Notes FS Unit 2

Dr Ajay Chhabria’s Notes

UNIT-II Equity finance
1. Share Capital
2. Prospectus – information disclosure.
3. Issue and allotment.
4. Shares without monetary consideration.
5. Non-opting equity shares.
Debt Finance
1. Debentures.
2. Nature, issue and class.
3. Deposits and acceptance.
4. Creation of charges.
5. Fixed and floating charges.
6. Mortgages.
7. Convertible debentures.
1. Share Capital Æ
2. Prospectus – information disclosure Æ
PROSPECTUS- MEANING AND ROLE
The term prospectus can be understood in general as, a document containing statement of the
property, business, undertaking for the formation and development of a company for
which an appeal is made to the public to subscribe for shares. The term prospectus is
however, defined in clause 2(70) of the Companies Act, 2013 which is explained in the
definitional part of this supplementary.
Public offer and private placement- Section 23 of the Companies Act, 2013 is related to the issue
of securities by the public company and private company. The section prescribes the
mode of issue of securities.
According to the section, a public company may issue securities in the following manner –
(a) to public through prospectus (herein referred to as "public offer"), or

(b) through private placement; or
(c) through a rights issue or a bonus issue, and
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(d) in case of a listed company or a company which intends to get its securities listed, with
theprovisions of the Securities and Exchange Board of India Act, 1992 and the rules and
regulations made there under.
Here term, "public offer" includes initial public offer (IPO) or further public offer of securities to
the public by a company, or an offer for sale of securities to the public by an existing
shareholder, through issue of a prospectus.
Whereas a private company may issue securities —
(a) by way of rights issue; or

(b) bonus issue; or
(c) through private placement.
Point of comparison with respect to new law-
This is a new provision which seeks to provide the way in which a public company or a private
company may issue securities.
Section 55 A (Companies Act 1956): Power of SEBI
Power of Securities and Exchange Board to regulate issue and transfer of securities, etc.(Section
24) - This section 24 of the Companies Act, 2013 seeks to provide that issue and transfer of
securities etc of the listed companies / companies which intend to get their securities listed, shall
be administered by SEBI and the Central Government, as required.
The Ministry of Corporate Affairs issued an order called as, the Companies (Removal of
Difficulties) Order, 2013 on 20th September, 2013. By this order Ministry clarified that until a
date is notified by the Central Government under section 434(1) of the Companies Act, 2013 for
transfer of all matters, proceedings or cases to the Tribunal constituted under Chapter 28 of the
Companies Act, 2013, till then, the Board of Company Law Administration shall exercise the
powers of the Tribunal under sections 24, 58 and section 59 in pursuance of the second proviso
to section 465(1) of the Companies Act, 2013.
¾ This section replaces Section 55A (Powers of Securities and Exchange Board of
India) of the 1956 Act.
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¾ The provisions of new law contained in 2013 Act, clearly shows that this
provision shall also apply to chapter IV of the 2013 Act so far it relates to issue
and transfer of securities by listed companies and companies which intend to get
their securities listed( i.e. unlisted companies) on any recognised stock exchange
in India, administered by the Securities and Exchange Board.
Requirements as to the issue of Prospectus
Advertisement of prospectus – Section 30 of the Companies Act, 2013 seeks to provide for an
advertisement of any prospectus of a company to be published.
Section provides that where an advertisement of any prospectus of a company is published, it

shall specify therein-
¾ the contents of its memorandum as regards the objects, the liability of members and the
amount of share capital of the company, and
¾ the names of the signatories to the memorandum and the number of shares subscribed for
by them, and
¾ its capital structure.
¾ This section of the 2013 Act replaces section 66 (Newspaper advertisements of

prospectus) of the 1956 Act.
¾ The new Act of 2013 now makes it mandatory to specify in the advertisement of
prospectus, the contents of its memorandum as regards the objects, the liability of
members and the amount of share capital of the company, and the names of the
signatories to the memorandum and the number of shares subscribed for by them, and its
capital structure. These particulars in an advertisement were not mandatory under the
1956 Act.
Abridged form of prospectus
The term has been defined in the definitional part of the supplementary.
Issue of application forms for securities- This section 33 of the Companies Act, 2013 provides
that every form of application issued for the purchase of any securities of a company shall be
accompanied by an abridged prospectus, except where form of application was issued bonafidely
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inviting a person to enter an underwriting agreement with respect to such securities, or in relation
to securities which were not offered to the public. A copy of the prospectus shall be furnished to
any person, before the closing of the subscription list and the offer. *If a company makes any
default the company shall be punishable with fine of amount 50, 000/- for each fault.
This section 33 of the new Act, 2013 replaces section 56(3)[Matters to be stated and reports to be
set out in prospectus] of the 1956 Act.
No change in the law except that the requirement as to the matters to be stated in the prospectus
is applicable to shares or debentures in the old law, has been extended to any securities in the
new law.
Instead of Information Memorandum, each application for securities shall be accompanied by

abridged prospectus under the 2013 Act.
Penalty of ` 50,000 for the default has been fixed whereas in the 1956 Act it was maximum
charged penalty.
Shelf Prospectus – Section 31
Shelf Prospectus- According to section 31 of the Companies Act, 2013, any class or classes of
companies as prescribed by the Securities and Exchange Board of India may file a shelf
prospectus with the registrar of companies at the stage of the first offer of securities for a period
of one year.
No further issue of prospectus is required in respect of a second or subsequent offer of securities

included in such prospectus for a period of 1 year.
Company shall also file information memorandum on new charges created, of any change in the
financial position with the registrar of companies prior to the issue of a second or subsequent
offer under shelf prospectus.
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Where a company or any other person has received applications for the allotment of securities
along with advance payments of subscription before the making of any such change, the
company or other person shall intimate the changes to such applicants.
Where an information memorandum is filed, every time an offer of securities is made with all the
material facts with the registrar, such memorandum together with the shelf prospectus shall be
deemed to be a prospectus.
This section of the new Act, 2013 replaces Section 60 A (Filing of Shelf Prospectus) of the 1956
Act.
This facility in the new Act is available to any class or classes of companies as prescribed by
SEBI whereas the 1956 Act prescribes that this facility was available to any public financial
institution, public sector bank or scheduled bank whose main object were financing..
The facility of shelf prospectus as per the new law given in the 2013 Act, is no longer limited to
financing entities.
Information Memorandum
Red Herring Prospectus- The expression "red herring prospectus" means a prospectus which
does not include complete particulars of the quantum or price of the securities included therein.
According to section 32 of the Companies Act, 2013, red herring prospectus may be issued by a
company prior to the issue of a prospectus and shall be filed with the registrar at least 3 days
prior to the opening of the subscription list and the offer. Any variation between the red herring
prospectus and the prospectus shall be highlighted as variations in the prospectus. Upon closing
of the offer of securities, the details of information which are not included in the red herring
prospectus is to be filed with the registrar and the SEBI.
¾ This section of the Act 2013 replaces section 60 B (Information Memorandum) of the
1956 Act.
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¾ The new Act, 2013 only says about the filing of red herring prospectus and final
prospectus and removes the filing of information memorandum as given under the 1956
Act.
¾ Requirement of individually intimating the variations between red herring prospectus and
the prospectus, has been dispensed with.
Mis-statement in Prospectus and its consequences
An untrue statement or misstatement is one, which is misleading, in the form and context in
which it has been included in the prospectus. Where a certain matter which is material enough
has been omitted from the prospectus, and the omission is calculated to mislead those who act on
the faith of the prospectus, the prospectus shall be deemed, in respect of such omission, to be a
prospectus in which an untrue statement is included. The prospectus in these circumstances may
also be described as a ‘misleading prospectus’. The inclusion of mis-statement in a prospectus
may lead to criminal and civil liability.
I. Criminal liability for mis-statements in prospectus- Sections 34 of the Companies Act, 2013,
says that where any prospectus is issued or circulated or distributed, which includes any
statement which is untrue or misleading in form or context in which it is included or where any
inclusion or omission of any matter is likely to mislead, then every person who authorises the
issue of such prospectus shall be liable for fraud.
Exception: This shall not apply to a person if he proves that:
I. such statement or omission was immaterial, or

