UNIT III

Capital contributed by the owner or entrepreneur of a business, and obtained, for example, by means of savings or inheritance, is known as own capital or equity, whereas that which is granted by another person or institution is called borrowed capital, and this must usually be paid back with interest. The ratio between debt and equity is named leverage

OWNED CAPITAL
Ownership capital consists of amount contributed

by owners as well as profits

FEATURES
PROVISION OF RISK CAPITAL PERMANENT SOURCE OF CAPITAL SEPARATION OF OWNERSHIP AND

MANAGEMENT NO SECURITY REQUIRED

we may in general follow the customary line of distinction and say that most bonds, notes, accounts payable, and other obligations of a corporation, may be regarded as representative of borrowed capital, and most shares of capital stock may be regarded as representative of owned capital.

DEBT CAPITAL
It includes all funds available by way of loans or

credit
FEATURES
TIME HORIZON NEED FOR SECURITY REPAYMENT CONTROL

SHARE- DEFINITION
Section 2(46) of the Companies Act, 1956 has

defined a share as follows :

Share means share in the Share capital of the

company and includes stock, except when a distinction between stock and share is expressed or implied
A share is the interest of the shareholder in the

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 series of covenants entered into by all the shareholders inter se.

SHARE CAPITAL
In simple words : Share capital denotes a

particular amount of money with which a business is started

In the case of a company : Share capital refers to

he amount of money raised by the issue of shares

SHARE CAPITAL
Under the companies Act, the capital of the

company refers to the following

Nominal or registered capital Issued capital Subscribed capital Called-up capital Paid up capital Reserve capital

KINDS OF SHARES
EQUITY SHARES
With Voting rights With differential rights

PREFERENCE SHARES
Cumulative & Non Cumulative Participating & Non participating Convertible & Non Convertible

Redeemable & Irredeemable

EQUITY SHARES
WITH VOTING RIGHTS
The holder of such Equity shares will have the right

to vote on every resolution placed before the company. His voting rights on a poll will be in proportion to his share of the paid up equity capital of the company

EQUITY SHARES
WITH DIFFERENTIAL RIGHTS
The holders of such equity shares have differential rights

as to dividend, voting or otherwise in accordance with rules prescribed by the Central Govt.
The articles of association must authorize the issue of

such equity shares

Approval of shareholders must be obtained in GM by

passing an ordinary resolution

Such shares shall be allowed to the extent of 25% of

the total issued share capital

EQUITY SHARES
WITH DIFFERENTIAL RIGHTS

The company must have distributable profits for 3

financial years preceding such issue & has not defaulted in the repayment of its deposits or debentures on maturity or interest thereon
The company will not be allowed to convert its

equity capital with normal voting rights into equity capital with differential voting rights & vice versa
Members holding equity shares with differential

rights as to voting or dividend shall be entitled to bonus shares and right shares of the same class of the same class

PREFERENCE SHARES
TYPES OF PREFERENCE SHARES

Cumulative & Non Cumulative Participating & Non participating

Convertible & Non Convertible

Redeemable & Irredeemable

PREFERENCE SHARES
REDEEMABLE PREFERENCE SHARES

In case of such shares the capital has to be

returned during the lifetime of the company as per the terms of issue or whenever the company so chooses after giving notice Paying back of capital is known as redemption No company can now issue preference shares which are redeemable after the expiry of a period of 20 years from the date of issue (Sec.80(5)A)

PREFERENCE SHARES
REDEEMABLE

PREFERENCE

SHARES

(CONDITIONS)
The Articles must authorise the issue of

such shares No such shares shall be redeemed except out of the profits of the company or out of the proceeds of the fresh issue of shares No such shares shall be redeemed unless they are fully paid up The premium, if any, payable on redemption shall be provided out of the profits of the company or out of the companys premium

PREFERENCE SHARES
REDEEMABLE

PREFERENCE

SHARES

(CONDITIONS)
If such shares are redeemed out of the

profits of the company, the company shall create a reserve fund to be called Capital Redemption Reserve Account out of its divisible profits The redemption of such shares shall not be taken as reduction of the companys authorized share capital The CRRA(capital redemption reserve account) may be applied by the company in

PREFERENCE SHARES
REDEEMABLE PREFERENCE SHARES (NOTICE)
Notice of redemption must be sent to the registrar within

one month of the date of redemption

PREFERENCE SHARES
IRREDEEMABLE PREFERENCE SHARES
In case of Irredeemable Preference Shares the capital

has to be returned on the winding up of the company But after the commencement of Companies (Amendment) Act, 1988, no company can issue any preference shares which are irredeemable

PREFERENCE SHARES
Redemption

of existing PREFERENCE SHARES

IRREDEEMABLE

All existing irredeemable preference shares shall be

redeemed within a period of 5 years from the commencement of this Act (15th June 1988) Where a company is not in a position to redeem any such shares within the aforesaid period, it may, with the approval of NCLT, issue further redeemable preference shares of an equal amount & thereupon the unredeemed preference shares shall be deemed to have been redeemed by operation of law.

