Formation of Capital
1. Equity Capital:
o Equity capital is the ownership capital, raised by a company in exchange for
shares. It represents investors’ ownership in the company.
o Investors are entitled to dividends, voting rights, and a share in the company's
assets upon liquidation.
2. Debt Capital:
o Debt capital is borrowed capital that a company secures through loans or
issuing debentures.
o Debenture holders are creditors who receive regular interest but do not have
ownership or voting rights in the company.
Aspect Debt Capital Equity Capital
Definition Borrowed funds for fixed tenure Ownership funds in exchange for shares
Role Liability to be repaid Asset, part of the company’s funds
Duration Short- to long-term Long-term capital
Risk Low risk for the investor High risk for the investor
Payoff Interest income Dividends/profits
Shares (Companies Act, 2013)
1. Definition of Shares (Sec 2(84)):
o A "share" represents a unit of ownership in a company and includes stock, as
defined by the Companies Act, 2013.
2. Types of Shares:
o Equity Shares (Sec 43): These represent ownership and typically carry voting
rights. Equity shares provide dividends from profits but have higher risk as
they are last in priority for repayment.
o Preference Shares (Sec 55): Preference shareholders receive dividends before
equity shareholders and have a higher claim on assets in liquidation but
generally lack voting rights.
3. Issuance of Shares (Sec 62):
o Shares can be issued to existing shareholders (rights issue), employees
(ESOP), or other investors (private placement).
4. Share Capital (Sec 43):
o Defined as the capital fund raised by issuing shares. Types include:
Authorized Capital: The maximum capital that can be raised, as
mentioned in the company's Memorandum.
Issued Capital: The portion of authorized capital offered to investors.
Subscribed Capital: Part of issued capital that investors have
subscribed to.
Paid-Up Capital: Amount actually paid by investors; often matches
subscribed capital.
5. Transfer of Shares (Secs 56-62):
o Outlines procedures for transferring shares and the company’s obligations
regarding proper documentation and registration.
6. Share Certificates (Sec 46):
o Proof of ownership issued by the company within a specific timeframe, either
two months from incorporation or two months from share allotment.
7. Alteration of Share Capital (Secs 61-62):
o Companies can consolidate, divide, or cancel shares as per the provisions.
Rights of Shareholders
1. Voting Rights (Sec 47):
o Equity shareholders have voting rights proportionate to their shareholding.
Preference shareholders may have limited or no voting rights unless specified.
2. Right to Receive Dividends (Sec 123):
o Shareholders are entitled to dividends declared by the board, subject to the
company’s profits and other conditions.
3. Right to Attend Meetings (Sec 96):
o Shareholders can attend AGMs and EGMs to vote on resolutions and
participate in discussions.
4. Right to Appoint Proxies (Sec 105):
o Shareholders may appoint a proxy to represent them at meetings and vote on
their behalf.
5. Right to Inspect Documents (Sec 138):
o Shareholders can access certain company records, like the register of members
and financial records.
6. Right to Transfer Shares (Sec 56):
o Shareholders can transfer their shares, subject to restrictions in the company’s
Articles of Association.
Types of Shares (Detailed Classification)
1. Equity Shares:
o Authorized, Issued, Subscribed, Paid-Up: Classification based on capital
structure as per the company’s MOA.
o Bonus Shares: Issued free to existing shareholders, often from retained
earnings.
o Rights Shares: Offered to current shareholders at a discounted rate before
being available publicly.
o Sweat Equity Shares: Rewarded to employees for their contributions.
o Voting and Non-Voting Shares: While most shares have voting rights, some
may be issued without voting privileges.
2. Preference Shares:
o Cumulative vs. Non-Cumulative: Cumulative preference shares allow
shareholders to accumulate unpaid dividends; non-cumulative do not.
o Participating vs. Non-Participating: Participating preference shares allow
shareholders to share in surplus profits beyond fixed dividends.
o Convertible vs. Non-Convertible: Convertible preference shares can be
exchanged for equity shares after a certain period.
o Redeemable vs. Irredeemable: Redeemable preference shares can be bought
back by the company, whereas irredeemable cannot.
Debentures (Sec 2(30))
1. Definition:
o A debenture is a debt instrument without collateral, relying on the
creditworthiness of the issuer. Debenture holders are creditors and receive
interest but have no voting rights.
2. Types of Debentures:
o Registered vs. Bearer: Registered debentures are issued to specific holders,
while bearer debentures can be transferred by possession.
o Redeemable vs. Irredeemable: Redeemable debentures have a fixed
repayment date, while irredeemable (perpetual) do not.
o Convertible vs. Non-Convertible: Convertible debentures allow conversion
into equity shares, while non-convertible do not, offering higher interest as
compensation.
Forfeiture and Surrender of Shares
1. Forfeiture of Shares:
o Forfeiture occurs when a shareholder fails to pay calls or installments. The
company may then cancel the shares, following due process under its Articles.
o Procedure: Notice must be sent, giving at least 14 days for payment. If
unpaid, a board resolution is passed to forfeit the shares.
o Effects of Forfeiture:
The member ceases to hold ownership.
Liability for unpaid dues remains if liquidation happens within one
year.
Forfeited shares become company property and may be reissued.
2. Surrender of Shares:
o Voluntary act where shareholders return shares to the company, often used as
an alternative to forfeiture.
o Conditions: Allowed if permitted by the Articles, often to avoid penalties
associated with forfeiture.
o Legal Basis: Not specifically recognized by law but accepted if it follows
forfeiture-like conditions.
Increase and Reduction of Share Capital
1. Increase:
o Authorized by shareholder resolution, allowing the company to issue more
shares.
2. Reduction:
o Requires approval from creditors and regulatory bodies to ensure protection of
creditors' interests. Often requires amendment of the Articles.