II. he had reasonable grounds to believe, and did up to the time of issue of the prospectus
believe, that the statement was true or the inclusion or omission was necessary.
¾ This section of the Act, 2013 replaces Section 63(Criminal liability for mis-statements in
¾ In the new law of 2013 Act, penalties are made much rigid than that of old law. Here the
person who authorizes the issue of such prospectus shall be punishable for fraud under
section 447.
¾ Class action suits may be taken against the guilty person as per section 37 of the 2013
Act.
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II. Civil liability for mis-statements in prospectus- The section 35 of the Companies Act, 2013
provides that where any person subscribes for securities on the basis of misleading statements or
inclusion or omission of any matter in the prospectus resulting in any loss or damages, then the
company and every person who has authorized the issue of such prospectus or a director,
promoter and the other, whosoever is liable- shall have to compensate every person who has
sustained such loss or damage.
*Where a prospectus has been issued with intent to defraud the applicants for the securities of a
company or any other person or for any fraudulent purpose, every person referred in this section
shall be personally responsible, without any limitation of liability, for all or any of the losses or
damages that may have been incurred by any person who subscribed to the securities on the basis
of such prospectus.
Exception: No person shall be liable, if he proves that—
(a) having consented to become a director of the company, he withdrew his consent before the
issue of the prospectus, and that it was issued without his authority or consent; or
(b) the prospectus was issued without his knowledge or consent, and that on becoming aware of
its issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or
consent.
¾ This section of the Act, 2013 replaces Section 62(Civil liability for mis-statements in
¾ No significant difference. Though section has been more simplified stating the conditions
when the company and every person shall be liable to pay compensation to every person
who has sustained loss/damage and the exceptions of the same. Civil liability is also
extended to experts. Now apart from untrue statement, civil liability will also arise in case
of inclusion or omission of any matter which is misleading.
Act.
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III. Public offer of securities to be in dematerialized form- This section 29 of the Companies
Act, 2013 seeks to provide that public company making public offer and such other class or
classes of companies, shall issue the securities only through dematrialised form.
The provision says:
(i) Issue of securities in dematerialized form: According to the provisions (a) every company
making public offer; and (b) such other class or classes of public companies as may be
prescribed, shall issue the securities only in dematerialised form by complying with the
provisions of the Depositories Act, 1996 and the regulations made thereunder.
(ii) In case of other companies: Whereas other companies, may convert their securities into
dematerialised form or issue its securities in physical form in accordance with the provisions of
this Act or in dematerialised form in accordance with the provisions of the Depositories Act,
1996 and the regulations made there under.
¾ This section of the 2013 Act replaces section 68B(Initial offer of securities to be in
dematerialized form in certain cases) of the 1956 Act.
¾ Every company making public offer and such other class or classes of public companies
as may be prescribed shall issue the securities only in dematerialized form by complying
with the provisions of the Depositories Act, 1996 and the regulations made there under.
Such enabling provisions were not there in the 1956 Act.
¾ The requirement that only a company making initial public offer of any security for a
sum of ten crore rupees or more, shall require to issue securities in dematerialized form,
has been dispensed with.
IV. Punishment for fraudulently inducing persons to invest money- This section 36 of the
Companies Act, 2013 provides that such persons who fraudulently induces persons to invest
money by making statement which is false, deceptive, misleading or deliberately conceals any
facts , shall be punishable for fraud under section 447.
According to the section, any person shall be liable for fraud who, knowingly or recklessly,
makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately
conceals any material facts, to induce another person to enter into, or to offer to enter into,—
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(a) any agreement for acquiring, disposing of, subscribing for, or underwriting securities; or
(b) any agreement, the purpose of which is to secure a profit to any of the parties from the yield
of securities or by reference to fluctuations in the value of securities; or
(c) any agreement for obtaining credit facilities from any bank or financial institution.
Point of comparison with respect to new law
¾ This section of the new Act, 2013 replaces section 68(Penalty for fraudulently inducing
persons to invest money) of the 1956 Act.
¾ The new law provides for penalty for fraudulently inducing persons to invest money in
securities with the more rigid punishment.
¾ The 2013 Act prescribes punishment for falsely inducing another person to enter into an
agreement to obtain credit facilities from any bank or financial institution has also been
provided.
Act.
V. Action by affected persons - The section 37 of the Companies Act, 2013, provides that a
suit may be filed or any other action may be taken by any person, group of persons or any
association of persons who have been affected by any misleading statement or the inclusion/
omission of any matter in the prospectus.
This new provision enables class action by person, group of persons or any association of
persons affected by misleading prospectus. This section is applicable for section 34, 35 & 36 of
the 2013 Act.
VI. Punishment for personation for acquisition, etc., of securities- According to this section
38 of the Companies Act, 2013, those persons who apply in a fictitious name or make multiple
applications or otherwise induce a company to allot or register any transfer of securities in
fictitious name shall be liable for fraud. And the amount so received through disgorgement of
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gain, seizure and disposal of such securities, shall be credited to the IEPF (Investor Education
and Protection Fund).
¾ This section of the new Act, 2013 replaces section 68A (Impersonation for acquisition,
etc., of shares) of the 1956 Act.
¾ The new law contained under the 2013 Act provides for the stringent punishment of fraud
for the impersonation for acquisition etc. of the securities and the disgorgement
provisions.
Offer for sale or prospectus by implication or deemed prospectus
Document containing offer of securities for sale to be deemed prospectus-The section 25 of the
Companies Act, 2013 seeks to provide that any document by which the offer or sale of shares or
debentures to the public is made shall for all purpose be treated as prospectus issued by the
company.
Act lays down the following provisions
(i) Document by which offer for sale to the public is made: According to the given provision
where a company allots or agrees to allot any securities of the company to all or any of those
securities being offered for sale to the public, then any document by which the offer for sale to
the public is made- shall be deemed to be a prospectus issued by the company.
(ii) Contents of prospectus and the liability: All enactments and rules of law as to the contents of
prospectus and as to liability in respect of mis-statements, in and omissions from prospectus, or
otherwise relating to prospectus, shall apply with the modifications [as specified in sub- sections
(3) and (4)] and shall have effect as if the securities had been offered to the public for
subscription and as if persons accepting the offer in respect of any securities were subscribers for
those securities.
The liability, if any, of the persons by whom the offer is made in respect of mis-statements
contained in the document or otherwise in respect thereof, remains same as that in the case of a
prospectus.
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(iii) Securities must be offered for sale to the public: For the purposes of this Act, it shall be
evident that an allotment of, or an agreement to allot, securities was made with a view to the
securities being offered for sale to the public if it is shown—
(a) that an offer of the securities or of any of them for sale to the public was made within six
months after the allotment or agreement to allot; or
(b) that at the date when the offer was made, the whole consideration to be received by the
company in respect of the securities had not been received by it.
*(iv) Effect of an application of section 26 on this section: Section 26 relating to the matters
stated in the prospectus, as applied by this section shall have effect, as if
(I) it required a prospectus to state in addition to the matters required by that section to be stated
in a prospectus—
a. the net amount of the consideration received or to be received by the company in