VOTING RIGHTS
VOTING RIGHTS OF PREFERENCE

SHAREHOLDERS
A preference shareholder of a company will have the right

to vote on resolutions which directly affect his rights.

A preference shareholder is entitled to vote if dividend has

not been paid in the case of cumulative preference shares for an aggregate period of not less than 2 years preceding the commencement of the meeting

VOTING RIGHTS
VOTING RIGHTS OF PREFERENCE

SHAREHOLDERS
In the case of non cumulative preference shares, they will

have a right to vote on all resolutions if their dividend remained unpaid for two financial years immediately preceding the meeting or for any 3 years during a period of six years ending with the financial year preceding the meeting
The voting rights of preference shareholders will be in

proportion to the paid up value of preference capital to the total paid up equity capital of the company

SOURCES OF FINANCE
Issue of shares
Issue of debentures Loans from financial institutions

Retained profits
Public deposits

ISSUE OF SHARES EQUITY SHARES

FEATURES
Residual claim on income

Residual claim on companys assets in case of

liquidation.
Right to control: Legal power to elect directors on the

board
Voting rights Limited Liability Provides risk capital

ISSUE OF SHARES EQUITY SHARES

Merits
Permanent Capital: No

Demerit scost: Dividends not Higher

tax deductible and higher floatation costs
Risk: Uncertainty regarding

liability for returning the capital

Borrowing base: Increases the

companys borrowing base

Dividend payment discretion:

Not legally obliged to pay dividends.

dividend and capital gains; investors demand a high rate of return

Earnings dilution: When

profits do not increase in proportion to increase in share

Ownership dilution

ISSUE OF SHARES PREFERENCE SHARES

FEATURES
A hybrid security It has features of both ordinary

shares and debentures Prior claims on income and assets over ordinary shares Fixed Dividend: Expressed as a percentage

ISSUE OF SHARES PREFERENCE SHARES

FEATURES Cumulative dividends: All past unpaid preference dividend will be paid before ordinary dividends are paid Participation: May participate in extra ordinary profit earned by the company
Voting Rights: Section

87 of the act confers voting rights on preference shareholders in certain circumstances. They have a right to vote only on resolutions that directly affect the rights attached to preference shares. Any resolutions regarding the winding-up of the company or the repayment or reduction of share capital are deemed directly to affect the rights attached to preference shares.

Convertibility: Can be converted fully/partially into ordinary shares

ISSUE OF SHARES PREFERENCE SHARES

MERITS

Risk less advantage: Fixed obligation

Payment of dividend can be postponed

Limited

voting rights: Control shareholders is preserved

of

ordinary

Fixed dividend

ISSUE OF SHARES PREFERENCE SHARES

DEMERITS

Non deductibility of dividends; costlier than debentures

Commitment to pay dividend: If cumulative, then dividends

have to be paid

DEBENTURES
FEATURES

A long term promissory note for raising loan

capital
Debentures holders are the creditors of the firm
Interest rate: Fixed; called contractual rate of

interest
Interest is tax deductible Maturity: Specific period of time Claims

on assets and income: Claim on

DEBENTURES
FEATURES
Redemption: can be done through
Sinking

fund: Cash set aside periodically for retiring debentures Buy back Provision: Redeem debentures at a specified price before the maturity date
Indenture/Debenture

trust deed: A legal agreement between the company and debenture trustees

Security: Can be secured by a lien on companys assets;

Unsecured debentures not protected by security

DEBENTURES
MERITS

Debenture issue is a cheaper source of finance No ownership dilution Fixed payment of interest Funds raised by the issue of debentures can be

used to earn a much higher rate of return than the rate of interest

DEBENTURES
DEMERITS
Obligatory payments Financial Risk Cash outflows: Must be paid on maturity, involving huge cash outflows Restricted Covenants: Debenture indenture may limit companys flexibility (Indentures are written agreement under which bonds and debentures are issued and which sets forth the maturity date, interest rate and other terms)

