Shares, Share Capital and Debentures: Explained

The Companies Act, 2013 (‘the Act’) defines the term ‘share’ in Section 2(84) as a share in the share capital of a company which includes stock unless such differentiation between the two is made out. The definition does not help us understand its nature and hence, the courts and jurists have given us many important definitions for the same.

This article explores the meaning, differences and scope of shares, share capital and debentures.

I. Share

The Halsbury’s Law of England: It defines a ‘share’ as a right to a specified amount of the share capital of a company, carrying with it certain rights and liabilities while the company is a going concern and in its winding up. The Court in Borland’s Trustee v. Steel Bros[1], stated that a share in 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 inter se.

In Bacha Guzdar v. CIT [2] it said that a share is a right of participation in a company’s profits when it is a going concern, and its assets when it is being wound up.

Hence, it becomes clear that to raise capital for its own purposes, a company issues shares to the public or private individuals, and in proportion to the shares acquired by them, they acquire rights and liabilities of participation as well, such as Voting Rights and liability to pay the amount due on share when called on.

In Indian law, a share is also included in the definition of goods under Sale of Goods Act, 1930 which labels both shares and stock as ‘moveable property’ covered under its ambit. Section 44 of the Act categorises shares a movable property as well.

II. Share Capital

The solitary word ‘capital’ when used in Company law often refers to the share capital itself. It is not necessary that all companies shall have share capital although all companies limited by share must have a share capital specified in their memorandum. Companies limited by guarantee may or may not opt to have a share capital. In a company operating with a share capital, it means a statement included in the memorandum stating the maximum amount of capital the company is authorized to raise and breaks down the amount into a given number of shares of a given value each. It looks like this – “The Share Capital is Rs. 100000 divided into 10000 shares of Rs. 10 each.”

• Important Terms (Types of Capital)

1. Authorised/Registered Capital: As given in section 2 (8), “authorised capital” or “nominal capital” means the capital which is authorised by the memorandum of a company to be the maximum amount of share capital of the company. It is the 1 lakh amount in the above example. The company cannot raise more money than this amount.
2. Issued Capital: As given in section 2 (50), “issued capital” means the capital which the company issues from time to time for the subscription. It is that part of the registered or authorized capital which the company issues for public subscription and allotment for the time being. This is to be computed at the nominal value.
3. Subscribed Capital: As given in Section 2 (86), “subscribed capital” means the part of the capital which is for the time being subscribed by the members of a company. It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company. It is clear that the entire issued capital may or may not be subscribed. The part which does get subscribed becomes this.
4. Called up Capital: As given in section 2 (15), “called-up capital” means the part of the capital, which has been called for payment. Shares are issued and the people subscribing them are not required to pay at the time. Payment is called from time to time asking people to deposit the amount as per the shares subscribed. Called up capital is that portion of the subscribed capital which has been called up or demanded on the shares by the company. The amount that actually gets paid will become the paid-up capital.
5. Paid-up Share Capital: As given in section 2 (64), “paid-up share capital” or “share capital paid-up” means the aggregate amount of money credited as is equivalent to the amount received in respect of shares issued. It includes any amount credited as paid-up in respect of shares of the company but does not include any other amount received in respect of such shares, by whatever name it may be called.

• Equity and Preference Share Capital

Equity share capital is defined in the explanation to Section 43 of the Act as all share capital which is not preference share capital. So, let us understand preference shares first.

Preference share capital is that part of the issued share capital which bears a preferential right in two respects. One, the payment of the dividend is either done at a fixed amount or a fixed rate, unlike the equity shares. Two, at the time of repayment of the paid-up capital, or in the case of winding up, it is seen 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. These special qualities make these shares preferred shares, and the capital from then the Preferred share capital.