respect of the securities to which the offer relates; and
b. the time and place at which the contract where under the said securities have been
or are to be allotted may be inspected;
(II) the persons making the offer were persons named in a prospectus as directors of a company.
[* This sub-section (3) is yet to be notified]
(v) Person making an offer is a company or firm: Where a person making an offer to which this
section relates is a company or a firm, it shall be sufficient if the document, that is deemed to be
prospectus, is signed on behalf of the company or firm by- (i) two directors of the company, or
(ii) by not less than one-half of the partners in the firm, as the case may be.
This section of the Act, 2013 replaces section 64(Document containing offer of shares or
debentures for sale to be deemed prospectus) of the 1956.
Where a person making an offer to which this section relates is a company or a firm, such offer
shall be signed on behalf of the company or firm by two directors of the company or by not less
than one-half of the partners in the firm, as the case may be and not by their agent authorized in
writing, as provided under the Companies Act, 1956.
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3. Issue and allotment Æ
Procedures for Issue and Allotment of Shares | Provisions of Companies Act
A private company can start business as soon as it gets the certificate of incorporation. It is
prohibited by law to issue any prospectus, inviting the general public to subscribe towards its
share capital. The shares are taken up privately by the promoters and their relatives and friends.
But in case of public company, a proper procedure has been laid down in the Companies Act for
the issue and allotment of shares. The following are the main provisions of the Companies Act
relating to the issue and allotment of shares.
Provisions of companies act relating to issue and allotment of shares --
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1. A public company must file a prospectus or statement in lieu of prospectus, inviting offers
from the public for the purchase of shares in the company.
2. After studying the prospectus, the public applies for shares of the company in the printed
prescribed forms. The company can ask for the issue price of the share to be paid in full along
with the application or it can be payable in installments as share application money, share
allotment money, share first call, share second call and so on. The amount payable as application
money must be at least 5 percent of the nominal amount of the share.
3. No allotment of shares can be made unless the ‘Minimum Subscription‘ as given in the
prospectus had been subscribed or applied for. Minimum Subscription is the minimum amount
which, in the estimate of the directors, is required to run the business. It has to be stated in the
prospectus.
4. The amount of share application money must be deposited in a bank. It can be operated by the
company only after getting the certificate of commencement.
5. If the minimum subscription amount of 90% of the issue was not achieved by the company
within 60 days from the date of closure of the issue, the company has to refund the entire
subscription amount immediately. For any delay beyond 78 days, the company has to pay an
interest of 6% per annum.
After allotment, the directors can call upon the shareholders to pay the full amount due on shares
in one or more installments as mentioned in the prospectus. The articles of a company usually
contain provisions regarding calls. If there is no such provision in the Articles, the following
provisions shall apply:
i. No call shall be for more than 25% of the nominal value of each share.
ii. Interval between any two calls should not be less than one month.
iii. At least 14 days’ notice must be given to each member for a call specifying the amount,
date and place of payment.
iv. Call should be made on a uniform basis on the entire body of shareholders falling under
the same class.
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ALLOTMENT OF SECURITIES UNDER THE COMPANIES ACT, 2013
(i) Private Placement
(ii) Right Issue
(iii) Preferential Allotment
1. PRIVATE PLACEMENT: -
Private placement means any offer of securities or invitation to subscribe securities or invitation
to subscribe securities to a select group of persons by a company (other than by way of public
offer) through issue of private placement offer letter and which satisfies the conditions as
specified in Section 42 of the Companies Act, 2013.
The private placement of securities is governed by Section 42 of the Companies Act, 2013 read
with Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014.
CONDITIONS: -
(i) A private placement offer cannot be made to more than 200 people in aggregate (in total) in a
financial year excluding “Qualified Institutional Buyers (QIBs)” and employees of the Company
being offered securities under a scheme of employee’s stock option as per the provisions of
clause (b) of Sub-Section (1) of Section 62.
“Qualified Institutional Buyer (QIB)” means the qualified institutional buyer as defined in the
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009 as amended from time to time.
(ii) If a company, whether listed or unlisted makes an offer to allot or invites subscription, or
allots, or enters into an agreement to allot, securities to more than 200 persons, whether the
payment for the securities has been received or not or whether the Company intends to list its
securities or not on any recognized stock exchange in or outside India, the same shall be deemed
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to be an offer to the public and shall accordingly be governed by the provisions of Part I of
chapter III of SEBI (ICDR) Regulation, 2009.
(iii) No fresh offer or invitation under this section shall be made unless the allotments with
respect to any offer or invitation made earlier have been completed or that offer or invitation has
been withdrawn or abandoned by the Company.
(v) The number of such offers or invitations shall not exceed 4 in a financial year and not more
than once in a calendar quarter with a minimum gap of 60 days between any 2 such offers or
invitations.
(vi) The value of such offer or invitation shall be with an investment size of not less than Rs.
20,000/- per person of the face value of the securities.
(vii) A company making an offer or invitation under this section shall allot its securities within
60 days from the date of receipt of the application money for such securities and if the Company
is not able to allot securities within that period, it shall repay the application money to the
subscribers within 15 days from the date of completion of sixty days and if the Company fails to
repay the application money within the aforesaid period, it shall be liable to repay the money
with interest at the rate of twelve per cent per annum from the expiry of the sixtieth day. Also the
money received as share application money shall be kept in separate bank account in a scheduled
bank and shall not be utilized for any of the following purpose: -
¾ For adjustment against allotment of securities;

