Company Law_ Share, Capital and Debentures

8/14/2019 Company Law_ Share, Capital and Debentures

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Reliance Power IPO

oversubscribed in 60sec

11/14/09 22Share, Capital and

4th March, 2008; Tuesday,

9.55 am: The Anil Ambani-controlledReliance Power opens for stocksubscription in the Rs 405-Rs 450 range.

9.56 am: History is created the stock isoversubscribed. By evening the Rs 11,600-crore issue is oversubscribed a staggering10.55 times. And its still three days to gobefore subscriptions close.


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Some Common Figures ofThe Market



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INDIAN MARKETS FOR 28JAN 2008



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Definition of Shares

A share in the share capital of a company,and includes stock except where adistinction between stock and share isexpressed or implied.

In other words,

a share in a company is one of the units

in which the total capital of the company isdivided.



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Definition of Shares

A share in the share capital of a company,and includes stock except where adistinction 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 thecompany is divided.



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Example: If the capital of acompany is 10000 and isdivided into 1000 units ofRs10 each, each unit ofRs.10shall be called a share of thecompany.



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Kinds of shares

SHARES

11/14/09 88Share, Capital andDebentures


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Preference shares

Such shares enjoy some preferentialright:

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 ofthe company.

If any share carry only one of above thesetwo preferential rights, they will be treatedas equity shares.



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Voting right of preferenceshareholder

They do not enjoy normal voting right likeequity share holders, they are howeverentitled to vote in following two cases:

When any resolution directly affecting theirrights is to be passed.

When the dividend due (whether declared or

not) on their preference shares or partthereof 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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Equity shares

These shares carry the right to receive thewhole of surplus profits after thepreference shares, if any.

Further, directors have the sole right ofrecommending dividends to such sharesand as such they may not get anydividends in case the director choose so.

Holders of equity shares are the actualowners 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 payingit to the preference share holders.

The rate of dividend on these shares depends uponthe profits of the company. They may be paid ahigher 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 share holders.11/14/09 1515Share, Capital and


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Equity Shares..

Advantage Disadvantage

Equity shares do not create any obligation topay a fixed rate of dividend.

If only equity shares are issued the companycan not take the advantages of trading onequity.

Equity shares can be issued without creatingany charge over the assets of the company.

As equity capital can not be redeemed there isa danger of overcapitalization.

It is a permanent source of capital and thecompany has not to repay it except underliquidation.

Equity share holders can put obstacles inmanagement by manipulation and organizingthemselves.

Equity share holders are the real owners of thecompany who have the voting rights.

During prosperous periods higher dividendshave to be paid leading to increase in value of

shares in the market and speculation.

In case of profits equity share holders are thereal gainers by way of increased dividends andappreciation in the value of shares.

Investors who desire to invest in safesecurities with a fixed income have noattraction for such shares.


C i b P f &


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Comparison between Preference &equity shares

Preference shares Equity sharesThese shares are entitled to a fixed rate ofdividend.

The rate of dividend on equity sharesdepends upon the amount of profitavailable and the funds requirements ofthe company for future expansion etc.

Dividend on these shares is paid in

preference to the equity shares.

The dividend on equity shares is paid only

after the preference dividend has beenpaid.

Redeemable preference shares may beredeemed by the company.

Equity shares can not be redeemedexcept under a scheme involving reductionof capital or buy back of its own shares.

The voting rights of these shares arerestricted.

An equity share holder can vote on allmatters affecting the company.

The preference shares have preference toequity shares with regard to payment ofcapital on winding up.



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Deferred shares

They are also known as founder shares",since they are often held by the promoterof the company.

They are issued as other ordinary sharesand gets a fixed dividends just likepreference shares.

But they are the last to receive both as

regards dividends and repayment ofcapital.



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Special provision regardingto application and

allotment of shares

Certain restriction on public companies

regarding allotment of shares, may bediscussed under the following heads:

When no public offer is made

When public offer was made



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When no public offer ismade

Where a public company having a sharecapital does not offer shares to the public,it need not issue a prospectus. In such

case it shall not proceed to allot sharesunless at least three days before the firstallotment it has filed with the registrar forregistration a statement in lieu of

prospectus.

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When public offer is made

In case when public company offers sharesto the public for subscription, the provisionsrelating 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 firstallotment only after two years of theformation of the company, and shouldcomply 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 ofshares

In case of subsequent allotment of sharesOffered to the public for subscription by apublic company, all the special provisionsapplicable to first allotment of shares

discussed above apply, except the provisionrelating to:

Minimum subscription [sec, 69(1)], and

Deposit of application money in a schedulebank



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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 amember of a company has a right to receivea certificate of his share.

A share certificate shall be under the seal ofthe company and shall specify:

The shares to which it relates

The amount paid up thereon

The name, address, and occupation of theshare holder.

Should be signed by atleast 2 directors andsecretary.



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Share warrant

A share warrant is a document issued by apublic company stating that its bearer isentitled to the shares specified therein.

A public company limited by shares mayconvert its fully paid-up shares into sharewarrants.

Advantage of issuing share warrants is that

shares can be transferred by mere deliveryof warrant.



