SHARES, CAPITAL

&
DEBENTURE
Presented by
BHARGAV BARUAH
IIPM, Bangalore
FW-07-09
 Reliance Power IPO
oversubscribed in 60
sec

4th March, 2008; Tuesday,

9.55 am: The Anil Ambani-controlled

•

Reliance Power opens for stock

subscription in the Rs 405-Rs 450 range.

9.56 am: History is created — the stock is

•

oversubscribed. By evening the Rs 11,600-

crore issue is oversubscribed a staggering
10.55 times. And it’s still three days to go
before subscriptions close.

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 Some Common Figures of
The Market

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INDIAN MARKETS FOR 28
JAN 2008

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 Definition of Shares

A share in the share capital of a company,

and includes stock except where a
distinction between stock and share is
expressed or implied.
In other words,
a share in a company is one of the units
in which the total capital of the company is
divided.

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 Definition of Shares

A share in the share capital of a company,

and includes stock except where a
distinction between stock and share is
expressed or implied.

In other words, a share in a company is one

of the units in which the total capital of the
company is divided.

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Example: If the capital of a
company is 10000 and is
divided into 1000 units of
Rs10 each, each unit of Rs.10
shall be called a share of the
company.

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 Kinds of shares
● SHARES

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Debentures
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 Preference shares

Such shares enjoy some preferential

right:
1: As to the payment of dividend at a fixed
rate during the life of the company.
2: As to the return of capital winding up of
the company.
If any share carry only one of above these
two preferential rights, they will be treated
as equity shares.

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 Voting right of preference
shareholder
They do not enjoy normal voting right like
equity share holders, they are however
entitled to vote in following two cases:
When any resolution directly affecting their
rights is to be passed.
When the dividend due (whether declared or
not) on their preference shares or part
thereof has remain unpaid.

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Kinds of preference shares
Cumulative preference shares
Non-cumulative preference shares
Participating preference shares
Non-participating preference shares
Convertible preference shares
Non-convertible preference shares
Redeemable preference shares
Irredeemable preference shares

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11/14/09 Share, Capital and 1313
 Equity shares

® These shares carry the right to receive the

whole of surplus profits after the
preference shares, if any.
® Further, directors have the sole right of
recommending dividends to such shares
and as such they may not get any
dividends in case the director choose so.
® Holders of equity shares are the actual
owners of the company.

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 Equity Shares
§ They have voting rights in the meeting of the
company.
§ They have a control over the working of the
company.
§ Equity share holders are paid dividend after paying
it to the preference share holders.
§ The rate of dividend on these shares depends upon
the profits of the company. They may be paid a
higher rate of dividend or they may not get
anything.
§ These share holders take more risk as compared to
preference share holders.
§ Equity capital is paid after meeting all other claims
including that of preference
11/14/09
share holders.
Share, Capital and 1515
 Equity Shares..
•Advantage •Disadvantage
•Equity shares do not create any obligation to •If only equity shares are issued the company
pay a fixed rate of dividend. can not take the advantages of trading on
equity.
•Equity shares can be issued without creating •As equity capital can not be redeemed there is
any charge over the assets of the company. a danger of overcapitalization.

•It is a permanent source of capital and the •Equity share holders can put obstacles in
company has not to repay it except under management by manipulation and organizing
liquidation. themselves.

•Equity share holders are the real owners of the •During prosperous periods higher dividends
company who have the voting rights. have to be paid leading to increase in value of
shares in the market and speculation.

•In case of profits equity share holders are the •Investors who desire to invest in safe
real gainers by way of increased dividends and securities with a fixed income have no
appreciation in the value of shares. attraction for such shares.

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Debentures
 Comparison between Preference &
equity shares

•Preference shares •Equity shares

•These shares are entitled to a fixed rate of •The rate of dividend on equity shares
dividend. depends upon the amount of profit
available and the funds requirements of
the company for future expansion etc.

•Dividend on these shares is paid in •The dividend on equity shares is paid only
preference to the equity shares. after the preference dividend has been
paid.

•Redeemable preference shares may be •Equity shares can not be redeemed

redeemed by the company. except under a scheme involving reduction
of capital or buy back of its own shares.

•The voting rights of these shares are •An equity share holder can vote on all
restricted. matters affecting the company.

•The preference shares have preference to

equity shares with regard to payment of
capital on winding up.
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 Deferred shares

§ They are also known as “founder shares",

since they are often held by the promoter
of the company.
§ They are issued as other ordinary shares
and gets a fixed dividends just like
preference shares.
§ But they are the last to receive both as
regards dividends and repayment of
capital.

