CHAPTER-I

GENERAL CONCEPT OF SECURITIES

AN OVER VIEW

The term “securities” is very comprehensive in meaning

and nature. Therefore, to understand the general concept
relating to securities, one has to consider various aspects
thereof. In this regard, it is quite pertinent to describe some
general characteristics of shares, debentures and deposits.

Traditionally, securities can be separated into two

classes, namely, shares and debentures which legal practice
tries to classify but which in prevailing corporate scenario
merge into each other. The fundamental legal difference
between then is that the holder of a share is a member of the
company, 1 whereas the debenture holder is a creditor of the
company but not a member of it.

Previously, securities had not defined in the companies

Act 1956. It is only after the companies (Amendment) Act,
2000, the term securities has been defined. Clause (45AA) has
been inserted is section 2 of the companies under which
securities has been defined to mean “securities as defined in
clause (h) of section 2 of the securities contracts (Regulation)
Act, 1956 and includes hybrids”.

Under section 2 (h) of securities contracts (Regulation)

Act, “ Securities” includes: -

(i) shares, scripts, stock, bonds debentures, debentures

stock or other marketable securities of the like nature
in or of any incorporated company or other body
corporate;

(ia). Derivatives;
 (ib) units or any other instrument issued by any
collective investment scheme to the investors in
such schemes;

(ii) Government Securities;

(iia) Such other instruments as may be declared by the

central government be to securities; and

(iii) rights or interests in securities;

Company can now issue as well as invest all types of

securities as aforesaid. Prior to the said amendment, company
could issue and invest only in shares, debentures and bonds
as recognized by the companies Act.

Units of mutual funds and units or instrument issued by

the plantation companies are now covered by the term
“Securities” and hence such companies will now be required to
comply with all provisions relating to prospectus and can also
be held liable under the Act for misstatement therein.
Securities Debt instrument are also now covered by the term
“Securities”.

The term shares and debentures will now required to be

replaced by the term securities in certain provisions 2 under the
companies Act.

A share is not a sum of money but an interest measured

by a sum of money and made up of various rights and
liabilities. More precisely, a share is an existing bundle of
rights and liabilities as according to its nature and different
classes, e.g. preference shares carry preferential dividends
and preferential rights at the time of liquidation of the
company.

With the commencement of depository Act, 1996, dealing

in shares can be made in demat form under which the physical

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form of shares is dispensed with and the dealing in shares
shall be made in electronic form.

This chapter is divided into three parts, viz., shares,

debentures and deposits. An effort is being made to discuss all
the three kinds of securities as follows:

A. SHARES

1. MEANING AND NATURE

A company is not the property of its shareholders, but it

is a legal device adopted by shareholders for carrying on trade
or business as proprietors. A company is now considered as
species of social organisation with a life and dynamics of its
own and having a firm and deep-rooted affiliation with its
duties and responsibilities towards the contemporary society in
our socialist republic.

The capital of a company and its division into shares of

fixed denomination must be stated in the memorandum of
association of the company in the capital clause.

A share in a company is a proprietary interest in the

company 3 . It is a personal property, constituting a chose in
action 4 . A shareholder is the proportionate owner of the
company, but he does not own the company’s assets which
belong to the company as a separate and independent legal
entity 5 .

Share may be defined as a proportion to which the

shareholder is entitled in the profit of the company while it is a
going concern and in the return of capital when the company is
wound up. “Share” means share in the share capital of the
company and include stock except where a distinction between
stock and share is expressed or implied 6 .

Section 82 of the companies Act is also necessary to

understand the legal nature of shares. It provides that the

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share or other interest of any member in a company shall be
movable property transferable in a manner provided by the
articles of association of company but it is not a negotiable
instrument.

S.83 of the companies Act further says that each share in

a company shall be distinguished by its appropriate number.

In its nature, a share is not a sum of money, but a bundle

of rights and liabilities; it is an interest measured by a sum of
money. Its rights and liabilities are regulated by the articles of
association of the company 7 . In India a share is regarded as
goods as described by the section 2(7) of Sale of goods Act,
1930 which says that goods means any kind of movable
property other than actionable claim and includes stock and
shares.

In Borland’s Trustee V/S Steel Bros. Co 8 ., Farwell, J.,

defined the share “ as the interest of a share holder in a
company measured by a sum of money, for the purpose of
liability in the first place and of interest in the second, but also
consisting of a series of mutual covenants entered into by all
the share holders interse in accordance with the companies
Act.

Supreme Court of India in Commissioner of Income Tax

V/S Standard Vacuum Oil Company 9 approved the above
definition of share wherein it has observed “by a share in a
company is meant not only sum of money but an interest
measured by a sum of money and made up of diverse rights
conferred on its directors by the articles of the company which
constitute a contract between him and the company.