RETAINED PROFITS
FEATURES
Retained profits are the undistributed profits after the

payment of dividends & taxes They represent the internal source of finance available to the company Also known as ploughing back of profits Basis of financial expansion and growth of the company Cushion of security in times of adversity

RETAINED PROFITS
MERITS
More dependable than external sources

No cost involved in raising the fund

No fixed commitments Control over the management remains unaffected Improves credibility of the company

RETAINED PROFITS
DEMERITS
Misuse of such funds

Large retention of earnings over a long period of

time may lead to dissatisfaction among investors

PUBLIC DEPOSITS
FEATURES Unsecured deposits invited by the company from the

public. Invited for a period of 3 months - 3 years They can be renewed from time to time Company issues deposit receipt as an acknowledgement of debt by the company High rate of interest- depends on the period & reputation of the company Public deposits cannot exceed 25% of share capital & free reserves

PUBLIC DEPOSITS
MERITS

Less administrative costs

Public deposits are unsecured Interest paid on PDs are tax deductible

PDs introduce flexibility in the financial structure of

the company No dilution of shareholders control

PUBLIC DEPOSITS
DEMERITS Limited amount can be raised because of restrictions

The maturity period is relatively short

PDs are an uncertain & unreliable source of finance

SHARE CERTIFICATE
A share certificate is issued by a company under its

common seal, specifying the number of shares held by any member & the amount paid on each share
A share certificate is a declaration by the company that

the person in whose name the certificate is made out & to whom it is given, is a shareholder in the company & the certificate is given by the company with the intention that it shall be used by the person to whom it is given & acted upon in the sale & transfer of shares

SHARE CERTIFICATE -CONTENTS

Name & address of the registered office of the company Serial number of the share certificate

Date of issue of the certificate

Name & address of the shareholder Number & class of shares

Nominal value of each share

Amount paid on each share Impression of the common seal of the company

Space for the signatures of 2 directors & secretary

SHARE CERTIFICATE -CONTENTS

The share certificate form consists of 3 parts
Counterfoil for reference

Proper certificate
Receipt to be signed by the shareholder

SHARE CERTIFICATE Time limit

Companies are required to deliver the certificates of

shares & debentures

Within three months of allotment or Within 2 months after the application for registration of

transfer is made
NCLT has been empowered to grant an extended

period of not more than 9 months in appropriate cases

In case of default a notice may be served upon the

company by the person entitled

SHARE CERTIFICATE Time limit

Company has to respond within 10 days of the receipt

of the notice otherwise the allottee can file an application to the NCLT NCLT may pass an order directing the company to issue such certificate and to pay all costs to the applicant All defaulters shall be punishable with a fine which may extend to 5000 per day till the default continues

SHARE CERTIFICATE ISSUE OF

DUPLICATE SHARE CERTIFICATE
If such a certificate is proved to have been lost or

destroyed
If such a certificate is defaced, mutilated or torn & is

surrendered to the company

SHARE CERTIFICATE ISSUE OF

DUPLICATE SHARE CERTIFICATE
When the original certificate is defaced or mutilated :
The shareholder will surrender the certificate & will

request for the duplicate The secretary must ensure that the application for duplicate certificate is in proper form & is accompanied by the requisite fee The company will cancel the original certificate and a duplicate of the same is issued in due course

SHARE CERTIFICATE ISSUE OF

DUPLICATE SHARE CERTIFICATE
When original certificate is lost or destroyed
Company requires a satisfactory proof of the loss or

destruction
Shareholder will have to give an affidavit stating the fact

of the loss of the certificate

A letter of indemnity is also required to be given by the

shareholder in favour of the company to protect it against any claim that may be made by any person on the original certificate

SHARE CERTIFICATE ISSUE OF

DUPLICATE SHARE CERTIFICATE
When original certificate is lost or destroyed
If the original certificate was for a considerable number of

shares, the shareholder may be required to give a supporting guarantee from his banker or other person of known financial standing
Before issuing a duplicate certificate the company shall

give a public notice of the loss /destruction of the certificate in the leading newspaper at the cost of the shareholder
The shareholder also has to pay a prescribed fee for the

issue of the duplicate certificate

SHARE CERTIFICATE LEGAL

EFFECTS
Estoppel as to the title to the shares

Estoppel as to payment

SHARE WARRANT
A share warrant is a document issued under the

common seal of the company stating that the bearer is entitled to the specified number of shares Being a bearer document it can be transferred by mere delivery

SHARE WARRANT -- CONDITIONS

The Articles must empower the company to issue such

share warrants The shares must be fully paid up The company must obtain the approval of the Central Govt. before it can issue warrants Only public companies limited by shares can issue share warrants

