Module 3: SHARE CAPITAL, DEBENTURES & BONDS

Syllabus- Types and Definition of Shares, issue of share -book building- offer,
Allotment of shares -pro-rata basis, Employee Stock Ownership Plan (ESOP), Buyback,
Sweat Equity, Bonus, Right, Capital Reduction, Share Certificate, Demat System,
Transfer and Transmission, Redemption of Preference Shares, Rules regarding
Dividend and distribution of dividend.
Debenture –Definition, Types, Rules Regarding Issue of Debenture, Bonds- issues of
bonds, types of bonds- concepts only.

SHARES
Shares can be described as the financial instrument issued by the company to raise
funds from the general public. A share represents fractional ownership in a body
corporate. Thus, a share is the smallest unit of the company’s overall net worth.
Shares are the smallest unit of the company’s capital or can be said as a unit of equity.
The holder of such shares in a company is known as “Shareholders” (the owners of
the company).
These shares can be issued to the public for raising the funds of the company for its
expansion. The market used for trading of shares is known as “Share Market” which
deals in various markets, but the most popular share markets are NSE (National Stock
Exchange) and BSE (Bombay Stock exchange).
Meaning of Shares
The capital of a company is divided into units of a fixed denomination. Share refers to
only such a unit. It is therefore clear that a share is a fractional part of the company’s
share capital. Otherwise, share capital means the capital raised by a company by the
issue of shares.
Definition of Shares
Section 2(46) defines a share as “a share in the share capital of a company and includes
stock except where a distinction between stock and share is expressed or implied”.
TYPES OF SHARES
1. Preference Share
2. Equity Share

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1. Preference shares: Preference shares by its name define preferential rights over other
shares and get the claims before ordinary or equity shares. Preference shareholders get
a dividend in priority at the time of dividend distribution. Even at the time of liquidation
of the company, they have the preferential right over capital repayment. Preference
shares have various types; they are as follows:
Features of Preference Shares
The following are the features of preference shares:
1. Preferential dividend option for shareholders.
2. Preference shareholders do not have the right to vote.
3. Shareholders have a right to claim the assets in case of a wind up of the company.
4. Fixed dividend pay-out for shareholders, irrespective of profit earned.
5. Acts as a source of hybrid financing.
Types of Preference Shares

1. Cumulative preference share: Cumulative preference shares are a special type

of shares that entitles the shareholders to enjoy cumulative dividend pay-out at
times when a company is not making profits. These dividends will be counted as
arrears in years when the company is not earning profit and will be paid on a
cumulative basis, the next year when the business generates profits.
2. Non-cumulative preference shares: These types of shares do not accumulate
dividends in the form of arrears. In the case of non-cumulative preference shares,
the dividend pay-out takes place from the profits made by the company in the
current year. If there is a year in which the company doesn’t make any profit,
then the shareholders are not paid any dividends for that year and they cannot
claim for dividends in any future profit year.
3. Participating preference shares: These types of shares allow the shareholders
to demand a part in the surplus profit of the company at the event of liquidation
of the company after the dividends have been paid to the other shareholders. In
other words, these shareholders enjoy fixed dividends and also share a part of
the surplus profit of the company along with equity shareholders.
4. Non-participating preference shares: These shares do not yield the
shareholders the additional option of earning dividends from the surplus profits
earned by the company. In this case, the shareholders receive only the fixed
dividend.

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 5. Redeemable Preference Shares: Redeemable preference shares are shares that
can be repurchased or redeemed by the issuing company at a fixed rate and date.
6. Non-redeemable Preference Shares: Non-redeemable preference shares are
those shares that cannot be redeemed during the entire lifetime of the company.
In other words, these shares can only be redeemed at the time of winding up of
the company.
7. Convertible Preference Shares: Convertible preference shares are a type of
shares that enables the shareholders to convert their preference shares into equity
shares at a fixed rate, after the expiry of a specified period as mentioned in the
memorandum.
8. Non-convertible Preference Shares: These type of preference shares cannot be
converted into equity shares. These shares will only get fixed dividend pay-out
and also enjoy preferential dividend pay-out during the dissolution of a company.

2. Equity Shares: Equity share is a primary source of finance for any company giving
investors rights to vote, share profits, and claim on assets.
Equity shares are one of the most significant sources of long-term financing. They are
also known as owner’s equity or ordinary share. The shareholders of such shares are the
company’s absolute owner, but these shareholders get the dividend paid only after the
payment of the dividends to the preference shareholders.
Types of Share Capital

 Authorized Share Capital: The maximum amount of share capital a company is

authorized to issue, as specified in its constitutional documents. This sets a limit on
the total capital the company can raise by issuing shares.