In Hindustan Lever Employees Union V/S Hindustan

Lever Ltd. & Others 1 0 , Sen, J., Observed that the shareholders
have no interest in the assets of the company while the
company is in existence. It is only at the stage of liquidation of

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the company that the shareholders become interested in the
assets of the company. A share represents a bundle of rights
which includes inter alia, the rights (i) to elect director; (ii) to
vote on resolution at meeting of the company; (iii) to enjoy the
profit of the company, if and when dividend is declared and
distributed; & to share in the surplus, if any, on its liquidation.

Thus a share confers its holders a right to receive a

proportionate part of the profits of the company, to take part in
the management of the business of the company in accordance
with the articles to receive a proportion of the assets in the
event of winding up and all other benefits of the membership.
Equally, a share carries the liability of share holder to pay its
full amount by making “calls” for payment, and the liability to
pay the full in the event of winding up etc. All these rights and
liabilities are subject to the terms and conditions laid down in
the articles of association. It is also stated that shares are
recognized in law, as well as in fact, as object of property,
which are bought, sold mortgaged and bequeathed. They are
indeed the typical items of property in the modern commercial
era and particularly suited to its demand because of their
exceptional liquidity 1 1 .

2. CLASSIFICATION OF SHARES

When the Principal rights carried by the shares differ

from those carried by other shares, a separate class of shares
is constituted. For instance, some shares carry preferential
right as to dividend or capital, or more votes than other share.

All the shares may be of one kind, or may be divided into

two different classes only if so authorized by the articles of the
company as originally framed or as altered by special
resolution. Capital must be divided into shares of a fixed
amount. The companies Act now permit only two kinds of

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shares to be issued, 1 2 viz., equity shares and preference
shares.

I. EQUITY SHARE

Equity shares may be of two kinds

(I) With voting right; or

(II) With differential rights as to dividend voting or

otherwise in accordance with such rules and
subject to such conditions as may be prescribed

Ordinary share capital or equity share capital is defined

in the companies Act as meaning all share capital which is not
preference share capital 1 3 .

Ordinary shares constitute the residuary class in which

everything is vested after the special rights of preference
classes if any, have been satisfied. They confer a right to the
“equity” in the company and, in so far as member can be said
to own the company the ordinary shareholders are its
proprietors. If the company’s shares are all of one class, these
are necessarily ordinary shares, and if a company has a share
capital it must have at least one ordinary share whether or not
it also has preference shares 1 4 .

Ordinary shares usually carry the main financial risk if

the company is unsuccessful, but they also carry the greatest
prospect of financial reward if the venture of company is
successful 1 5 .

Distinction may be drawn between ordinary shares,

ranking equally as regards financial participation by dividing
them into separate classes with different voting rights. They
will be distinguished as “A”, “B”,”C” etc. ordinary shares. Many
public companies have issued non-voting “A” ordinary shares.

SWEAT EQUITY SHARES: - S. 79A 1 6 of the companies Act,

deals with the sweat equity shares. They are issued by the

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companies in lieu of services. The expression ‘sweat equity
shares’ means equity shares issued at a discount or for
consideration other than cash for providing know-how or
making available rights in the nature of intellectual property
rights or value additions by whatsoever name called 1 7 .

The issue should be authorized by a special resolution at

a general meeting of the company. The resolution should
specify the number of share and their current market price and
also the class or classes of directors or employees to whom
they are to be issued and consideration for the sweat equity
shares proposed to be issued. They can be issued only after
one year from the commencement of business.

Shares issued as sweet equity shares are to be treated

for all purposes like other shares, and therefore, all the
limitations, restrictions and provisions relating to equity shares
will be applicable to them.

Sweet equity shares shall be issued in accordance with

SEBI regulations. Where the shares are not listed at a stock
exchange, they can be issued as sweet equity shares in
accordance with the guidelines.

II. PREFERENCE SHARE:-

Preference share capital means that part of the share

capital of a company which fulfils following two requirements 1 8 .

(i) During the continuance of the company it must be

assured of a preferential dividend. The preferential
dividend they may consist of a fixed amount payable
to preference share holders before anything is paid to
ordinary shareholders, or the amount payable as
preferential dividend may be calculated at a fixed rate.

(ii) On the winding up of the company it must carry a

preferential right to be paid, i.e. the amount paid up
on preference shares must be paid back before

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 anything is paid to the ordinary shareholders. This
preference, unless there is an agreement to the
contrary, exists only up to amount paid up or deemed
to have been paid up on the share.