SHARE WARRANT --EFFECTS

The holder of share warrant is no longer the member of

the company Any holder of the warrant may surrender the warrant for cancellation and take a share certificate If the Articles permit then the holder of a share warrant can enjoy the rights of a member to the extent mentioned therein The bearer of a share warrant shall not be deemed to be the holder of shares specified in the warrant so as to fulfill the condition of qualification shares for the director

SHARE CERTIFICATE Issued by Pvt & public companies

SHARE WARRANT Issued only by public companies

Issued in respect of fully paid as well as partly paid up shares

Approval of Central govt is not required

Issued only in respect of fully paid up shares

Approval of Central Govt is required

Nominal stamp duty is required Holder is a member

Heavy stamp duty is required Holder is not a member unless the Articles permit
Holder doesnt have any such right unless the Articles permit

Holder can present a petition for winding up of the company

SHARE CERTIFICATE
It is not a negotiable instrument Transfer requires a transfer deed & its registration is compulsory It forms the share qualification for directors In this case dividend is paid through a dividend warrant

SHARE WARRANT
It is a negotiable instrument Can be transferred by mere delivery It cannot constitute the share qualification Dividend is paid through bearer dividend coupons

DEBENTURE
Section 2(12) states that a debenture includes

debenture stock, bonds & any other securities of a company whether constituting charge on the assets of the company or not.
In simple words An instrument in writing , signed by

the company under its common seal, acknowledging the debt due by it to its holders.
Popular mode of borrowing by the company

FEATURES
It is an acknowledgement of indebtedness by the

company to its holder for the amount stated in it It is issued under the common seal of the company It provides for a fixed rate of interest It provides for the repayment of money at a fixed date except in case of perpetual debentures Debentures are generally secured Debentures can be issued at par, at premium or at discount but cannot be redeemed at discount

KINDS OF DEBENTURES
Registered & Bearer Debentures Redeemable & Irredeemable Debentures Secured & Unsecured Debentures Convertible & Non-convertible Debentures

SHARES

DEBENTURES

Shareholders are the owners of the Debenture holders are the creditors company of the company Shareholders have voting rights & Debenture holders do not have any the right to attend GMs such rights
Income of shareholders is dividend & it can be paid only out of the profits Shares do not have any such security Income of debenture holders is interest & it can be paid either out of the profits or out of the capital (in case of no profits) Debentures are generally secured

ISSUE OF DEBENTURES
A Private company can issue debentures immediately

after obtaining the certificate of incorporation

A Public company can issue debentures only after

obtaining the certificate of commencement of business

BOD can issue debentures (only be means of resolution

passed at the board meeting)

Debentures can be issued by directors for any amount

authorized by its Articles (< sum of paid up capital + reserves) except with the consent of the company in the

ISSUE OF DEBENTURES
Debentures can be issued at par, premium or discount But cannot be redeemed at discount No company can issue debentures carrying voting rights Legal requirements as to prospectus, allotment, issue of

certificates same as shares No need for minimum subscription Debentures once redeemed can be reissued Debenture Certificate should be given within 3 months from allotment

TRANSFER & TRANSMISSION

Bearer Debentures can be transferred by mere

delivery They are negotiable instruments Registered debentures can be transferred only as per the provisions of the law

DEBENTURE REDEMPTION RESERVE

A Company issuing Debentures is required to create

a Debenture Redemption Reserve known as DRR Out of the profits of the Company, a certain portion of profits is transferred to this reserve. Any balance after redemption will be used to issue fully paid Bonus Shares

Debenture with Pari Passu provision

The effect of Pari-passu clause is that Debentures

shall be discharged proportionately. This happens in case of inadequacy of funds But in the absence of Pari Passu clause, debentures shall be payable according to the date of issue If all the debentures have been issued on the same date, they shall be payable according to the serial number

BONDS
Bonds are another source of Debt financing
Their features are similar to that of Debentures Different types of Bonds
Tax free Bonds Zero Coupon Bonds Deep Discount Bonds

PLOUGHING BACK OF PROFITS

Self financing by a company In other words, the savings generated internally by a

company in the form of 'retained earnings' are ploughed back into the company for diversification of its business
It is actually the amount held back by the entrepreneur

after paying a reasonable dividend to the shareholders of the company and these undistributed profits are used by the company to meet its present and future financial requirements

PURPOSE--PLOUGHING BACK OF PROFITS

For expansion and growth of the business

For strengthening the financial position of the company

For meeting various working capital requirements of the

company For redemption of old debts For replacement of obsolete assets and modernisation.

