NATIONAL INSTITUTE OF

FASHION TECHNOLOGY

PATNA

COURSE: MASTER OF FASHION MANAGEMENT

YEAR: 2019-21
SUBJECT: FINANCE FOR EXECUTIVES
TOPIC: SHARES AND DEBENTURES AS A SOURCES OF LONG-TERM CORPORATE
FINANCE

SUBMITTED TO SUBMITTED BY
MR. KISLAY KASHYAP KARISHMA RAJ

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LONG TERM FINANCE

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Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20
years or maybe more depending on various factors. Capital expenditures in fixed assets like plant
and machinery, land and building, etc., of business are funded using long-term sources of
finance. Part of working capital which permanently stays with the business is also financed with
long-term sources of funds.
LONG TERM FINANCE

SHARES DEBENTURES

SHARES
Shares are units of ownership interest in a corporation or financial
asset that provide for an equal distribution in any profits, if any are
declared, in the form of dividends. Issue of shares is the main source
of long-term finance. Shares are issued by joint stock companies to
the public. A person holding shares is called a shareholder.
Characteristics of Shares:
The main characteristics of shares are following:
1. It is a unit of capital of the company.
2. Each share is of a definite face value.
3. A share certificate is issued to a shareholder indicating the number of shares and the
amount.
4. Each share has a distinct number.
5. The face value of a share indicates the interest of a person in the company and the extent
of his liability.
6. Shares are transferable units.
Shareholders are of different habits and temperaments. Some want to take lesser risk and are
interested in a regular income. There are others who may take greater risk in anticipation of huge
profits in future. In order to tap the savings of different types of people, a company may issue
different types of shares. These are:

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  Equity Shares, and
 Preference Shares.
Equity Shares
It represents the ownership capital of a firm. A public limited company may raise funds from
public or promoters as equity share capital by issuing ordinary equity shares. Ordinary
shareholders are those the owners of which receive their dividend and return of capital after the
payment to preference shareholders. They undertake the risk of the company. They elect
directors and have total control over the management of the company. These shareholders are
paid dividends only when there are distributable profits. As equity shares are paid only on
liquidation, this source has the minimum risk.
Types of Equity Shares:

 Sweat Equity Shares: Section 79 A of the Companies Act, 1956, has defined sweat
equity shares as those shares which are issued by a company to its employees or directors
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 addition. Such shares
are treated as the reward to the employees or directors. The company may issue sweat
equity shares if it has been authorized by a special resolution passed in the general
meeting and not less than one year has elapsed since the date of commencement of
business.

 Right Shares: If an existing company wants to make a further issue of equity shares, the
issue must first be offered to the existing shareholders. The method of issuing shares is
called right issue. The existing shareholders have right to entitlement of further shares in
proportion to their existing shareholding. For a shareholder who does not want to buy the
right shares, his right of entitlement can be sold to someone else. The price of right shares
will be generally fixed above the nominal value but below the market price of the shares.
Section 81 of the Companies Act, 1956, provides for the further issue of shares to be first
offered to the existing members of the company, such shares are known as ‘right shares’.

 Bonus Shares: Sometimes a company may not be in a position to pay cash dividends in
spite of adequate profits because of the adverse effect on the working capital of the
company. These shares are known as bonus shares or capitalization of retained earnings.
These shares are issued out of accumulated or undistributed profits to shareholders.
Bonus shares may also be issued when a company wants to build up cash resources for
expansion, or other purposes like repayment of liability.

Preference Shares

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Preference share capital is another source of long-term financing for a company. As the name
suggests, these shares carry preferential rights over equity shares both regarding the payment of
dividend and the return of capital. These shares carry a fixed rate of dividend and such dividend
must be paid in full before the payment of any dividend on equity shares. Similarly, at the time
of liquidation, the whole of preference capital must be paid before any payment is made to equity
shareholders.

Types of Preference Shares:

 Cumulative Preference Shares: The holders of these shares have the right to receive the
arrears of dividend if for any year it has not been paid because of insufficient profit.