(a) Cumulative And Non Cumulative Preference Share-:

Preference shares may be either cumulative or non

cumulative. If there is no profits in one year and the arrears of
dividends are to be carried forward and paid out of the profits
of subsequent year. Preference shares are known as
cumulative, and on the other hand, it unpaid dividends lapses.
The share are said to be non cumulative 1 9 . It is decided by the
terms of the issue and provisions of the company’s articles that
they are cumulative or non-cumulative. But if there is no clear
provision to the contrary preference shares are deemed as
cumulative. Reference is made of a case, namely, foster v/s
coles, foster and sons Ltd. 2 0 : -

Where it was provided by the memorandum and articles

of a company that preference shares were carrying cumulative
preferential dividends. They were reconstructed and clause 95
of the articles was altered by striking out the word “cumulative”
before preference. Even so the court held that the holders of
preference shares were entitled to a cumulative preferential
dividends as the word “cumulative” was dropped with the
intention of converting the preference shares into non
cumulative. The preference shares were presumed to be
cumulative unless there was a clear provision in the articles to
that effect.

(b) Participating And Non-Participating Preference

Shares-:

In case after the fixed amount and some amount of

dividends have been paid to the preference share holders and
ordinary shareholders respectively, there is surplus profits

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which are proposed to be distributed among the shareholders.
Again, in the winding up of a company after paying back both
the preference and ordinary shareholder if there is a surplus.
In both the cases if preference shareholders are also entitled
to a share in the distribution on surplus, they are known as
participating preference share and if not, they are called as
non-participating shares.

Generally preference shares are presumed to be non-

participating. The preference share holders are not entitled to
any share in the distribution of any such surplus unless there
is a clear provision in the terms of issue, or in memorandum
and articles conferring upon them the right of participating
thus, for example, in will V/S united Lanket. plantation
company Ltd 2 1 .

Where it was provided in the articles of a company that

preference shareholders were entitled to a cumulative
preference dividend at the rate of 10 percent per annum and
that such preference shares ranked both as regards capital
and dividend in priority to other shares. The court held that
preference shareholders were not entitled in the distribution of
the surplus profits to anything more than 10 percent dividend.

(c) Redeemable And Irredeemable Preference Shares-:

Under section 80 of the companies Act a company has

power to issue redeemable preference shares if its articles
authorize to issue such kind of share. However option of
redemption lies with the company. Paying back of shares is
called redemption. There are some conditions with respect to
the fund out of which shares can be redeemed which are as
follows. 2 2 : -

(i) The shares to be redeemed must be fully paid.

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(ii) Shares shall be reduced only out of profits of the
company, which would otherwise be available for
dividends.

(iii) When redemption is made out of profit a sum equivalent

to the amount paid on redemption shall be paid to a
reserve fund to be called ‘capital redemption reserve
account’.

The share which cannot be paid back is called

irredeemable preference shares. The amendment Act of 1988
abolished the category of irredeemable preference shares.
Sub- section (5-A) inserted by the amendment Act says that no
company limited by shares shall issue any preference share
which is irredeemable or is 20 years 2 3 from the date of issue.

A new section 80-A was also inserted by the companies

(Amendment) Act, 1988 to provide about the redemption of
existing irredeemable preference shares. They must be
redeemed within 5 years from the effective date of the
amendment. The section further says that shares which are
redeemable within ten years will be redeemed as they fall, but
the period should not be more than 10 years.

III. BONUS SHARES:-

These shares are allotted by the company in satisfaction

of bonus. Sometimes huge profits are accumulated and the
company, with the intention to distribute these profits and
instead of paying the dividends or bonus in cash, issue fully
paid up new shares to its members of applies the dividends (or
bonus) belonging to the shareholder in the payment of the
unpaid value of the shares already held by them. The fully paid
up new shares so issued to the old shareholders of the
company are known as bonus shares. These shares cannot be
issued unless there is a clear provision in the article to that
effect, and the company has sufficient undistributed profits. A

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return of the issue of bonus shares stating their number and
nominal amount is required to be filled by the company with
the Registrar.

IV. UNCLASSIFIED SHARES: -

In recent years it has become common to describe the un

issued shares as unclassified shares where the whole of the
authorized share capital is not issued. This practice is
borrowed from the U.S.A. which is logical is so far as it
recognizes that until shares are issued they confer no rights at
all and that the rights ultimately attached to them depends on
the company’s decision at the time of issue.

3. DEPOSITORY SYSTEM:-

Depository system came into being with the

commencement of Depositories Act, 1996. It provides for
dealing in shares in demat forms under which the physical form
of share is evaded and trading in shares shall be made by
electronic mode.

