CAPITAL OF A COMPANY- SHARES AND DEBENTURES

SANKALP JAIN*

INTRODUCTION

For the company to exist and continue its operations, it requires capital from investors and
other sources. The capital plays important role during the early development of company
law during the industrial evolution. The capital includes share capital which is received
when a company issues shares to shareholders as well as the loan capital which the
company obtains from issuing debentures to creditors. Capital of a company means cash
or goods used to generate income either by investing in a business or a different income
property. In other words the money, property and other valuables which collectively
represent the wealth of an individual or business are called capital of a company. By shares,
we mean units of ownership interest in a corporation or financial asset. Owning shares in
a business does not mean that the shareholder has direct control over the business's day-
to-day operations. However, being a shareholder does entitle the possessor to an equal
distribution in any profits, if any are declared in the form of dividends. Debenture means
a type of debt instrument that is not secured by physical asset or security.

Companies in India are governed by Companies Act 1956 and the subsequent Companies
Act, 2013. For establishing public company, minimum number of members should be 7 and
maximum number is unlimited, and for private company minimum number of members
should be 2 and maximum 50. Public company’s shares are fully transferable but in private
company transfer of shares can be conditional & restricted. On incorporation (registration)
the company becomes a body corporate having perpetual succession & common seal and
its assets neither belong to the members nor the liabilities of the company are the liabilities

*
Email: [email protected].

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of the members. The debt of the company has to be paid by the company itself.1 There are
various kinds of companies which are enumerated in the diagram hereunder:

Kinds of a company

Unincorporated Incorporated company

company

Chartered company Statutory company Registered Company

Private company Public company

Limited Unlimited Limited Unlimited

By Shares By Guarantee
By Shares By Guarantee

Having Share Capital Without Share Capital

Generally in unlimited companies, shares can be purchased by the company itself without
any restrictions. Private company can start with the paid up capital of Rs. 1,00,000/- and the

1
Salmon v. Salmon & Co. Ltd. (1895) 99 ALL ER.

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public company can commence its operations with the paid up capital of Rs. 500,000/-. The
shares or debentures or other interest of any member in a company shall be movable
property, transferable in the manner provided by the articles of the company.2 Nature of
shares or debentures is also similar under Section 44 of the Companies Act 2013.

SHARE CAPITAL

"Share" means share in the share capital of a company and includes stock except where a
distinction between stock and shares is expressed or implied.3 However, as per
subsequently enacted new Companies Act 2013, share means a share in the share capital of
a company and includes stock.4 Capital refers to the amount invested in the company so
that it can carry on its activities. The capital clause in Memorandum of Association must
state the amount of capital with which company is registered giving details of number of
shares and the type of shares of the company. A company cannot issue share capital in
excess of the limit specified in the Capital clause without altering the capital clause of the
Memorandum of Association. Share capital can be of various types which are enumerated
as follows:

1. Nominal, authorised or registered capital means the sum mentioned in the capital
clause of Memorandum of Association. It is the maximum amount which the
company raise by issuing the shares and on which the registration fee is paid. This
limit cannot be exceeded unless the relevant clause of Memorandum of Association
is amended.

2. Issued capital means that part of the authorised capital which has been offered for
subscription to members and includes shares allotted to members for consideration
in kind also.

2
S. 82, Companies Act 1956.
3
S. 2(46), Companies Act 1956.
4
Id. at S. 2(84).

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 3. Subscribed capital means that part of the issued capital at nominal or face value
which has been subscribed or taken up by purchaser of shares in the company and
which has been allotted.

4. Called-up capital means the total amount of called up capital on the shares issued
and subscribed by the shareholders on capital account, i.e. if the face value of a
share is Rs. 10/- but the company requires only Rs. 2/- at present, it may call only Rs.
2/- now and the balance Rs. 8/- at a later date. Rs. 2/- is the called up share capital
and Rs. 8/- is the uncalled share capital.

5. Paid-up capital means the total amount of called up share capital which is actually
paid to the company by the members.

