NATURE OF SHARES AND DEBENTURES

INTRODUCTION

Every company is limited by shares must have a share capital. Share Capital of a company refers to the amount invested in the company for it to carry out its operations. The share capital may be altered or increased, subject to certain conditions. A company’s share capital may be divided into small shares of different classes. The different classes of share capital and the rights attached to these classes are different. A company may issue a debentures with an option to convert such debentures into shares either wholly or partly at the time for redemption these types of debentures shall be approved by the special resolution passed in the General meeting. Sometimes when the company is in need of funds without diluting its equity state, the company opts for debenture issue.

The shares or debentures or any other interest of any Member in a company shall be moveable property transferable in a manner provided by the Articles of association.[1]

The companies act provides that the securities or any other interest of any member in a public company shall be freely transferable.[2]

This concept of Free transferability of shares in public and private company it was held that the company act makes a clear distinction regarding the transferability of shares relating to private and public companies.[3]

Private Company: is a company which restricts the rights to transfer its shares.

Public Company: the shares and debentures and any other interest of the company are freely transferable.

Nature of Shares:

A share is the interest of the member in the company.[4] Share means a share in the share capital of a company refers to the amount invested in the company and it also includes stock. It represents the interest of the shareholder of the company. Measured for the purpose of liability and dividend. It attaches to various rights and liabilities.

Share, debenture or any other interest of any member of a company shall be moveable property. It shall be transferable in any manner provided for the articles of association of the company. A member may transfer any other interest in the company in the manner provided in articles.

For Example: rights attached to a member in a guarantee company such as membership interest, suspension of membership or assignment of interest may be made, transferable by making a provision in the articles of the Company.

DEBENTURES: In every organization, whether it operates on any scale, there is a need for funds, for conducting various business activities. There has to be sufficient capital, based on the appetite of the company, in order to ensure smooth functioning. There are various methods adopted by companies to raise funds and capital, but some companies might opt for issuing debentures, especially when there is a need for raising funds for the long term.

A debenture is an amount of a loan that a company has to raise from the public that’s why a company issues debenture. A person who purchased and holds a debenture is called a debenture holder who becomes the creditor/ charge holder of the company a debenture is a document that bears the company’s seal and is issued by it. A debenture is a document that acknowledges the fact that the company has earned funds in the sum of the debenture’s nominal value. It entails paying a fixed rate of interest before the principal is repaid.

The word ‘debenture’ has been derived from the Latin word ‘debere’ which means to borrow. A debenture is a written instrument acknowledging a debt under the common seal of the company. It contains a contract for repayment of principal after a specified period or at intervals or the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates.

Nature Of Debentures:

Debenture is a debt of a company. Its like a loan which needs to be repaid over a certain period of time. Debentures carry fixed interest rate. Debenture includes stocks, bonds or any other Instrument of a company evidencing a debt whether constituting a charge on the assets of the company or not[5].

Provided that—

  • the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
  • such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture.
  1. Debentures for cash: As defined above, debentures are usually issued for raising funds for the company. They are mainly issued for cash. The Debentures can be issued either at par, at discount or at premium.
  2. Debentures as collateral security A collateral security is additional security along with the primary security when a company obtains loan or overdrafts facility from a bank or any other financial institution. Debentures issued as such a collateral liability are a contingent liability for the company, Only when the company defaults on such a loan plus interest will this liability arise.
  3. Debentures issued as consideration other than cash This is another type of issue of debentures. Sometimes company requires some assets or machineries, plants, equipment which are huge in cost. The company need not have money at that particular time for the payment. So, instead of making payment in cash, the Company issues debentures to the vendor against such purchase with the terms of payment of the consideration other than cash.

Characteristics of Debentures

  1. It is in the form of a certificate of indebtedness of the company and issued by the company itself.  It generally creates a charge on the assets/ undertaking of the company. There is usually a specific date of redemption.
  2. The debenture holders are creditors to the company and they do not have any claim of ownership of the company, unlike shareholders.
  3.  As the debenture holders are not the owner of the company so they are not entitled to the administration and management of the company.
  4. The debenture holder need not be concerned with the profits or loss of the company, they have a fixed rate of interest on the principal amount which they get every year irrespective of the financial condition of the company.
  5.  Debentures usually have a charge on the assets of the company, which means that if the company goes into liquidation and is not able to repay the amount, the debenture holders can also sell the property of the company through the legal process under the applicable law to recover the money of the debenture holders.
  6. There is an undertaking given by the company to repay debenture holders the principal amount along with the interest at the stated time.
  7. The debenture holders cannot claim the privilege to vote in any meeting of the company.
  8.  When the company is in winding up, the priority of the company is to repay the debenture holders of the company as per the applicable law hence, there is no risk involved of loss of money of the debenture holders.

REFERENCES:

  1. https://taxguru.in/income-tax/debentures-companies-act-2013.html
  2. https://taxguru.in/company-law/legal-concept-provision-debentures.html
  3. https://www.investopedia.com/terms/d/debenture.asp

[1] Section 44 of the Companies Act 2013.               

[2] Section 58(2) of the Companies Act 2013.

[3] Western Maharashtra development corporation v. Bajaj Auto ltd. 8th may 2018

[4] Section 2(84) of the Companies Act 2013.

[5] Section 2(30) of the Companies Act 2013.

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