Prior to the coming into existence of Depositories Act,

the whole business of dealing in securities was effected by
their physical holding resulting considerable inconvenience to
the investors due to bad delivery, duplicate or fake share
certificate, undue delay in transaction of securities by the
companies and fraudulent transfer of shares etc.

In order to remove such inconvenience,

Government passed Depositories Act thereby dealing in
securities shall be made through electronic form, which is an
efficient mode of transaction of shares. Ownership of shares
changes automatically on the basis of its delivery on the one
hand and payment on the other.

The term ‘depository’ has been defined in section 2 (I)(e)

of Depositories Act, 1996, as a company formed and registered
under the companies Act and which has been granted a

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certificate of registration under sub-section (IA) of section 12
of the securities and exchange Board of India, 1992.

It is also defined in SEBI guidelines for Disclosure and

Investor Protection, 2000. Clause 1.2 defined “depository”
means a body corporate registered under SEBI (Depositories
and Participants) Regulation, 1996.

Therefore, it is required that each depository has to be

registered with SEBI and received a certificate of registration
on fulfillment of necessary conditions.

In case investors willing to join the depository system

have to be registered with one or more Depository Participants
(DP) who will work as an agent for the depository. Section 2 (I)
(g) of Depositories Act defines the term ‘participant’ as a
person registered as such under sub-section (IA) of section 12
of the SEBI Act, 1992. Thus, each participant is also required
to be registered with SEBI.

Participants will be custodial agencies, i.e., banks

financial institutions and large corporate brokerage firms. They
are required to maintain securities account’s balance and shall
inform the investors about their holding of shares from time to
time. Demat account can only be opened with any Depository
Participants of National Securities Depository Ltd. (NSDL) and
Central Depository of Securities Ltd. (CDSL). NSDL and CDSL
are Depository operations modules 2 4 .

I. DEMATERIALISATION OF SHARES:-

It is a process by which the physical certificate of an

investor is taken back by the company and converted into the
electronic form and an equivalent number of securities are
credited in the investor account with depository participant
(DP). For the purpose of joining the depository system and to
the convert the physical shares into electronic holding,
following steps are to be taken 2 5 : -

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 a) Share holder has to open an account with any DP of
his choice, by

(i) filling up the account opening form available with

DP, and

(ii) signing participant client agreement;

b) filling of a dematerialization request form to DP;

c) submit the share certificates duly cancelled by writing

“Surrendered for dematerialization” along with the
Dematerialization Request form (DRF) to DP;

d) the dematerialization form along with the share

certificates will be sent by the DP to the Registrar and
Transfer Agent (R&T) of the company;

e) if found in order by the R&T Agents, the shares

certificates are cancelled and confirmation in
electronic mode made to NSDL/CDSL. NSDL/CDSL, in
turn, confirms dematerialization to the DP;

f) the DP credits the account of the investor with the

number of shares so dematerialized and the investor
then holds the shares in electronic mode; and

g) the DP will give a periodic statement of holding and

will update the shareholder’s accounts and inform the
same to him.

II. REMATERIALISATION OF SHARES-:

It is a term used for converting electronic holding back

into physical shares certificates. The process of
rematerialisation of share is also carried out with the DP of
shareholders. Following steps are to be taken in connection
with the Rematerialisation of shares 2 6 .

(a) Shareholder has to submit Rematerialisation Request

Form (RRF) to the DP;

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 (b) DP intimates NSDL/CSDL of the request through the
system;

(c) DP submits Rematerialisation Request Form (RRF) to

the Registrar of the company;

(d) NSDL/CDSL confirms Rematerialisation Request to

the Registrar of the company;

(e) NSDL/CDSL updates accounts and down loads details

to DP; and

(f) the Registrar of the company dispatch certificates to

the shareholder.

III. TRADING IN DEMATERIALISED SHARES:-

Demat shares are traded in the same manner as share in

a physical from, i.e., through a broker. In handling of demat
shares, the only intermediary is DP but trading cannot be done
through the DP itself. When shares are purchased or sold, the
DP should be duly informed so that he may receive or release
the requisite number of shares into or from relevant account 2 7 .
Trading in dematerialized shares is possible on those stock
exchange whose clearing houses are linked to the Depository,
Viz., Bombay Stock Exchange (BSE), National Stock Exchange
(NSE), Delhi Stock Exchange (DSE), Madras Stock Exchange,
Banglore Stock Exchange, and the Over The Counter
Exchange of India (OTCEI).

B. DEBENTURES

1. MEANING AND DEFINITION

Debentures play a crucial role in corporate finance and

constitute a valuable instrument by which companies raise
loans for meeting their requirement of long term and medium
term financial needs.

