This article has been written by Mr. Parag Awadhiya, a third-year student at Balaji Law college, Pune. 

 

ABSTRACT- 

The Companies Act financial structure of a spoken about company includes the share capital and bond. Similarly to debentures, bonds are debt instruments of an organization but they do not show in the share capital which represents the ownership interest of shareholders. This work provides an overview of both kinds of shares and debentures in addition to discussing their features, issues and redemption as governed by companies’ regulations in the Companies Act.

The share capital is what this article leads with before it mentions such different forms like equity shares, preference shares etc. that have some attributes. In this part, calls on shares, issue of shares, release of share certificates and allocation of shares take place.

A Complete Guide to Comprehending Share Capital and Debentures under the Companies Act. It can be difficult to navigate the complexity of debentures and share capital within the bounds of the Companies Act, but understanding these basic financial instruments is essential for businesses. This extensive article seeks to clarify these ideas and provide you with a clear understanding.

INTRODUCTION-

 

First of all, According to the Companies’ Act, the two most important aspects of corporate finance are the structure of share capital and the issuing of debentures. However, equity capital represents the owners’ portion of the business, whereas debentures are a kind of debt financing used by several businesses. Company managers, investors, attorneys at law, and other stakeholders in the legal and financial world need to understand the complexity of share capital and debentures in order to function effectively. This paper is primarily focused on providing a thorough study of shares and debentures under the Companies Act, including their kinds, characteristics, issuance, redemption, and regulatory compliance.

1. Share Capital: The Foundation of a Company

Definition: Share capital represents the total amount of money raised by a company through the issue of shares. It reflects the ownership of shareholders in the company, divided into individual units called shares.

Types of Shares:

Equity Shares: Carry ownership rights, voting rights, and the potential for dividends.

Preference Shares: Offer a fixed dividend and preferential treatment in case of liquidation but typically lack voting rights.

Sweat Equity Shares: Issued in exchange for services rendered, subject to specific regulations.

Issuing Shares: Companies follow a defined process for issuing shares, outlined in the Companies Act and their Articles of Association. This includes obtaining necessary approvals, filing documents, and maintaining shareholder records.

Share Capital Alterations: Companies can increase or decrease their share capital through various methods like bonus issue, buyback, or consolidation, subject to legal and shareholder approval requirements.

Kinds of share capital- 

 

2. Debentures: Borrowing with Benefits

Definition: Debentures are debt instruments issued by a company to raise funds. They represent fixed-income securities with a promise to repay the principal amount and interest at specified intervals.

Types of Debentures:

Secured Debentures: Backed by a specific asset of the company, offering greater security to investors.

Unsecured Debentures: Not backed by any specific asset, carrying higher risk for investors but offering potentially higher returns.

Convertible Debentures: Offer the option to convert into equity shares under certain conditions.

Issuing Debentures: Issuing debentures also follows a defined process, involving approvals, disclosures, and adherence to regulations.

Redemption of Debentures: Companies must redeem debentures at maturity or as per agreed terms, ensuring timely repayment to investors.

 

3. Key Considerations under the Companies Act

Compliance: The Companies Act lays down various provisions regarding share capital and debentures, outlining issuance procedures, rights of shareholders and debenture holders, and redemption mechanisms. Companies must adhere to these regulations to avoid legal complications.

Share Capital Requirements: Different company types have minimum share capital requirements stipulated in the Act.

Voting Rights and Dividends: The Act defines voting rights and dividend distribution policies for different share classes.

Debenture Trustee: For secured debentures, the Act mandates appointing a debenture trustee to protect investor interests.

Disclosures: Companies must disclose relevant information about share capital and debentures in their financial statements and other filings.

4. Beyond the Basics: Additional Considerations

Taxation: Share capital and debentures have tax implications, including capital gains tax, dividend tax, and interest income tax. Understanding these is crucial for financial planning.

Impact on Financial Position: Share capital and debentures affect a company’s financial health, impacting its debt-to-equity ratio, solvency, and risk profile.

Investment Strategies: Investors need to understand the differences between shares and debentures when making investment decisions, considering factors like risk, return, and liquidity.

 

As stated by RULE 4 of the Companies (Share Capital and Debentures) Rules 2014.

Undefined None – private, listed or public company whether is limited by shares or not shall be able to issue. equity shares bearing different rights such as to dividend, voting or otherwise, if it does not comply with the following conditions:

 

1. a) the company’s articles of association allows the company to issue shares with

differential rights.

 

1. c) the issue of shares is enabled by an ordinary resolution adopted at the general meeting.

of the Shareholders where the shares of the company are listed on the stock exchange;

acknowledged stock exchange, the release of those shares shall be authorized by the

shareholders through postal Ballot.

 

c)the shares with different rights should not be more than twenty six percent of the total of the post issue paid up equity share capital including equity shares with differential rights.

issued at any point of time.

 

1. d) the entity has a track record of distributable profits for the last 3 years.

years.

 

1. f) the organization has not failed in filing financial statements and an annual return too three previous financial years including the financial year in which the decision is made issue such shares

ALLOTMENT OF SHARES

 

Allotment is the issuing of Shares by the company to shareholders. 

Acceptance by him of an offer to purchase Shares for a sum of money. Allotment has not been filled in the Companies Act 2013. It refers to the meaning of the word.

act of allotting.

The public investing submits its offers to subscribe for Shares in Application Forms.

[prospectus] by the Company. As long as the company approves the application.

what the company does is apportioning. Some definitions by decisions of courts.

given below:

 

1. Allotment depicts “The appropriation out of the previously unappropriated Capital

of the Company, of a particular amount of Shares given to a person — Sri Gopal Jalan &

“Co v Calcutta Stock Exchange Association Ltd” (1964).

