This Article is written by Saima Masood & this article disscuss the concepts Shares, Share Capital, and Debentures.
SHARE : INTRODUCTION
Share is defined in section 2(84) of companies act
In finance, a share refers to a unit of ownership in a company or corporation. It represents a claim on a portion of the company’s assets and earnings. When a company goes public, it often divides its ownership into smaller parts called shares, which are then sold to investors.
By owning shares in a company, investors become shareholders and have certain rights and privileges. These may include voting rights in major company decisions, the opportunity to receive dividends (a distribution of profits to shareholders), and the ability to sell or transfer their shares to others.
Shares are typically bought and sold on stock exchanges, and their prices can fluctuate based on market demand and supply. The performance of a company, market conditions, and other factors influence the value of shares. Investors often analyze various financial indicators and company fundamentals to make informed decisions about buying or selling shares.
Investing in shares can provide opportunities for capital appreciation (profit from the increase in share prices) and may offer higher returns compared to other investment options. However, it also carries risks, as share prices can decline, leading to potential losses for investors.
Overall, shares represent a means for investors to participate in a company’s ownership and potential growth, as well as potentially earn income through dividends or capitalize on changes in share prices.
TYPES OF SHARE:
In finance, there are various types of shares that represent ownership interests in a particular company. These shares are typically categorized based on certain characteristics. Here are some common types of shares in finance:
- Common Shares: Common shares, also known as ordinary shares, are the most prevalent type of shares. They represent ownership in the company and give shareholders the right to vote on corporate matters. Common shareholders may also receive dividends, which are a distribution of profits, and have the potential for capital appreciation.
- Preferred Shares: Preferred shares are a type of share that has certain preferential rights compared to common shares. These rights may include a fixed dividend payment, priority over common shareholders in receiving dividends or assets during liquidation, and sometimes no voting rights. Preferred shares offer a more stable income stream but may not have the same potential for capital appreciation.
- Voting Shares: Voting shares carry the right to vote at the company’s general meetings and participate in decision-making processes. These types of shares are crucial in corporate governance and allow shareholders to have a say in matters such as electing board members and approving major corporate transactions.
- Non-voting Shares: Non-voting shares do not grant voting rights to shareholders. Instead, they focus primarily on capital appreciation potential or receiving dividends. Companies issue these shares to raise capital while maintaining control among existing shareholders.
- Convertible Shares: Convertible shares are a type of security that can be converted into a predetermined number of common shares at a future date. These shares provide an option for shareholders to switch from the preferred or convertible share class to the common share class, enabling them to benefit from potential capital appreciation.
- Founders’ Shares: Founders’ shares are typically issued to the initial founders of a company and often carry special rights or privileges, such as higher voting power or preferential dividend distribution. These shares allow founders to retain control over the company even as additional shares are issued.
- Treasury Shares: Treasury shares are shares issued by a company but subsequently repurchased and held by the company itself. These shares do not have any voting rights or receive dividends. Companies may later reissue these shares or retire them, reducing the total number of outstanding shares.
SHARE CAPITAL:
Share capital refers to the total value of shares issued by a company to its shareholders. It represents the ownership interest that individuals or entities hold in the company. Share capital is an important aspect of a company’s capital structure and is often used to raise funds for business operations, expansion, or other purposes.
Companies issue shares to investors in exchange for capital, which can be in the form of cash, assets, or services rendered. The value of shares is determined by factors such as the company’s financials, market conditions, and investor demand.
Share capital is typically divided into a fixed number of shares, with each share having a certain nominal or face value. The nominal value is usually a small fraction of the actual market value of the share. For example, a company might issue 1,000,000 shares with a nominal value of $1 per share.
There are two main types of share capital:
- Authorized Share Capital: This represents the maximum amount of share capital a company is legally allowed to issue. It is mentioned in the company’s articles of association and can only be changed by obtaining the approval of the shareholders through a resolution.
- Issued Share Capital: This refers to the portion of the authorized share capital that has been issued to shareholders. It represents the actual shares that are in circulation and held by investors. Issued share capital can further be classified as either subscribed or paid-up capital.
- Subscribed Share Capital: This is the portion of issued share capital that investors have agreed to purchase but may not have fully paid for yet. It represents the shares that investors are committed to acquiring.
- Paid-up Share Capital: This is the portion of issued share capital for which investors have made full payment. It represents the shares that investors have fully paid for and acquired ownership of.