A debenture is a certificate of loan issued by a company.

It is a type of securities and has been defined in the

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companies Act in section 2 (12) in the following words,
“Debentures includes debenture stock, bonds and any other
securities of a company whether constituting a charge on the
company’s assets or not.”

It is very difficult to define the term debenture. In modern

commercial parlance, it is used as having elastic
characteristics. It is not a technical term. Chitty. J., observed
in a case 2 8 .

“I cannot find any precise legal definition of the term. It is

not either in law or commerce a strictly technical term, or what
is called a term of art.”

In Edmonds V/S Blaina 2 9 , the same learned judge

described the meaning of the term debenture as follows:-

“The term itself imports a debt-an

acknowledgement of a debt and speaking of the
numerous and various forms of instruments which have
been called debenture without any one being able to say
the term is incorrectly used, I., find that generally if not
always, the instrument imports an obligation or covenant
to pay. This obligation or covenant is in most eases at
the present day accompanies by some charge or
security.”

Topman says that debenture is a document given by a

company as evidence of debt to the holder usually arising out
of the loan and most commonly secured by charge 3 0 .

In modern commercial usage a debenture devotes an

instrument issued by the company normally but not
necessarily, called on the face of it a debenture and providing
for the payment of, or acknowledging the indebtness of a
specified sum say 100 pound at a fixed rate, with interest
thereon 3 1 . It usually but not necessarily gives a charge by a

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way of security, and is often though not invariably expressed to
be one of a series of like debentures 3 2 .

Indeed no definition can help in all cases to know

whether a particular document issued by a company is a
debenture or not. “We must look at the substance of the
instrument itself and without the assistance of any precise
legal definition, from the best opinion we can ascertain
whether the instrument is or is not a debenture 3 3 . This principle
has been followed by the Bombay High Court in Laxman
Bharamgi V/S emperor 3 4 .

A private company was incorporated for the purpose of

selling the patron “Bonds” and to invest the money realized by
the sale of those bonds. The form of the bond bore a serial
number. It acknowledged a debt; it was one of a series; it bore
the company’s seal; it provided for the payment of interest by
determining the luck number.

The court observed: “ The main features which in our

opinion tend conclusively to show that these ‘patron Bonds’ are
debentures are the acknowledgement of debt, the promise to
return it, the fact that they form a series bearing consecutive
number.

Debenture is a species of debt instrument. Debt

instrument has been defined in SEBI guidelines, 2000.
According to clause 1.2, “Debt instrument” means an
instrument which creates or acknowledges indebtness, and
includes debenture, stock, bonds, and such other securities of
a body corporate, whether constituting a charge on the assets
of the body corporate or not.

2. USUAL CHARACTERSTICS OF A DEBENTURE:-

(a) A debenture is in the form of certificate issued under the

seal of the company

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 (b) The certificate is generally an acknowledgement of
indebtedness.

(c) A debenture is as a rule one of a series, yet a single

debenture is not uncommon.

(d) A debenture generally creates a charge on the under-

taking of the company or on some class of its assets or
on some part of its profits. However, a debenture which
creates no such charge is perfectly valid.

The legal relationship between a company and its

debenture holder is simply the contractual relation ship of
debtor and creditor, coupled, if the debt is secured on some or
all of the company’s assets, with that of mortgagor or
mortgagee 3 5 . The debenture holder is in law not a member of
the company having rights in it as in the case of shareholder 3 6 ,
but a creditor of the company having rights against it. However
the difference between them is not as clear, for the debenture
may give the holder contractual rights viz., rights to appoint a
director, right to a share of profit to repayment at a premium,
right to attend and vote at general meeting and even right to
convert his debenture into equity shares.

3. KINDS OF DEBETURES

I. SECURED AND UNSECURED DEBENTURES

Since a debenture does not, necessarily contain a charge

debentures are classified, oftenly, into secured and unsecured
debentures. However, it is a matter of great practical
importance that debentures are normally of a secured type.
Debenture may be secured:

(a) by way of a specific charge or fixed charge or mortgage

on particular property of the company; or.

(b) by way of a floating charge; or

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 (c) by both a specific and floating charge. It is usual in a
case when specifically secured debentures are issued to
add by way of a further security, a floating charge.

When the debentures or debentures stock constitute an

unsecured liability of the company, they are called as
unsecured debentures.

CHARGE:-

The discussion of debenture would not be completed unless we

discus the concept and kinds of charge. It is usual, though not
necessary, for debentures to create a charge on the company’s
assets. The charges which a company may create over it
assets are of two kinds, viz., fixed charge and floating charge.