¾ For repayment of monies where the Company is unable to allot securities.
(viii) No company offering securities under this section shall release any public advertisements
or utilize any media, marketing or distribution channels or agents to inform the public at large
about such an offer.
(ix) Any offer or invitation not in compliance with the provisions of this section shall be treated
as a public offer and all provisions of the Companies Act, 2013 and the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 shall be
required to be complied with.
PROCEDURE: -
(i) Check the provision in the Articles of Association of the Company regarding Private
Placement of shares and if the same is not there then the Articles of Association needs to be
amended suitably as per the Provisions of the Companies Act, 2013.
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(ii) Issue Notice for convening Board Meeting at least seven days before the date of meeting for
making the proposal for private placement of shares and approval of notice of convening the
General Meeting.
(iii) Issue Notice of the General Meeting at least 21 clear days before the date of the Meeting to
all the Shareholders, Directors and Auditors as required Section 101 of the Companies Act,
2013.
(iv) In General Meeting pass the Special Resolution for Private Placement of shares along with
the approval on the Offer Letter.
(v) File E-Form MGT -14 with Registrar of Companies within 30 days of passing the Special
Resolution.
(vi) Issue offer letter in Form PAS-4 within 30 days of record of name of persons.
(vii) Prepare complete record of Private Placement in Form PAS-5.
(viii) File Form PAS-4 and Form PAS-5 with Registrar of Companies within 30 days of issue of
offer letter in E-Form GNL-2.
(ix) Call Board Meeting for Allotment of shares within 60 days of receipt of share application
money.
(x) File E-Form PAS-3 with Registrar of Companies within 30 days of Allotment of shares;
(xi) File E-Form MGT-14 with Registrar of Companies within 30 days of Board meeting for
resolution passed in the Board Meeting for allotment of securities.
(xii) Issue share certificate to the respective shareholder within 2 months from the date of
allotment of shares.
Note: Non-compliance of the above mentioned provisions and guidelines can lead to a penalty of
Rs. 2 crores or the amount involved in the offer, whichever is higher.
2. RIGHTS ISSUE OF SHARES: -
The Right issue of shares means issue when new shares are offered to the existing shareholders
in proportion to their current shareholding. The Right Issue of shares is governed by Section 62
of the Companies Act, 2013.
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CONDITIONS: -
As per Section 62 (1) where at any time, a company having a share capital proposes to increase
its subscribed capital by the issue of further shares, then such shares shall be offered: -
(a) to persons who, at the date of the offer, are holders of equity shares of the company in
proportion, as nearly as circumstances admit, to the paid-up share capital on those shares by
sending a letter of offer subject to the following conditions, namely: –
(i) the offer shall be made by notice specifying the number of shares offered and limiting a time
not being less than fifteen days and not exceeding thirty days from the date of the offer within
which the offer, if not accepted by 90% of its members, shall be deemed to have been declined;
(ii) unless the Articles of the Company otherwise provide, the offer aforesaid shall be deemed to
include a right exercisable by the person concerned to renounce the shares offered to him or any
of them in favor of any other person; and the notice referred to in clause (i) shall contain a
statement of this right; and
(iii) after the expiry of the time specified in the notice aforesaid, or on receipt of earlier
intimation from the person to whom such notice is given that he declines to accept the shares
offered, the Board of Directors may dispose of them in such manner which is not dis-
advantageous to the shareholders and the Company.
PROCEDURE: -
(i) Issue Notice for convening the Board Meeting at least 7 days before the date of meeting for
making the proposal for right issue of shares.
(ii) In Board Meeting pass a resolution for approving the “Letter of offer”. The letter of offer
shall also include right of renunciation of shares.
(iii) Issue the Letter of offer to all the existing shareholders through registered post or speed post
or through electronic mode at least three days before the opening of the issue.
(iv) Acceptance, renunciations and rejection of rights offered to be obtained from the respective
shareholders.
(v) Issue Notice for convening the Board Meeting for Allotment of shares within 60 days of
receipt of share application money.
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(vi) In the Board Meeting pass the resolution for allotment and issue of shares.
(vii) File E-Form PAS-3 with Registrar of Companies within 30 days of Allotment of securities.
(viii) File E-Form MGT-14 with Registrar of Companies within 30 days of Board meeting for
resolution passed in the Board Meeting for allotment of securities.
(ix) Issue share certificate to the respective shareholder within 2 months from the date of
allotment of shares.
3. PREFERENTIAL ALLOTMENT OF SHARES: -
The Preferential allotment of shares is governed by Section 62(1(C) of the Companies Act, 2013
read with Rule 13 of Companies (Share Capital and Debentures) Rules, 2014.
PROCEDURE: -
(i) Check the provision in the Articles of Association of the Company regarding Preferential
Allotment of shares and if the same is not there then the Articles of Association needs to be
amended suitably as per the provisions of the Companies Act, 2013.
(ii) Issue Notice for convening Board Meeting for making the proposal for Preferential
Allotment of shares and approval of notice of convening the General Meeting.
(iii) The following disclosures shall be given in the explanatory statement to be annexed to the
notice of the general meeting pursuant to Section 102 of the Companies Act, 2013: -
¾ The objects of the issue;

¾ The total number of shares or other securities to be issued;
¾ The price or price band at/within which the allotment is proposed;
¾ Basis on which the price has been arrived at along with report of the registered valuer;
¾ Relevant date with reference to which the price has been arrived at;
¾ The class or classes of persons to whom the allotment is proposed to be made;
¾ Intention of promoters, directors or key managerial personnel to subscribe to the offer;
¾ The proposed time within which the allotment shall be completed;
¾ The names of the proposed allottees and the percentage of post preferential offer capital
that may be held by them;
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¾ The change in control, if any, in the company that would occur consequent to the
preferential offer;
¾ The number of persons to whom allotment on preferential basis have already been made
during the year, in terms of number of securities as well as price;
¾ The justification for the allotment proposed to be made for consideration other than cash
together with valuation report of the registered valuer; and
¾ The pre issue and post issue shareholding pattern of the company in the prescribed
format.
(iv) Issue Notice of the General Meeting at least 21 clear days before the date of the Meeting to
all the Shareholders, Directors and Auditors as required Section 101 of the Companies Act,
2013.
(v) In General Meeting pass the Special Resolution for Preferential Allotment of shares.
(vi) File E-Form MGT-14 with Registrar of Companies within 30 days of passing the Special
Resolution.
(vi) The securities allotted by way of Preferential offer shall be made fully paid up at the time of
allotment.
(viii) The allotment of securities on a preferential basis made pursuant to the special resolution
passed pursuant to sub-rule (2)(b) shall be completed within a period of 12 months from the date
of passing of the special resolution. If the allotment of securities is not completed within 12
months from the date of passing of the special resolution, another special resolution shall be
passed for the company to complete such allotment thereafter.
(ix) the price of the shares or other securities to be issued on a preferential basis, either for cash
or for consideration other than cash, shall be determined on the basis of valuation report of a
registered valuer and when convertible securities are offered on a preferential basis with an
option to apply for and get equity shares allotted, the price of the resultant shares shall be
determined beforehand on the basis of a valuation report of a registered valuer and also complied
with the provisions of Section 62 of the Act.
(x) Where shares or other securities are to be allotted for consideration other than cash, the
valuation of such consideration shall be done by a registered valuer who shall submit a valuation
report to the company giving justification for the valuation.
(xi) Where the preferential offer of shares is made for a non-cash consideration, such non-cash
consideration shall be treated in the following manner in the books of account of the company.
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(xii) Where the non-cash consideration takes the form of a depreciable or amortizable asset, it
shall be carried to the balance sheet of the company in accordance with the accounting standards.
(xiii) Where clause (i) is not applicable, it shall be expensed as provided in the accounting
standards.
(xiv) Once the allotment is made, the company shall within 30 days of allotment, file with the
Registrar a return of allotment in E-Form PAS.3, along with the fee as specified in Companies
(Registration of Offices and Fees) Rules, 2014.
(xv) Issue share certificates within a period of 2 months from the date of allotment.
(xvi) Intimate the details of allotment of shares to the Depository immediately on allotment of
such shares
(xvii) In case of listed companies, the conditions/procedures prescribed under Chapter VII of
SEBI (ICDR) Regulations are to be complied with.
Further issue of share capital (Section 62)