 Issued Share Capital: The portion of authorized capital that has been issued to
shareholders. It represents the total value of shares sold to investors.

 Subscribed Share Capital: The part of issued capital that investors have agreed to
purchase. Not all issued shares are necessarily subscribed by shareholders.

 Called-up Share Capital: The amount that shareholders are required to pay.
Companies might not demand the full price of each share at once; the unpaid portion
is called "uncalled capital."

 Paid-up Share Capital: The part of called-up capital that shareholders have paid.
It represents the actual funds received from shareholders.

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 DISTINCTION BETWEEN EQUITY SHARES & PREFERNCE SHARES
BASIS FOR
EQUITY SHARES PREFERENCE SHARES
COMPARISON
Equity shares are the ordinary Preference shares are the
shares of the company shares that carry preferential
Meaning representing the part ownership rights on the matters of
of the shareholder in the payment of dividend and
company. repayment of capital.
Priority in payment of
The dividend is paid after the
Payment of dividend dividend over equity
payment of all liabilities.
shareholders.
In the event of winding up
In the event of winding up of the
of the company, preference
Repayment of capital company, equity shares are
shares are repaid before
repaid at the end.
equity shares.
Rate of dividend Fluctuating Fixed
Redemption No Yes
Normally, preference shares
do not carry voting rights.
Voting rights Equity shares carry voting rights. However, in special
circumstances, they get
voting rights.
Preference Shareholders do
Equity Shareholders holders have
Participation in not have the right to
the right to participate in the
Management participate in the
management decisions.
management decisions.
Equity shares can never be Preference shares can be
Convertibility
converted. converted into equity shares.
Preference shareholders
generally get the arrears of
dividend along with the
Equity shareholders have no
present year's dividend, if
Arrears of Dividend rights to get arrears of the
not paid in the last previous
dividend for the previous years.
year, except in the case of
non- cumulative preference
shares.
Equity Shareholders are at a Preference Shareholders are
Risk higher risk compared to at a lower risk compared to
Preference Shareholders Equity Shareholders.

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Advantages of share capital
1. Raising Capital: Issuing shares is a powerful way for companies to raise
substantial amounts of capital without having to take on debt. This can support
various business activities, including product development, market expansion,
and operational scaling.
2. Source of Long-Term Finance- Shares are a form of permanent capital since
they do not have to be repaid (equity shares). Shareholders remain invested in
the company as long as they choose to hold the shares, providing a long-term
funding source.
3. Growth Advantage: The capital raised through shares can be directed toward
growth initiatives like expansion into new markets, acquisition of other
businesses, or launching new products.
4. Ownership: Shares represent ownership in a company, so shareholders have a
stake in the business's success. Companies sell ownership shares to raise funds,
and in return, investors get a piece of the company.
5. Voting Rights: Most shares, especially common shares, come with voting rights.
This allows shareholders to participate in key decisions, such as electing board
members and approving major corporate policies.
6. Profit and Wealth Maximization: Shares provide investors with a return on
investment in the form of dividends and potential capital gains. As the company
profits, shareholders benefit from an increase in share value and regular dividend
payments.
7. Creditworthiness: By raising capital through shares, companies avoid taking on
debt and reduce their debt-to-equity ratio. This strengthens the balance sheet,
showing potential lenders and investors that the company has a solid financial
foundation without heavy obligations.

Disadvantages of share capital

1. Demanding and Time-Consuming: The process of issuing shares, particularly
in public markets, involves regulatory compliance, preparing disclosures, and
managing investor relations, which is costly and time-intensive.
2. Over-Capitalization: Over-capitalization occurs when a company raises more
capital than it can profitably invest, leading to a lower return on equity.
3. Investor Anxiety: Shareholders may pressurize management to achieve short-
term results, creating anxiety and leading to conflicts if the company doesn’t
perform as expected.
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 4. Speculation: Share prices can fluctuate due to speculation and market trends
unrelated to the company's actual performance.
5. Recession Period Management-Explanation: During economic downturns,
share prices generally fall, reducing the company’s ability to raise further capital
and affecting investor confidence.

DEBENTURES
Debentures are the certificate or the creditorship securities issued by the company to
the public when there is a need of capital for expansion and development, but the
company don’t want to uplift their share capital. They are the liability of the company
which has to be repaid in a specific time period; however, a feasible alternative of term
loans for companies.