(a) Fixed Charge

A fixed charge is a charge on some definite and

ascertained property of the company. When debentures are
secured by creating a charge on a definite and ascertained
property of the company, viz., land, it is said that the
debentures have been secured by a fixed or specific charge.
Therefore, under a fixed charge certain property of the
company is mortgaged with the holder of the debentures, the
company cannot transfer the property under charge without the
consent of the holder of charge and if it is transferred without
his consent, the transfer will be effective subject to the charge.
In the winding up of the company the holder of a debenture
secured by a fixed charge ranks as a secured creditor in
respect of the debt due to him on the debenture.

(b) Floating Charge

When a charge is created on property which is not fixed

but changing or unstable, it is known as floating charge. It is a
charge on the class of assets of the company present and
future which are constantly undergoing a change from time to
time in the ordinary course of business. For example, where a

23
debenture is secured by creating a charge on “the undertaking
all sums of money arising therefrom,” the charge will be valid
as a floating charge. 3 7

Thus, floating charge is a charge of ambulatory in nature,

floating with the property it is intended to cover. In a floating
charge the charge remains floating and the property liquid until
some default is made and the debenture holder takes steps to
enforce his security or until winding up 3 8 . The chief
characteristics of the floating charge is that the company is
free to deal with its assets so long as a it is a going concern or
till the charge holder intervenes to enforce his security. In that
event the charge crystallizes and is converted into a fixed
charge. His right to intervene may of course be suspended by
agreement. But if there is no agreement for suspension, he
may exercise his right when ever he pleases after default.

Lord Macnaghten 3 9 has explained the nature of a floating

charge in the following terms: “a floating security is an
equitable charge on the assets for the time being of a going
concern.”

The main characteristics of a floating charge which

distinguish it from a fixed charge have been summed up by
Romer L.J., in Re Yorkshire Woolcombers Association Ltd 4 0 .

“A mortgage or charge by a company which contains the

three following characteristics is a floating charge.

(i) It should be a charge upon a class of assets both

present and future.

(ii) The class of assets charged must be one which in the

ordinary course of business of the company would be
changing from time to time.

(iii) It should be contemplated by the charge until some

steps is taken by the mortgagee, the company shall

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 have the right to use the assets comprised in the
charge in the ordinary course of business.

A charge crystallizes or becomes fixed under the

following circumstances:

(a) when the company ceases to carry on business;

or

(b) when the company is wound up or even if it is

voluntary wound up for reconstruction; or

(c) when the company makes a default in paying

principal or interest and the holder of the charge
takes steps to enforce the security, e.g.,
appointing a receiver; or

(d) when the sum lent becomes repayable on

account of breach of any condition contained in
the debenture by the company.

Section 534 clearly provides that a floating charge

created within twelve years immediately preceding the
commencement of winding up shall be invalid unless it is
proved that the company immediately after the creation of
charge was solvent. Even a charge created within twelve
months immediately preceding the commencement of winding
up of the company is valid to the extent of the cash paid or to
be paid to the company in consideration of such charge,
together with interest on that amount at the rate of 5% per
annum or such other rate as may from the time being notified
by the central government in this behalf in the official gazette.
In Re Eric Holmes Property Ltd., 4 1 the creditor in whose favour
a charge was created gave 400 pound in cash to the company
at that time. The proceedings of the winding up of the company
were commenced within 12 months from the date of the
charge. The charge was held to be valid upto 400 pound.

25
(II) REDEEMABLE DEBETURES:-

Generally debentures are redeemable the company has

the right to pay back the debenture holder and have its
property released from the mortgage or charge on the expiry of
the term of loan. Redeemed debentures can be re-issued 4 2 .
The company may re-issue the same debentures or other
debentures in their place. Upon such re-issue the person
entitled to the debentures has the same right and priorities as
if the debentures had never been redeemed 4 3 .

Where a company has, either before or after the

commencement of the Act, deposited any of its debentures to
secure advances from time to time on current account or
otherwise, the debentures shall not be deemed to have been
redeemed by reason only of the account of the company having
ceased to be in debit whist the debentures so deposited.

(III) IRREDEEMABLE OR PERPETUAL DEBENTURES:-

Perpetual debentures are those debentures which

contain no clause as to payment or which contains a clause
that it shall not be paid except in the event of a winding up or
some serious default by the company. According to section
120, a condition contain in any debenture shall not be invalid
by reason only that thereby, the debentures are made
irredeemable, or redeemable only on the happening, however
remote, or on the expiration of a period, however remote.