(1) Where at any time, a company having a share capital proposes to increase its
subscribed capital by the issue of further shares, such shares shall be offered—
(a) to persons who, at the date of the offer, are holders of equity shares of the
company in proportion, as nearly as circumstances admit, to the paid-up share
capital on those shares by sending a letter of offer subject to the following
conditions,
namely:—
(i) the offer shall be made by notice specifying the number of shares
offered and limiting a time not being less than fifteen days and not
exceeding thirty days from the date of the offer within which the offer, if
not accepted, shall be deemed to have been declined;
(ii) unless the articles of the company otherwise provide, the offer
aforesaid shall be deemed to include a right exercisable by the person
concerned to renounce the shares offered to him or any of them in favour
of any other person; and the notice referred to in clause (i) shall contain a
statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on
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receipt of earlier intimation from the person to whom such notice is given
that he declines to accept the shares offered, the Board of Directors may
dispose of them in such manner which is not dis-advantageous to the
shareholders and the company;
(b) to employees under a scheme of employees’ stock option, subject to special
resolution passed by company and subject to such conditions as may be rescribed;
or
(c) to any persons, if it is authorised by a special resolution, whether or not
those persons include the persons referred to in clause (a) or clause (b), either for
cash or for a consideration other than cash, if the price of such shares is
determined by the valuation report of a registered valuer subject to such
conditions as may be prescribed.
(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be
despatched through registered post or speed post or through electronic mode to all the
existing shareholders at least three days before the opening of the issue.
(3) Nothing in this section shall apply to the increase of the subscribed capital of a
company caused by the exercise of an option as a term attached to the debentures issued
or loan raised by the company to convert such debentures or loans into shares in the
company: Provided that the terms of issue of such debentures or loan containing such an
option have been approved before the issue of such debentures or the raising of loan by a
special resolution passed by the company in general meeting.
(4) Notwithstanding anything contained in sub-section (3), where any debentures

have been issued, or loan has been obtained from any Government by a company, and if
that Government considers it necessary in the public interest so to do, it may, by order,
direct that such debentures or loans or any part thereof shall be converted into shares in
the company on such terms and conditions as appear to the Government to be reasonable
in the circumstances of the case even if terms of the issue of such debentures or the
raising of such loans do not include a term for providing for an option for such
conversion: Provided that where the terms and conditions of such conversion are not
acceptable to the company, it may, within sixty days from the date of communication of
such order, appeal to the Tribunal which shall after hearing the company and the
Government pass such order as it deems fit.
(5) In determining the terms and conditions of conversion under sub-section (4), the
Government shall have due regard to the financial position of the company, the terms of
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issue of debentures or loans, as the case may be, the rate of interest payable on such
debentures or loans and such other matters as it may consider necessary.
(6) Where the Government has, by an order made under sub-section (4), directed that
any debenture or loan or any part thereof shall be converted into shares in a company and
where no appeal has been preferred to the Tribunal under sub-section (4) or where such
appeal has been dismissed, the memorandum of such company shall, where such order
has the effect of increasing the authorised share capital of the company, stand altered and
the authorised share capital of such company shall stand increased by an amount equal to
the amount of the value of shares which such debentures or loans or part thereof has been
converted into.
Time Limit for allotment of securities under the new Companies Act, 2013:
Under the new Companies Act, Sections 62 & 42 and Rule 13 of Companies (Share Capital
and Debentures) Rules, 2014 deals with issue of shares on preferential basis. Rule 13
prescribes that any such issue on preferential basis has to comply with conditions laid down
in section 42 of the Companies Act, 2013. Section 42(6) further provides that-
“(6) A company making an offer or invitation under this section shall allot its securities
within sixty days from the date of receipt of the application money for such securities and if the
company is not able to allot the securities within that period, it shall repay the application
money to the subscribers within fifteen days from the date of completion of sixty days and if the
company fails to repay the application money within the aforesaid period, it shall be liable to
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repay that money with interest at the rate of twelve per cent. per annum from the expiry of the
sixtieth day:
Provided that monies received on application under this section shall be kept in a separate bank
account in a scheduled bank and shall not be utilised for any purpose other than—
(a) for adjustment against allotment of securities; or
(b) for the repayment of monies where the company is unable to allot securities.”
4. Shares without monetary consideration Æ
Issue of Shares for Consideration (Other than Cash)
Shares are one of the most important instrument to raise capital at all stages of business. Issue of
shares seems to be a simple process and most of the people know about it in its general form
only. But the picture is not as it seems to be. There are various means and purposes of issuing
shares. There are many purposes for which they’re issued. In this article, we will understand the
concept of issue of shares for consideration (other than cash).
Means of Issue of Shares
There are 2 generally two means of the issue of shares:
For Cash
For Consideration Other than Cash
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In case of issue of shares for cash, the company provides the shares to the investor in exchange
of cash as consideration. It is the most general means of the issue of shares. Such kind of
issuing is done for the general public. The Company calls such total cash consideration in
certain parts or installments.
When an asset is acquired by a company, the payment of asset price can be made by the issue of
shares or in cash to the vendor. Moreover, when shares are given against the purchase
price, it is known as ‘Issue of shares for consideration other than cash’. In this case,
shares are not open to the general public.
As the term clear itself, issue of shares for consideration other than cash means shares of the
company are issued to somebody for anything which is not cash.
Case –
How Can You Issue Shares for Consideration Other than Cash?
Equity shares of a company represent units of ownership in the company and as ownership rights
have a price attached to them, so do equity shares.Pricing of equity shares Equity shares
commonly have something called a face value or nominal value, typically Rs. 10, and a premium
(depending on the valuation of the company) say Rs. 35. So in the example above, the price to be
paid for acquisition of an equity share is Rs. 45 where Rs. 10 is the face value and Rs. 35 is the
premium. This is a pretty straightforward case. When complications arise If the company wants
to allot shares to, say, a key technical consultant for his contribution to the company, some tricky
issues arise. Such a person cannot be granted employee stock options (as they are not
“employees” of the company). This problem also arises in the case of promoter directors.
Promoter directors cannot be granted ESOPs as they are not technically in the same category of
persons as employees due to their position of control in the company. Issuing shares for
consideration other than cash is therefore a viable alternative for such persons. The law on the
point Under Section 75 of the Companies Act, 1956, issue of shares for consideration other than
cash can be made by a company provided that they also file the relevant contract (such as
contract for services, or for sale of assets) pursuant to which such allotment was made to the
Registrar of Companies within thirty days of allotment. For instance, in the case of hiring a
technical consultant, you need to file the contract you entered into with the consultant with the
Registrar of Companies within 30 days. But this is not a gift Issue of shares for consideration
other than cash should be differentiated from a gift, in that in an issue for consideration other
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than cash, there is a consideration which is not in cash, whereas in a gift there is no consideration
at all.
Further, issue of shares for consideration other than cash should also not be confused with issue
of shares at a discount. Illustrating by way of an example, issue of shares to your technical
advisor for services rendered free of cost to him is an issue of shares for consideration other than
cash (in which he does not pay even the nominal value), whereas issuing shares at a discount, is,
for example, issuing shares valued at Rs. 35 at Rs. 10. How do you value these shares (issued for
consideration other than cash)? An important aspect to remember when issuing shares for
consideration other than cash is valuation. When one refers to valuation in this context it means
(a) valuation of the shares (if they are offered for a premium) and, (b) valuation of the services or
assets on the basis of which such shares were allotted. While typically in start-ups, valuation of
shares are not required as usually they are allotted at face value, valuation of services or assets is
important as that will determine the number of shares which are to be allotted. As these shares
will be issued through a preferential allotment (i.e. allotment to a specific individual as against
pro-rata to the shareholders) a special resolution of the board and the shareholders will also be
required. If there are investors in the company, it is important therefore to bring them on board
before issuing such shares. Issue of these shares to a non-resident Indian Earlier, such issue was
not permitted by the Reserve Bank of India. These restrictions have now been lifted subject to
certain limitations including that it must be against import of capital goods and for incurring pre-
operative or pre-incorporation expenses.
5. Non-opting equity shares Æ
What Is a Non-Equity Option?

