Law Unit III

8/13/2019 Law Unit III

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UNIT III



Capital contributed by the owner or entrepreneur of a business, and

obtained, for example, by means of savings or inheritance, is known as own

capital or equity, whereas that which is granted by another person or

institution is called borrowed capital, and this must usually be paid back

with interest. The ratio between debt and equity is named leverage

http://en.wikipedia.org/wiki/Ownership_equity

http://en.wikipedia.org/wiki/Leverage_(finance)

http://en.wikipedia.org/wiki/Leverage_(finance)

http://en.wikipedia.org/wiki/Ownership_equity



OWNED CAPITAL

Ownership capital consists of amount contributedby owners as well as profits

FEATURES PROVISION OF RISK CAPITAL

PERMANENT SOURCE OF CAPITAL

SEPARATION OF OWNERSHIP AND

MANAGEMENT NO SECURITY REQUIRED



we may in general follow the customary line of distinction and say that

most bonds, notes, accounts payable, and other obligations of a

corporation, may be regarded as representative of borrowed capital,and most shares of capital stock may be regarded as representative of

owned capital.

http://chestofbooks.com/finance/private/Business/Chapter-VII-Long-Term-Borrowed-Capital-Bonds-And-Mortgages.html

http://chestofbooks.com/finance/private/Business/Stocks-And-Shares.html

http://chestofbooks.com/finance/private/Business/Stocks-And-Shares.html

http://chestofbooks.com/finance/private/Business/Chapter-VII-Long-Term-Borrowed-Capital-Bonds-And-Mortgages.html



DEBT CAPITAL

It includes all funds available by way of loans orcredit

FEATURESTIME HORIZON

NEED FOR SECURITY

REPAYMENT

CONTROL



SHARE- DEFINITION

Section 2(46) of the Companies Act, 1956 hasdefined a share as follows :

“Share means share in the Share capital of the

company and includes stock, except when a

distinction between stock and share is expressedor implied”

A share is the interest of the shareholder in the

company measured by a sum of money for thepurpose of liability in the first place, and of interest

in the second, but also consisting of series of

covenants entered into by all the shareholders inter

se.”



SHARE CAPITAL

In simple words : Share capital denotes aparticular amount of money with which a business

is started

In the case of a company : Share capital refers to

he amount of money raised by the issue of

shares



SHARE CAPITAL

Under the companies Act, the capital of thecompany refers to the following

Nominal or registered capital

Issued capital

Subscribed capital

Called-up capital

Paid up capital Reserve capital



KINDS OF SHARES

EQUITY SHARES With Voting rights

With differential rights

PREFERENCE SHARES

Cumulative & Non Cumulative

Participating & Non participating

Convertible & Non Convertible Redeemable & Irredeemable



EQUITY SHARES

WITH VOTING RIGHTS

The holder of such Equity shares will have the right

to vote on every resolution placed before the

company.

His voting rights on a poll will be in proportion to his

share of the paid up equity capital of the company



EQUITY SHARES

WITH DIFFERENTIAL RIGHTS

The holders of such equity shares have differential rights

as to dividend, voting or otherwise in accordance with

rules prescribed by the Central Govt.

The articles of association must authorize the issue of

such equity shares

Approval of shareholders must be obtained in GM bypassing an ordinary resolution

Such shares shall be allowed to the extent of 25% of

the total issued share capital



EQUITY SHARES

WITH DIFFERENTIAL RIGHTS

The company must have distributable profits for 3financial years preceding such issue & has notdefaulted in the repayment of its deposits or

debentures on maturity or interest thereon

The company will not be allowed to convert itsequity capital with normal voting rights into equitycapital with differential voting rights & vice versa

Members holding equity shares with differentialrights as to voting or dividend shall be entitled tobonus shares and right shares of the same classof the same class



PREFERENCE SHARES

TYPES OF PREFERENCE SHARES

Cumulative & Non Cumulative

Participating & Non participatingConvertible & Non Convertible

Redeemable & Irredeemable



PREFERENCE SHARES

REDEEMABLE PREFERENCE SHARES

In case of such shares the capital has to be

returned during the lifetime of the company

as per the terms of issue or whenever the

company so chooses after giving notice

Paying back of capital is known as

redemptionNo company can now issue preference

shares which are redeemable after the

expiry of a period of 20 years from the dateof issue Sec.80 5 A



PREFERENCE SHARES

REDEEMABLE PREFERENCE SHARES –(CONDITIONS)

