SHARES

MEANING
When a company wants to raise capital for either expanding its business or for
operational requirements, it has two options: either borrowing money or issuing
stocks that provide part-ownership of the company to investors. Shares are the
smallest denomination of a company’s stocks, indicating a portion of ownership of
the company. In simple words, a share indicates a unit of ownership of the particular
company. If you are a shareholder of a company, it implies that you as an investor,
hold a percentage of ownership of the issuing company. As a shareholder you stand
to benefit in the event of the company’s profits, and also bear the disadvantages of
the company’s losses.
Shares can be taken as goods according to the Sales of Goods Act, 1930, they are
also considered as movable property abide by the limitations of the articles of the
association of the company.

For example : A company set up to run a business will usually have money put into
it by the shareholders in return for shares. E.g. A, B and C set up a company and
decide that they will each put in Rs. 1,000 as share capital. The simplest way for this
to be represented is for the company to issue 1,000 share of Rs. 1 to each of the three
shareholders. The company's issued share capital will then be Rs. 3,000 divided into
3,000 shares of Rs. 1 each ( value of one share is Rs.1).

Farwell J. in Borlands Trustee v. Steel [1901] -: ‘A share is the interest of a

shareholder in the company measured by a sum of money, for the purposes of
liability in the first place, and of interest in the second, but also consisting of a series
of mutual covenants entered into by all the shareholders in accordance with
Companies Act’.
The Commissioner Of Income-Tax ... vs Standard Vacuum Oil Company on 26
October, 1965 -:A share is not a sum of money; it represents an interest measured by
a sum of money and made up of diverse rights contained in the contract evidenced by
the articles of association of the Company, which makes a contract between him and
the company, thus a share is a right to participate in the profit made by a company
while it’s a going concern and declares dividend and in the assets of the company in
the event its being wound up. As regard nature of share it is not a sum of money but
caries with a bundle of rights and liabilities.

NATURE OF SHARES
As per Section 2(84) of the Companies Act, 2013, “Share” means a share in the share
capital of a company and includes stock. It represents the interest of a shareholder in
the company, measured for the purposes of liability and dividend. It attaches various
rights and liabilities.
Share, debentures or other interest of any member in a company shall be movable
property. It shall be transferable in any manner provided for in the articles of
association of the company. Shares are a peculiar kind of movable property which
cannot pass from hand to hand like bales of cotton. The property in these shares
belonged to the registered shareholders and could not be transferred to another
except according to the articles of the company. Shareholders are owners of certain
rights and interests and subject to certain liabilities.

SHARE CAPITAL
Share Capital is the amount of money that a company receives by the sale of its
shares. The company uses this amount of money as the capital of the company to
commence business and gain profits in its business. This capital is also used to
acquire movable and immovable properties that are required for running the
business. Every company limited by shares must have a share capital. Share capital of
a company refers to the amount invested in the company for it to carry out its
operations. The share capital may be altered or increased, subject to certain
conditions. A company’s share capital may be divided into small shares of different
classes. The different classes of share capital and the rights attached to these classes
are different. Though the real meaning of share Capital is cumbersome, under The
Act, it means that the value of the assets contributed to the company by those who
subscribe for its shares. The real thing which would matter is the value because
assets will change in the form of course of business.

DIFFERENT ASPECTS OF SHARE CAPITAL:

The following different terms are used to denote different aspects of share capital:

1. Authorised or Registered Capital:

Also known as ‘nominal capital’, it is the maximum share capital, which any
company can legally issue. When a company is registered, it has to provide its
Memorandum of Association, as previously mentioned. This MoA indicates how
much capital a specific company can raise via the issue of shares.
This type of share capital indicates an organisation’s maximum amount of share
capital. If it is a Limited company, its MOA will also have details on how much
capital is being used to start that enterprise besides how many shares it intends to
issue.
For example ; if the Authorised share capital of a company is Rs. 10 lakh, and a
single share is priced at Rs. 10 then the maximum number of shares to be issued will
be 1 lakh.
 2. Issued Capital
It is authorized capital which is actually issued to the public for sale. Generally, a
company does not issue the shares for its total authorized capital at one time. It rather
invites front end public for a part of its capital and the subscription for the remaining
capital is called for as and when required.
For example ; if the Authorised share capital of a company is Rs. 10 lakh, and a
single share is priced at Rs. 10 then the maximum number of shares to be issued will
be 1 lakh, but company issued only 50 thousand shares then issued share capital will
be 5 lakhs(10*50,000).