Share capital offers certain rights to shareholders, such as voting rights, entitlement to dividends, and the right to receive a share of the company’s assets in case of liquidation. The value of shares held by shareholders can fluctuate based on market conditions and the performance of the company.
DEBENTURES:
Debentures is defined in section 2(30) of the company act,2013
Debentures are a type of fixed-income investment instrument issued by corporations or governments to raise capital. They represent a form of long-term debt, where the issuer promises to pay back the principal amount along with periodic interest payments, typically at a fixed rate.
Investors who purchase debentures are essentially lending money to the issuer and become creditors of the companyny or government entity. Unlike equity shares, debenture holders do not have ownership rights or voting privileges in the issuing organization.
Debentures come in various form s, including secured or unsecured, convertible or nonconvertible, and redeemable or irredeemable. Secured debentures are backed by specific assets of the issuer, providing some assurance to investors in case of default. Unsecured debentures, on the other hand, do not have any collateral and rely solely on the creditworthiness of the issuer.
CONVERTIBLE DEBENTURES : grant the holder the option to convert their debentures into equity shares of the issuing company at a predetermined price or conversion ratio. This feature provides the potential for additional returns if the stock price rises. Non-convertible debentures cannot be exchanged for equity shares.
REEDEMABLE DEBENTURES: have a specific maturity date, at which point the issuer is obligate d to repay the principal amount to the debenture holders. Conversely, irredeemable debentures do not have a maturity date, and the issuer pays periodic interest indefinitely.
Investing in debentures can be attractive for fixed-income investors seeking stable returns and lower risk compared to equity investments. Debentures are usually considered less risky than stocks, as they have a fixed interest rate and predetermined repayment terms. However, they are still subject to credit risk, meaning there is a possibility of the issuer defaulting on interest payments or failing to repay the principal.
Before investing in debentures, it is important to assess the creditworthiness and financial stability of the issuing organization. Credit rating agencies evaluate debentures and assign ratings based on the issuer’s ability to meet its financial obligations. Higher-rated debentures are generally considered safer investments but offer lower interest rates compared to lower-rated debentures.
RELATIONSHIP BETWEEN SHARE, SHARE CAPITAL AND DEBENTURES:
The relationship between share, share capital, and debentures is an essential aspect of a company’s capital structure. Let’s delve into each of these terms and understand how they are interconnected.
- Shares: Shares represent the individual units of ownership in a company. When a person purchases shares of a company, they become a shareholder and obtain certain rights, such as voting rights and entitlement to dividends. Shares can be in the form of common shares or preferred shares, with each having distinct characteristics and benefits.
- Share Capital: Share capital refers to the total value of all the shares issued by a company. It represents the long-term funding provided by shareholders to the company in exchange for ownership rights. Share capital is a key component of a company’s equity, which makes up its funding structure.
- Debentures: Debentures, on the other hand, are a form of debt instrument issued by a
company to raise capital. Unlike shares, debentures do not give ownership rights to the holders. Instead, debenture holders have a claim on the company’s assets and receive fixed interest payments periodically. Debentures are usually issued for a specific time period and are considered a long-term debt of the company.
The relationship between these three elements lies in their contribution to a company’s capital structure:
- Shareholders provide share capital to the company, representing their long-term investment in the business. Share capital is a permanent source of funding for the company and is recorded in the equity section of the balance sheet.
- Debenture holders, on the other hand, provide debt capital to the company. Debentures represent the company’s liability to repay the borrowed amount along with periodic interest payments. Debentures are recorded as long-term debt in the company’s balance sheet.
- Both share capital and debentures contribute to the overall financial structure of a company. The proportion of each in the capital structure depends on various factors, such as the company’s funding requirements, risk appetite, and cost of capital.
- Companies use a combination of equity (share capital) and debt (debentures) to strike a balance between risk and return. The mix of share capital and debentures influences the company’s ability to finance its operations, make investments, and manage its financial obligations.
In summary, shares represent ownership in a company, share capital represents the total value of all the shares issued, and debentures represent long-term debt issued by the company. Together, these elements contribute to a company’s capital structure and influence its financial position and funding options.
HOW TO CALCULATE SHARE CAPITAL:
To calculate share capital, you need to consider the total number of shares issued by a company and the nominal value assigned to each share.