FEATURES OF DEBENTURES
 Borrowed Funds: Debentures are the capital funds that are borrowed by the
authority bodies from the public while seeking for a capital; however, the
company needs to repay the capital to the investors within a stipulated period of
time.
 Fixed-rate of interest: It is always issued with a fixed rate of interest which is
payable once in every six months or annually to the investors as decided by the
shareholders in the annual general meeting.
 Compulsory payment of interest: The Company is obligated to the debenture
holder interest payment in priority irrespective of the condition of profit or loss
in their business.
 Security: Debentures can be secured against the assets of the companies even if
the company becomes insolvent debenture holders will get their money by
selling the assets of the company.
 Redemption: Redemption of debenture implies paying back of the sum to the
debenture holders against the issued debentures as mentioned in the company’s
prospectus on the completion of a fixed period of time or date at par, premium
or discount.
 No voting rights: Debenture holders are the creditors of the company; thus, have
no right to say or make a vote on any internal matters of the company until their
rights are being affected or the company asks their opinion in special
circumstances.

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  Appointment of Trustee: At the time of issuing of debentures to the public
investing in your company, a deed is signed by the person appointed as trustee,
the trustee is supposed to ensure that the borrowing firm fulfils its institution.
 Convertibility: Debentures has an option of convertibility, i.e., the company
may issue convertible debentures at the option of debenture holders which are
convertible into equity shares.

TYPES OF DEBENTURES

1. ON THE BASIS OF REGISTRATION

 Registered Debentures: Debenture holders whose full details such as name,
phone number, address are retained and registered under the company’s register
can only claim for such debentures, transfer of such debentures also requires
registration and are not transferable by simply delivering documents to one
another.

 Bearer Debentures: These debentures are the unregistered debentures of the

company, and therefore the company does not retain any information about the
investors in their register like registered debenture holders. They are payable to
the bearer or holder of the security and are easily transferable by the holder to
any person with his consent of transferring.

2. ON THE BASIS OF SECURITY

 Secured debentures: These are debentures that are secured against an
asset/assets of the company. This means a charge is created on such an asset in
case of default in repayment of such debentures. So in case, the company does
not have enough funds to repay such debentures, the said asset will be sold to
pay such a loan. The charge may be fixed, i.e. against a specific assets/assets or
floating, i.e. against all assets of the firm.

 Unsecured debentures: These are not secured by any charge against the assets
of the company, neither fixed nor floating. Normally such kinds of debentures are
not issued by companies in India.

3. ON THE BASIS OF REDEMPTION

 Redeemable debentures: These debentures are repayable after a certain
period.

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  Irredeemable debentures: These debentures are not repayable at the end of
a definite period and are usually only repaid when the company goes into
liquidation

4. ON THE BASIS OF CONVERSION

 Convertible Debentures: These debentures are considered as long-term
unsecured debts of the company. However, it can be converted into equity or
preference shares by the holders as and when required at the rate declared in the
agreement signed at the time of the issue of debentures.

 Non- Convertible Debentures: Non- Convertible Debentures will always

remain the debt of the company, and cannot be converted into shares at any point
as they are the fixed income instrument without any collateral against which the
company pays a certain interest after a specific duration of time, i.e., on maturity.

Advantages of Debentures

 The company without giving ownership rights can raise long-term funds.

 Interest amount to be paid on debentures remains constant irrespective of any

fluctuations in the profit of the company.

 At the time of liquidation, debenture holders are on top priority to claim on the
assets of the company.

 Debentures are less risky than shares from an investors point of view as investing
in debentures is the safest option of investment though it will always give a profit
in return.

Disadvantages of Debentures

 They are the creditors of the company; thus don’t have any voting rights in the
matters of the company.

 Interest on debenture is fully taxable on the company’s income.

 It becomes challenging to pay debenture capital when the economy faces crises
like depression.

 It increases the cost of capital because of brokerage, commission, etc.

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RULES REGARDING ISSUE OF DEBENTURE/PROCESS OF ISSUING
DEBENTURES

Hold a Board Meeting: A company needs to hold a Board Meeting to take into account
and pass resolutions for the following items:
o Issue of Debentures;
o Approving the Offer Letter;
o Approving Private Placement of shares;
o Debenture Subscription Agreement;
o Opening of a bank account; and
o Calling of the EGM (Extraordinary General Meeting).

Call an EGM: The Company also requires to call an EGM (Extraordinary General
Meeting) to consider and pass a special resolution for the following items:
 Increment in the borrowing capacity of the company;
 Issue of the Non-Convertible Debentures.