The Articles must authorise the issue of

such sharesNo such shares shall be redeemed except

out of the profits of the company or out ofthe proceeds of the fresh issue of shares

No such shares shall be redeemed unlessthey are fully paid up

The premium, if any, payable on redemptionshall be provided out of the profits of thecompany or out of the company‟s premium



PREFERENCE SHARES

REDEEMABLE PREFERENCE SHARES –(CONDITIONS)

If such shares are redeemed out of the

profits of the company, the company shallcreate a reserve fund to be called „CapitalRedemption Reserve Account‟ out of itsdivisible profits

The redemption of such shares shall not betaken as reduction of the company‟s authorized share capital

The CRRA(capital redemption reserve

account) may be applied by the company in



PREFERENCE SHARES

REDEEMABLE PREFERENCE SHARES –(NOTICE)

Notice of redemption must be sent to the registrar within

one month of the date of redemption



PREFERENCE SHARES

IRREDEEMABLE PREFERENCE SHARES

In case of Irredeemable Preference Shares the capital

has to be returned on the winding up of the company

But after the commencement of Companies(Amendment) Act, 1988, no company can issue any

preference shares which are irredeemable



PREFERENCE SHARES

Redemption of existing IRREDEEMABLEPREFERENCE SHARES

All existing irredeemable preference shares shall be

redeemed within a period of 5 years from thecommencement of this Act (15th June 1988)

Where a company is not in a position to redeem any

such shares within the aforesaid period, it may, with the

approval of NCLT, issue further redeemable preferenceshares of an equal amount & thereupon the

unredeemed preference shares shall be deemed to

have been redeemed by operation of law.



VOTING RIGHTS

VOTING RIGHTS OF PREFERENCESHAREHOLDERS

A preference shareholder of a company will have the right

to vote on resolutions which directly affect his rights.

A preference shareholder is entitled to vote if dividend has

not been paid in the case of cumulative preference shares

for an aggregate period of not less than 2 years preceding

the commencement of the meeting



VOTING RIGHTS

VOTING RIGHTS OF PREFERENCESHAREHOLDERS

In the case of non cumulative preference shares, they will

have a right to vote on all resolutions if their dividend

remained unpaid for two financial years immediately

preceding the meeting or for any 3 years during a period of

six years ending with the financial year preceding the

meeting

The voting rights of preference shareholders will be in

proportion to the paid up value of preference capital to the

total paid up equity capital of the company



SOURCES OF FINANCE

Issue of shares

Issue of debentures

Loans from financial institutions

Retained profits Public deposits



– SHARES

FEATURES

Residual claim on income

Residual claim on company‟s assets in case of

liquidation.

Right to control: Legal power to elect directors on the

board

Voting rights

Limited Liability

Provides risk capital



– SHARES

Merits Permanent Capital: No

liability for returning the

capital

Borrowing base: Increases the

company’s borrowing base

Dividend payment discretion:

Not legally obliged to paydividends.

Higher cost: Dividends not

tax deductible and higher

floatation costs

Risk: Uncertainty regarding

dividend and capital gains;

investors demand a high

rate of return

Earnings dilution: When

profits do not increase in

proportion to increase in

share

Ownershi dilution

Demerits



ISSUE OF SHARES – PREFERENCE SHARES

FEATURES

A hybrid security – It has features of both ordinary

shares and debentures Prior claims on income and assets over ordinary

shares

Fixed Dividend: Expressed as a percentage



SHARES

FEATURES

Cumulative dividends: All past unpaid preference dividend will be paidbefore ordinary dividends are paid

Participation: May participate in extra ordinary profit earned by the

company

Voting Rights: Section 87 of the act confers voting rights on

preference shareholders in certain circumstances. They

have a right to vote only on resolutions that directly affect

the rights attached to preference shares. Any resolutions

regarding the winding-up of the company or therepayment or reduction of share capital are deemed

directly to affect the rights attached to preference shares.