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 Special provision regarding
to application and
allotment of shares
§ Certain restriction on public companies
regarding allotment of shares, may be
discussed under the following heads:
§ When no public offer is made
§ When public offer was made

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 When no public offer is
made
§ Where a public company having a share
capital does not offer shares to the public,
it need not issue a prospectus. In such
case it shall not proceed to allot shares
unless at least three days before the first
allotment it has filed with the registrar for
registration a statement in lieu of
prospectus.

§ 11/14/09 § Share, Capital and § 2020

 When public offer is made

In case when public company offers shares

to the public for subscription, the provisions
relating to allotment may be studied under
the following heads:
First allotment of shares
Subsequent allotment of shares

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 First allotment of shares

 A public company can make the first

allotment only after two years of the
formation of the company, and should
comply with certain restrictions:
 Registration of the prospectus
 Minimum subscription
 Application money
 Effect of irregular allotment
 Shares to be dealt in on a stock exchange

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 Subsequent allotment of
shares
In case of subsequent allotment of shares
Offered to the public for subscription by a
public company, all the special provisions
applicable to ‘first allotment of shares’
discussed above apply, except the provision
relating to:
Minimum subscription [sec, 69(1)], and
Deposit of application money in a schedule
bank

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 Issue of shares

Shares can be issued at par

Shares can be issued at premium

Shares can be issued at discount

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 Share certificate

Every person whose name is entered as a

member of a company has a right to receive
a certificate of his share.
A share certificate shall be under the seal of
the company and shall specify:
The shares to which it relates
The amount paid up thereon
The name, address, and occupation of the
share holder.
Should be signed by atleast 2 directors and
secretary.
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 Share warrant

A share warrant is a document issued by a

public company stating that its bearer is
entitled to the shares specified therein.
A public company limited by shares may
convert its fully paid-up shares into share
warrants.
Advantage of issuing share warrants is that
shares can be transferred by mere delivery
of warrant.

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 Transfer and
Transmission of
Shares
 Procedure to be followed
by Companies
Issue Receipt / acknowledgement
Use the prescribed format of covering letter
bear a unique serial number
Must affix date receipt stamp
Shall return share certificates and transfer
with prescribed time of one month

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Not impound certificates
Dispatch after realization of the stock invest
Ensure adequate security marks
Signature difference
- Original transfer deed
- Original Certificate
- Original objection memo with the reason

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 CAPITAL

In order to finance its activities, a

company needs capital which is raised by a
public company by the issue of a prospectus
inviting deposits or offers for shares and
debentures from the public .

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 SHARE CAPITAL

DEFINITION
Share Capital is the
capital raised by a
company by the issue of
shares.
 CLASSES OF
CAPITAL
§ NOMINAL OR AUTHORISED OR REGISTERED
CAPITAL
§ ISSUED CAPITAL
§ SUBSCRIBED CAPITAL
§ CALLED-UP CAPITAL
§ UNCALLED CAPITAL
§ PAID-UP CAPITAL
§ REVERSED CAPITAL
§ FIXED OR BLOCK CAPITAL
§ WORKING OR CIRCULATING CAPITAL
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 NOMINAL,AUTHORISED OR
REGISTERED CAPITAL
This is the sum stated in the memorandum of
association as the capital of the company.
Maximum amount which the company is authorized
to raise by issuing shares.
Also known as registered capital.

EG: Nominal capital may be Rs 10,00,000 divided

into 1,00,000 equity shares of Rs 10 each

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 ISSUED CAPITAL

It is the part of the authorized or nominal

capital which the company needs for the
time being and has been issued for “PUBLIC
SUBSCRIPTION”

EG: out of the authorized capital of Rs10,00,000,

the company may decide to issue for public
subscription only Rs 6,00,000 divided into 60,000
equity shares

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 SUBSCRIBED CAPITAL

The amount of the issued capital which

has been taken up by the public is known as
the SUBSCRIBED CAPITAL

EG: out of 60,000 equity shares issued for

subscription, only 50,000 shares maybe
taken up by public. Subscribed capital will
be 5,00,000 shares of Rs 10 each

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 CALLED UP CAPITAL

The company does not need the full

nominal or face value of its subscribed
capital in which case it calls only the part of
the face value

EG: If the company decided to call up Rs. 5

per share out of its nominal value of Rs.10

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 UNCALLED CAPITAL

The difference between the subscribed

capital and the called up capital is known as
UNCALLED CAPITAL

EG: The subscribed capital is Rs. 5,00,000,

the called up capital is Rs. 2,50,000 Thus
uncalled capital is Rs 2,50,000

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 PAID-UP CAPTAL

Often, some of the subscribers for shares

do not pay the full amount called up for
them, Therefore the amount actually paid by
the shareholders is known as paid-up
capital.