In India, there is the concept of par value of shares. Par value of shares means the face
value of the shares. A share under the Companies act, can either be of Rs. 10 or Rs. 100
or any other value which may be the fixed by the Memorandum of Association of the
company. When the shares are issued at the price which is higher than the par value
say, for example par value is Rs. 10 and it is issued at Rs. 15 then Rs. 5 is the premium
amount i.e. Rs. 10 is the par value of the shares and Rs. 5 is the premium. Similarly when
a share is issued at an amount lower than the par value, say Rs. 8, in that case Rs. 2 is
discount on shares and Rs. 10 will be par value.

TYPES OF SHARES

There are two types of shares under Companies Act.

1. Equity shares means that part of the share capital of the company which are not
preference shares.5

5
K. Majumdar and Dr. G. K. Kapoor, Taxmann’s Company Law 161 (Taxmann Publications Pvt. Ltd., New Delhi,
2004).

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 2. Preference Shares6 defined u/s 85(1) of the Act are shares which fulfill the following
2 conditions:

a) It carries preferential rights in respect of dividend at fixed amount or at fixed

rate i.e. dividend payable is payable on fixed figure or percent and this dividend
must paid before the holders of the equity shares can be paid dividend.

b) It also carries preferential right in regard to payment of capital on winding up or

otherwise. It means the amount paid on preference share must be paid back to
preference shareholders before anything in paid to the equity shareholders. In
other words, preference share capital has priority both in repayment of dividend
as well as capital.

Therefore, a share which does not fulfill both these conditions is an equity share.
Section 437 of the new Companies Act is very different from the parent Act.

6
Dr. Madan Pal Singh, Company Law As An Instrument For Protection Of Public Interest 39 (Allahbad Law
Agency, Haryana, 1st Edn., 2010).
7
S. 43, Companies Act 2013: The share capital of a company limited by shares shall be of two kinds, namely:—
(a) equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be
prescribed; and
(b) preference share capital:
Provided that nothing contained in this Act shall affect the rights of the preference shareholders who are
entitled to participate in the proceeds of winding up before the commencement of this Act.
Explanation.—For the purposes of this section,—
(i) ̳ equity share capital‘‘, with reference to any company limited by shares, means all share capital which is not
preference share capital;
(ii) ̳ p
̳ reference share capital‘‘, with reference to any company limited by shares, means that part of the issued
share capital of the company which carries or would carry a preferential right with respect to—
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may
either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the share capital
paid-up or deemed to have been paid-up, whether or not, there is a preferential right to the payment
of any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the
company;
(iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either or both of the
following rights, namely:—

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Preference shares are further classified into two types:

1. Cumulative or Non-cumulative:8 A non-cumulative or simple preference shares

gives right to fixed percentage dividend of profit of each year. In case no dividend
thereon is declared in any year because of absence of profit, the holders of
preference shares get nothing nor can they claim unpaid dividend in the subsequent
year or years in respect of that year. Cumulative preference shares, however, confer
the right to the preference shareholders to demand the unpaid dividend in any year
during the subsequent year or years when the profits are available for distribution.
In this case dividends which are not paid in any year are accumulated and are paid
out when the profits are available.

2. Redeemable and Non-Redeemable:9 Redeemable preference shares are preference

shares which have to be repaid by the company after the term of which for which
the preference shares have been issued. Irredeemable preference shares means
preference shares need not repaid by the company except on winding up of the
company. However, under the Companies Act, a company cannot issue
irredeemable preference shares. In fact, a company limited by shares cannot issue
preference shares which are redeemable after more than 10 years from the date of
issue. In other words, the maximum tenure of preference shares is 10 years. If a
company is unable to redeem any preference shares within the specified period, it
may, with consent of the Company Law Board, issue further redeemable preference
shares equal to redeem the old preference shares including dividend thereon.

(a) that in respect of dividends, in addition to the preferential rights to the amounts specified in sub-
clause (a) of clause (ii), it has a right to participate, whether fully or to a limited extent, with capital
not entitled to the preferential right aforesaid;
(b) that in respect of capital, in addition to the preferential right to the repayment, on a winding up,
of the amounts specified in sub-clause (b) of clause (ii), it has a right to participate, whether fully or
to a limited extent, with capital not entitled to that preferential right in any surplus which may
remain after the entire capital has been repaid.
8
M. C. Kuchhal, Modern Indian Company Law 137 (Shree Mahavir Book Depot Publishers, 2009).
9
Ibid.

