HIMACHAL PRADESH NATIONAL LAW UNIVERSITY,

SHIMLA

Assignment on Company law

Share and Debentures: - Procedure of issuance

SUBMITTED BY SUBMITTED TO

APRAJITA ALOK SHARMA

1120181925 FACULTY OF LAW

BBA LLB
 TABLE OF CONTENTS

1. Introduction................................................................................... 3
Shares.................................................................................................................... 4

Types of Share Capital.......................................................................................... 4

Issue of Shares.................................................................... 6
Procedure to Issue of shares ..........................................................7

3. Debentures................................................................................................................. 9

• Meaning and general nature of debenture as a source of finance .......10

• Types of Debentures-.........................................................................................11
• Issue of debentures:..........................................................12
• Procedure to Issue Debentures under Companies Act,2013............................13
 Introduction

To start a business on a large scale requires huge amount of capital, professional skills, and
other resources. Sometime it may not be possible for a single individual to do the needful. In
such cases, a group of like-minded people get together and set up a company, called a Joint
Stock Company registered under companies act. The capital market is a market for financial
investments that are direct or indirect claims to capital. The capital market comprises the
complex of institutions and mechanism through which intermediate term funds and long term
funds are pooled and made available to business, government and individuals. The capital
Market also encompasses the process by which securities already outstanding are transferred.
The capital market is a place where the suppliers and users of capital meet to share one
another's views, and where a balance is sought to be achieved among diverse market
participants. The securities decouple individual's acts of saving and investment over time,
space and entities and thus allow savings to occur without concomitant investment. An
efficient capital market can provide a mechanism for raising capital and also by protecting
investors in corporate securities. The capital market has two interdependent and inseparable
segments, the primary market and stock (secondary market). The primary market provides the
channel for sale of new securities. The issuer of securities sells the securities in the primary
market to raise funds for investment and/ or to discharge. Secondary market refers to a
market where securities are traded after being initially offered to the public in the primary
market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary
market. Secondary market comprises of equity markets and the debt markets. In the
subsequent section, this paper will peruse the issuance procedure of Shares and Debentures in
the Capital Market.
 SHARES

By 'Share' in a company is meant not any sum of money but an interest measured by a sum of
money and made up of diverse rights conferred on its holder by the articles of the company,
which constitutes a contract between him and the company.18 'Share' means a share in the
share capital of a company and includes stock except where the distinction between stock and
shares is express or implied. 'Equity Share Capital' means, with reference to any such
company, all share capital which is not preference share capital. Sections 85 to 90 of the
Indian Companies Act, 1956, deal with kinds of share capital and voting rights. They do not
apply to any private company unless when it is the subsidiary of a public company. The
principles underlying these sections are (i) that voting rights are generally confined to holders
of equity share capital, preference shareholders being given rights of voting only for certain
purposes and under certain given conditions and (ii) that voting rights and other rights of
shareholders are to be strictly proportional to their share of equity share capital.

TYPES OF SHARE CAPITAL

Under the company law, the capital is not divided into seven classes but, in the act 2013 the
share capital of company limited by shares is broadly divided in 2 categories namely.

1 Equity share capital

2 Preference share capital

A. Equity Share Capital -‘‘Equity share capital’’, with reference to any company limited by
shares, means all share capital which is not preference share capital. As per section 43 (a)
equity share capital may be divided on the basis of voting rights and differential rights(DVR)
as to dividend, voting rights or otherwise according to the rules. A DVR share is like an
ordinary equity share, but it provides fewer voting rights to the shareholder. The difference in
voting rights can be achieved by reducing the degree of voting power. 1It is ideal for long
term investors, typically small investors who seek higher dividend and are not necessarily
interested in taking a voting position. The Companies (Share Capital and Debentures) Rules,
1 Second proviso inserted by the Companies (Share Capital and Debentures) Third Amendment Rules, 2016,
w.e.f. 19-7-2016.
2014 (hereinafter referred to as Rules) provide that no company whether it is unlisted, listed
or a public company limited by shares shall issue equity shares with differential rights as to
dividend, voting or otherwise, unless it complies with the following conditions:

(a) The articles of association of the company authorizes the issue of shares with differential
rights;

(b) Approval of the shareholder through ordinary resolution is necessary to issue such shares.
In case listed company approval of shareholder is necessary through postal ballot.

