ASSIGNMENT

SUBMITTED BY,
SANJANA BENNY
ROLL NO: 69
CLASS 5(10)
INTRODUCTION
For a company, there are two different ways through which it can raise funds -
by issuing shares or by issuing debt instruments. While the end goal of both of
these ways is the same, there are plenty of fundamental differences between the
both of them. One such difference has to do with the holders of the company’s
shares or debt instruments. Debentures are part of loan. A shareholder or
member is the joint owner of a company; but the debenture holder is only a
creditor of the company. Shareholders are invited to attend the annual general
meeting of the company.Debenture holders are not invited, unless any decision
affecting their interest is taken.
SHAREHOLDER AND DEBENTURE HOLDER

A shareholder is the joint owner of a company; but a debenture holder is only a

creditor of the company.

● Who are shareholders?

As the name itself implies, anybody who owns the shares of a company is
termed as a shareholder. Here’s an interesting fact for you. The owner of the
shares need not just be an individual. In some cases, other companies and even
partnership firms own the shares of a company. Since they own parts of the
company, shareholders are widely referred to as owners of the company.
Shareholders are the owners of the company. Shareholders actively participate
in the decision making process of the company.Shareholders are entitled to
receive dividends, which is basically a share in the profits of the
company.Despite generating profits, a company may choose not to pay
dividends to its shareholders.

There are two types of shareholders:

● Equity Shareholders
Equity shareholders are the main stakeholders in a company and when
the time of dividend distribution comes the preference shareholders
would get the first.
● Preference shareholders

Preference shareholders generally have no voting rights because of

their preferred status. They receive fixed dividends, generally larger
than those paid to common stockholders, and their dividends are paid
before common shareholders.
The number of shareholders in a company depends upon the type of company
which they are opening.

● For a one-person company, one person is required.

● For a private limited company, two persons are needed.
● For a public limited company, a minimum of seven persons are
required.

Shareholders’ Rights

There are various rights available to a shareholder. Different type of rights has
been discussed below:

Appointment of directors

Shareholders play an important role in the appointment of directors. An

ordinary resolution is required to be passed by the shareholders for the
appointment. Apart from this, shareholders can also appoint various types of
directors. They are:

● An additional director who will hold the office until the next general
body meeting;
● An alternate director who will act as an alternate director for a period
of 3 months;
● A nominee director;
● Director appointed in the case of a casual vacancy in the office of any
director appointed in a general meeting in a public company.

Apart from this shareholder also can challenge any resolution passed for the
appointment of a director in the general body meeting.

Legal action against directors

Shareholders also can bring legal action against directors by the rules laid down
in the Companies Act 2013. They are:
 ● Any act done by the director in any manner which is prejudicial
against the affairs of the company.
● Any act done which is beyond the law or against the constitution.
● Fraud.
● When the assets of the company are being transferred at an
undervalued rate.
● When there is a diversion of funds of the company.
● Any act done in a mala fide manner.
3. Appointment of company auditors

Shareholders also have a right to appoint the company auditors. Under

Companies Act 2013, the first auditor of the company is to be appointed by the
board of directors. Further the shareholders at the annual general body meeting
at the recommendation of directors and audit committee. The appointment is
generally done for five years and further can be ratified by passing a resolution
in the annual general body meeting.

Voting rights

Shareholders also have the right to attend and vote at the annual general body
meeting. Every company registered in India should comply with the provisions
of the Companies Act 2013. It is mandatory for every Indian company to hold
an annual general meeting once in every year. The meeting can be held
anywhere at the head office of the company or any other place as given by the
company. At the meeting, there are various mandatory agendas which are to be
discussed. These include the adoption of financial statements, appointment or
ratification of directors and auditors etc.

When a resolution is brought by members of a company then according to

companies act 2013 it can be passed only by the means of voting by the
shareholders. Companies Act 2013 recognizes following types of voting:

● Voting by the showing of hands – Every member present in the

meeting has one vote. So, in this type of voting shareholders vote just
by showing of hands.
● Voting done by polling – In this type of voting the chairman or the
shareholders’ demand for a poll. However, in case of differential
 rights as to voting, a particular class of equity shares may also have
weighted voting rights.
● Voting done by electronic means– every company who has more than
1000 shareholders has to put up a facility of voting through online
means. Every member should be provided with the means of voting of
online.
● Voting by means of postal ballot– any resolution in the meeting can
also be passed by means of a postal ballot.

A shareholder also has a right to appoint proxy on his behalf when he is unable
to attend the meeting. Though the proxy is not allowed to be included in the
quorum of the meeting in case of voting, it is allowed by following a procedure
mentioned in the Companies Act 2013.

Right to call for general meetings

Shareholders have the right to call a general meeting. They have a right to
direct the director of a company to can all extraordinary general meeting. They
also can approach the Company Law Board for the conduction of general body
meeting, if it is not done according to the statutory requirements.

Right to inspect registers and books

As shareholders are the main stakeholders in a company, they have the right to
inspect the accounts register and also the books of the firm and can ask
questions about the same if they feel so.

Right to get copies of financial statements

Shareholders have the right to get copies of financial statements. It is the duty of
the company to send the financial statements of the company to all its
shareholders either in a quarterly or annual statement.
Winding up of the company

Before the company is wound up the company has to inform all the shareholders
about the same and also all the credit has to be given to all the shareholders.

Other Shareholders’ Rights

● When the sale of any material of any company is done then the
shareholders should get the amount which they are entitled to receive;
● When a company is converted into another company then it requires
prior approval of shareholders. Also, all the appointment has to be
done according to all the procedures and also auditors and directors
have to be done;
● Right to approach the court in case of insolvency.

