A) Share Capital

Share Capital refers to the amount of capital raised by a company by issuing shares. It
represents the total amount invested by the shareholders in exchange for shares of ownership.
This is a key source of finance for companies, especially during their initial stages or for
expansion.

i. Definition of Share
A share is the smallest unit of ownership in a company. By purchasing shares, an individual
or entity becomes a shareholder (part-owner) of the company. Shares give the shareholder
certain rights, such as the right to receive dividends, the right to vote in company meetings,
and, in some cases, the right to participate in the company's management.
 Companies Act, 2013 (Section 2(84)) defines shares as a share in the share capital of
a company and includes stock.
 A share is also a movable property and can be transferred or transmitted as per the
company's Articles of Association.
Shares are divided into two primary categories: equity shares and preference shares.

ii. Kinds of Shares

Under the Companies Act, 2013, shares in a company are broadly classified into two types:
1. Equity Shares (Section 43(a)):
o Also known as ordinary shares, these shares carry voting rights and are
entitled to dividends that are not fixed but vary based on the company's
profitability.
o Equity shareholders have a residual claim on the company's assets in case of
liquidation, meaning they are paid after all other claims (debts and preference
shares) are settled.
2. Preference Shares (Section 43(b)):
o These shares have preferential rights over equity shares in two respects:
 Dividend: Preference shareholders receive a fixed dividend before any
dividend is paid to equity shareholders.
 Capital repayment: In the event of liquidation, preference
shareholders are repaid their capital before equity shareholders.
o Preference shares may or may not carry voting rights, depending on the terms
of the issue.

iii. Allotment of Shares

Allotment of shares is the process by which a company assigns shares to applicants. This
typically happens after a public issue, private placement, or rights issue.
Key points regarding allotment:
 The company must follow its Articles of Association or a resolution passed at the
general meeting.
 An allotment letter is issued to the applicant, specifying the number of shares
allocated to them.
 The company must issue shares within a specific time, and allotment should comply
with the rules prescribed under the Companies Act and SEBI guidelines, in case of
public companies.
Irregular allotment may lead to penalties or the allotment being declared void.

iv. Share Certificate, Calls on Shares, Forfeiture & Lien on Shares

1. Share Certificate (Section 46):
o A share certificate is a document issued by a company that certifies the
ownership of shares in that company.
o It must be issued within 60 days of allotment or 60 days after the transfer of
shares.
o It serves as evidence of the shareholder's title to the shares.
2. Calls on Shares:
o A company may call for unpaid amounts on shares from shareholders after
allotment. This is known as a call.
o The call can be made in multiple installments, and shareholders must pay the
amounts within the stipulated time.
o Non-payment of calls can lead to forfeiture of shares.
3. Forfeiture of Shares:
o When a shareholder fails to pay a call, the company may forfeit the shares by
giving proper notice.
o Once forfeited, the shareholder loses ownership rights and any payments made
towards the shares.
o Forfeited shares can be reissued by the company, but the former shareholder
does not get any refund.
4. Lien on Shares:
o A company has a lien (right to hold) on a shareholder's shares for unpaid calls
or other dues.
 o The lien gives the company the right to sell the shares to recover the money
owed.

v. Issue of Shares at Premium and Discount

1. Issue of Shares at Premium (Section 52):
o When a company issues shares at a price higher than their nominal (face)
value, it is called an issue at a premium.
o The excess amount (premium) is transferred to a special account called the
Securities Premium Account.
o This premium can only be used for specific purposes such as issuing bonus
shares, writing off preliminary expenses, etc., as prescribed under the
Companies Act.
2. Issue of Shares at Discount:
o Generally, the Companies Act, 2013 prohibits issuing shares at a discount,
except in certain situations such as sweat equity shares or during the
conversion of debentures.
o Issuing shares at a discount, without proper justification, can lead to penalties
for the company.

