SHARES AND DEBENTURES UNDER COMPANIES ACT, 2013 By Akarshi Singh

Shares and Debentures have been covered under Chapter IV of the Companies Act. All the companies which are limited by shares need to have a share capital. The amount which is invested in the company for carrying out the operations is known as share capital. It can be modified or

increased, subject to certain conditions. Different classes hold small shares in the company and it can be divided accordingly. The rights attributed to different classes of the share capital are different. Shares and debentures or such other interests of any member in a particular company

shall be a movable property and it is important to note that such interests shall be transferable as per the rules prescribed in the Articles of Association of the company.

 

Kinds of share capital

It has been defined under section 43 of the Companies Act. The share capital that is limited by shares in a company can be divided into the following:

(a) equity share capital

(i) with voting rights; or

(ii) with differential voting rights or otherwise according to the rules that are prescribed; and

(b) preference share capital

Certificate of shares

This has been contained under section 46 of the act. It declares that a certificate which is issued under the common seal of the company shall be prima facie evidence of the title to the person holding such shares. Such certificate shall

specify the shares held by any person. Moreover, where shares are held in a dematerialized form, the record of the depository shall be prima facie evidence of the interest of the beneficial owner. A certificate shall be issued within 60 days of the allotment of shares.

This act also has a provision for the issuance of a duplicate certificate that can be issued if the certificate:

1. is proved to be lost, destroyed, or ;
2. has been mutilated, defaced, or torn and also surrendered to the company.

Voting rights

Every member of the company

●  limited by shares and

●  holding equity share capital shall have a right to vote on all the resolutions placed before the company and his voting right shall be determined by his paid-up equity share capital in the company.

Every member of a company limited by shares and holding any preference share capital shall have a right to vote ONLY on resolutions placed before the company which directly:

●  affects his preference share rights;

●  such resolution meant for the winding up of the company

●  for reduction or repayment of preference share capital or equity share capital

and his voting right shall be in proportion to his share in the paid-up preference share capital of the company.

Calls, forfeiture & re-issuance

According to section 49 of the Act, where any calls for further share capital are made on the shares of a class, such calls shall be made on a uniform basis on all shares falling under that class. No discrimination can be made between the shareholders of the same class about the time of repayment and amount.

In this regard certain provisions are to be followed which are given as under:

1. Authorization by the Articles of Association to make calls on the amount remaining unpaid on the shares.
2. Seeking approval of the Board of Directors by passing a resolution in a duly convened meeting.
3. Calls shall be made on a uniform basis on the same class of shares.

Forfeiture of shares

When the shares that have been allocated to the shareholders are canceled owing to the non-payment of the amount of subscription to the issuing company, such a situation is known as the forfeiture of shares. All the entries associated with the forfeited stocks apart from those associated with premiums, already mentioned in the accounting records must have been converted. The share capital account is debited with the amount called up.

Reissuance of shares

Forfeited shares of a company may either be reissued to the other person or canceled as directed by the Board. Reissue of the shares forfeited does not amount to allotment and is considered as the sale of shares. When a company issues shares whose shares are listed in a recognized stock exchange, re-issue of the forfeited shares shall be made as per guidelines mentioned in rules under SEBI and the listing agreement.

Issue of shares

At discounted price

Except under section 54, any shares issued by the company at a discounted price shall be void.

Sweat Equity Shares

This has been defined under section 54. A company may issue SES if the following conditions are fulfilled:

1. The issue is approved by a special resolution passed by the company;
2.  the resolution mentions specific considerations, the number of shares, and the current market price, if any,
3. where the equity shares of the company are listed on a recognized stock exchange, the sweat equity shares are issued by the regulations made by the Securities and Exchange Board on this behalf and
4. if they are not so listed, the sweat equity shares are issued by such rules as may be prescribed.

Issue of bonus shares

Section 63 of the Act states that a company may issue fully paid-up bonus shares to its members out of –

(i) its free reserves;

(ii) the securities premium account; or

(iii) the capital redemption reserve account

provided that the issue of bonus shares cannot be made by capitalizing reserves that are created by the revaluation of assets.

Buyback of shares

A company may purchase its shares under out of:

1. free reserves
2. securities premium account
3. proceeds of the issuance of any shares

Such buyback can be done by any of the following methods:

1. From existing shareholders or security holders
2. From the open market
3. By purchasing shares issued to employees of the company under ESOP or sweat equity.

Debentures

Section 71 of the Act allows a company may issue debentures with an option to convert such debentures into shares, at the time of redemption either partly or wholly. The option to convert the issue of debentures into shares partly or wholly shall be passed at a general meeting where it shall be approved by a special resolution. The section prohibits the issue of debentures carrying voting

rights.

A company may present secured debentures concern to such terms

and conditions as may be prescribed.

The rules in this regard have been prescribed as under:

1. secured debentures may be issued provided that the date of its redemption shall not exceed 10 years from the date of issue. A company engaged in infrastructure projects may extend this period of 10 years but it can’t be extended for more than 30 years.
2. such an issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company and it shall be sufficient to pay the amount along with the interest.
3.  the company shall appoint a debenture trustee before the issue of a prospectus or letter of offer
4. security for the debentures by way of a charge or mortgage shall be created in favor of the debenture trustee on-

(i) any specific movable property of the company which hasn’t been pledged and/or

(ii) any mentioned immovable property wherever located, or any interest therein.

Nomination

This has been covered under section 72 of the act and it states that

●  every holder of securities may nominate any person to whom his securities shall vest after his death.

●  Where the securities of a company are held by more than one person jointly, the joint holders may nominate any person to whom all the rights in the securities shall reside in the circumstance of the death of all the joint holders.

Case law – The Canning Industries Cochin Ltd. V. SEBI

In an order dated 28 January 2020, SAT has held that an offer of Fully convertible debentures to the existing members of the company and subsequent allotment is not a private placement of the securities as mentioned under section 42 of the Act. An offer to a company’s shareholders cannot be termed as an offer made to a “selected group of persons”.

Conclusion

Debentures are usually considered a safer option when it comes to investing. The reason is, that they offer fixed income and there is no capital loss. On the other hand, shares offering more return are considered to be risky and depend on the price fluctuations in the market. A person holding shares holds ownership of the company’s financial assets. Shareholders can also vote on matters relating to the company. In the stock market shares can be sold and bought. And it provides liquidity to the shareholders.

Debentures are issued by the company to raise their capital and are considered debt instruments. In return, the company pays the principal amount along with the interest to the debenture holders as may be fixed. Debentures are considered to be a long-term instrument with a maturity age of 5 to 20 years.