Table of Differences

Preferred Share Capital	Equity Share Capital
The fixed amount of fixed rate of dividend	The amount depends on the available profits and foreseeable expenditure.
Dividend is paid in preference to equity shares	Dividend is paid after payment of Preferred shares.
Preference is given to preferred shareholder over equity shareholder at the time of winding up.	Lower preference for a preferred shareholder during winding up.
The dividend may be cumulative.	The dividend is not cumulative
Section 47 states that Voting rights of the preferred shareholder are limited than equity holders. These can only vote in case of a variation in their special privileges, or when their dividend has not been paid for 2 years. Further, they are entitled to vote on the resolution on winding up of a company.	Equity shareholders may vote on any and all issues
No Bonus or Rights shares are issued.	Bonus or Rights shares might be issued to existing shareholders.
The voting right of a preferred shareholder is calculated with respect to his share in the total preferred share capital only.	The voting right of an equity shareholder is calculated with respect to his share in the total equity share capital only.

III. Debentures

Another way of raising money by the company is to borrow money in return for interest. A security that the borrowed sum will be repaid is issued in the nature of a debenture. Thus, a debenture is a tool used by the company to raise borrowed capital in exchange for fixed rates of interest. The moneylender in this scenario is called creditor of the company. According to Section 2(30) of the Companies Act, 2013 “debenture” 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. It covers both secured and unsecured debentures.

In Ram Ratan Karmarkar v. Amulya Charan Karmarkar [3], a debenture was differentiated from a loan such that a debenture means a document which creates or acknowledges a debt. A loan creates a right in the creditor to demand repayment, and the substance of debt is a liability upon the debtor to repay the money.

Types of Debentures

• On the Basis on Convertibility

1. Non-Convertible Debentures (NCD): These instruments cannot be converted into equity shares. They will retain their debt character only.
2. Partly Convertible Debentures (PCD): A part of these instruments can be converted into Equity shares in future at the notice of the issuer. The issuer decides in which ratio the conversion is done, usually at the time of subscription itself.
3. Fully convertible Debentures (FCD): These debentures are fully convertible into Equity shares at the issuer’s notice. The issuer decides the ratio of conversion. Upon conversion, the investors enjoy the same status as any ordinary shareholders of the company.
4. Optionally Convertible Debentures (OCD): The investor has an option to convert these debentures into shares at a price decided by the issuer or agreed upon at the time of issue.

• On the Basis of Security

1. Secured Debentures: Secured debentures are those secured by a charge on the fixed assets of the company issuing it. This means that if the issuer fails to pay either the principal or interest amount, his assets can be sold for repayment of the liability to the investors. Section 71(3) of the Companies Act, 2013 provides that secured debentures may be issued by a company subject to such terms and conditions as may be prescribed by the Central Government through rules.
2. Unsecured Debentures: In these instruments, if the issuer defaults on payment of the interest or principal amount, the investor has to be on the same standing as other unsecured creditors of the company waiting for repayment. These are also called Naked Debentures.

• On the Basis of Redeemability

1. Redeemable Debentures: These are the debentures which are issued with a condition that they will be redeemed at a fixed date or upon demand, or after notice, or under a system of periodical drawings. Debentures, generally are redeemable and on redemption, they can be reissued or cancelled.
2. Perpetual or Irredeemable Debentures: A Debenture, in which no time is fixed for the company to pay back the money, is an irredeemable debenture. The holder of debenture cannot demand repayment till the company is a going concern and does not make default in payment of interest. After the commencement of the Companies Act, 2013, a company cannot issue perpetual or irredeemable debentures.

• On the Basis of Registration

1. Registered Debentures: A company maintains a register of debenture holders. The debenture, when issued to a specific person’s name, mentioning such name on the certificate and the register, creates a Registered Debenture. It can only be transferred like shares by a duly stamped instrument of transfer satisfying the requirements of Section 56 of the Act.
2. Bearer debentures: On the contrary, debentures may be made out to bearer, making them freely transferable by delivery and entitling its bearer to the amount at the time of redemption. Bearer debentures are negotiable instruments, and the person holding it is a ‘holder in due course’ under the Negotiable Instruments Act. He is thus entitled to receive the principal and the interest thereon (Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat [4]).

---

References

[1] [1901] 1 Ch 279

[2] 57 Bom. L.R. 617 (SC)

[3] 56 CWN 728 at p. 729

[4] (1971) 41 Com Cases 1063

---

1. Law Library: Notes and Study Material for LLB, LLM, Judiciary and Entrance Exams
2. Online Exam Preparation – The Prep Destination