File MGT-14 with ROC: The Company needs to file MGT-14 with the ROC (Registrar
of Company), within thirty days of passing Special Resolution in the EGM.

Maximum Limit: The Company needs to restrict the offer letter to a maximum of 200
investors in any financial year;

Investment Size: The investment size for each investor should not be less than Rest.
20000.

Letter of Offer: The Company needs to dispatch the letter of offer to the investors and
open a bank account.

File Offer Letter with ROC: The directors of the company need to file the offer letter
with the ROC and Form GNL-2, PAS 4, and PAS 5.

Receive Money from Investors: The directors then collect application money from the
investors for the allotment of debentures.

Convene a Board Meeting: The Company requires to hold another board meeting after
the closure of offer to discuss the agendas given below: To allot its debentures within
sixty days starting from the date of receiving application money;
 To approve the agreement for charge creation;
 To approve the debenture trust deed.

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File CHG-9: Within thirty days of creating a charge on assets, the company needs to
file Form CHG-9 with the ROC (Registrar of Companies).

Restriction on using Application Money: The issuer company cannot use the funds
collected until it allots its debentures to all the investors.

File Return of Allotment: The director of the issuer company needs to file the Return
of Allotment in Form PAS 3 with the Registrar of Companies within fifteen days of
allotment.

File the Corporate Action: The issuer company needs to file its Corporate Action
within two working days of allotment.

Basis SHARE DEBENTURE

Ownership A share is a part of the A debenture is a part of the

company’s share capital. company’s borrowed capital.

Return The return on shareholdings is The return on debentures is known

known as Dividend. as Interest.

Charge v. The payment of dividends is an The payment of interest is a charge.

appropriation out of profits. It means the company needs to pay
Appropriation the interest even if it incurs losses
also.

Priority Shareholders are not given Debenture Holders are given

preference at the time of priority over Shareholders.
liquidation.

Security Shares are not secured, i.e., does Debentures are usually secured,
carry any charge on assets. i.e., carry a fixed or a floating
charge over the assets.

Convertibility Shareholders cannot convert Debentures Holders can convert

their shares into debentures. their debentures into shares.

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Voting Rights Shareholders are given voting Debenture holders are not given
rights. any voting rights.
Owner v. Shareholders are known as Debenture holders are known as
Creditor owners of a company. creditors of a company.
Quantum Dividend on shares is an Interest on debentures is a charge
appropriation of profit. against profit.

Issue of Shares

Book Building Offer-Book building is a process used to determine the price at which
shares will be issued in an initial public offering (IPO). Investors place bids at various
price points, and the final issue price is set based on demand, allowing the company to
gauge market interest and optimize pricing.

Pro-rata Basis: A pro-rata basis refers to the allocation of shares to investors in

proportion to their existing holdings. For instance, if a company offers new shares and
an investor owns a certain percentage of existing shares, they are entitled to purchase
the same percentage of the new shares.

ESOP (Employee Stock Ownership Plan): ESOPs are programs that provide
employees with an ownership interest in the company through stock options or shares.
This incentivizes employees to contribute to the company's success, aligning their
interests with those of shareholders.

Buy back: A buyback occurs when a company repurchases its own shares from the
marketplace. This can be used to reduce the number of outstanding shares, support share
price, or return surplus cash to shareholders.

Sweat Equity: Sweat equity refers to shares awarded to individuals (often founders or
employees) in exchange for their hard work, expertise, or contributions to the company
rather than cash investment. This recognizes and compensates their efforts in building
the business.

Bonus Shares: Bonus shares are additional shares given to existing shareholders at no
extra cost, typically issued in proportion to their existing holdings. This is a way to
reward shareholders without distributing cash dividends.

Right Shares: Right shares are offered to existing shareholders, giving them the first
opportunity to purchase additional shares before the company offers them to the public.
This helps maintain their proportional ownership in the company.
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Capital Reduction: Capital reduction is a process where a company decreases its share
capital, often by reducing the nominal value of shares or cancelling unissued shares.
This can improve financial stability or return surplus capital to shareholders.

Share Certificate: A share certificate is a legal document that certifies ownership of a

specific number of shares in a company. It typically includes details such as the
shareholder’s name, the number of shares owned, the type of shares, and the company’s
name.