Shareholders’ Duties

There are also responsibilities and duties of shareholders which they should
perform. Besides several rights which they have, there exists several duties.
They are:

● Shareholders should participate in the general body meetings so that

they can see and also can advise on the matters which they feel is not
going good.
● Shareholders should consult on the matters of finance and other topics.
● Shareholders should be in touch with other members of the company
so that they can see the work progress of the company.

● Who are debenture holders?

Now, as you already saw above, a company, if it chooses to, can raise funds by
issuing debt instruments. One such debt instrument that many companies prefer
to issue is debentures. A company, when it wants to borrow money from the
public, issues debentures.

And in return, it pays a fixed rate of interest on the borrowing to the holders of
debentures on a regular basis. Once the tenure of the borrowing is over, the
company would then redeem the debentures by returning the principal back to
the borrowers.

Debenture holders are merely lenders to the company and are considered to be
creditors.Debenture holders cannot participate in the decision making process.
Since they have lent money to the company, debenture holders are entitled to
receive interest. Whether it generates profits or not, a company is obligated to
pay interest to its debenture holders.

Rights as a Debenture Holder

● To receive interest / redemption in due time
● To receive a copy of the trust deed on request
● To apply for winding up of the company if the company fails to pay
its debt.
● To approach the Debenture Trustee with your grievance, if any.

Companies Act 1956 has made certain provisions to

protect the interest of Debenture holders.

1) A company who accepts funds from debenture holders shall appoint one or
more debenture trustees and it should be mentioned in Prospectus or Letter of
Offer. The debenture trustee will be primarily responsible to ensure that the
interests of the debenture holders are protected and the grievances of the
debenture holders are effectively redressed. The debenture trustee should take
the following effective steps to ensure:

a. That the assets of the company and the guarantors are sufficient to discharge
the principal amount at all times.
b. That the prospectus of the letter of offer does not contain any inconsistent
matter with the terms of debentures or with the trust deed.

c. That the company does not commit any breach of the provisions of the
agreement.

d. That the immediate steps are taken to remedy any breach of the provisions of
trust deed.

e. That the meeting of debenture holders can be called as and when required.

2) The trust deed should be executed in the prescribed form and within
stipulated period.

3) This trust deed can be inspected by any debenture holders of the company
and he can take the copies of the same on the payment of prescribed fees.

4) A company is required to created debenture redemption reserve for the

redemption of debentures and every year adequate amount should be credited to
this reserve out of the profits until such debentures are redeemed.

5) If any default is made on part of the company in redemption of the

debentures on the date of maturity, then the Company Law Board can order the
company to pay the principal amount of debentures and the interest thereon.

6) If any default is made in complying with the order of Company Law Board,
every responsible officer shall be punishable with a fine which may extent to
Rs. 500 per day during which the offence continues.
difference between shareholders and debenture holders:

● A person having the debentures is called debenture holder whereas a

person holding the shares is called shareholder.
● A shareholder subscribes to the shares of a company. Shares are the
parts of share capital. On the other hand, debenture-holders are the
subscribers to debentures. Debentures are part of loan.
● A shareholder or member is the joint owner of a company; but a
debenture holder is only a creditor of the company.
● Shareholders are invited to attend the annual general meeting of the
company. Debenture holders are not invited, unless any decision
affecting their interest is taken.
● Shareholders control the affairs of the company. It is managed by the
Board of Directors, the elected representatives of the shareholders.
Debenture holders are not concerned with the management and
regulation of the company.
● Shareholders receive copies of the Annual Report containing the
Balance Sheet, the Profit & Loss Account and the Auditor’s Report.
● Interest on debentures is payable whether there are profits or not. But
dividend on shares is to be paid only when the company has earned
profits. Interest on debentures may be paid out of capital but dividend
on shares can never be paid out of capital.
● Rate of dividend on equity shares is not assured, whereas rate of
interest on debentures is assured.
● Shares cannot be converted into debentures whereas debentures can
be converted into shares.
● Convertible debentures which can be converted into shares at the
option of debenture holder can be issued, while shares convertible
into debentures cannot be issued.
● Debentures are generally secured and carry a charge on the assets of
the company, whereas shares have no such charge. The debenture
holder, being a secured creditor of the company, is paid-off prior to a
shareholder in the event of winding up of a company.
● Share capital is not returned except in case of redeemable preference
shares. Debentures being loan is repaid by the company.
● Debentures can be issued at a discount, whereas shares cannot be
issued at a discount except as provided under Section 79 of the
Companies Act.
● There can be mortgage debentures i.e. assets of the company can be
mortgaged in favor of debenture holders. But there can be no
mortgage shares. Assets of the company cannot be mortgaged in
favor of shareholders.
CONCLUSION

In business, issuing debentures is one way to raise money for the working of the
company. It is very different from equity shares or other kinds of shares (both
preference and equity). The basic distinction being, when one buys the shares of
the company he becomes the part-owner of the company, but when one buys
debentures issued by the company he becomes a creditor to the company. We
can conclude that debenture is a kind of formal loan given to the company by
another individual. The company is under obligation to repay the loan within a
specified period of time with interest.Shareholders thereby play an important
role in the functioning of a company. They have various rights which include
the appointment of the company’s director, auditor etc., to voting rights and
having a say when the company goes insolvent. With every right, comes a
corresponding responsibility which the shareholder must carry out diligently.