3. Subscribed Capital
Subscribed Capital is the part of issued Capital which is generally accepted and
willfully taken by the public. If the public accepts the total issued capital, then the
issued capital shall be equal to the Subscribed Capital.
4. Called-up capital
Called-up capital means the total amount of called up capital on the shares issued
and subscribed by the shareholders on capital account. I.e if the face value of a share
is Rs. 10/- but the company requires only Rs. 2/- at present, it may call only Rs. 2/-
now and the balance Rs.8/- at a later date. Rs. 2/- is the called up share capital and
Rs. 8/- is the uncalled share capital.

5. Paid-up capital
Paid-up capital means the total amount of called up share capital which is actually
paid to the company by the members. In other words the amount which shareholders
pay as soon as they buy shares of an entity is known as paid-up capital.

KINDS OF SHARE CAPITAL :

Section 43 of the Act provides that the share capital of a company limited by shares
shall be of two kinds:
A. equity share capital—
(i). with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in
accordance with such rules as may be prescribed; and
B. preference share capital
 A. Equity Share Capital

‘‘Equity share capital’’, with reference to any company limited by shares, means all
share capital which is not preference share capital.
Equity Shares are the main source of raising the funds for the Company. All equity
shareholders are collectively owners of the company and they have the authority to
control the affairs of the business. It is a form of partial or part Ownership in the
company in which shareholders bear the highest business risk. Ownership in the
company is depending on the % of shares they hold.. A share is a unit of ownership
in a company and has an exchangeable value that is influenced by market forces. As
per Section 43 of the Companies Act, 2013, a company’s share capital is of two
types of shares, namely – equity shares and preference shares. The Equity
shareholders get the profit of the company in the form of dividend but the rate of
dividend is not fixed as it fluctuates according to profits i.e. more profit: more
dividend and vice versa.

As per section 43 (a) equity share capital may be divided on the basis of voting rights
and differential rights as to dividend, voting rights or otherwise according to the
rules.
A differential rights equity share is like an ordinary equity share, but it provides
fewer voting rights to the shareholder. The difference in voting rights can be
achieved by reducing the degree of voting power. It is ideal for long term investors,
typically small investors who seek higher dividend and are not necessarily interested
in taking a voting position.

B . Preference Share Capital

With reference to any company limited by shares, Preference share capital means that
part of the issued share capital of the company which carries or would carry a
preferential right with respect to—
(i). payment of dividend, either as a fixed amount or an amount calculated at a
fixed rate, which may either be free of or subject to income-tax; and
(ii). repayment, in the case of a winding up or repayment of capital, of the amount
of the share capital paid-up or deemed to have been paid-up, whether or not, there is a
preferential right to the payment of any fixed premium or premium on any fixed
scale, specified in the memorandum or articles of the company;

Preference Shares, as the name suggests are the shares in which shareholders get the
profit of the company in form of dividends before Equity shareholders at a fixed
dividend rate. Money raised through the issue of preference shares is called
preference share capital. Preference shareholders do not have the authority to control
the affairs of the company. In case of company insolvency issues, Preference
shareholders are paid first from company assets.
These shares come with a fixed rate of dividend and a preferential right to avail
profits and claim assets during liquidation. In fact, these shares are ranked between
debt and equity in terms of priority and repayment of capital. Like equity shares,
preference shareholders are also partial owners of a company. However, they are not
entitled to voting rights and hence do not really possess the power to control or
influence company-oriented decisions.

Types of Preference Shares:

1. Cumulative or Non-cumulative: A non-cumulative or simple preference shares

gives right to fixed percentage dividend of profit of each year. In case no
dividend thereon is declared in any year because of absence of profit, the holders
of preference shares get nothing nor can they claim unpaid dividend in the
subsequent year or years in respect of that year. Cumulative preference shares
however give the right to the preference shareholders to demand the unpaid
dividend in any year during the subsequent year or years when the profits are
available for distribution . In this case dividends which are not paid in any year
are accumulated and are paid out when the profits are available.