For example mortgage of land by a company to a single

mortgagee is a debenture within this section, and is not invalid
by reason of the date of redemption being postponed to a
remote period 4 4 .

The issue of perpetual debentures amounts to the

granting of a perpetual annuity. If the debentures are secured
by a floating charge, the money secured will become payable

26
on the company’s going into liquidation and the security will be
enforceable on the class of assets as it exist at that time.

(IV) CONVERTIBLE DEBENTURES :-

A company intending to raise additional equity capital at

a particular time may find that the prevailing conditions in the
capital market are not congenial for the issue of equity shares.
Under such circumstances, the company may issue debentures
with the provision that holder will have the option of converting
them into equity shares after the completion of specified
period, say 3 to 5 years. Thus, convertible debentures bay be
defined as debentures which are convertible into shares at the
option of the holders after a specified period.

They can be issued by the company any which are a

hybrid form between debentures and shares. A convertible
debenture may be issued secured and unsecured and contains
an option entitling the holder to convert his debt, into ordinary
or preference shares of the company at stated rate of
exchange and at times stated in the debentures. Once he has
exercised his option, he cannot revert back to his former
status.

Convertible debentures may be issued as debentures or

debentures stock. The company must maintain at all times
sufficient unissued capital to cover all outstanding conversion
rights.

(V) REGISTERED DEBENTURES AND DEBENTURES TO

BEARER: -

Company may issued debentures as:

(a) Debentures payable to registered holder.

(b) Debentures payable to bearer.

(c) Hybrid combination of (a) and (b) -

27
 (i) either debentures payable to registered holder, but
interest payable to bearer, or

(ii) debentures payable to bearer, but with power for

bearer to have them placed on a register and to
have them at any time withdrawn there from.

Indian companies Act., 1956 provide that every company

shall keep a register of the holders of its debentures 4 5 . The
name of registered holder must be placed both on the
debenture certificate and on the company’s register. He can
transfer his debentures in the open market in just the same
way as shares are transferred 4 6 . Transfer will have to be
registered with the company. Registration of transfer can only
be avoided by issuing debentures payable to bearer, as the
company has not maintain a register of such debenture
holder 4 7 . Such debentures are transferable, like negotiable
instrument, by simple delivery and free from equities and are
known as debentures payable to bearer.

In Calcutta safe deposit co. Ltd. V/S Ranjit Mathura das

Sampat 4 8 , The court held that a person to whom a bearer
debenture is transferred becomes its holder and will be entitled
to recover the principal and interest when due. If the company
defaults to pay him, he can also apply for winding up and, if
the petition is otherwise competent the company cannot ask
him to explain why he did not collect by the interest for a long
time. The court further goes on to say that section 118 of the
Negotiable instrument Act., applies, and therefore, every
holder of bearer debentures is presumed to be holder in due
course 4 9 unless the contrary is shown.

INDEX RELATING TO THE DEBENTURES: -

Where the number of debenture holders exceeds fifty, an

index should be maintained which should enable the entries
relating to a debenture holder to be readily found 5 0 . Any

28
change in the number of debenture holders and their
particulars should be reflected within fourteen days.

C DEPOSITS

One of the methods by which a company can raise

capital is by inviting and accepting fixed deposits from the
public or from its members. Since these deposits are
unsecured, section 58 A was inserted by the companies
amendment, Act 1974 in order to safeguard the interest of the
depositors.

Under section 58- A (1) the central government has, in

consultation with the Reserve Bank Of India, prescribed the
limits up to which, the manner in which and the conditions
subject to which deposits may be invited. Deposits may be
invited or accepted by a company either from the public or
from it members. Deposits should be invited in accordance with
the deposits rules and by an advertisement accompanies by a
statement showing the financial position of the company in
such form as may be prescribed by the rules and the company
inviting deposits should not be involved in default in the
repayment of any deposit or part thereof and any interest there
upon in accordance with the terms and conditions of such
deposits 5 1 . If any deposit is accepted or renewed in
contravention of rules as may be made under sub-section (i),
the company shall repay it within thirty days or within further
thirty days if allowed by the central government on sufficient
cause shown by the company.

Till 1988, the depositors had only two remedies if a

company failed to repay the deposits-(1) a civil suit for the
recovery of money, or (2) a petition for winding up of the
company on the ground that the company was unable to pay
its debts under sections 433 (e) and 434 of the companies
Act.

29
 These two remedies are costly and time consuming.
Therefore under the Amendment Act, 1988 sub sections (9)
and (10) provide for a speedier and summary remedy.

Where deposit is not refunded in accordance with its

terms and conditions. The Company Law Board may order
repayment. It may do so on its own motion or on the
application of the depositor. The Board may extend the
schedule for repayment.