Convertibility: Can be converted fully/partially into ordinary shares



ISSUE OF SHARES – PREFERENCE SHARES

MERITS

Risk less advantage: Fixed obligation

Payment of dividend can be postponed

Limited voting rights: Control of ordinary

shareholders is preserved

Fixed dividend





DEBENTURES

FEATURES

A long term promissory note for raising loan

capital

Debentures holders are the creditors of the firm

Interest rate: Fixed; called contractual rate of

interest

Interest is tax deductible

Maturity: Specific period of time

Claims on assets and income: Claim on



DEBENTURES

FEATURES

Redemption: can be done through

Sinking fund: Cash set aside periodically for retiring

debentures

Buy back Provision: Redeem debentures at a specified price

before the maturity date

Indenture/Debenture trust deed: A legal agreement

between the company and debenture trustees

Security: Can be secured by a lien on company‟s assets;

Unsecured debentures not protected by security



DEBENTURES

MERITS

Debenture issue is a cheaper source of finance

No ownership dilution

Fixed payment of interest

Funds raised by the issue of debentures can be

used to earn a much higher rate of return thanthe rate of interest





RETAINED PROFITS

FEATURES

Retained profits are the undistributed profits after the

payment of dividends & taxes They represent the internal source of finance

available to the company

Also known as ploughing back of profits

Basis of financial expansion and growth of thecompany

Cushion of security in times of adversity



RETAINED PROFITS

MERITS

More dependable than external sources

No cost involved in raising the fund No fixed commitments

Control over the management remains unaffected

Improves credibility of the company



RETAINED PROFITS

DEMERITS

Misuse of such funds

Large retention of earnings over a long period oftime may lead to dissatisfaction among investors



PUBLIC DEPOSITS

FEATURES

Unsecured deposits invited by the company from the

public.

Invited for a period of 3 months - 3 years

They can be renewed from time to time

Company issues deposit receipt as an

acknowledgement of debt by the company High rate of interest- depends on the period &

reputation of the company

Public deposits cannot exceed 25% of share capital

& free reserves



PUBLIC DEPOSITS

MERITS Less administrative costs

Public deposits are unsecured

Interest paid on PDs are tax deductible

PDs introduce flexibility in the financial structure of

the company

No dilution of shareholder‟s control





SHARE CERTIFICATE

A share certificate is issued by a company under its

common seal, specifying the number of shares held by

any member & the amount paid on each share

A share certificate is a declaration by the company that

the person in whose name the certificate is made out &

to whom it is given, is a shareholder in the company &

the certificate is given by the company with the intentionthat it shall be used by the person to whom it is given &

acted upon in the sale & transfer of shares

--



--CONTENTS

Name & address of the registered office of the company

Serial number of the share certificate

Date of issue of the certificate

Name & address of the shareholder Number & class of shares

Nominal value of each share

Amount paid on each share Impression of the common seal of the company

Space for the signatures of 2 directors & secretary

--



--CONTENTS

The share certificate form consists of 3 parts

Counterfoil for reference

Proper certificate

Receipt to be signed by the shareholder



SHARE CERTIFICATE – Time limit

Companies are required to deliver the certificates of

shares & debentures

Within three months of allotment or

Within 2 months after the application for registration oftransfer is made

NCLT has been empowered to grant an extended

period of not more than 9 months in appropriate cases

In case of default a notice may be served upon the

company by the person entitled



SHARE CERTIFICATE – Time limit

Company has to respond within 10 days of the receipt

of the notice otherwise the allottee can file an

application to the NCLT

NCLT may pass an order directing the company toissue such certificate and to pay all costs to the

applicant

All defaulters shall be punishable with a fine which may

extend to 5000 per day till the default continues



SHARE CERTIFICATE – ISSUE OF

DUPLICATE SHARE CERTIFICATE

If such a certificate is proved to have been lost or

destroyed

If such a certificate is defaced, mutilated or torn & is

surrendered to the company

SHARE CERTIFICATE





When the original certificate is defaced or mutilated :

The shareholder will surrender the certificate & will

request for the duplicate

The secretary must ensure that the application for

duplicate certificate is in proper form & is accompanied by

the requisite fee

The company will cancel the original certificate and a

duplicate of the same is issued in due course



SHARE CERTIFICATE





When original certificate is lost or destroyed

If the original certificate was for a considerable number of

shares, the shareholder may be required to give a

supporting guarantee from his banker or other person of

known financial standing

Before issuing a duplicate certificate the company shall

give a public notice of the loss /destruction of the

certificate in the leading newspaper at the cost of theshareholder

The shareholder also has to pay a prescribed fee for the

issue of the duplicate certificate

SHARE CERTIFICATE LEGAL



SHARE CERTIFICATE – LEGAL

EFFECTS

Estoppel as to the title to the shares

Estoppel as to payment



SHARE WARRANT

A share warrant is a document issued under the

common seal of the company stating that the bearer is

entitled to the specified number of shares Being a bearer document it can be transferred by mere