vi. Issue of Sweat Equity Shares & Issue of Bonus Shares

1. Sweat Equity Shares (Section 54):
o These are shares issued to employees or directors at a discount or for
consideration other than cash, typically as a reward for their contribution to
the company.
o They are issued for providing know-how, intellectual property, or value
addition to the company.
2. Bonus Shares (Section 63):
o Bonus shares are additional shares issued to existing shareholders for free,
based on the number of shares they already own.
o They are usually issued from the company’s reserves or surplus to capitalize
its profits.
o Bonus shares are not taxable and are used as a mechanism to enhance
shareholder value without changing the total capital.

vii. Alteration & Reduction of Share Capital

 1. Alteration of Share Capital (Section 61):
A company can alter its share capital in the following ways:
o Increase in authorized capital: The company can increase its share capital by
issuing new shares.
o Consolidation: It can consolidate shares into larger denominations (e.g.,
converting ten ₹10 shares into one ₹100 share).
o Sub-division: It can subdivide shares into smaller denominations (e.g.,
converting one ₹100 share into ten ₹10 shares).
o Cancellation of unissued shares: The company can cancel shares that have
not been issued.
2. Reduction of Share Capital (Section 66):
o A company may reduce its share capital by returning surplus capital to
shareholders or by extinguishing unpaid share capital.
o This requires special approval from the National Company Law Tribunal
(NCLT) and must not prejudice creditors' interests.

viii. Transfer & Transmission of Shares

1. Transfer of Shares (Section 56):
o Transfer is the voluntary transfer of shares from one person to another,
typically through sale, gift, or inheritance.
o It involves executing a share transfer deed, getting it stamped, and submitting
it to the company along with the share certificate.
2. Transmission of Shares:
o Transmission refers to the automatic transfer of shares upon the death,
insolvency, or legal incapacity of a shareholder.
o No consideration is involved in transmission, and it typically passes to the
legal heir or a nominee.

ix. Buy-Back of Shares (Section 68)

Buy-back refers to the process by which a company repurchases its own shares from the
shareholders, thereby reducing the total number of shares in the market.
Key points:
 A company can buy back shares from its existing shareholders, employees, or in the
open market.
  Buy-back is subject to limits: the company cannot buy back more than 25% of its total
paid-up equity capital and free reserves in a financial year.
 It must be authorized by the company’s Articles of Association and requires
shareholder approval through a special resolution.
 Post buy-back, the company cannot issue further shares for a certain period unless
specified exceptions apply.

B) Debentures
Debentures are a type of long-term debt instrument issued by companies to raise funds from
the public or private investors. They represent a loan taken by the company and are typically
secured by the company’s assets. Debenture holders are creditors of the company, not owners,
and are entitled to fixed interest payments.