Here’s the formula to calculate share capital:
Share Capital = Number of Issued Shares x Nominal Value per Share
- Determine the number of issued shares: This refers to the total number of shares that have been authorized and allotted by the company. It can typically be found in the company’s financial statements or share registry.
- Determine the nominal value per share: The nominal value, also known as the par value or face value, is the stated value assigned to each share at the time of issuance. It is often mentioned in the company’s memorandum of association or articles of incorporation.
- Multiply the number of issued shares by the nominal value per share: Multiply the number of issued shares by the nominal value to calculate the share capital.
For example, let’s say a company has issued 10,000 shares with a nominal value of $1 per share:
Share Capital = 10,000 shares x $1/share
Share Capital = $10,000
Therefore, the share capital of the company in this example would be $10,000.
It’s worth mentioning that share capital can also include any additional paid-in capital or share premium above the nominal value, depending on the specific circumstances and accounting principles applicable to the company. In such cases, the formula may involve more complex calculations.
WHAT IS SHARE CAPITAL IN COMPANIES ACT 2014
In the Companies Act 2014, share capital refers to the total value of shares issued by a company. It represents the ownership stake that shareholders have in the company. Share capital plays a crucial role in the formation and operation of a company, as it determines the rights and obligations associated with owning shares.
The Companies Act 2014 sets out specific provisions regarding share capital, including its structure, issuance, and maintenance. Here are some key points related to share capital in the Companies Act 2014:
- Classes of shares: The Act allows companies to issue different classes of shares, each with distinct rights, preferences, and restrictions. These classes may include ordinary shares, preference shares, redeemable shares, and others.
- Authorised share capital: The Act specifies that a company must have an authorised share capital, which represents the maximum value of shares the company can issue. The company’s constitution determines the authorized share capital, which can be increased or reduced through certain procedures outlined in the Act.
- Issued share capital: This represents the portion of the authorized share capital that the company has actually issued to shareholders. It signifies the ownership interest held by shareholders and can be in the form of both paid-up and unpaid shares.
- Share allotments: The Act provides guidelines on the procedures for issuing shares, including the requirement for directors to obtain shareholder approval, maintain proper records, and ensure compliance with any restrictions imposed by the company’s constitution.
- Share capital maintenance: The Act outlines provisions related to the maintenance and reduction of share capital. For example, it provides mechanisms for reducing share capital, such as through a court-approved process or the company’s voluntary decision based on certain conditions.
Optionally fully convertible
The optionally fully convertible Debenture is a kind of debenture which can be converted into shares at the expiry of a certain. At a predetermined price ,if the debt holder investor wishes to do so the securities as defined as u/s 2(81)) of companies act ,2013 means securities as defined in clause (h) of section 2 of the Securities contract (regulation) act 1956 and include hybrid. Hence after analysing the above definition of “OFCD”, “ hybrid” and “securities” it could be rightly concluded that an o of OFCD being a hybrid security force under the definition of “ securities” as defined u/s 2(h) of securities contract regulation act 1956 and u/s 2(81) of Company Act 2013 as it inherits the characteristics of debenture initially and also that of the shares at a latest stage in the option to convert the security into share be exercised by the shareholder.
WHAT IS 12% OF DEBENTURE
Debentures are debt instruments issued by companies or governments to raise funds from investors. When a company issues debentures, it promises to pay a fixed rate of interest to the debenture holders for a specified period of time.
If 12% of debenture refers to the interest rate on the debentures, it means that the company is offering a fixed annual interest rate of 12% to the debenture holders. This is the rate at which the company will pay the interest on the debentures throughout the term until they mature.
Investors who hold these debentures will receive an annual interest payment equal to 12% of the nominal value of their debenture investment. For example, if an investor purchases a debenture with a face value of $10,000, they will receive $1,200 in interest income per year.
It’s important to note that the interest payments on debentures are generally paid on a periodic basis, such as annually, semi-annually, or quarterly, depending on the terms of the debenture agreement.
The percentage rate on debentures reflects the risk associated with the investment. Higher interest rates usually indicate higher risk, as the company needs to compensate investors for the increased risk of default. Therefore, a 12% interest rate implies that the debentures carry a relatively higher level of risk.
Investors should carefully consider the financial stability and creditworthiness of the issuing company before investing in debentures. It is also advisable to read and understand the terms and conditions of the debenture agreement, including the rights of the debenture holders and any potential risks involved.