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 3. Participating Preference Share or non-participating preference shares:10
Participating preference shares are entitled to a preferential dividend at a fixed rate
with the right to participate further in the profits either along with or after payment
of certain rate of dividend on equity shares. A non-participating share is one which
does not have such right to participate in the profits of the company after the
dividend and capital have been paid to the preference shareholders.

A company can issue the preference shares which from the very beginning are redeemable
on a fixed date or after certain period of time not exceeding 10 years provided it comprises
of following conditions:-

1. It must be authorised by the articles of association to make such an issue.

2. The shares will be only redeemable if they are fully paid up.

3. The shares may be redeemed out of profits of the company which otherwise would
be available for dividends or out of proceeds of new issue of shares made for the
purpose of redeem shares.

4. If there is premium payable on redemption it must have provided out of profits or

out of shares premium account before the shares are redeemed.

5. When shares are redeemed out of profits a sum equal to nominal amount of shares
redeemed is to be transferred out of profits to the capital redemption reserve
account. This amount should then be utilised for the purpose of redemption of
redeemable preference shares. This reserve can be used to issue of fully paid bonus
shares to the members of the company.

10
Ibid.

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ALTERATION OF CAPITAL

A company limited by shares can alter the capital clause of its Memorandum11 in any of the
following ways provided that such alteration is authorized by the articles of association of
the company:-

1. Increase in share capital by such amount as it thinks expedient by issuing new

shares.

2. Consolidate and divide all or any of its share capital into shares of larger amount
than its existing shares. for instance, if the company has 100 shares of Rs.10 each
(aggregating to Rs. 1000/-) it may consolidate those shares into 10 shares of Rs100
each.

3. Convert all or any of its fully paid shares into stock and re-convert stock into fully
paid shares of any denomination.

4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum
so that in subdivision the proportion between the amount paid and the amount if
any unpaid on each reduced shares shall be same as it was in case of from which the
reduced share is derived.

5. Cancel shares which have been not been taken or agreed to be taken by any person
and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be
done by passing a resolution at the general meeting of the company and does not require
any confirmation by the court. Reduction of the share capital can be effected only in the
manners specified in Section 100-104 or by way of buy back under Section 77A and 77B of
the parent Act. Notice of alteration to share capital is required to be filed with the registrar

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of the company in Form no. 5 within 30 days of the alteration of the capital clause of the
Memorandum. The Registrar shall record the notice and make necessary alteration in
Memorandum and Articles of Association of the company.

CONVERSION OF SHARES INTO STOCKS:12

Conversion of fully paid shares into stock may likewise be affected by the ordinary
resolution of the company in the general meeting. Notice of the conversion must be given
to the Registrar within 30 days of the conversion and the stock may be converted into fully
paid shares following the same procedure and notice given to the Registrar in Form no. 5. In
this connection, the following provisions are important:-

1. Only fully paid shares can be converted into stocks.

2. Direct issue of stock to members is not lawful and cannot be done.

3. The difference between shares and stock is that shares are transferable only in
complete units so that transfer of half or any portion of share is not possible
whereas stock is expressed in terms of any amount money and is transferable in any
money fractions.

4. Articles may be give the Board of Directors authority to fix minimum amount of
stock transferable.

5. Since stock is not divided into different units it is not required to be numbered.
Shares on the other hand must be numbered.

12
Robert R. Pennington, Company Law 241 (Oxford University Press, 2006).

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REDUCTION OF SHARE CAPITAL WITH SANCTION OF THE COURT

A company limited by the shares or a company limited by guarantee and having share
capital can if authorised by its articles, by special resolution and subject to confirmation by
the court on petition reduce its share capital. It may affect reduction of its share capital in
any of following circumstances:-

1. Where the company is over capitalised:-

a) It may extinguish or reduce the liability of member in respect of uncalled or

unpaid capital. For example, where shares are of Rs. 100 each with Rs. 60
paid up, the company may reduce them to Rs. 60 fully paid and thus release
the shareholder from the liability on uncalled capital of Rs. 40/-.

b) Pay off or return part of the unpaid capital not wanted for the purpose of the
company. For example, where the shares are fully paid of Rs. 100 they may
be reduced Rs. 40 each and Rs. 60 may be paid back to the shareholders.

c) Pay off part of the paid up share capital on the footing that it may be called
up again. If shares are of Rs. 100 each the company may pay off Rs. 25 per
share on condition that when desired the company may call it again without
extinguishing the liability of shareholders to pay the uncalled share capital.

d) Reduce by a combination of the aforesaid methods.