A non-equity option is a derivative contract for which the underlying assets are instruments other
than equities. Typically, that means a stock index, physical commodity, or futures contract, but
almost any asset is optionable in the over-the-counter market. These underlying assets include
fixed income securities, real estate, or currencies.
As with other options, non-equity options give the holder the right, but not the obligation, to
transact the underlying asset at a specified price on or before a specified date.
Understanding a Non-Equity Option
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Options, similar to all derivatives, allow investors to speculate on or hedge against movements of
the underlying assets. Non-equity options will enable them to do so on instruments which are not
exchange-traded equities.
All strategies available to exchange-traded options are also available for non-equity options.
These include simple puts and calls, as well as combinationsand spreads, which are strategies
using two or more options. Notable examples of combinations and spreads include vertical
spreads, strangles, and iron butterflies.
For exchange-traded non-equity options, such as gold options or currency options, the exchange
itself sets strike prices, expiration dates, and contract sizes. For over-the-counter versions, the
buyer and seller set all terms and become counterparties to the trade.
Options Contracts
The terms of an option contract specify the underlying security, the price at which the underlying
security can be transacted, called the strike price, and the expiration date of the contract. An
exchange-traded equity option covers 100 shares per option contract, but a non-equity option
might include 10 ounces of palladium, $100,000 par value in a corporate bond or, if
thecounterparties so agree, $17,000 par value in bonds. Anything is possible in the over-the-
counter market, as long as two parties are willing to trade.
In a call option transaction, opening a position happens when a contract or contracts are bought
from the seller. The seller is also called the writer. In the trade, the buyer pays the seller
a premium. The seller has the obligation of selling shares at the strike price if the option get
exercised by the buyer. If the seller holds the underlying asset and sells a call, the position is
called acovered call. This implies that if the seller is called away, they will have the underlying
shares to deliver to the owner of the long call.
The major problem with over-the-counter non-equity options is that liquidityis limited because
there is no guaranteed way to close the option position before expiration. To offset a position,
one of the parties must find another party with whom to create the opposite option contract. If
that is not possible, the investor could buy or sell another option in a related area to partially
offset the movements of the original underlying asset.
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For exchange-traded options, the process is much more straightforward as all the investor needs
to do is offset the position on the exchange.
Debt Finance
1. Debentures –
Types of Debentures
The definition of debentures under Companies Act, 2013 says companies cannot issue
debentures carrying voting rights. Apart from this, there are no other specific restrictions. Hence,
companies are free to issue many other types of debentures.
We can classify types of debentures in the following five categories: security, convertibility,
permeance, negotiability, and priority.
Based on Security
Secured Debentures
Unsecured Debentures
Based on Convertibility
Convertible Debentures
Non-convertible Debentures
Based on Permeance
Redeemable Debentures
Irredeemable Debentures
Based on Negotiability
Registered Debentures
Bearer Debentures
Based on Priority
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First Mortgage Debentures
Second Mortgage Debentures
1. Types of Debentures on the basis of Security
In terms of security, a debenture may basically either carry some security or it might not. Thus,
debentures can be of two types here:
a) Secured Debentures: These debentures carry a charge on some assets of the issuing
company. In case the company fails to repay the debt, its assets will be sold off to
pay creditors. This security on debentures may be of two types: Fixed-charge or
Floating charge. In the case of a fixed charge, the security relates to a specific
asset of the company. On the contrary, a floating charge covers all assets of the
company in general.
b) Unsecured Debentures: These debentures are very risky for investors. This is because they
do not carry any security or charge on the company’s assets. The company only
promises to pay the debt amount and interest. Its assets are not liable for
attachment in case of its failure to repay.
2. Types of Debentures on the basis of Convertibility
In order to make their debentures attractive to investors, companies can make them convertible.
On grounds on convertibility, debentures may be of the following two types:
a) Convertible Debentures: These debentures convert into equity or preference shares after a
specific period of time. This conversion may be either compulsory or optional at
the debenture holder’s discretion. Further, it may be either fully convertible or
partly convertible. In terms of the value of the shares that debentures convert into,
they may be at par or even at premium or discount.
b) Non-convertible Debentures: On the contrary to convertible debentures, non-convertible

ones remain debentures. They are not convertible into shares.
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3. Types of Debentures on the basis of Permanence
In terms of permanence and duration, debentures are of the following types:
a) Redeemable Debentures: These debentures are redeemable on a specified date. For example,
if a debenture’s maturity period is 5 years, it becomes redeemable on the expiry of
5 years. These 5 years will start from the date of issue of the debenture.
b) Irredeemable Debentures: Irredeemable debentures do not have a specific maturity date.

They last throughout a company’s lifetime. Thus, the company redeems them
only when it faces liquidation.
4. Types of Debentures on the basis of Negotiability
The aspect of negotiability basically relates to transferability. This ground differentiates

debentures on the basis of whether they are freely transferable. It divides debentures on the
following two grounds:
a) Registered Debentures: As the name suggests, the details of these debenture holders are
registered in the company’s records. Only the debenture holders can redeem these
debentures. Hence, they are not freely transferable. They can be transferred only
if relevant provisions of the Companies Act, 2013 are fulfilled.
b) Bearer Debentures: Companies do not register details of debenture holders in this case. They
can be redeemed by the person owning them, without their identity being
checked. This happens because these debentures are freely transferable. Thus,
anybody can sell and buy them from their holders.
5. Types of Debentures on the basis of their Priority
Just like shares, companies rank debentures also in terms of priority. Investors prefer buying
instruments having priority because it helps them reduce their risks. Debentures can be of the
following two types in this case:
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a) First Mortgage Debentures: As the name suggests, companies repay these debentures first.
Debenture-holders get their money before all others in their category.
b) Second Mortgage Debentures: These debentures are repaid only after the first mortgage
debentures are satisfied.
2. Commercial Banks
Commercial banks occupy a vital position as they provide funds for different purposes as well as
for different time periods. Banks extend loans to firms of all sizes and in many ways, like, cash
credits, overdrafts, term loans, purchase/discounting of bills, and issue of letter of credit. The rate
of interest charged by banks depends on various factors such as the characteristics of the firm
and the level of interest rates in the economy. The loan is repaid either in lump sum or in
installments.
Bank credit is not a permanent source of funds. Though banks have started extending loans for
longer periods, generally such loans are used for medium to short periods. The borrower is
required to provide some security or create a charge on the assets of the firm before a loan is
sanctioned by a commercial bank.
Merits
The merits of raising funds from a commercial bank are as follows:
(i) Banks provide timely assistance to business by providing funds as and when needed by it.
(ii) Secrecy of business can be maintained as the information supplied to the bank by the
borrowers is kept confidential;
(iii) Formalities such as issue of prospectus and underwriting are not required for raising loans
from a bank. This, therefore, is an easier source of funds;
(iv) Loan from a bank is a flexible source of finance as the loan amount can be increased
according to business needs and can be repaid in advance when funds are not needed.
Limitations
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The major limitations of commercial banks as a source of finance are as follows:
(i) Funds are generally available for short periods and its extension or renewal is uncertain and
difficult;
(ii) Banks make detailed investigation of the company’s affairs, financial structure etc., and may
also ask for security of assets and personal sureties. This makes the procedure of obtaining funds
slightly difficult;
(iii) In some cases, difficult terms and conditions are imposed by banks. for the 1grant of loan.
For example, restrictions may be imposed on the sale of mortgaged goods, thus making normal
business working difficult.
Trade Credit
Trade credit is the credit extended by one trader to another for the purchase of goods and
services. Trade credit facilitates the purchase of supplies without immediate payment. Such
credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts payable’.
Trade credit is commonly used by business organisations as a source of short-term financing. It
is granted to those customers who have reasonable amount of financial standing and goodwill.
The volume and period of credit extended depends on factors such as reputation of the
purchasing firm, financial position of the seller, volume of purchases, past record of payment and
degree of competition in the market. Terms of trade credit may vary from one industry to another
and from one person to another. A firm may also offer different credit terms to different
customers.
Merits
The important merits of trade credit are as follows:
(i) Trade credit is a convenient and continuous source of funds;
(ii) Trade credit may be readily available in case the credit worthiness of the customers is known
to the seller;
(iii) Trade credit needs to promote the sales of an organisation;

