Equity in a company is represented through shares. There are businesses that see shares as a financial asset that allows for the equitable distribution of any declared dividends from any remaining profits. Owners of dividend-free stocks receive no share of the company’s earnings. They expect the stock price to rise along with the company’s profits, in which case they will have a stake in that growth. Shares, which reflect ownership in a company, can be either common or preferred. Therefore, the terms “shares” and “stock” are often used synonymously.[i]
Debentures can refer to bonds or other forms of unsecured debt such as notes or loans. Debentures are unsecured debt obligations that are backed solely by the creditworthiness and good standing of the issuing company. Corporations and governments alike commonly use debentures as a means of financing. Coupon payments are a form of interest that some debentures pay out at regular intervals. Debentures are another type of long-term debt used by corporations. Conversely, corporate debentures lack this security. Instead, they rely entirely on the financial health and creditworthiness of the underlying corporation as collateral. These monetary obligations have a coupon rate and a specified date of redemption or repayment. Interest payments on debt are often made ahead of dividend payments to shareholders. Debentures are preferable to other forms of debt and loans for businesses because they provide lower interest rates and longer payback periods.[ii] Bonds and debentures are forms of financial instruments that a business can issue in accordance with Section 2(30) of the Companies Act 2013[iii]. Such instruments can be secured against the firm’s assets or left unsecured.[iv]
Section 44[v] talks about the nature of shares and debentures and terms them as transferrable movable property in accordance to the articles of association of a company. Therefore, it acts under the guidance of articles that a company permits. In the case of a guarantee corporation, for instance, the Articles of Incorporation might be amended to allow for the transferability of a member’s rights, including those related to membership interest, suspension of membership, and assignment of interest. The case of WESTERN MAHARASHTRA DEVELOPMENT CORPORATION LTD. Vs. BAJAJ AUTO LTD.[vi] examines the idea of free transferability of shares in both public and private corporations and finds that the Company Act provides a clear distinction between the two in this respect. According to the dictionary, a “private corporation” is a business that does not allow for the free trading of its stock. According to the Act, a public corporation’s stock, debentures, and any other stake in the firm must be freely transferable.
According to Section 56[vii] of the Companies Act, 2013 and Rule 11[viii] of the Companies (Share Capital and Debentures) Rules, 2014, unless a proper instrument of transfer in Form A is filed with the company, the company is not required to register a transfer of the company’s securities or the interest of a member in the company (in the case of a company having no share capital). Affixing stamps on a separate sheet of paper and attaching it to the transfer application or cancelling stamps by drawing a line across the stamp was determined to be not illegal and would not invalidate the aforementioned application in VARDHMAN PUBLISHERS LTD. V. MATHRUBHUMI PRINTING & PUBLISHING CO. LTD.[ix] In the event that the instrument of transfer is lost or not delivered within the 60-day period, the Company may register the transfer on such conditions as to indemnity as the Board may deem reasonable.
The Supreme Court ruled that shares and debentures can be transferred just like any other kind of personal property in V.B. Rangaraj v. V.B. Gopalakrishnan[x], A company’s shares may only be transferred with shareholder approval and subject to any restrictions specified in the company’s articles. Thus, the corporation and its shareholders are not bound by any restrictions that are not expressly stated in the Articles.
Primarily shares can be categorized into two categories- Namely equity shares and preference shares. First, there are equity shares, also known as ordinary shares, which are exchanged on the stock market. They provide shareholders the ability to cast a vote, but the dividend rate is variable and nonredeemable.
Second are the preference shares which, as the name implies, give their holders priority over equity shareholders when it comes to receiving dividends from the firm. In the event of a corporate liquidation in the future, they ensure that shareholders come out on top following the payment of debts. Though they pay out dividends reliably, shareholders in these stocks have no say in company affairs. Preference shares can be obtained through private placement or an exchange.[xi]
Debentures also constitute of many different categories:
- Secured or Unsecured debentures- Debentures can be either secured (by a levy on the company’s assets) or unsecured. This implies that if the firm goes bankrupt, the debenture holders can use the collateral to get their money back, whether it is the principle or interest they are owed. The aforementioned features are not offered by unsecured debentures.
- Redeemable and Non- Redeemable Debentures- They can be either redeemable (where the principle is repaid within a certain time frame) or non-redeemable (where the interest is paid until maturity).
Debentures can be either convertible or non-convertible, registered or bearer and first or second debentures. However, there are certain differences between the two which need to be addressed:
- Shares represent the ownership stake in a corporation, whereas Debentures represent the debt owed to a lender.
- When seeking funding from the public, issuers must always issue shares to investors, however debentures can be issued if desired.
- Owners of shares are entitled to dividend payments, whereas holders of debentures are entitled to interest payments.
- In contrast to stockholders, who are the owners of the company’s capital and have voting rights, debenture holders have no say in the company’s management.
- Unlike common stock, the holder of a convertible debenture has the option of exchanging the debenture for shares or other forms of ownership capital.
- The shareholder’s fund, item no. 6 on the balance sheet, is where money contributed by stockholders is kept. Debentures, on the other hand, are classified as long-term liabilities and appear in the portion of the balance sheet devoted to non-current liabilities.
In conclusion, Shares and debentures are both valuable financial assets and tools that may be used to raise funds. In their own ways, they are both outperforming expectations, but their roles and rewards are distinct from one another. Both offer financial benefits, while the latter offers priority and interest payments. In order to maximise earnings and leverage risk as may look appropriate, it is essential for a real-world investor to know whether or not their investing objectives are in order.
[iii] Companies Act, 2013, §2(30), No.18, Acts of Parliament, 2013 (India)
[v] Companies Act, 2013, §44, No.18, Acts of Parliament, 2013 (India)
[vi] Western Maharashtra Development Corporation Ltd. v. Bajaj Auto Ltd, APPEAL NO.153 OF 2010 IN PETITION NO.174 OF 2006
[vii] Companies Act, 2013, §56, No.18, Acts of Parliament, 2013 (India
[viii] Rule 11, Companies (Share Capital and Debentures) Rules, 2014
[ix] Vardhman Publishers Ltd. v. Mathrubhumi Printing & Publishing Co. Ltd ,1991 71 CompCas 1 Ker
[x] V.B Rangaraj v. V.B Gopalakrishnan,  73 Comp Cas 201
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