(c) the shares with differential rights shall not exceed twenty-six percent of the total postissue
paid up equity share capital including equity shares with differential rights issued at any
point of time;

(d) The company having consistent track record of distributable profits for the last three
years;

(e) the company has not defaulted in filing financial statements and annual returns for three
financial years immediately preceding the financial year in which it is decided to issue
such shares;

(f) the company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference shares
or debentures that have become due for redemption or payment of interest on such
deposits or debentures or payment of dividend; 2

(g) the company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or State level financial
institution or scheduled Bank that has become repayable or interest payable thereon or
dues with respect to statutory payments relating to its employees to any authority or
default in crediting the amount in Investor Education and Protection Fund to the Central

2 Proviso inserted by the Companies (Share Capital and Debentures) Third Amendment Rules, 2016, w.e.f. 197-
2016.
 Government; (h) the company has not been penalized by Court or Tribunal during the last
three years of any offence under the Reserve Bank of India Act, 1934, the Securities and
Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the
Foreign Exchange Management Act, 1999 or any other special Act, under which such
companies being regulated by sect-oral regulators.

B. Preference Share Capital The other type of share capital is the “Preference share
capital”. According to section 55 of the Act, a company limited by shares cannot issue any
preference shares which are irredeemable. However a company limited by shares may, if so
authorised by its articles, issue preference shares which are liable to be redeemed within a
period not exceeding twenty years from the date of their issue. With reference to any
company limited by shares, Preference share capital means that part of the issued share
capital of the company which carries or would carry a preferential right with respect to3—

(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate,
which may either be free of or subject to income-tax; and

(b) repayment, in the case of a winding up or repayment of capital, of the amount of the
share capital paid-up or deemed to have been paid-up, whether or not, there is a preferential
right to the payment of any fixed premium or premium on any fixed scale, specified in the
memorandum or articles of the company; Capital shall be deemed to be preference capital,
notwithstanding that it is entitled to either or both of the following rights, namely:—

(a) That in respect of dividends, in addition to the preferential rights to the amounts with
respect to dividend, it has a right to participate, whether fully or to a limited extent, with
capital not entitled to the preferential right aforesaid; 4

(b) that in respect of capital, in addition to the preferential right to the repayment, on a
winding up, of the amounts aforesaid, it has a right to participate, whether fully or to a
limited extent, with capital not entitled to that preferential right in any surplus which may
remain after the entire capital has been repaid.

3 http://www.investinganswers.com/financial-dictionary/bonds/debentures- 1047
4 http://download.nos.org/srsec320newE/320EL26.pdf, accessed on: 26/5/2018 12
 METHODS OF ISSUE OF SHARES

A. Private Placement (Section 42 of the Companies Act, 2013, Rule 14)

B. Preferential allotment/Preferential offer

C. Right Issue

D. Conversion of Loan/Debentures into shares.

E. Bonus issue

ISSUE OF SHARES

(A) Issue of Shares at Premium Where a company issues shares at a premium, whether for
cash or otherwise, a sum equal to the aggregate amount of the premium received on those
shares shall be transferred to a “securities premium account”. The provisions of this Act
relating to reduction of share capital of a company shall, except as provided in section 52,
apply as if the securities premium account were the paid-up share capital of the company.
(Section 52) The securities premium account may be applied by the company—

(a) Towards the issue of unissued shares of the company to the members of the company as
fully paid bonus shares;

(b) In writing off the preliminary expenses of the company;

(c) In writing off the expenses of, or the commission paid or discount allowed on, any issue
of shares or debentures of the company;

(d) In providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or

(e) For the purchase of its own shares or other securities under section 68.
Certain class of companies as may be prescribed and whose financial statement comply with
the accounting standards prescribed for such class of companies under section 133, can utilise
securities premium account only for the following purposes:-
(a) in paying up unissued equity shares of the company to be issued to members of the
company as fully paid bonus shares; or