i. Meaning, Definition, and Kinds of Debentures

Meaning
A debenture is a document that acknowledges the company's indebtedness to the debenture
holder. It is a method by which companies borrow money and agree to repay it with interest.
Debentures are typically issued under a common seal of the company and include the terms
of repayment and interest.
Definition
According to Section 2(30) of the Companies Act, 2013, debentures include "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."
Kinds of Debentures
Debentures can be classified based on different criteria, such as security, convertibility, and
redemption. Here are the main kinds:
1. Secured vs. Unsecured Debentures
o Secured Debentures: These are backed by a charge on the company’s assets,
providing security to debenture holders in case of default. The charge may be
a fixed or floating charge:
 Fixed Charge: A charge on specific assets of the company.
 Floating Charge: A charge on the general assets of the company,
which can change as the company conducts business.
o Unsecured Debentures: These are not backed by any charge or security. The
holders are treated as general creditors and face higher risk in the event of the
company’s insolvency.
2. Convertible vs. Non-Convertible Debentures
 o Convertible Debentures: These can be converted into equity shares of the
company at the option of the debenture holder after a specified time.
Convertible debentures can be:
 Fully Convertible: Entirely convertible into equity shares.
 Partly Convertible: Only a part of the debenture is convertible, while
the rest remains as debt.
o Non-Convertible Debentures (NCDs): These cannot be converted into equity
shares and remain as debt until maturity.
3. Redeemable vs. Irredeemable (Perpetual) Debentures
o Redeemable Debentures: These are repayable after a specific period, either at
a fixed date or over a series of dates. Most debentures issued are redeemable.
o Irredeemable Debentures (Perpetual Debentures): These do not have a
fixed date of repayment and continue indefinitely, though they may be
repayable on winding up of the company or if the company defaults.
4. Registered vs. Bearer Debentures
o Registered Debentures: These are registered in the name of the holder in the
company’s records. Transfer of these debentures requires execution of a
transfer deed and registration with the company.
o Bearer Debentures: These are not registered in the company’s records and
can be transferred by mere delivery. Interest payments are made to whoever
holds the debenture.
5. Participating vs. Non-Participating Debentures
o Participating Debentures: These allow debenture holders to participate in the
surplus profits of the company after dividends are paid to shareholders.
o Non-Participating Debentures: These entitle holders only to fixed interest
payments, without any share in the company’s profits.

ii. Debenture Holder & His Remedies, Debenture Trust Deed

Debenture Holder
A debenture holder is a creditor of the company who holds the company’s debentures and is
entitled to receive regular interest payments at a fixed rate until the debentures mature, at
which point the principal amount is repaid. The debenture holder does not hold any
ownership interest in the company and does not generally have voting rights unless
specifically provided.
Rights of Debenture Holders:
 1. Right to Interest: Debenture holders are entitled to receive interest at the specified
rate, usually on an annual or semi-annual basis. This interest is payable even if the
company does not make profits.
2. Right to Repayment: On the maturity of the debentures, the debenture holders have
the right to receive repayment of their principal amount.
3. Right to Sue: If the company defaults on the payment of interest or principal, the
debenture holder has the right to sue the company.
4. Right to Enforce the Charge: In case of secured debentures, the debenture holder
can enforce the charge on the company’s assets if the company defaults.
5. Right to Participate in the Winding Up: If the company is wound up, the debenture
holder has a claim over the assets of the company, typically ranking higher than
equity shareholders.

Remedies Available to Debenture Holders

Debenture holders have various remedies if the company defaults in meeting its obligations:
1. Petition for Winding Up:
o If the company fails to pay the interest or principal amount on time, debenture
holders (if secured) can file a petition for winding up of the company under
Section 271 of the Companies Act, 2013.
o In case of winding up, debenture holders are repaid from the sale of the
company's assets before equity shareholders.
2. Enforcing the Security:
o For secured debentures, debenture holders can enforce the security by selling
the charged assets of the company in case of default.
o They can appoint a receiver to take control of the charged assets to recover
their dues.
3. Filing a Suit for Recovery:
o Debenture holders can file a suit in court to recover unpaid interest or
principal.
4. Conversion of Debentures:
o In case of convertible debentures, the debenture holders may opt to convert
them into equity shares if the company defaults, subject to the terms of the
debenture issue.