1

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(iv) If an organisation wants to increase its inventory level in order to meet expected rise in the
sales volume in the near future, it may use tradecredit to, finance the same;
(v) It does not create any charge on the assets of the firm while providing funds.
Limitations
Trade credit as a source of funds has certain limitations, which are given as follows:
(i) Availability of easy and flexible trade credit facilities may induce a firm to indulge in
overtrading, which may add to the risks of the firm;
(ii) Only limited amount of funds can be generated through trade credit;
(iii) It is generally a costly source of funds as compared to most other sources of raising money.
(iv) Short Term only
(v) Between the two private parties so chances of dispute is high
Factoring
Factoring is a financial service under which the ‘factor’ renders various services which includes:
(a) Discounting of bills (with or without recourse) and collection of the client’s debts. Under this,
the receivables on account of sale of goods or services are sold to the factor at a certain discount.
The factor becomes responsible for all credit control and debt collection from the buyer and
provides protection against any bad debt losses to the firm. There are two methods of factoring
—recourse and non-recourse. Under recourse factoring, the client is not protected against the
risk of bad debts. On the other hand, the factor assumes the entire credit risk under non-recourse
factoring i.e., full amount of invoice is paid to the client in the event of the debt becoming bad.
(b) Providing information about credit worthiness of prospective client’s etc., Factors hold large
amounts of information about the trading histories of the firms. This can be valuable to those
who are using factoring services and can thereby avoid doing business with customers having
poor payment record. Factors may also offer relevant consultancy services in the areas of
finance, marketing, etc.
The factor charges fees for the services rendered. Factoring appeared on the Indian financial
scene only in the early nineties as a result of RBI initiatives. The organisations that provides such
services include SBI Factors and Commercial Services Ltd., Canbank Factors Ltd., Foremost
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Factors Ltd., State Bank of India, Canara Bank, Punjab National Bank, Allahabad Bank. In
addition, many non-banking finance companies and other agencies provide factoring service.
Merits
The merits of factoring as a source of finance are as follows:
(i) Obtaining funds through factoring is cheaper than financing through other means such as bank
credit; (ii) With cash flow accelerated by factoring, the client is able to meet his/her liabilities
promptly as and when these arise;
(iii) Factoring as a source of funds is flexible and ensures a definite pattern of cash inflows from
credit sales. It provides security for a debt that a firm might otherwise be unable to obtain;
(iv) It does not create any charge on the assets of the firm;
(v) The client can concentrate on other functional areas of business as the responsibility of credit
control is shouldered by the factor.
Limitations
The limitations of factoring as a source of finance are as follows:
(i) This source is expensive when the invoices are numerous and smaller in amount;
(ii) The advance finance provided by the factor firm is generally available at a higher interest
cost than the usual rate of interest;
(iii) The factor is a third party to the customer who may not feel comfortable while dealing with
it.
Lease Financing
A lease is a contractual agreement whereby one party i.e., the owner of an asset grants the other
party the right to use the asset in return for a periodic payment. In other words it is a renting of
an asset for some specified period. The owner of the assets is called the ‘lessor’ while the party
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that uses the assets is known as the ‘lessee’. The lessee pays a fixed periodic amount called lease
rental to the lessor for the use of the asset. The terms and conditions regulating the lease
arrangements are given in the lease contract. At the end of the lease period, the asset goes back
to the lessor. Lease finance provides an important means of modernisation and diversification to
the firm. Such type of financing is more prevalent in the acquisition of such assets as computers
and electronic equipment which become obsolete quicker because of the fast changing
technological developments. While making the leasing decision, the cost of leasing an asset must
be compared with the cost of owning the same.
Merits
The important merits of lease financing are as follows:
(i) It enables the lessee to acquire the asset with a lower investment;
(ii) Simple documentation makes it easier to finance assets;
(iii) Lease rentals paid by the lessee are deductible for computing taxable profits;
(iv) It provides finance without diluting the ownership or control of business;
(v) The lease agreement does not affect the debt raising capacity of an enterprise;
(vi) The risk of obsolescence is borne by the lesser. This allows greater flexibility to the lessee to
replace the asset.
Limitations
The limitations of lease financing are given as below:
(i) A lease arrangement may impose certain restrictions on the use of assets. For example, it may
not allow the lessee to make any alteration or modification in the asset;
(ii) The normal business operations may be affected in case the lease is not renewed;
(iii) It may result in higher payout obligation in case the equipment is not found useful and the
lessee opts for premature termination of the lease agreement; and
(iv) The lessee never becomes the owner of the asset. It deprives him of the residual value of the
asset.
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Public Deposits
The deposits that are raised by organisations directly from the public are known as public
deposits. Rates of interest offered on public deposits are usually higher than that offered on bank
deposits. Any person who is interested in depositing money in an organisation can do so by
filling up a prescribed form. The organisation in return issues a deposit receipt as
acknowledgment of the debt. Public deposits can take care of both medium and short-term
financial requirements of a business. The deposits are beneficial to both the depositor as well as
to the organisation. While the depositors get higher interest rate than that offered by banks, the
cost of deposits to the company is less than the cost of borrowings from banks. Companies
generally invite public deposits for a period upto three years. The acceptance of public deposits
is regulated by the Reserve Bank of India.
Merits
The merits of public deposits are:
(i) The procedure of obtaining deposits is simple and does not contain restrictive conditions as
are generally there in a loan agreement;
(ii) Cost of public deposits is generally lower than the cost of borrowings from banks and
financial institutions;
(iii) Public deposits do not usually create any charge on the assets of the company. The assets
can be used as security for raising loans from other sources;
(iv) As the depositors do not have voting rights, the control of the company is not diluted.
Limitations
The major limitation of public deposits are as follows:
(i) New companies generally find it difficult to raise funds through public deposits;
(ii) It is an unreliable source of finance as the public may not respond when the company needs
money;
(iii) Collection of public deposits may prove difficult, particularly when the size of deposits
required is large.
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Commercial Paper (CP)
Commercial Paper emerged as a source of short term finance in our country in the early nineties.
Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short
period, varying from 90 days to 364 days. It is issued by one firm to other business firms,
insurance companies, pension funds and banks. The amount raised by CP is generally very large.
As the debt is totally unsecured, the firms having good credit rating can issue the CP. Its
regulation comes under the purview of the Reserve Bank of India.
The merits and limitations of a Commercial Paper are as follows:
Merits
(i) A commercial paper is sold on an unsecured basis and does not contain any restrictive
conditions;
(ii) As it is a freely transferable instrument, it has high liquidity;
(iii) It provides more funds compared to other sources. Generally, the cost of CP to the issuing
firm is lower than the cost of commercial bank loans;
(iv) A commercial paper provides a continuous source of funds. This is because their maturity
can be tailored to suit the requirements of the issuing firm. Further, maturing commercial paper
can be repaid by selling new commercial paper;
(v) Companies can park their excess funds in commercial paper thereby earning some good
return on the same.
Limitations
(i) Only financially sound and highly rated firms can raise money through commercial
papers. New and moderately rated firms are not in a position to raise funds by this
method;
(ii)
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Financial Institutions
The government has established anumber of financial institutions all over the country to provide
finance to business organisations (see Box E).
These institutions are established by the central as well as state governments.
They provide both owned capital and loan capital for long and medium term requirements and
supplement the traditional financial agencies like commercial banks. As these institutions aim at
promoting the industrial development of a country, these are also called ‘development banks’. In
addition to providing financial assistance, these institutions also conduct market surveys and
provide technical assistance and managerial services to people who run the enterprises. This
source of financing is considered suitable when large funds for longer duration are required for
expansion, reorganisation and modernisation of an enterprise.
Merits
The merits of raising funds through financial institutions are as follows:
(i) Financial institutions provide longterm finance, which are not provided by commercial banks;
(ii) Besides providing funds, many of these institutions provide financial, managerial and
technical advice and consultancy to business firms;
(iii) Obtaining loan from financial institutions increases the goodwill of the borrowing company
in the capital market. Consequently, such a company can raise funds easily from other sources
as well;
(iv) As repayment of loan can be made in easy instalments, it does not prove to be much of a
burden on the business;
(v) The funds are made available even during periods of depression, when other sources of
finance are not available.
Limitations
The major limitations of raising funds from financial institutions are as given below:
(i) Financial institutions follow rigid criteria for grant of loans. Too many formalities make the
procedure time consuming and expensive;
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(ii) Certain restrictions such as restriction on dividend payment are imposed on the powers of the
borrowing company by the financial institutions;
(iii) Financial institutions may have their nominees on the Board of Directors of the borrowing
company thereby restricting the powers of the company.
--------------------------
The following part is not completed please ignore
1. Debentures. (Not the part of Test-1 still )
Debentures are an important instrument for raising long term debt capital. A company can raise
funds through issue of debentures, which bear a fixed rate of interest. The debenture issued by a
company is an acknowledgment that the company has borrowed a certain amount of money,
which it promises to repay at a future date. Debenture holders are, therefore, termed as creditors
of the company.
In layman’s term, a Debenture is the acknowledgment of the debt the organization has taken
from the public at large. They are very crucial for raising long-term debt capital. A company can
raise funds through the issue of debentures, which has a fixed rate of interest on it. The debenture
issued by a company is an acknowledgment that the company has borrowed an amount of money
from the public, which it promises to repay at a future date. Debenture holders are, therefore,
creditors of the company.
Debenture holders are paid a fixed stated amount of interest at specified intervals say six months
or one year. Public issue of debentures requires that the issue be rated by a credit rating agency
like CRISIL (Credit Rating and Information Services of India Ltd.) on aspects like track record
of the company, its profitability, debt servicing capacity, credit worthiness and the perceived risk
of lending. A company can issue different types of debentures (see Box C and D). Issue of Zero
Interest Debentures (ZID) which do not carry any explicit rate of interest has also become
popular in recent years. The difference between the face value of the debenture and its purchase
price is the return to the investor.
Merits
The merits of raising funds through debentures are given as follows:
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(i) It is preferred by investors who want fixed income at lesser risk;
(ii) Debentures are fixed charge funds and do not participate in profits of the company;
(iii) The issue of debentures is suitable in the situation when the sales and earnings are relatively
stable;
(iv) As debentures do not carry voting rights, financing through debentures does not dilute
control of equity shareholders on management;
(v) Financing through debentures is less costly as compared to cost of preference or equity
capital as the interest payment on debentures is tax deductible.
Limitations
Debentures as source of funds has certain limitations. These are given as follows:
(i) As fixed charge instruments, debentures put a permanent burden on the earnings of a
company. There is a greater risk when earnings of the company fluctuate;
(ii) In case of redeemable debentures, the company has to make
provisions for repayment on the specified date, even during periods of financial difficulty;
(iii) Each company has certain borrowing capacity. With the issue of debentures, the capacity of
a company to further borrow funds reduces.
Types of Debenture
1. Secured and Unsecured:
Secured debenture creates a charge on the assets of the company, thereby mortgaging the assets
of the company. Unsecured debenture does not carry any charge or security on the assets of the
company.
2. Registered and Bearer:
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A registered debenture is recorded in the register of debenture holders of the company. A regular
instrument of transfer is required for their transfer. In contrast, the debenture which is
transferable by mere delivery is called bearer debenture.
3. Convertible and Non-Convertible:
Convertible debenture can be converted into equity shares after the expiry of a specified period.
On the other hand, a non-convertible debenture is those which cannot be converted into equity
shares.
4. First and Second:
A debenture which is repaid before the other debenture is known as the first debenture. The
second debenture is that which is paid after the first debenture has been paid back.
2. Nature, issue and class.
3. Deposits and acceptance.
4. Creation of charges.
5. Fixed and floating charges.
6. Mortgages.
7. Convertible debentures.
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Page 41 of 41

