have voting rights, though non-voting ordinary
share-holders also existed, but this was strongly disapproved of under the English system.

Preference Shares- “A preference share is a share which entitles a holder to an annual


dividend, of a fixed amount per share (usually expressed as a percentage of the nominal
value of the share), paid in priority to any dividend payments to other members."

Deferred Shares- These shares generally came with a condition that no dividends can be
paid to the shareholder for a period of time, generally one financial year, unless the
ordinary shareholders have been paid a certain amount in that year; and these are generally
issued to founders of the company and thus also called ‘founders’ shares.’

But with the enactment of the Companies Act, 1956, under Section 86 of the Act, only two
kinds of shares are now recognized and can be issued by a company limited by shares.
Section 86 states:

New issues of share capital to be only of two kinds

The share capital of a company limited by shares shall be of two kinds only, namely:-

(a) Equity share capital-

(i) With voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules
and subject to such conditions as may be prescribed;

(b) Preference share capital.


With regard to issuing shares with differential voting rights, certain rules which have been
specified by the Department of Company Affairs have to be followed while issuing such
shares. These Rules, among other things, provide that only 25 percent of the total issued
share capital, including non-voting shares, can be shares with differential voting rights
(hereinafter DVR unless otherwise specified), and it can only be issued by a company which
has distributable profits in the last three years immediate to such issuance. Neither Equity
shares with regular voting rights will be allowed to be converted to DVR nor will the latter
be allowed to be converted to the former, and a shareholders’ resolution by the general
body will have to approve the issue of such shares. The company should not have defaulted
in addressing investor’s grievances or defaulted in filing annual returns in the last three
years, but most importantly, the Articles of Association of the company in question should
permit the issuing of such shares. It must also be kept in mind that the company cannot
issue shares with DVR if it has been convicted under either FEMA, 1999, or SEBI Act, 1992,
or Securities Contracts (Regulation) Act, 1956.

Preference Share Capital has been defined and explained elaborately in Section 85 of the
Companies Act, which states that preferential share capital is that capital which fulfils the
two conditions, first, there has to be assured dividend during the life of the company, which
may or may not be a fixed amount, or a fixed rate, to be paid to preferential shareholders
before anything is paid to equity shareholders, and secondly, if the company is wound up,
the preferential dividends must be paid to the preferential shareholders before anything is
paid to the equity shareholders.

There are three main types of preference


shares:
Participating or Non-Participating shares
Once the fixed amount of dividend as decided by the company has been paid first to the
preference shareholder, and then some amount to the ordinary shareholder, there
sometimes still may be some surplus profits which is decided to be distributed among the
shareholders, the problem that rises then is whether the preference shareholders can take
part in distribution of the surplus, and a similar question arises if a company is being wound
up and there is surplus. Now if the preference shareholders are entitled to a share in the
distribution of the surplus, then they are known as participating preference shares.
However, generally the principle followed is that of non-participating preference shares
where they are not entitled to the surplus being distributed to them. So generally
preference shareholders will only get the dividend that is fixed for them and the right of
participation as per the terms of the Memorandum of Association or Articles of Association
unless it has been expressly provided otherwise. In Scottish Insurance Corporation v.
Wilsons & Clyde Coal Co: the House of Lords observed that the Articles of the company
about to go into liquidation stated specifically that in the event of winding up preference
stock would be have higher priority to the extent of the amount paid thereon. On the
question as to whether preference shareholders would be entitled to a share of the surplus,
Lord Simonds said such a right would depend on their terms of contract with the company
in question, and in this case no such right was given for a share in the surplus.

Cumulative and Non-Cumulative shares


Preference shares are cumulative when there are no profits in one year, but the arrears in
dividends are carried forward to the next few years and are paid out of profits of those
subsequent years. But if the dividend lapses the year there are no profits, then it is non-
cumulative shares, and the kind of preference shares depends on the terms of issue and
Articles of Association of the Company, but generally, unless it is clearly indicated otherwise,
shares tend to be cumulative.