CASE RELATED TO DEBENTURES
In the case of CIT vs. ITC Hotels Limited (190 Taxmann 430), the Honble. Karnataka High Court has also concluded that even if the debentures were to be converted into shares at a later date the expenditure incurred on such convertible debentures has to be treated as revenue expenditure.
vi. In the case of DCIT vs. Modern Syntex India Limited (95 TTJ JP 161), the Honble ITAT Jaipur, has also very clearly held that debenture is nothing but just another form of loan on which interest is payable. The debentures cannot be equated with shares. As regards convertible debentures, the company may also issue other debentures in which case the option is given to the debenture holders to convert them into equity or preferential shares at stated rate of exchange after certain period.
Thus, debenture conversion is also another form of loan for a specified period till they are converted into shares. Interest is payable on convertible debentures till they are converted into shares when dividend becomes payable.
SEBI (SECURITY AND EXCHANGE BOARD OF INDIA) guidelines for issue of Share and Debentures:
The Securities and Exchange Board of India (SEBI) is the regulatory body responsible for overseeing the securities market in India. SEBI has issued various guidelines for the issue of shares and debentures by companies. Here are some key guidelines:
- Prospectus: Companies issuing shares or debentures need to prepare a prospectus containing all relevant information about the company, its promoters, financials, risk factors, and terms of th e issue. The prospectus should adhere to SEBI’s guidelines for content and disclosure.
- Minimum Subscription: A company cannot allot shares or debentures unless a minimum portion of the issue, as specified by SEBI, is subscribed by the public. This ensures that there is adequate investor interest in the company.
- Use of Issue Proceeds: The guidelines require companies to use the funds raised through the issue for the purposes stated in the prospectus. Companies must disclose their intended use of funds and provide periodic reports on its utilization.
- Pricing: SEBI specifies rules for pricing securities during the issue. Companies must determine the price based on various factors like market conditions, demand, business valuation, and regulatory requirements. The price should be fair and transparent to protect the interests of investors.
- Credit Rating: In case of debenture issuances, SEBI mandates that companies obtain a credit rating for their debenture issue from a registered credit rating agency. This helps investors assess the creditworthiness and risk associated with the debentures.
- Timelines and Compliance: SEBI sets timelines and procedures for the issue of shares and debentures. Companies must adhere to the prescribed timelines and comply with regulatory requirements to ensure a fair and transparent issuance process.
- Disclosure and Investor Protection: SEBI emphasizes the importance of adequate disclosure and investor protection. Companies must provide all material information, including risk factors, in the prospectus and other documents related to the issue. SEBI also monitors compliance with fair trade practices and takes action against any fraudulent or manipulative activities.
CONCLUSION:
In conclusion, shares, share capital, and debentures are important components of a company’s capital structure and financing.
Shares represent ownership in a company and entitle shareholders to certain rights and privileges, including voting rights, dividend payments, and the ability to participate in the company’s growth and profits. Shareholders can be individuals or other entities such as institutional investors.
Share capital refers to the total value of the shares issued by a company and represents the initial capital invested by shareholders. It plays a crucial role in determining the financial stability and strength of a company.
Debentures, on the other hand, are a type of long-term debt instrument issued by companies to raise funds. They represent a loan taken by the company, which is typically repaid with regular interest payments over a fixed period. Debenture holders are creditors of the company and do not have ownership rights or voting privileges like shareholders.
Both shares and debentures are important sources of financing for companies. Share capital represents equity financing, as it involves selling ownership stakes in the company, while debentures represent debt financing, as the company borrows funds and promises to repay them.
When a company issues shares or debentures, it must adhere to regulatory requirements and financial markets’ standards. This ensures transparency and protection for investors. Companies may issue different types of shares or debentures with varying terms and conditions to meet specific financing needs.
In conclusion, shares, share capital, and debentures are integral to the functioning of a company’s capital structure. They provide companies with the necessary funds to finance operations, expansion, and other strategic initiatives. Understanding these concepts is essential for investors, business owners, and financial professionals to navigate the complexities of the financial markets and make informed decisions.
REFERENCES
- Avtar Singh, Company Law, Eastern Book Company (EBC), 16th edition.
- S Chand, A Textbook of Company Law, P. P. S. Google, 11th edition.
- https://www.rbi.org.in/commonperson/English/Scripts/FAQs.aspx?Id=711