Notes FS Unit 2

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2. Prospectus – information disclosure Æ

PROSPECTUS- MEANING AND ROLE

(a) to public through prospectus (herein referred to as "public offer"), or

Whereas a private company may issue securities —

(a) by way of rights issue; or

Point of comparison with respect to new law-

Section 55 A (Companies Act 1956): Power of SEBI

Point of comparison with respect to new law-

Requirements as to the issue of Prospectus

Section provides that where an advertisement of any prospectus of a company is published, it

Point of comparison with respect to new law-

¾ This section of the 2013 Act replaces section 66 (Newspaper advertisements of

Abridged form of prospectus

Point of comparison with respect to new law-

Instead of Information Memorandum, each application for securities shall be accompanied by

Shelf Prospectus – Section 31

No further issue of prospectus is required in respect of a second or subsequent offer of securities

Point of comparison with respect to new law-

Point of comparison with respect to new law-

Mis-statement in Prospectus and its consequences

Exception: This shall not apply to a person if he proves that:

I. such statement or omission was immaterial, or

Point of comparison with respect to new law-

Exception: No person shall be liable, if he proves that—

Point of comparison with respect to new law-

The provision says:

Point of comparison with respect to new law-

Point of comparison with respect to new law

omission of any matter in the prospectus.

Point of comparison with respect to new law-

Point of comparison with respect to new law-

Offer for sale or prospectus by implication or deemed prospectus

Act lays down the following provisions

a. the net amount of the consideration received or to be received by the company in

[* This sub-section (3) is yet to be notified]

Point of comparison with respect to new law-

3. Issue and allotment Æ

Procedures for Issue and Allotment of Shares | Provisions of Companies Act

Provisions of companies act relating to issue and allotment of shares --

ALLOTMENT OF SECURITIES UNDER THE COMPANIES ACT, 2013

(i) Private Placement

(ii) Right Issue

(iii) Preferential Allotment

¾ For adjustment against allotment of securities;

(vii) Prepare complete record of Private Placement in Form PAS-5.

2. RIGHTS ISSUE OF SHARES: -

3. PREFERENTIAL ALLOTMENT OF SHARES: -

¾ The objects of the issue;

Further issue of share capital (Section 62)

(4) Notwithstanding anything contained in sub-section (3), where any debentures

(a) for adjustment against allotment of securities; or

4. Shares without monetary consideration Æ

Issue of Shares for Consideration (Other than Cash)

Means of Issue of Shares

There are 2 generally two means of the issue of shares:

For Consideration Other than Cash

5. Non-opting equity shares Æ

What Is a Non-Equity Option?

Understanding a Non-Equity Option

Second Mortgage Debentures

1. Types of Debentures on the basis of Security

2. Types of Debentures on the basis of Convertibility

b) Non-convertible Debentures: On the contrary to convertible debentures, non-convertible

3. Types of Debentures on the basis of Permanence