2. Redeemable and Non- Redeemable: Redeemable Preference shares are

preference shares which have to be repaid by the company after the term of which
for which the preference shares have been issued. Irredeemable Preference shares
means preference shares need not repaid by the company except on winding up of
the company. However, under the Indian Companies Act, a company cannot issue
irredeemable preference shares. According to section 55 of the Act, a company
limited by shares cannot issue any preference shares which are irredeemable.
However a company limited by shares may, if so authorised by its articles, issue
preference shares which are liable to be redeemed within a period not exceeding
twenty years from the date of their issue.
3. Convertible and Non- Convertible: Convertible Preference shares includes an
option that allows shareholders to convert their preferred shares into a set number
of equity shares, generally any time after a pre-established date. Under normal
circumstances, convertible preferred shares are exchanged in this way at the
shareholder's request. However, a company may have a provision on such shares
that allows the shareholders or the issuer to force the issue. Non-Convertible
preference shares are those shares that cannot be converted into equity shares.
4. Participating and Non- Participating : Participating Preference Shares
provides its shareholders with the right to be paid dividends in an amount equal to
the generally specified rate of preferred dividends, plus an additional dividend
based on a predetermined condition. This additional dividend is typically designed
to be paid out only if the amount of dividends received by equity shareholders is
greater than a predetermined per-share amount. If the company is liquidated,
participating preference shareholders may also have the right to be paid back the
purchasing price of the stock as well as a pro-rata share of remaining proceeds
received by equity shareholders. These shares do not benefit the shareholders the
 additional option of earning dividends from the surplus profits earned by the
company, but they receive fixed dividends offered by the company.

Difference between equity share and preference shares

Parameter Preference Shares Equity Shares

Definition Preference shares come with Equity share is the foundation

preferential rights over equity of the company as it raises
share when it comes to fund. Equity shares represent
receiving dividend or repaying the extent of ownership in a
capital. company.

Dividend payout Preference shareholders receive After all of the liabilities have
dividends before equity been paid, the equity
stockholders shareholders receive dividends.

Rate of dividend Dividend rate is fixed for It changes for equity

preference shareholders shareholders depending on the
company's profits.

Bonus shares Preference shareholders do not In addition to existing

receive any bonus against their shareholdings, equity
current shareholdings. stockholders are granted bonus
shares.

Capital Preference shares are When the company closes, the

repayment reimbursed before the equity equity shares are repaid at the
shares. end.

Voting rights Preference shares does not Equity shares offer voting
offer any voting rights. rights.

Role in For preference shareholders, As the equity shares have

management they are not allowed to voting rights they can
participate in the management. participate in the management.

Redemption You can redeem the preference Equity shares cannot be

shares. redeemed.

Convertibility Can be converted into equity Cannot be converted.

 shares.

Arrears of Preference shareholders can Equity shareholders are not

dividend avail arrears of dividend in offered any arrears of
addition to the dividends dividends.
received for that year.

Mandate to issue It is not a compulsion for every It is mandatory that all

company to issue preference companies issue equity shares.
shares.

Type of investors Investors with a low-risk Investors with a great risk

profile can invest in preference appetite can invest in equity
shares. shares.

Associated Preference stockholders are Payment of an equity dividend

burden entitled to dividends, and is optional and depends on the
companies must pay them. company's profit.

DEBENTURES

The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to
borrow.
Section 2(30) of the Companies Act, 2013 define “debenture" which includes
debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.
Thus, Debenture is a written instrument acknowledging a debt to the Company. It
contains a contract for repayment of principal after a specified period or at intervals
or at the option of the company and for payment of interest at a fixed rate payable
usually either half-yearly or yearly on fixed dates.

