Shares, capital and debentures

Presented byPresented byBHARGAV BARUAHBHARGAV BARUAH

IIPM, BangaloreIIPM, BangaloreFW-07-09FW-07-09

04/08/23 2Share, Capital and Debentures

44thth March, 2008; Tuesday, March, 2008; Tuesday,

•9.55 am: 9.55 am: The Anil Ambani-controlled Reliance Power opens for stock subscription in the Rs 405-Rs 450 range.

•9.56 am: 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.

Some Common Figures of The Market

04/08/233

Share, Capital and Debentures


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.


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.


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.


SHARESSHARES

PREFERENCE EQUITYDEFERRED

SHARES

CUMULATIVE NON-CUMULATIVE

PARTICIPATINGOR

NON-PARTICIPATING

CONVERTIBLEOR

NON-CONVERTIBLE

REDEEMABLEOR

IRREDEEMABLE

PARTICIPATINGOR NON-PARTICIPATING

CONVERTIBLEOR

NON-CONVERTIBLE

REDEEMABLEOR IRREDEEMABLE



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.


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.


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



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.


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 share holders.

They take risk both regarding dividend and return of capital.

Equity share capital can not be redeemed during the life time of the company.


•Advantage •Disadvantage•Equity shares do not create any obligation to pay a fixed rate of dividend.

•If only equity shares are issued the company can not take the advantages of trading on equity.

•Equity shares can be issued without creating any charge over the assets of the company.

•As equity capital can not be redeemed there is a danger of overcapitalization.

•It is a permanent source of capital and the company has not to repay it except under liquidation.

•Equity share holders can put obstacles in management by manipulation and organizing themselves.

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

•During prosperous periods higher dividends 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 real gainers by way of increased dividends and appreciation in the value of shares.

•Investors who desire to invest in safe securities with a fixed income have no attraction for such shares.


•Preference shares •Equity shares

•These shares are entitled to a fixed rate of dividend.

•The rate of dividend on equity shares 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 preference to the equity shares.

•The dividend on equity shares is paid only after the preference dividend has been paid.

•Redeemable preference shares may be redeemed by the company.

•Equity shares can not be redeemed except under a scheme involving reduction of capital or buy back of its own shares.

•The voting rights of these shares are restricted.

•An equity share holder can vote on all matters affecting the company.

•The preference shares have preference to equity shares with regard to payment of capital on winding up.


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.


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


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.


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


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 prospectusMinimum subscriptionApplication moneyEffect of irregular allotmentShares to be dealt in on a stock exchange


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


Shares can be issued at par

Shares can be issued at premium

Shares can be issued at discount


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.


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.


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


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


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 .


DEFINITIONShare Capital is the capital raised by a company by the issue of shares.

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


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


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


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


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


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


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


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.


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


This capital consists of assets

manufactured or acquired for sale at

profit


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 conditions is a debenture.


It is issued by a company and is usually in the form of a certificate which is an acknowledgement of indebtedness

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

It is one of series issued to a number of lenders.


It usually specifies a particular period or date as the date of repayment

It 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.

A debenture holder does not have any right to vote in the company meetings.



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


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.


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.


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.


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.


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.


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

Second debentures :- These are the debentures which are to be paid after the “first debentures” have been redeemed.


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.


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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Documents

Shares, capital and debentures