delivery



HARE WARRANT -- CONDITIONS

The Articles must empower the company to issue such

share warrants

The shares must be fully paid up

The company must obtain the approval of the Central

Govt. before it can issue warrants

Only public companies limited by shares can issue

share warrants





SHARE CERTIFICATE SHARE WARRANT

Issued by Pvt & public companies Issued only by public companies

Issued in respect of fully paid as

well as partly paid up shares

Issued only in respect of fully paid

up shares

Approval of Central govt is not

required

Approval of Central Govt is

required

Nominal stamp duty is required Heavy stamp duty is required

Holder is a member Holder is not a member unless theArticles permit

Holder can present a petition for

winding up of the company

Holder doesn’t have any such right

unless the Articles permit



SHARE CERTIFICATE SHARE WARRANT

It is not a negotiable instrument It is a negotiable instrument

Transfer requires a transfer deed &

its registration is compulsory

Can be transferred by mere

delivery

It forms the share qualification for

directors

It cannot constitute the share

qualification

In this case dividend is paid

through a dividend warrant

Dividend is paid through bearer

dividend coupons



DEBENTURE

Section 2(12) states that „a debenture includesdebenture stock, bonds & any other securities of a

company whether constituting charge on the assets

of the company or not.‟

In simple words „An instrument in writing , signed by

the company under its common seal, acknowledging

the debt due by it to its holders‟.

Popular mode of borrowing by the company



FEATURES

It is an acknowledgement of indebtedness by the

company to its holder for the amount stated in it

It is issued under the common seal of the company

It provides for a fixed rate of interest It provides for the repayment of money at a fixed date

except in case of perpetual debentures

Debentures are generally secured

Debentures can be issued at par, at premium or at

discount but cannot be redeemed at discount



KINDS OF DEBENTURES

Registered & Bearer Debentures Redeemable & Irredeemable Debentures

Secured & Unsecured Debentures

Convertible & Non-convertible Debentures



SHARES DEBENTURES

Shareholders are the owners of the

company

Debenture holders are the creditors

of the company

Shareholders have voting rights &

the right to attend GMs

Debenture holders do not have any

such rights

Income of shareholders is

‘dividend’ & it can be paid only

out of the profits

Income of debenture holders is

‘interest’ & it can be paid either

out of the profits or out of thecapital (in case of no profits)

Shares do not have any such

security

Debentures are generally secured



ISSUE OF DEBENTURES

A Private company can issue debentures immediatelyafter obtaining the certificate of incorporation

A Public company can issue debentures only after

obtaining the certificate of commencement of business

BOD can issue debentures (only be means of resolution

passed at the board meeting)

Debentures can be issued by directors for any amount

authorized by its Articles (< sum of paid up capital +

reserves) except with the consent of the company in the



ISSUE OF DEBENTURES

Debentures can be issued at par, premium or discount But cannot be redeemed at discount

No company can issue debentures carrying voting rights

Legal requirements as to prospectus, allotment, issue ofcertificates –same as shares

No need for minimum subscription

Debentures once redeemed can be reissued

Debenture Certificate should be given within 3 monthsfrom allotment





Debenture with Pari Passu



Debenture with Pari Passu

provision

The effect of Pari-passu clause is that Debentures

shall be discharged proportionately.

This happens in case of inadequacy of funds

But in the absence of Pari Passu clause, debenturesshall be payable according to the date of issue

If all the debentures have been issued on the same

date, they shall be payable according to the serial

number



BONDS

Bonds are another source of Debt financing

Their features are similar to that of Debentures

Different types of Bonds Tax free Bonds

Zero Coupon Bonds

Deep Discount Bonds



PLOUGHING BACK OF PROFITS

Self financing by a company

In other words, the savings generated internally by acompany in the form of 'retained earnings' are ploughed

back into the company for diversification of its business

It is actually the amount held back by the entrepreneur

after paying a reasonable dividend to the shareholders of

the company and these undistributed profits are used by the company to meet its present and future financial

requirements

PURPOSE--PLOUGHING BACK



PURPOSE--PLOUGHING BACK

OF PROFITS

For expansion and growth of the business

For strengthening the financial position of the company

For meeting various working capital requirements of the

company For redemption of old debts

For replacement of obsolete assets and modernisation.

BENEFITS--PLOUGHING BACK



BENEFITS--PLOUGHING BACK

OF PROFITS

A company with such reserves can face unforeseencontingencies; capital market crisis and other downturnsin the economy with lesser difficulty and ease

Help to stabilize the dividend policy of the company.

Helps in improving the company's relations with its

shareholders. It even helps in appreciating the value ofits shares.