Redeemable and Irredeemable Preference


shares
A public limited company can issue redeemable preference shares to be redeemed on a
fixed date or after a certain period of time during the lifetime of a company, and the
guidelines for this have been laid down in Section 80 of the Companies Act. According to
this Section, the shares must be fully paid to be redeemed, and the shares can be redeemed
only out of the profits of the company available for dividends and the same applies to any
premium to be paid on redemption, or, the company can issue fresh shares in order to
utilize the proceeds to carry out the redemption. It was held in Birla Global Finance Ltd. (In
re) that Preference shares can also be redeemed under Section 100 of the Act, which
provides for special resolution for reduction of share capital if shares are to be redeemed
neither out of profits nor out of fresh issuance of shares. Irredeemable shares are those
shares for which the company need not pay the shareholder back unless the company is
wound up or liquidated. But since the Companies (Amendment) Act 1998, further amended
in 1996, has prohibited any more issuing of irredeemable shares or share that can be
redeemed after expiry of twenty years as per Section 80 (5A). Also, Section 80A states that
all irredeemable shares that existed shall be redeemed within five years of the Act
commencing, necessarily, and those shares to be redeemed in ten years would have to be
redeemed as per the terms, or within ten years of commencement of the Act, whichever is
earlier, and in case a company is not in a position to do so, the term may be extended on
permission from the Company Law Board.
Cumulative Convertible Preference Shares
(CCPS)
As per guidelines released in 1985, the Government has permitted the issuance of a
separate class of shares called the cumulative convertible preference shares, but this can be
done only by public limited companies and not private limited companies. In the United
Kingdom, sometimes if it chooses to, a company is allowed to issue convertible shares, that
is, preference shares that can be converted to ordinary shares, it can be also be at the
choice of the shareholder, or at a fixed pre-decided date.

Equity shares are basically equivalent what used to be earlier ordinary shares and though it
has not been defined in Section 86 of the Act, it has been mentioned in Section 86 as part of
classification of shares, but there is a vague and broad explanation of equity share capital in
Section 85(2) which states that equity share capital is ordinary capital which is not
preference share capital. Equity capital is also known as ‘risk capital’ because they carry the
greater amount of risk in case a business venture fails, and they get only residual rights and
benefits that other shareholders have not already got.

PART B: OTHER INSTRUMENTS


While dealing with the securities in the primary market, it is also essential to briefly discuss
debentures as part of such securities. The definition of ‘debentures’ as per Section 2(12)
talks of what it includes, like debenture, stock, bonds etc, ‘which constitute a charge on the
company’s assets or not’, but it does not explain the nature of debentures. According to an
observation in Levy v. Abercorris Co. “debenture means a document which either creates a
debt or acknowledges it, and any document which fulfils either of those conditions is a
debenture." Though the meaning of the term is thus very wide, there are certain
characteristic features, like it is movable property which can be issued by the company, it
provides details like mode of payment, time of payment etc for redemption of the debt, and
it’s a certificate of debt that creates a charge on the company’s undertakings. The different
broad types of debentures are bearer debentures, registered debentures, perpetual or
irredeemable debentures, redeemable debentures, naked debentures and convertible
debentures.

The next and final portion will discuss the various instruments of shares, like share warrants,
share certificate, share bonus, GDRs and ADRs which, even though are not instruments of
share, they act as options to investment. A share certificate is understood to be a document
that acts as evidence that the shareholders are the actual owners of the shares, and it is
made out in the name of the person who holds such shares. It acts as estoppel on two
counts- one, that the company cannot say that there was a mistake in the case of an
innocent purchaser, and two, cannot deny the validity of the amount of payment marked on
the certificate, again for a bona fide purchaser.

Section 205(3) of the Act talks about bonus shares whereby a company can issue certain
shares to its existing members that transfers profits to share capital, and these shares are
always fully paid and issued free of charge. But this has to be permitted by the company’s
articles of association and regulated by SEBI guidelines.

Share warrants are provided for in Section 114 of the Act, which states that a public limited
company if permitted to do so by its articles of association, and also on permission from the
Central Government, can convert existing fully paid up shares into share warrants, and
these warrants entitle the bearer to the shares that are mentioned in it, and Section 115
says that the person in whose name the warrant is issued is no longer on the register of the
company as a member, but the particulars of the share warrant shall be entered into the
register.

ADRs stand for American Depository Receipt and GDR stands for Global Depositiory
Receipts, and they both act as a method through which foreign investment can be made in
countries across the world, and is now gaining popularity in India rapidly as a result of the
boom in foreign investment over the last few years. While ADRs are more specific to
American deposits, GDRs are a general term for such investments, and they can be in any
global form of issues for instance Euro issues or Pound issues, and they are based on an
agreement between the company and the depositor bank setting out rights and obligations
of both, and the underlying company shares are held by a third bank which is generally in
the home country of the issuing corporate entity.