(b) In writing off the expenses of or the commission paid or discount allowed on any issue of
equity shares of the company; or

(c) For the purchase of its own shares or other securities under section 68. 5

(B) Issue of Shares at Discount Company under section 53 of the Act has been
prohibited to issue shares at discount, except in case of issue of sweat equity shares. Any
share issued by a company at a discounted price shall be void. Where a company contravenes
the provisions of this section, the company shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to five lakh rupees and every officer who is
in default shall be punishable with imprisonment for a term which may extend to six months
or with fine which shall not be less than one lakh rupees but which may extend to five lakh
rupees, or with both.

(C) Issue of Sweat Equity Shares According to Section 2(88) of the Act “sweat equity
shares” means such equity shares as are issued by a company to its directors or employees at
a discount or for consideration, other than cash, for providing their know-how or making
available rights in the nature of intellectual property rights or value additions, by whatever
name called. The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares issued under this
section and the holders of such shares shall rank pari passu with other equity shareholders.

The rules have defined ‘value additions’ to mean actual or anticipated economic benefits
derived or to be derived by the company from an expert and/or a professional for providing
know-how or making available rights in the nature of intellectual property rights, by such
person to whom sweat equity is being issued for which the consideration is not paid or
included in-

5 https://www.indiafilings.com/learn/sebi-regulation-preferential-share-issues/
(a) The normal remuneration payable under the contract of employment, in the case of an
employee; and/or

(b) Monetary consideration payable under any other contract, in the case of non-
employee. According to section 54 an unlisted company may issue sweat equity shares of a
class of shares which has already been issued. The company shall satisfy the following
conditions, namely:—

(a) The issue is authorised by a special resolution passed by the company;

(b) The resolution specifies the number of shares, the current market price, consideration, if
any, and the class or classes of directors or employees to whom such equity shares are to
be issued;

(c) Not less than one year has, at the date of such issue, elapsed since the date on which the
company had commenced business; and 20 Share Capital and Debentures

(d) Where the equity shares of the company are listed on a recognised stock exchange, the
sweat equity shares are issued in accordance with the regulations made by the Securities
and Exchange Board in this behalf and if they are not so listed, the sweat equity shares are
issued in accordance with such rules as may be prescribed. SEBI (Issue of Sweat Equity)
Regulations, 2002 shall be applicable to all the listed companies; in all other cases rules
shall be applicable. Under rules an unlisted company shall not issue sweat equity shares
unless the issue is authorized by a special resolution passed by the company in general
meeting6

Debentures

The share capital of a company constitutes the permanent capital of the company. But the
funds obtained in the form of share capital may not be - and usually are not - sufficient to
meet the financial needs of a company. So a company may have to rely on other sources of

6 http://www.yourarticlelibrary.com/accounting/debentures/redemption-of-debentures-
sourcesandmethods/57164
long term funds. Debenture is one of the frequently used methods by which a company can
procure long term funds for its further development and expansion of business. Funds
acquired by means of debentures represent loan or debt and therefore they are known as loan
or debt capital of the company. The term 'debenture' is derived from the Latin word "debere"
which means "to owe a debt". A debenture may, therefore, be defined as a document issued
by the company as an evidence of debt. It is the acknowledgement of the company's
indebtedness to its holders. The term debenture has not been defined under The Companies
Act, 1956. Section 2 (12) of the Act only states that the word "debenture" includes debenture
stock, bonds and any other securities of a company, whether constituting a charge on the
assets of the company or not . This definition conforms to the one in The English Companies
Act, 1948. The term debenture has been explained by Palmer in more elaborate words as
follows: “In modern commercial usage a debenture denotes an instrument issued by a
company, normally but not necessarily called on the face of it a debenture and providing for
payments of, or acknowledging indebtedness in, a specified sum - say, Rs. 100 at a fixed date
with interest thereon. It usually but not necessarily gives a charge by way of security, is often,
though not invariably, expressed to be one of a series of like debentures.” 8 In short,
debenture is the instrument or certificate issued by the company acknowledging the debt due
by it to the holder of the instrument. It is usually issued under common seal, and it may be
secured or unsecured by fixed or floating charge on the assets of the company. The terms and
conditions on which they are issued are endorsed on the reverse of the security.