In R. Pure Drinks (New India) Ltd 5 2 . Court held that Company

Law Board, while ordering for repayment, did not authorize
reduction in share capital. It may take into account the interest
of the company and also of public interest. The Board may
require repayment either in full or in part and subject to such
conditions and within such time as may prescribe. The
company and any interested person should be given an
opportunity of being heard.

30
 CHAPTER-I
NOTES AND REFERENCES

1. A person may, however, becomes a member without

being a shareholder in case the company has not a
share capital.

2. Sections 55 to 81, 108, 109, 110, 112, 113, 116, 117,

118 119, 120, 121, 122, 206, 206A & 207 and all other
sections wherever they appear.

3. Hohlo, case book on company Law; II Ed. P. 203.

4. There are two kinds of immovable property, viz.,

chose in possession and chose-in-action. Chose-in
possession devotes the property of which one has
actual physical possession, whereas chose-in-action
means property of which one does not have physical
possession instead has a right to it, which is
enforceable by a law suit. A company’s share is a
chose in action and a share certificate is evidence of
it.

5. Palmer’s company Law 21 s t Ed. P. 280.

6. See the provision of section 2(46) of companies Act,

1996.

7. See the contents of schedule I, Table A in respect of

rights and liabilities of shareholders.

8. (1901) I Ch. D. 279 (288).

9. (1966) 1 Comp. L.J. 187. (SC).

10. (1994) 4 Comp. L.J. 267 (SC).

11. L.B.C. Gower. The Principles of Modern Company

Law, 5 t h Ed. P. 360.

12. S. 86 of the companies Act, 1956.

31
13. S. 85 (2) of the Act.

14. L.B.C. Gower, Principles of modern company Law, 5 t h

Ed. P. 283.

15. Palmer’s Company Law, 21 s t Ed. P. 283.

16. It was added by the companies (Amendment) Act.

17. Explanation II of section 79-A.

18. S. 85 (1). This is not necessary to give any priority to

the amount of dividend remaining unpaid up to the
commencement of winding up or to any fixed premium
or premium on any fixed scale specified in the
memorandum or articles of the company as provided
in S. 85 (1)&(ii).

19. Avtar Singh, company Law 11 t h Ed. P. 186.

20. (1906) 22 TLR 555.

21. (1912) 2 Ch. D. 571.

22. Proviso of section 80 (1).

23. After the Amendment Act of 1996.

24. www.nsdl.co.in . NSDL goes live in May6, 1999.

25. http://www.capital market.com.

26. Supra, 24.

27. http:///www .ITspace.com

28. Levy v/s Abercorris company 37 Ch. D. 260, 264.

29. (1887) 36 Ch. D. 215, 219.

30. Topman’s Company Law, 168, 12 t h Ed.

31. Palmer’s company Law, 21 s t Ed. P 364.

32. Ibid.

33. Supra, 27.

32
34. AIR 1946 Bom. 18.

35. L.B.C. Gower. The principles of company Law, 5 t h Ed.

P. 377.

36. Sometime shareholder is not a member of the

company as in case of bearer of share warrant. He is
a shareholder but not a member as his name is struck
from the register of membership [Section 115(1)].

37. Re Panama New Zealand and Australia Royal Mail Co.

(1870) 5 Ch.App. 318.

38. Gower, L.B.C., The Principle of Modern Company Law,

5 t h Edn., 8.

39. See Govt. Stock Co. v/s Manilal Rail Co.(1897)

A.C.81.

40. (1903) 2 Ch. 284.

41. (1965) 2 All.E.R. 333; (1966) 1 Comp. L.J. 19.

42. S. 121 (1) Provides that if there is no provision to the

contrary in the articles, or in the conditions of the
issue, or if there is no resolution showing an intention
to cancel the redeemed debentures, the company shall
have the power to keep the debentures alive for the
purpose of re-issue.

43. S. [121(2)].

44. Knightsbridge Estates Trust Ltd. v/s Byrne (1940) AC.

613.

45. S. 152 of the Act.

46. S. 108 of the Act.

47. S. 152(4) of the Act.

48. (1971) 41 comp cas. 1063, 1070, Cal.

33
49. Any person who for consideration becomes the
possession of negotiable instrument, if payable to
bearer thereof, if payable to thereof to order, before
the amount mentioned in it became payable and
without having sufficient cause to believe that the
defect existed in the title of the person from whom he
derived his title.

50. Avtar Singh, company Law 11 t h Ed. p. 364.

51. S. 58A(2) of the Act.

52. (1995) 83 Comp. Cas. 174 CLB.

34