 Non-cumulative Preference Shares: The holders of these shares have the right to
receive dividend out of the profits of any year. In case profits are not available in a year,
the holders get nothing, nor can they claim unpaid dividends in subsequent years.

 Participating Preference Shares: The holders of these shares are entitled to a fixed
preferential dividend and in addition, carry a right to participate in the surplus profits
along with equity shareholders after dividend at a certain rate has been paid to equity
shareholders.
Again, in the event of liquidation of the company, if after paying back both the
preference and equity shareholders, there is still any surplus left, then the participating
preference shareholders get additional shares in the surplus assets of the company.

 Non-participating Preference Shares: These preference shares have no right to

participate in the surplus profits of the company on its liquidation. Such shareholders are
entitled to a fixed rate of dividend only.

 Convertible Preference Shares: These preference shares can be converted into equity
shares after a specified period of time. The conversion of such shares can be made as per
the provisions of the Articles of Association.

 Non-convertible Preference Shares: Non-convertible preference shares are those shares

which cannot be converted into equity shares.
 Redeemable Preference Shares: These preference shares are redeemed before
liquidation of the company as per terms of issue in accordance with the provisions of
Articles of Association.
 Irredeemable Preference Shares: These preference shares are not redeemed before
liquidation of the company. Such shares are not redeemed unless a company is liquidated.

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DEBENTURES
A debenture is a document of acknowledgement of a debt with a
common seal of the company. It contains the terms and conditions of
loan, payment of interest, redemption of the loan and the security offered
by the company. According to Section 2(12) of the Companies Act,
1956, debenture includes debenture stock, bonds and any other securities
of a company, whether constituting a charge on the assets of the
company or not. Thus, a debenture has been defined as
acknowledgement of debt, given under the common seal of the company and containing a
contract for the repayment of the principal sum at a specified date and for the payment of interest
at fixed rate/percent until the principal sum is repaid and it may or may not give the charge on
the assets to the company as security of loan. It is an instrument for raising long-term debt.

Characteristics of Debentures:

Following are the characteristics of Debentures:

1. Debenture holders are the creditors of the company. They are entitled to periodic
payment of interest at a fixed rate.
2. Debentures are repayable after a fixed period of time, say five years or seven years as
per agreed terms.
3. Debenture holders do not carry voting rights.
4. Ordinarily, debentures are secured. In case the company fails to pay interest on
debentures or repay the principal amount, the debenture holders can recover it from the
sale of the assets of the company.

Types of Debentures:

 Bearer Debentures: These debentures are transferable like negotiable instruments, by

mere delivery. The holder of such debenture receives the interest when it became due.
The transfer of such debenture is recorded in the register of the company.

 Secured or Mortgage Debenture: These debentures are secured by creating a charge on

the assets of the company. The charge may be fixed or floating. If a company fails to pay
debentures interest in due time or repay the principal amount, the debenture holders can
recover their dues by selling the mortgaged assets.
 Simple or Naked Debentures: When debentures are issued without any charge on the
assets of the company, such debentures are called naked or unsecured debentures.

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 Redeemable Debentures: These are debentures which are issued for a specified period
of time. On the expiry of that specified time, the company has the right to pay back the
debenture holders. The redemption may be affected by direct payment or by purchase and
cancellation of own debenture or by annual drawings or by periodical installments, etc.

 Registered Debentures: These are the debentures regarding which the names, addresses
and other particulars of holdings of the debenture holders are recorded in a register
maintained by the company. Transfer of these debentures will take place only on the
execution of the transfer deed. Interest is payable to the person whose name is registered
with a company.

 Irredeemable Debentures: These are the debentures which are not repayable during the
lifetime of the company and will be repaid only when the company goes into liquidation.

 Convertible Debentures: A company may issue convertible debentures in which case an

option is given to the debenture holders to convert them into equity or preference shares
at stated rates of exchange, after a certain period. Such debentures—once converted into
shares cannot be reconverted into debentures. Convertible debentures may be fully or
partly convertible.

 Non-Convertible Debentures: These are the debentures which are not converted into
shares and are redeemed at the expiry of specified period.

 Right Debentures: These debentures are issued to augment working capital finance in a
long-term basis.