 

The reissue of forfeited Shares is not tantamount to an expropriation.

Unspent Capital of the Company, and thus it is not allocation.

The process of Allocation of Shares- 

1. Decision of the Board of Directors/Committee should be taken. 
2. Allotment Letter: When distribution happens, the company must send/post the same letter of Allotment to each of the allottees with Share details given therein.
3. Return of Allotment: The Company should file in a Return of Allotment in FORM PAS -3, with the ROC along with fee, within 30 days from the date of allotment. The time limit may be elongated by the ROC upon the applicant’s request. made by the Company.
4. . Register of members: The Company will make the register of members accordance with section 88.
5.  Share Certificate: now the shareholder accepts the Electronic Share Certificate allotted will be able to see his holding in demit account.\

 

Divergence between the Shares and Debentures

1. In the case of Share or Share Capital, it the company’s owned capital. And in the case of Debenture, it is the company’s obligation to the debt provider or the creditor.
2. Going to the investors openly, the stock is very issuance is a requirement, while the issuance of debenture is optional.
3. Shares are the ownership rights of the dividends while debentures are the ownership rights towards the interest payment component.
4. Debenture holders have no management right as shareholders because they are the creditors and shareholders are the holders of the capital and have the voting rights.
5. The convertible debentures permit their holder to convert the same into shares or any other forms of ownership capital. The conversion option is not for a shareholder.

The shareholder’s fund is reflected in the balance sheet under the shareholder’s fund part. On the contrary, debentures are listed in the non-current liabilities section existing under the long-term liabilities. 

 

Regulatory Framework- 

Companies Act Provisions:

– The Companies Act and its numerous amendments form the basis for all the changes done in share capital as well as the debentures issuing, reduction and alteration.

– The provision of Sections 61 and 62 of the Companies Act, 2013 deals with the procedure for the issue of shares, including rights issue and preferential allotment also.

– Section 71 focusses on, the conditions private limited companies can issue debentures and also the contents of debenture trust deed.

 

SEBI Regulations:

– Security and Exchange Board of India (SEBI) regulations, however, play a major role in regulating the issuance and trading of securities, such as debentures, equally.

– SEBI also has the disclosures norms as the regulations for the issuance of debentures by the public companies to uphold transparency and also investor protection.

 

Listing Requirements:

– Companies which intend to list their debentures on the stock markets should adhere to the listing requirements as notified by the stock exchanges and also SEBI.

– They often embody the periodic reports, the maintenance of the minimum public shareholding as well as the compliance with the corporate governance principles.

 

Corporate Governance Implications:

Transparency and Accountability:

– Share capital and also debenture-related transactions disclosure of adequate amount maintains transparency and it also increases the investor confidence.

– The companies shall comply with the good corporate governance principles to implement the system in an unbiased, accountable, and also protect the interests of different stakeholders.

 

Risk Management:

– The issuance and the management of share capital and of debentures are the ways to balance the financial risks and to make the company financially stable.

– Properly carried out risk appraisal and mitigation will help to prevent liquidity problems or default problems related to debentures.

Conclusion

Understanding share capital and debentures under the Companies Act is essential for businesses and investors alike. This guide provides a solid foundation for further exploration, but seeking professional advice remains crucial for navigating complex financial decisions and ensuring legal compliance. Debentures and also share capital form the core of corporate financing, to which the scope of the Companies Act pertains. Stakeholders should be adequately informed on the procedure of the insightful corporate governance creation and also finance. They should get to know the types, the characters of these entities, their issue procedures, and legal compliance features. Through compliance with the legal rules and continuous learning about the new developments, the firms could make sure of the accountability, transparency and also give trust by their investors to the financial procedures. This article is a very good medium for the grasping the share capital and also debenture types under the Companies Act; with such knowledge, corporate governance will be made responsible and the decision-making will also become smart.

 

REFERENCES-

 This article was originally written by icsi.edu published on 2024 website. The link for the same is herein https://www.icsi.edu/media/portals/0/SHARE%20CAPITAL%20AND%20DEBENTURES.pdf. 

 

1. This article was originally written by wbsche.wb.gov.in published on 2024 website. The link for the same is herein, https://wbsche.wb.gov.in/assets/pdf/commerce/GCC&BA_SUPR_Share-capital-1_Sushita-Chakraborty_UG(R1).pdf. 

 

1. This article was originally written by umeschandracollege.ac.in published on 2023 website. The link for the same is herein,https://umeschandracollege.ac.in/pdf/study-material/company-law/Share%20Capital%20&%20Debenture.pdf. 

 

1. This article was originally written by  konceptca.com published on 2024 website. The link for the same is herein, https://www.konceptca.com/blog/share-capital-and-debentures#:~:text=Under%20the%20Companies%20Act%2C%202013,with%20limited%20risks%20and%20returns.

 

1. This article was originally written by  sebi.gov.in published on 2024 website. The link for the same is herein,https://www.sebi.gov.in/sebi_data/attachdocs/apr-2017/1492085873402.pdf. 

 

1. This article was originally written by  indmoney.com on published on 2024 website. The link for the same is herein, https://www.indmoney.com/articles/personal-finance/share-and-debenture-difference. 

 

1. This article was originally written by  indiacode.nic.in on published on 2024 website. The link for the same is herein, https://www.indiacode.nic.in/handle/123456789/1362/simple-search?query=Chapter%20IV%20%20The%20Companies%20(Share%20Capital%20and%20Debentures)%20Rules,%202014&searchradio=rules.