A company is a legal entity formed when two or more people come together with a common objective. Capital investment is a crucial factor when it comes to running business activities. Initial capital requirements are taken care of by the partners or investors of the company but as the company grows the capital requirements expand as well therefore the companies divide their capital in the form of shares and borrow money from the public by issuing debentures. This is the most preferred way used by the companies to raise capital.
WHAT ARE SHARES?
Shares are something that a company issues to raise capital. People who buy shares become shareholders of the company. They enjoy the profits of the company as well as bear the losses if occurred. Shareholders also have the right to demand residual proceeds in case the company decides to wind up.
Shares are classified into two main categories known as equity shares and preference shares. Equity shares are also known as ordinary shares and are actively traded in the stock market. The equity shareholders have voting rights in the matter of company decisions, receive dividends when the company makes a profit. However, the rate of dividend fluctuates depending upon the profits and losses faced by the company.
Preference shareholders on the other hand have the advantage to receive fixed dividends irrespective of the profits gained or losses suffered by the company and also receive dividends before equity shareholders. However, they do not hold a right to vote or take part in any event of the company.
A dividend means part of the profit that a company shares with its shareholders.
WHAT ARE DEBENTURES?
The debentures act as a long-term debt instrument of the company. Companies prefer borrowing money from the public rather than borrowing from the banks because banks place certain restrictions on the company as to how the borrowed funds should be used and this, in turn, leads to limitations on companies concerning certain activities to be carried out by them. Such limitations do not prevail when the money is borrowed from the public.
The debenture holders are paid a fixed rate of interest also known as debenture interest. Interest is paid even if the company earns no profit and it is paid even before paying out dividends. Debenture holders act as creditors of the company. They have no voting rights and are not entitled to the administration and management of the company. In case the company fails to pay its debts, the debenture holders have the right to apply for the winding up of the company.
HOW ARE SHARES AND DEBENTURES ISSUED BY THE COMPANY?
PROCEDURE TO ISSUE SHARES
The first step is the issue of the prospectus. Prospectus acts as an invitation to the public to subscribe to the shares of the company. All the details about the company are detailed out in the prospectus. To apply for shares, the investors require to fill out an application and pay the required money in the bank mentioned in the prospectus. The next step is the allotment of shares. Once minimum subscriptions are received the company sends an allotment letter to the investor and investors are considered to be a part of the company.
PROCEDURE TO ISSUE DEBENTURES
The procedure to issue debentures is similar to that of shares. A prospectus is issued by the company and interested investors have to apply for the issue of debentures. The company can issue debentures at par, at a premium, or at a discount.
When the price of the debentures issued is equal to its face value, the debentures are said to be issued at par, when the price of the debentures issued is more than its face value, the debentures are said to be issued at a premium and when the price of the issued debentures is less than its face value, the debentures are said to be issued at discount.
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