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Transfer andTransmission ofShares


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Procedure to be followedby 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 transferwith prescribed time of one month



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Not impound certificates

Dispatch after realization of the stock investEnsure 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, acompany needs capital which is raised by apublic company by the issue of a prospectus

inviting deposits or offers for shares anddebentures from the public .



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SHARE CAPITAL

DEFINITIONShare Capital is thecapital raised by acompany by the issue ofshares.


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CLASSES OFCAPITAL

NOMINAL OR AUTHORISED OR REGISTEREDCAPITAL

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 ofassociation 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 nominalcapital which the company needs for thetime 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 publicsubscription only Rs 6,00,000 divided into 60,000equity shares



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SUBSCRIBED CAPITAL

The amount of the issued capital whichhas been taken up by the public is known asthe SUBSCRIBED CAPITAL

EG: out of 60,000 equity shares issued forsubscription, only 50,000 shares maybe

taken up by public. Subscribed capital willbe 5,00,000 shares of Rs 10 each



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CALLED UP CAPITAL

The company does not need the fullnominal or face value of its subscribedcapital in which case it calls only the part of

the face value

EG: If the company decided to call up Rs. 5per share out of its nominal value of Rs.10



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UNCALLED CAPITAL

The difference between the subscribedcapital and the called up capital is known asUNCALLED CAPITAL

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

the called up capital is Rs. 2,50,000 Thusuncalled capital is Rs 2,50,000



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PAID-UP CAPTAL

Often, some of the subscribers for sharesdo not pay the full amount called up forthem, Therefore the amount actually paid by

the shareholders is known as paid-upcapital.

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 thecompany.



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FIXED OR BLOCK CAPTAL

It is that part of the capital which isinvested in fixed assets which are intendedto be kept in business more or lesspermanently.

EG: Investment made in land and building,plant and machinery, is fixed capital



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WORKING OR CIRCULATINGCAPITAL

This capital consists of assets

manufactured or acquired for sale at profit



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Debentures

The most usual form of borrowing by acompany

is by the issue of debentures. According

to sec.2(12) debenture includesdebenture stocks, bonds and any othersecurities of a company whetherconstituting a charge on the assets of the

company or not.Debenture means a document whicheither creates a debt or acknowledges it,and any document which fulfills either of

these conditions is a debenture.11/14/09 4242Share, Capital and

Characteristic features of


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Characteristic features ofdebenture

It is issued by a company and is usuallyin the form of a certificate which is anacknowledgement of indebtedness

It is issued under the companys seal. Itneed not, however, be necessarily underthe companys seal.

It is one of series issued to a number oflenders.



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It usually specifies a particular

period or date as the date ofrepayment

It generally creates a charge on theundertaking of the company or someparts of its property ; but there maybe debentures without any such

charge.

A debenture holder does not have

any right to vote in the company11/14/09 4444Share, Capital and

Classes of debentures


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Classes of debentures

Negotiability

Security

Permanence

Convertibility

Priority



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Classification according tonegotiability

Bearer debenture : These debentures alsoknown as unregistered debentures, are payableto its bearer. These are regarded as negotiableinstruments and are transferable by delivery.

Registered debentures: These are thedebentures which are payable to the registerholders. These are transferable in the mannerspecified in the conditions endorsed thereon.

These are not negotiable instruments



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Classification according tosecurity

Secured debentures : - Debentureswhich create some charge on theproperty of the company. The charge maybe a fixed charge or a floating charge

Unsecured or naked debenture :-Debentures which do not create anycharge on the assets of the company. The

holders of these debentures like ordinaryunsecured creditors may sue thecompany for recovery of the debt.


Classification according to


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Classification according topermanence

Redeemable debentures :- Debenturesare usually issued on the condition thatthey shall be redeemed after a certainperiod. They may be re-issued afterredemption in accordance with theprovisions of section. 121.



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Irredeemable debentures :- Adebenture will be treated as irredeemablewhere either there is no period fixed forrepayment of the principal amount or

repayment of it is made conditional onthe happening of an event which may nothappen for an indefinite period or mayhappen only in certain specified and

contingent events.



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Classification according toconvertibility

Convertibility debentures :- Thesedebentures give an option to theholders to convert them intopreference or equity shares at statedrates of exchange, after a certain period.If the holders exercise the right ofconversion, they cease to be lenders to

the company and become membersinstead.



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Non-convertible debentures :- Thesedebentures do not give any option to theirholders to convert them equity shares.

They are to be duly paid as and when theyare mature.



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Classification according topriority

First debentures :- These are thedebentures which are to be repaid inpriority to other debentures which maybe subsequently issued.

Second debentures :- These are thedebentures which are to be paid after the

first debentures have been redeemed.


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Debentures with Pari Passuclause

Debentures are usually issued in a serieswith a pari passu clause. In such a case theyare to be discharged rateable, though issuedat different and varying times. In the eventof a deficiency of assets to satisfy the wholedebt secured by the issue of debentures,they will abate proportionately.


D b t T t


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Debenture TrustDeed(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

Documents

Company Law_ Share, Capital and Debentures