BENEFITS--PLOUGHING BACK OF PROFITS

A company with such reserves can face unforeseen

contingencies; capital market crisis and other downturns in the economy with lesser difficulty and ease
Help to stabilize the dividend policy of the company. Helps in improving the company's relations with its

shareholders. It even helps in appreciating the value of its shares.

Most convenient and economical method of finance and

involves no legal formalities or negotiations

DRAWBACKS--PLOUGHING BACK OF PROFITS

Dissatisfaction among shareholders as they may get

lower dividends.
It may tempt the management to raise bonus shares to

the equity shareholders leading to overcapitalization of reserves

The company may not always use the retained earnings

to promote the interests of the shareholders.

Instead, it may be invested in unprofitable avenues or

misused by locking them up in those business concerns

FACTORS DETERMINING
Net profits
Dividend policy Corporate tax Age of the company Future plans of the company

PUBLIC DEPOSITS
The Companies Act, 1974 has introduced

Sec58A,58B to regulate and control the acceptance of deposits of companies other than banking Companies.
The NCLT in consultation with RBI fixes the

limit up to which the Companies can accept deposits either from a public or from its members

PUBLIC DEPOSITS --MEANING

Sec 2(b) of the Companies Acceptance of Deposit rules,

1975 defines any deposit of money with the Company and any deposit borrowed by a Company but does not include.. Any money received from the government. Any amount received as a loan from any banking Company Any amount received as a loan from any financial Institutions Any amount received by a Company from another Company

PUBLIC DEPOSITS --MEANING

Any amount received as an advance in the course of

business of the Company Any amount by way of subscription to any shares, stock bonds or debentures pending the allotment of such Securities Any amount received from the directors of the company Any amount brought in by the promoters of the company Any amount received from the shareholders by a private company

PUBLIC DEPOSITS RESTRICTIONS ON THE ACCEPTANCE

Only companies having a net worth of Rs 1 crore

are allowed to issue deposits.

No

deposit can be invited without issuing advertisement specifying the financial condition, management structure of the Company

Any company defaulted in repaying the deposits in

the past is prohibited from issuing deposits.

PUBLIC DEPOSITS RESTRICTIONS ON THE ACCEPTANCE

Every deposit holder need to give a nomination No deposits shall be repayable on demand Premature repayments is allowed in case of death

of the deposit holder

The maximum period up to which a deposit can be

accepted is 3 yrs.

The minimum period has been fixed at 6 months

PUBLIC DEPOSITS RESTRICTIONS ON THE ACCEPTANCE

A company can accept deposit which are repayable after

3 months in following cases :

Its shareholders (in case of public company) Deposits guaranteed by any director of the company Deposits against unsecured debentures

The amount of such deposits should not exceed 10% of

the aggregate of the paid up share capital and free reserves A company is permitted to accept other deposits up to a maximum of 25 % of the aggregate of the paid up share capital and free reserves

PUBLIC DEPOSITS RESTRICTIONS ON THE ACCEPTANCE

After 6m but before maturity-1% less rate than

applicable

Within 8 weeks from the date of receipt of money a

receipt should be given to the deposit holder

o Interest should not exceed the rate fixed by the RBI

(Currently it is 12.5%)

PUBLIC DEPOSITS RESTRICTIONS ON THE ACCEPTANCE

Any deposits issued in contravention of the above

rules should be repaid within 30 days from the date of receipt or within the extended time allowed by Central Govt.

If a company fails to refund the amount within the

allotted time, the company shall be punishable with fine which shall not be less than twice the amount of the deposit not refunded

PENALTY FOR CONTRAVENTION OF RULES

Where the company accepts or invites either directly or

indirectly any deposits either in excess of the limits or without making a proper advertisement, the company shall be punishable with fine which shall not be less than an amount equal to the amount of deposit so accepted
It the contravention is related to the invitation of deposit,

the fine may extend to 10 lakhs but shall not be less than Rs. 50,000 All defaulters shall be punished with imprisonment for a term which may extend to 5 yrs.

PENAL RATE OF INTEREST

The Companies Third Amendment Rules, 2001 provide

for payment of a penal rate of interest of 18% for the overdue period in case of public deposits matured & claimed but remaining unpaid In case of a deposit made by a small depositor the penal rate of interest shall be 20% compoundable on an annual basis

MAINTENANCE OF LIQUID ASSETS

A

company accepting public deposits is required to maintain liquid assets at least equal to 15% of the deposits maturing for repayment during the financial year.