Contents of Share Certificate

 Company Name: The legal name of the company issuing the shares.
 Certificate Number: A unique identification number assigned to the share
certificate.
 Shareholder's Name: The name of the individual or entity that owns the shares.
 Registered Address: The address of the shareholder as recorded in the
company's register.
 Number of Shares: The total number of shares represented by the certificate.
 Face Value of Shares: The nominal or par value of each share, indicating the
value of the shares at the time of issuance.
 Type of Shares: The classification of the shares, such as equity or preference
shares.
 Date of Issuance: The date when the share certificate is issued to the
shareholder.
 Signature of Authorized Signatory: The signature of an authorized person
from the company, usually the company secretary or a director.
 Company Seal: The official seal or stamp of the company, which adds
authenticity to the certificate.

Demat System : The dematerialization (demat) system allows physical share

certificates to be converted into electronic form, making trading, transfer, and holding
of shares more efficient. This system simplifies transactions and reduces paperwork.

Transfer and Transmission: Transfer refers to the voluntary process of changing the
ownership of shares from one person to another, while transmission is the transfer of
shares due to the death of a shareholder, passing ownership to legal heirs as per
inheritance laws/court.

Redemption of Preference Shares: Redemption of preference shares refers to the

process by which a company buys back its preference shares at a predetermined

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price after a specified period or upon the occurrence of certain conditions. This is
often done to return capital to shareholders or to restructure the capital base.

Meaning of Dividend- A dividend is a portion of a company's earnings distributed to

its shareholders as a reward for their investment in the company. Dividends can be
issued in various forms, including cash payments, additional shares (stock dividends),
or other property. They represent a way for shareholders to receive returns on their
investments, separate from any increase in the share price.

Rules Regarding Dividend Distribution

In India, the distribution of dividends is governed by several regulations, primarily the

Companies Act, 2013. Here are the key rules:

1. Declaration: Dividends can only be declared by the company’s board of

directors (in case of interim dividends) or by the shareholders in a general
meeting (for final dividends).

2. Profits Requirement: Dividends can only be declared out of the profits of the
company, ensuring that the company is financially capable of distributing
earnings.

3. Solvency Test: Before declaring a dividend, the board must ensure that the
company is solvent. This means the company should be able to pay its debts as
they become due.

4. Payment Timeframe: Once declared, dividends must be paid within 30 days. If

the payment is delayed, the company may be liable to pay interest to the
shareholders.

5. Equitable Distribution: Dividends must be distributed equitably among all

shareholders according to their shareholding proportions, ensuring that all
shareholders are treated fairly.

6. Statutory Reserves: Certain companies are required to transfer a specified

percentage of profits to reserves before declaring dividends. This is typically
applicable to companies operating in regulated industries, such as banking.

7. Preference Shares: If a company has issued preference shares, dividends must

be paid on these shares before any dividends are declared for equity shareholders.
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 8. Restrictions on Distribution: Companies may be prohibited from declaring
dividends if they are in default of any loan obligations or if there are any
outstanding liabilities.

9. Taxation: Dividends are subject to tax regulations. As of the Finance Act 2020,
dividends are taxed in the hands of the shareholders as per their income tax
slab rates, rather than being taxed at the company level.

Meaning of Bonds- A bond is a fixed-income financial instrument that represents

a loan made by an investor to a borrower (typically a corporation or government).
Bonds are essentially debt securities where the issuer promises to pay back the principal
amount (face value) on a specified maturity date, along with periodic interest payments
(coupon payments) to the bondholder.

Types of Bonds

1. Government Bonds: Issued by national governments, these bonds are

considered low-risk investments. Examples include U.S. Treasury bonds and
Indian government securities.
2. Corporate Bonds: Issued by companies to raise capital. These bonds typically
offer higher yields compared to government bonds but come with higher risk
depending on the issuer's creditworthiness.
3. Municipal Bonds: Issued by local or state governments, these bonds often
offer tax-exempt interest payments to investors, making them attractive to
individuals in higher tax brackets.
4. Zero-Coupon Bonds: Bonds that do not pay periodic interest. Instead, they
are issued at a discount to their face value and pay the full face value at maturity.
5. Convertible Bonds: Bonds that can be converted into a predetermined
number of the issuer's equity shares.
6. High-Yield Bonds (Junk Bonds): Bonds rated below investment grade, offering
higher interest rates to compensate for higher default risk.
7. Secured Bonds: Backed by specific assets or collateral, providing additional
security to bondholders in case of default.
8. Unsecured Bonds: Not backed by collateral, these bonds rely solely on the
issuer's creditworthiness for repayment.
9. Foreign Bonds: Issued in a different currency than the investor's home
currency. They carry exchange rate risk along with credit risk.

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