Emperor vs Laxman Bharmaji on 23 November, 1944: It was observed that debenture

indicates security against the lone taken by the company and contained the condition
of repayment at a fix rate of interest payable to a debenture holder. They may ensure
to create a charge on the company’s property but it is not always necessary, so the
debentures are acknowledgement of debt, the promise to return it.
 Types of
Debentures

On the basis On the basis of

On the basis On the basis of Mode of Basis of
of Security of Tenure Redemption Negotiability

Secured Redeemable Convertible Bearer

Non-
Unsecured Irredeemable Convertible
Registered

Partly
Convertible

On the basis of Security :

(a) Secured Debentures refer to those debentures where a charge is

created on the assets of the company for the purpose of payment in
case of default. A charge ranking Pari Passu with the first charge on
any assets referred to in Schedule III of the Companies Act, 2013
excluding intangible assets of the company. The secured debenture
holders have greater protection. Holders of secured debentures
remain convinced about the payment of interest and payment of
principal in the event of redemption.
(b) Unsecured Debentures These debentures are also known as naked
debentures. These debentures are not secured by way of charge on
the company’s assets. Interest rate payable on unsecured debentures
is generally higher than that which is payable on secured debentures.

On the basis of Tenure:

(c) Redeemable Debentures are those which are payable on the expiry of
the specific period (Maximum period 10 years from the date of
issue) either in lump sum or in installments during the life time of
the company. Debentures can be redeemed either at par or at
premium.
 (d) Irredeemable Debentures are also known as Perpetual Debentures
because the company does not give any undertaking for the
repayment of money borrowed by issuing such debentures. These
debentures are repayable on the winding-up of a company or on the
expiry of a long period. They can legally be framed as payable to
bearer.
Under the Companies Act, 2013, it is reiterated that in case of
Redeemable Debentures the maximum period of redemption is 10
years from the date of issue, except certain specified companies
infrastructure companies where the maximum redemption period
can be exceeding ten years but not exceeding thirty years.

On the basis of Mode of Redemption :

These debentures are issued by a company on the basis of option
provided to them for conversion of debenture in the equity shares of
the company after a certain period. It may be classified in the
following categories: —

(e) Convertible Debenture These debentures are converted into equity

shares of the company on the expiry of a specified period.
(f) Non-Convertible Debenture debentures do not have any option to
convert the same into equity shares and are redeemed at the expiry
of specified period(s).
A Company can only issue Secured Non-Convertible Debentures
(NCD’s). In case of issue of NCD’s by a Company not constituting
a charge on the assets of the Company, it shall be mandatory for
listing of the securities on the recognized stock exchange so that
same does not come under the purview of deposits. (Rule 2 (1)(c) of
Companies (Acceptance of Deposits), Rules, 2014).
(g) Partly Convertible Debenture are divided into two portions, viz.,
convertible and non-convertible portion. The convertible portion is
converted into equity shares of the company at the expiry of
specified period. The non-convertible portion is redeemed at the
expiry of the specified period in terms of the issue.

On the Basis of negotiability :

Debentures issued by a company may be negotiable or non-
negotiable. There are following two types of debentures: —

(h) Bearer Debentures These debentures are payable to bearer of the

debentures and transferable by mere delivery. These debentures are
also known as unregistered debentures.
(i) Registered Debentures These debentures are not transferable by mere
delivery of debenture certificates and shall be transferred as per the
 provisions of the Companies Act 2013, by executing transfer deeds
and the transfer registered by the company. Registered debentures
are not negotiable instruments. A registered holder of a debenture
means a person whose name appears both in the debenture
certificate and in the register of debenture holders. Principal and
interest amount, when due in respect of these debentures are payable
to the registered holders thereof only.

DIFFERENCE BETWEEN SHARE AND DEBENTURE

Areas Compared Shares Debentures

Nature Shares Are Ownership Debentures Are A Debt
Capital, Issued By A Instrument, Issued To
Company To The Public Raise Loans From The
Market
Return Policy Receive Dividend Based On Fixed Or
Announced By The Floating Interest Rates, A
Company Return Is Paid On
Maturity
Status Shareholders Enjoy Treated As Lenders
Ownership Status In The
Company
Security Not Secured. Depends Repayment Is Assured.
On Market Fluctuation Get Attached To The
And Performance Company’s Assets If The
Company Declares
Bankruptcy
Conversions Can’t Convert Equities Can Be Converted Easily
Into Debentures To Equities

Risk High Risk Secured Investment

Voting Rights Shareholders Have Debenture Holders Don’t

Voting Rights In The Have Any Rights To Vote
Company