Types of Debenture

A ‘company can issue various types of debentures which can be classified on the basis of
security, permanence, convertibility and records

• Redeemable and Irredeemable Debentures: Redeemable Debentures are issued for

specified period after which the company must repay the amount of debentures on specified
date or after notice or by periodical drawings. Irredeemable Debentures, on the other hand are
those debentures for which no fixed date is specified for repayment and the holders of which
cannot demand payment as long as the company is functioning and does not make default in
interest payment. Normally companies issue redeemable debentures.
• Registered and Bearer Debentures: Registered debentures are those which are
registered in the name of the holder by the company in the Register of Debenture holders.
Such debentures are made out in the name of the holder which appears in the debenture
certificate. Such debentures are transferable in the same manner as shares by transfer deeds.
Interest on such debentures is payable to the person whose name is registered with the
company in the register of Debenture holders. Bearer debentures are those which are
transferable by mere delivery.
Interest on such debenture is payable on the basis of coupons attached with the debenture
certificate.7

• Secured and Unsecured Debentures: Secured debentures are those debentures which
are secured either by the mortgage of a particular asset of the company known as Fixed
Charge or by the mortgage of general assets of the company known as Floating Charge.
Secured debentures are also known as Mortgaged Debenture's. Unsecured ‘debentures, on the
other hand are those debentures which are not secured by any charge or mortgage on any
property of the company .Unsecured debentures are also known as 'Naked Debentures'. Only
good companies of strong financial standing can issue such naked debentures.8

• Convertible and Non-convertible Debentures: Convertible debentures are those

debentures wherein the debenture holder is given an option to exchange a pat or whole of the
debenture amount for equity shares in the company on the expiry of a specified period. Some
companies issue convertible debentures wherein a part or whole of the debenture amount,
after the specified period, is compulsorily converted into equity shares of the company.
Where only a part of the debenture amount is convertible into equity shares such debentures
are known as 'Partly Convertible Debentures' but when the full amount of the debenture is
convertible into equity shares such debentures are known as 'Fully Convertible Debentures'.
Non-convertible debentures, on the other hand, are those debentures for which the debenture
holder does not have any right for conversion into equity shares.9

7 Nilima M, Accounting entries for redemption of debentures,2008

8 https://www.icsi.edu/media/portals/0/SHARE%20CAPITAL%20AND%20DEBENTURES.pdf (visited on 28th
October, 2018)
9 Available at: https://taxguru.in/company-law/issue-shares-companies-act2013-
privatelimitedcompanies.html (visited on 28th October, 2018)
 Issue of Debentures

The power to issue debentures can be exercised on behalf of the Company as a meeting of the
Board under the provisions of Section 179 (3)14. Further Section 7115 deals with the
provisions relating to the issuance of debentures along with the penalties for noncompliance
of the same which can be summarized as follows:

a. A company may issue debentures with an option to convert such debentures into shares,
either wholly or partly at the time of redemption. Provided that the issue of debentures
with an option to convert such debentures into shares shall be approved by a special
resolution passed by the shareholders in a duly convened general meeting of the
company.

b. Company can issue secured and unsecured debentures. Secured debentures may be issued
by a company subject to such terms and conditions as may be prescribed. Further
Company cannot issue any kind of debentures carrying any voting rights.

c. Company shall create a debenture redemption reserve account out of the profits of the
company available for payment of dividend and the amount credited to such account shall
not be utilized by the company except for the redemption of debentures.
10
d. Company cannot issue a prospectus or make an offer or invitation to the public or to its
members exceeding five hundred for the subscription of its debentures, unless it has,
before such issue or offer, appointed one or more debenture trustees.