Most convenient and economical method of finance and

involves no legal formalities or negotiations

DRAWBACKS--PLOUGHING



DRAWBACKS--PLOUGHING

BACK OF PROFITS

Dissatisfaction among shareholders as they may getlower dividends.

It may tempt the management to raise bonus shares tothe equity shareholders leading to overcapitalization ofreserves

The company may not always use the retained earningsto promote the interests of the shareholders.

Instead, it may be invested in unprofitable avenues or

misused by locking them up in those business concerns



FACTORS DETERMINING

Net profits

Dividend policy Corporate tax

Age of the company

Future plans of the company



PUBLIC DEPOSITS

The Companies Act, 1974 has introducedSec58A,58B to regulate and control the

acceptance of deposits of companies other

than banking Companies.

The NCLT in consultation with RBI fixes the

limit up to which the Companies can accept

deposits either from a public or from its

members



PUBLIC DEPOSITS --MEANING

Sec 2(b) of the Companies Acceptance of Deposit rules,1975 defines ………

“any deposit of money with the Company and any

deposit borrowed by a Company but does not

include………..

Any money received from the government.

Any amount received as a loan from any bankingCompany

Any amount received as a loan from any financialInstitutions

Any amount received by a Company from anotherCompany



PUBLIC DEPOSITS --MEANING

Any amount received as an advance in the course ofbusiness of the Company

Any amount by way of subscription to any shares, stock

bonds or debentures pending the allotment of suchSecurities

Any amount received from the directors of the company

Any amount brought in by the promoters of the company

Any amount received from the shareholders by a privatecompany

RESTRICTIONS ON THE



RESTRICTIONS ON THE

ACCEPTANCE

Only companies having a net worth of Rs 1 croreare allowed to issue deposits.

No deposit can be invited without issuingadvertisement specifying the financial condition,management structure of the Company

Any company defaulted in repaying the deposits inthe past is prohibited from issuing deposits.

RESTRICTIONS ON THE



RESTRICTIONS ON THE

ACCEPTANCE

Every deposit holder need to give a nomination

No deposits shall be repayable on demand

Premature repayments is allowed in case of deathof the deposit holder

The maximum period up to which a deposit can beaccepted is 3 yrs.

The minimum period has been fixed at 6 months

RESTRICTIONS ON THE



RESTRICTIONS ON THE

ACCEPTANCE

A company can accept deposit which are repayable after

3 months in following cases :

Its shareholders (in case of public company)

Deposits guaranteed by any director of the company Deposits against unsecured debentures

The amount of such deposits should not exceed 10% of

the aggregate of the paid up share capital and freereserves

A company is permitted to accept other deposits up to a

maximum of 25 % of the aggregate of the paid up share

ca ital and free reserves

RESTRICTIONS ON THE



RESTRICTIONS ON THE

ACCEPTANCE

After 6m but before maturity-1% less rate thanapplicable

Within 8 weeks from the date of receipt of money areceipt should be given to the deposit holder

o Interest should not exceed the rate fixed by the RBI(Currently it is 12.5%)

RESTRICTIONS ON THE



RESTRICTIONS ON THE

ACCEPTANCE

Any deposits issued in contravention of the aboverules should be repaid within 30 days from the

date of receipt or within the extended time allowedby Central Govt.

If a company fails to refund the amount within the

allotted time, the company shall be punishablewith fine which shall not be less than twice theamount of the deposit not refunded

PENALTY FOR



PENALTY FOR

CONTRAVENTION OF RULES

Where the company accepts or invites either directly orindirectly any deposits either in excess of the limits orwithout making a proper advertisement, the company

shall be punishable with fine which shall not be less thanan amount equal to the amount of deposit so accepted

It the contravention is related to the invitation of deposit,

the fine may extend to 10 lakhs but shall not be lessthan Rs. 50,000

All defaulters shall be punished with imprisonment for aterm which may extend to 5 yrs.



PENAL RATE OF INTEREST

The Companies Third Amendment Rules, 2001 provide

for payment of a penal rate of interest of 18% for the

overdue period in case of public deposits matured &claimed but remaining unpaid

In case of a deposit made by a small depositor the penal

rate of interest shall be 20% compoundable on an

annual basis

MAINTENANCE OF LIQUID



MAINTENANCE OF LIQUID

ASSETS

A company accepting public deposits is required to

maintain liquid assets at least equal to 15% of the

deposits maturing for repayment during the financialyear.

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Law Unit III