EG: If out of the called up capital of Rs.

2,50,000 the paid-up capital is Rs.
2,40,000, the un-paid capital will be Rs.
10,000
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 RESERVED CAPITAL

It is the part of the capital of a

company. Which shall not be called up
except at the time of winding up of the
company.

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Debentures
 FIXED OR BLOCK CAPTAL

It is that part of the capital which is

invested in fixed assets which are intended
to be kept in business more or less
permanently.

EG: Investment made in land and building,

plant and machinery, is fixed capital

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WORKING OR CIRCULATING
CAPITAL

This capital consists of assets

manufactured or acquired for sale at profit

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 Debentures

The most usual form of borrowing by a

company
is by the issue of debentures. According
to sec.2(12) ‘debenture’ includes
debenture stocks, bonds and any other
securities of a company whether
constituting a charge on the assets of the
company or not.
‘Debenture’ means a document which
either creates a debt or acknowledges it,
and any document which fulfills either of
these
11/14/09 conditions isShare,
a debenture.
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 Characteristic features of
debenture
Ø It is issued by a company and is usually
in the form of a certificate which is an
acknowledgement of indebtedness

Ø It is issued under the company’s seal. It

need not, however, be necessarily under
the company’s seal.

Ø It is one of series issued to a number of

lenders.
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ØIt usually specifies a particular
period or date as the date of
repayment

ØIt generally creates a charge on the

undertaking of the company or some
parts of its property ; but there may
be debentures without any such
charge.

Ø A debenture holder does not have

any right to vote
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 Classes of debentures

Negotiability

Security

Permanence

Convertibility

Priority
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 Classification according to
negotiability
§ Bearer debenture : These debentures also
known as unregistered debentures, are payable
to its bearer. These are regarded as negotiable
instruments and are transferable by delivery.
§ Registered debentures: These are the
debentures which are payable to the register
holders. These are transferable in the manner
specified in the conditions endorsed thereon.
§ These are not negotiable instruments

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 Classification according to
security
§ Secured debentures : - Debentures
which create some charge on the
property of the company. The charge may
be a fixed charge or a floating charge
§ Unsecured or naked debenture :-
Debentures which do not create any
charge on the assets of the company. The
holders of these debentures like ordinary
unsecured creditors may sue the
company for recovery of the debt.

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 Classification according to
permanence

§ Redeemable debentures :- Debentures

are usually issued on the condition that
they shall be redeemed after a certain
period. They may be re-issued after
redemption in accordance with the
provisions of section. 121.

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 § Irredeemable debentures :- A
debenture will be treated as irredeemable
where either there is no period fixed for
repayment of the principal amount or
repayment of it is made conditional on
the happening of an event which may not
happen for an indefinite period or may
happen only in certain specified and
contingent events.

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 Classification according to
convertibility
Ø Convertibility debentures :- These
debentures give an option to the
holders to convert them into
preference or equity shares at stated
rates of exchange, after a certain period.
If the holders exercise the right of
conversion, they cease to be lenders to
the company and become members
instead.

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Ø Non-convertible debentures :- These
debentures do not give any option to their
holders to convert them equity shares.
They are to be duly paid as and when they
are mature.

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 Classification according to
priority
Ø First debentures :- These are the
debentures which are to be repaid in
priority to other debentures which may
be subsequently issued.

Ø Second debentures :- These are the

debentures which are to be paid after the
“first debentures” have been redeemed.

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 Debentures with Pari Passu
clause
Debentures are usually issued in a series
with a pari passu clause. In such a case they
are to be discharged rateable, though issued
at different and varying times. In the event
of a deficiency of assets to satisfy the whole
debt secured by the issue of debentures,
they will abate proportionately.

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 Debenture Trust
Deed(Sec : 118 & 119)
§ The trust deed contains the terms and conditions endorsed in the debentures and defines the rights of

debenture-holders and the company. It usually empowers the trustees to appoint a receiver to protect their
interest. I t also contains other provisions concerning meeting of the debenture-holders supervision of the assets

charged, and the keeping of a register of a debenture holders. Whenever ther is a default by the company, the

security is enforced or action is taken by the trustees on behalf of all the debenture-holder

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 “ ”

Thank you
11/14/09 Share, Capital and 5555