To conclude, the researcher has discussed with the help of cases various definitions,
concepts and theories of share capital within the framework of the primary market by
reviewing both terms separately and then collectively, and then proceeded to analyse the
evolution of the types of share capital, pre-enactment and post-enactment of the
Companies Act. The paper then briefly discussed debentures as part of securities in primary
market, and proceeded to finish by talking about various instruments of shares, and
investment like share certificate, share bonus and share warrants, and GRDs and ADRs. The
paper was divided into two parts for conceptual clarity and convenience of the reader, the
first part dealt with nature, meaning and the different types and sub-types of share capital,
and was thus more expansive. The second part consisted of the various other instruments
which are necessary to holistically comprehend the concept of share capital.

DEBENTURE
A Debenture is a unit of loan amount. When a company intends to raise the loan amount
from the public it issues debentures. A person holding debenture or debentures is called a
debenture holder. A debenture is a document issued under the seal of the company. It is an
acknowledgment of the loan received by the company equal to the nominal value of the
debenture. It bears the date of redemption and rate and mode of payment of interest. A
debenture holder is the creditor of the company.

As per section 2(12) of Companies Act 1956, “Debenture includes debenture stock, bond
and any other securities of the company whether constituting a charge on the
company’s assets or not”.

TYPES OF DEBENTURES

Debenture can be classified as under :

1. From security point of view

(i) Secured or Mortgage debentures : These are the debentures that are secured by a
charge on the assets of the company. These are also called mortgage debentures. The
holders of secured debentures have the right to recover their principal amount with the
unpaid amount of interest on such debentures out of the assets mortgaged by the company.
In India, debentures must be secured. Secured debentures can be of two types :

(a) First mortgage debentures : The holders of such debentures have a first claim on the
assets charged.

(b) Second mortgage debentures : The holders of such debentures have a second claim on
the assets charged.
(ii) Unsecured debentures : Debentures which do not carry any security with regard to the
principal amount or unpaid interest are called unsecured debentures. These are called
simple debentures.

2. On the basis of redemption

(i) Redeemable debentures : These are the debentures which are issued for a fixed period.
The principal amount of such debentures is paid off to the debenture holders on the expiry
of such period. These can be redeemed by annual drawings or by purchasing from the open
market.

(ii) Non-redeemable debentures : These are the debentures which are not redeemed in the
life time of the company. Such debentures are paid back only when the company goes into
liquidation.

3. On the basis of Records

(i) Registered debentures : These are the debentures that are registered with the
company. The amount of such debentures is payable only to those debenture holders
whose name appears in the register of the company.

(ii) Bearer debentures : These are the debentures which are not recorded in a register of
the company. Such debentures are transferrable merely by delivery. Holder of these
debentures is entitled to get the interest.

4. On the basis of convertibility

(i) Convertible debentures : These are the debentures that can be converted into shares of
the company on the expiry of predecided period. The term and conditions of conversion
are generally announced at the time of issue of debentures.

(ii) Non-convertible debentures : The debenture holders of such debentures cannot


convert their debentures into shares of the company.
5. On the basis of priority

(i) First debentures : These debentures are redeemed before other debentures.

(ii) Second debentures : These debentures are redeemed after the redemption of first
debentures

ISSUE OF DEBENTURES

By issuing debentures means issue of a certificate by the company under its seal which is an
acknowledgment of debt taken by the company.

The procedure of issue of debentures by a company is similar to that of the issue of shares.
A Prospectus is issued, applications are invited, and letters of allotment are issued. On
rejection of applications, application money is refunded. In case of partial allotment, excess
application money may be adjusted towards subsequent calls.

Issue of Debenture takes various forms which are as under :

1. Debentures issued for cash

2. Debentures issued for consideration other than cash

3. Debentures issued as collateral security.

Further, debentures may be issued

(i) at par, (ii) at premium, and (iii) at discount


CONCLUSION
To conclude, the researcher has discussed with the help of cases various definitions,
concepts and theories of share capital within the framework of the primary market by
reviewing both terms separately and then collectively, and then proceeded to analyse the
evolution of the types of share capital, pre-enactment and post-enactment of the
Companies Act. The paper then briefly discussed debentures as part of securities in primary
market, and proceeded to finish by talking about various instruments of shares, and
investment like share certificate, share bonus and share warrants, and GRDs and ADRs. The
paper was divided into two parts for conceptual clarity and convenience of the reader, the
first part dealt with nature, meaning and the different types and sub-types of share capital,
and was thus more expansive. The second part consisted of the various other instruments
which are necessary to holistically comprehend the concept of share capital.

A Debenture is a unit of loan amount. When a company intends to raise the loan amount
from the public it issues debentures. A person holding debenture or debentures is called a
debenture holder. A debenture is a document issued under the seal of the company. It is an
acknowledgment of the loan received by the company equal to the nominal value of the
debenture. It bears the date of redemption and rate and mode of payment of interest. A
debenture holder is the creditor of the company