e. A debenture trustee shall take steps to protect the interests of the debenture holders and
redress their grievances in accordance with such rules as may be prescribed.

f. Any provision contained in a trust deed for securing the issue of debentures, or in any
contract with the debenture-holders secured by a trust deed, shall be void in so far as it
would have the effect of exempting a trustee thereof from, or indemnifying him against,
any liability for breach of trust, where he fails to show the degree of care and due
diligence required of him as a trustee, having regard to the provisions of the trust deed
conferring on him any power, authority or discretion; Provided that the liability of the
debenture trustee shall be subject to such exemptions as may be agreed upon by a
majority of debenture-holders holding not less than three fourths in value of the total
debentures at a meeting held for the purpose.

10 S. C. KUCHHAL, CORPORATION FINANCE 144 (1985).

g. A company shall pay interest and redeem the debentures in accordance with the terms and
conditions of their issue. Rule 18 of the Companies (Share Capital and Debentures)
Rules, 201416 ('2014 Rules') which prescribes certain conditions to be fulfilled by a
company in order to issue secured debentures provides that:

The company shall not issue secured debentures, unless it complies with the following
conditions, namely:-

a. An issue of secured debentures may be made, provided the date of its redemption
shall not exceed ten years from the date of issue. Provided that a company engaged in the
setting up of infrastructure projects may issue secured debentures for a period exceeding ten
years but not exceeding thirty years;

b. Such an issue of debentures shall be secured by the creation of a charge, on the

properties or assets of the company, having a value which is sufficient for the due repayment
of the amount of debentures and interest thereon;

c. The company shall appoint a debenture trustee before the issue of prospectus or letter
of offer for subscription of its debentures and not later than sixty days after the allotment of
the debentures, execute a debenture trust deed to protect the interest of the debenture holders.

PROCEDURE TO ISSUE DEBENTURES UNDER COMPANIES ACT, 2013

[Applicable Provisions: Section 56, 72, of the Companies Act, 2013 read with Rule 18 and 19
of the Companies (Share Capital and Debentures) Rules, 2014]

a. Call and hold Board meeting and decide which types of the debenture will be issued by the
Company.

b.If the Company decides to issue secured debenture the company has to comply with the
condition prescribed in the Rule 18 of the Companies (Share Capital & Debentures) Rules,
2014.

c. In case appointment of Debenture Trustee, consent shall be obtained from a SEBI

registered Debenture Trustee, who is proposed to be appointed. If debentures to be issued
are Secured Debentures, a Debenture Trust Deed in Form No. SH – 12 or as near thereto as
possible shall be executed by the Company in favour of Debenture Trustees within sixty
days of allotment of Debentures.
d.In the Board meeting pass resolutions for i) Approval of Offer letter for private placement
in Form No. PAS – 4 and Application Forms (In case of private placement of debentures);
ii) Approval of Form No. PAS – 5 (In case of private placement of debentures); iii)
Approval of Debenture Trustee Agreement and appointment of a Debenture Trustee (In
case of Secured Debentures only); iv) Appointment of an expert for valuation (In case of
private placement of debentures); v) Approval of increase of borrowing powers, if required;
vi) To authorize for creation of charge on the assets of the company; vii) Approve the
Debenture Subscription Agreement; viii) To fix day, date and time for the extraordinary
general meeting of shareholders.
e. Prepare the draft of i) Debenture Subscription Agreement; ii) Offer Letter for private
placement in Form No. PAS – 4 and Application Forms; iii) Records of a private placement
offer in Form No. PAS – 5; iv) Debenture Trustee Agreement; v) Mortgage Agreement for
creation of charge on assets of the company.11

f. Issue notices of extraordinary general meeting along with the explanatory statement.

g.Hold extraordinary general meeting and pass special resolution to issue convertible secured
debentures and increase borrowing powers of the company and to authorize the Board to
create charge on the assets of the company.

11 S. L. N. SINHA, D. HEMALATHA & S. BALAKRISHNAN : INVESTMENT MANAGEMENT-INTRODUCTION TO

SECURITIES ANALYSIS 773-776 (5th ed. 1979)