Debenture Trust Deed

A Debenture Trust Deed is a formal legal document that lays down the terms and conditions
under which debentures are issued. It is usually required when a company issues secured
debentures and appoints a Debenture Trustee to protect the interest of the debenture holders.
Key Components of a Debenture Trust Deed:
1. Appointment of Trustee:
o The deed appoints a trustee (usually a bank or a financial institution) who acts
on behalf of the debenture holders to safeguard their interests.
o The trustee monitors compliance with the terms of the debenture issue and
ensures that the company does not act contrary to the deed.
2. Security Details:
o The deed outlines the assets over which the debentures have a charge, whether
a fixed or floating charge.
o It also provides for procedures in the event of enforcement of security.
3. Covenants:
o The deed typically contains covenants that the company must abide by, such
as maintaining financial ratios, ensuring sufficient assets to cover the
debentures, and making regular interest payments.
o There may also be negative covenants, restricting the company from incurring
additional debt without the trustee’s approval.
4. Rights of Debenture Holders:
o The trust deed defines the rights of debenture holders, including the right to
receive interest and repayment of principal.
o It specifies the remedies available in case of default.
5. Duties of the Trustee:
o The trustee’s primary duty is to ensure that the company fulfills its obligations
under the debenture issue.
o If the company defaults, the trustee has the authority to enforce the security or
initiate legal proceedings on behalf of the debenture holders.
6. Meetings and Voting Rights:
o The deed may stipulate the procedure for holding meetings of debenture
holders and the rights of debenture holders to vote on specific issues, such as
variations in the terms of the debenture issue.

Importance of the Debenture Trust Deed:

  The Debenture Trustee acts as a safeguard for debenture holders, ensuring that their
interests are protected, especially in case of default.
 The trust deed gives a structured framework for the issuance, security, and repayment
of debentures, reducing ambiguity and risk for both the company and debenture
holders.

C) Borrowing Powers
Companies often need to borrow money to fund their operations, expand, or invest in new
projects. The borrowing powers of a company refer to its legal ability to take loans or other
forms of debt from lenders. This power is governed by the Companies Act, 2013, and the
company's Articles of Association (AoA) or Memorandum of Association (MoA). While
companies generally have the power to borrow, there are legal limits and restrictions to
prevent misuse of this ability.

i. Ultra Vires Borrowing

The term ultra vires refers to actions taken by a company that are beyond the scope of its
powers as defined in its Memorandum of Association (MoA) or Articles of Association
(AoA).
Ultra Vires Borrowing occurs when a company borrows money:
 Beyond the limits prescribed in its MoA or AoA.
 For purposes that are not authorized by its objects clause in the MoA.
 Without proper authorization from the board of directors or shareholders as required
by law.

Key Points on Ultra Vires Borrowing:

1. Consequences of Ultra Vires Borrowing:
o Borrowing beyond the company’s powers is not binding on the company, and
such borrowing can be void or voidable.
o Creditors may not have legal recourse to enforce repayment of ultra vires
borrowing, except in some cases where the funds were used for the benefit of
the company, or the company ratified the borrowing through proper approval.
2. Effects on Directors:
o Directors who authorize ultra vires borrowing may be held personally liable to
compensate the company or creditors if the borrowing causes a loss.
3. Lenders' Risk:
 o Lenders must ensure that the borrowing is within the powers of the company
as laid out in the MoA and that proper procedures are followed, such as
passing of resolutions.
o If the borrowing is ultra vires, lenders may have limited options to recover
their money.
4. Doctrine of Indoor Management:
o Under this doctrine, external parties dealing with a company are entitled to
assume that internal company procedures have been followed properly.
However, this may not apply if the borrowing is ultra vires the company's
objects or powers.

ii. Charges - Fixed & Floating Charge, Registration of Charges, Effects of

Nonregistration
When a company borrows money, it often creates a charge on its assets to secure the loan. A
charge is an interest or lien created on the company’s property or assets as collateral for the
loan.
Types of Charges:
1. Fixed Charge:
o A fixed charge is a charge created on specific, identifiable assets of the
company (e.g., land, buildings, machinery).
o The company cannot sell or dispose of these assets without the lender's
permission unless the charge is satisfied (i.e., the loan is repaid).
o Fixed charges generally apply to tangible, long-term assets that are stable in
nature.
2. Floating Charge:
o A floating charge is a general charge over a category of assets that fluctuate,
such as stock, inventory, or trade receivables.
o The company can deal with these assets in the ordinary course of business
(e.g., sell inventory) until the charge crystallizes (i.e., becomes fixed) due to a
default or winding up of the company.
o Once crystallized, the floating charge converts into a fixed charge, and the
lender can claim against the assets covered by the charge.
Key Differences:
 A fixed charge attaches to a specific asset, whereas a floating charge attaches to a
pool of fluctuating assets.
 Fixed charges offer stronger protection to lenders as they are attached to identifiable,
non-moving assets.
Registration of Charges (Section 77 of Companies Act, 2013):
1. Requirement for Registration:
o Under Section 77 of the Companies Act, 2013, companies are required to
register charges with the Registrar of Companies (RoC) within 30 days of
creating the charge.
o The registration includes details of the charge, the assets secured, the amount
of the loan, and the terms of the security.
2. Certificate of Registration:
o Upon successful registration, the company receives a Certificate of
Registration of Charge, which serves as proof that the charge is valid.
3. Priority of Charges:
o The priority of charges depends on the date of their registration, not on the
date of creation. In other words, the earlier a charge is registered, the higher its
priority in case of liquidation or insolvency.
4. Effects of Nonregistration:
o If a company fails to register a charge, the charge becomes void against the
company’s liquidator and creditors, meaning that the lender cannot enforce the
charge in case of liquidation.
o However, non-registration does not invalidate the underlying debt; the
company is still liable to repay the loan, but the lender loses the security
interest in the company’s assets.
5. Modification and Satisfaction of Charges:
o Any modification in the terms of the charge or satisfaction (repayment) of the
charge must also be registered with the RoC.

iii. Deposits
Deposits refer to funds borrowed by the company from its shareholders, directors, or the
public, with an obligation to repay the money at a future date with interest. Deposits are a
relatively simple way for companies to raise short-term or long-term finance.
Key Provisions on Deposits Under the Companies Act, 2013:
1. Eligible Companies for Accepting Deposits:
o Not all companies can accept deposits from the public. Only certain types of
companies, such as public limited companies, are allowed to do so.
 o Private companies are restricted from accepting deposits from the public,
though they can accept deposits from directors, relatives, and shareholders
under certain conditions.
2. Conditions for Accepting Deposits (Section 73 and 76 of the Companies Act, 2013):
o The company must pass a resolution in a general meeting to approve the
acceptance of deposits.
o The company must comply with the provisions of Section 73 (for deposits
from members) and Section 76 (for deposits from the public).
o The company must issue a circular to its members or the public, disclosing
the terms of the deposit, including the rate of interest, repayment date, and
security details.
3. Deposit Repayment Reserve Account:
o Companies accepting deposits must create a Deposit Repayment Reserve
Account, which holds at least 20% of the deposit amount maturing in the
next financial year.
o This reserve acts as a buffer to ensure that the company has sufficient funds to
repay deposits as they come due.
4. Rate of Interest:
o The interest rate on deposits is typically lower than other forms of borrowing
(e.g., debentures) and is prescribed by law to protect the public from
excessively high-risk lending practices.
5. Deposit Insurance:
o Companies are required to insure deposits to protect depositors in case of a
company’s default or insolvency.
6. Repayment of Deposits:
o Deposits must be repaid on or before the maturity date, and companies cannot
alter the repayment terms without the consent of the depositor.
7. Prohibition of Acceptance of Deposits in Certain Cases:
o The Companies Act, 2013 prohibits the acceptance of deposits from the public
under certain circumstances, including:
 If the company has defaulted in repaying earlier deposits.
 If the company has not filed financial statements or annual returns for
the previous financial year.
8. Penalties for Non-Compliance:
o Failure to comply with the provisions related to deposits can result in severe
penalties, including fines and imprisonment for company directors.
 o The company may also be required to refund the deposits with interest.

Conclusion on Borrowing Powers:

The borrowing powers of a company are crucial for its financial health and operational
growth. However, these powers are subject to strict legal guidelines to ensure the protection
of creditors and shareholders. The creation and registration of charges, along with proper
management of deposits, play a key role in ensuring that a company’s borrowing practices
remain transparent, lawful, and secure.