2. Where the company has suffered loss of capital, in such situation the company can
write off or cancel the share capital which has been lost or is unrepresented by
available assets.

3. Where the company has passed the resolution for reducing the share capital, it
must, by petition, apply in the prescribed form to the court for an order confirming
the reduction. Where the proposed reduction of share capital involves either
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 diminution of liabilities in respect of unpaid share capital or the payment to any
shareholder of any paid-up share capital or in any other case if the court so directs
the following provisions shall have effect:

a) Every creditor of the company who on the date fixed by the court is entitled
to debt from or any claim against the company shall be entitled to object to
the reduction.

b) The Court shall settle a list of creditors so entitled to object and for that
purpose shall ascertain as far as possible without requiring an application
from any of the creditors, the names of creditors and the nature and amount
of debt or claims and publish notices fixing the day or days within which
creditors not entered in the list are to be entered if they so desire.

4. Where a creditor entered on the list whose debt or claim is not discharged or has
not been determined does not consent to the reduction, the court may, if it thinks
fit, dispense with the consent of the creditors if the company secures payment of
this debt or claim by appropriating the following amounts as the court may direct:-

a) The company admits the full amount claim or debt or though not admitting it
is willing to provide for it, then the full amount of debt or claim.

b) If the company does not admit and is not willing to provide for the full
amount of debt or claim or if the amount is contingent or not ascertained,
then amount fixed by the court after due enquiry.

5. Where the proposed reduction of share capital involves either diminution of any
liability in respect of the unpaid share capital or payment of any shareholder of any
paid share capital, the Court may, having regard to any special circumstances of the
case as it thinks proper so to do, direct that the above provisions shall not apply to
any class or classes of creditors.

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 6. If the court is satisfied that with respect to every creditor of the company entitled to
object to reduction that either his consent to the reduction has been obtained or his
debt or claim has been discharged or has been determined or has been secured,
make an order confirming the reduction on such terms and conditions as it thinks fit.

7. Where the court makes such an order, it may, if for any special reasons thinks fit and
proper to do so, make an order directing that the company shall during such period
commencing on and any time after the date of the order as is specified in the order
add to its name as the last words the words "& Reduced" and make an order
requiring the company to publish the same along with the reasons for the reduction
or such other information in regard thereto as the court may think expedient with
view to giving proper information to the public and if the court thinks fit the causes
which led to reduction.

8. Where the company is ordered to add to its name the words "& Reduced" those
words shall until the expiry of period specified in the order shall be deemed to be
part of the name of the company.

9. The Registrar, on the order of the court confirming the reduction of the share capital
of the company and on delivering to him the certified copy of the order and of
minutes approved by the court showing with respect to the share capital of the
company as altered by the order, register the reduction of share capital. On
registration of order and minutes, the reduction of share capital shall take effect.

10. Notice of the registration shall be published in such manner as the court may direct.

REDUCTION OF SHARE CAPITAL WITHOUT SANCTION OF THE COURT

1. Buy back of shares in accordance with the provisions of Section 77A and 77B.

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 2. Forfeiture of shares- A company may if authorised by its articles forfeit shares for
non-payment of calls by the shareholders. Such proceedings amount to reduction of
capital but the act does not require court sanction for this purpose.

3. Valid surrender of the shares - A company may accept the surrender of shares.

4. Cancellation of Capital- A company may cancel the shares which has not been taken
up or agreed to be taken by the person and diminish the amount of its share capital.

5. Purchase of shares of member by the Company under Section 402B- The Company
Law Board may, on application made under Section 397 or Section 398, order the
purchase of shares or interest of any member of the company by the company.
These provisions come in force when a prescribed number of members make a
complaint to the CLB for mis-management or oppression of the minority
shareholders in the company.

6. Redemption of redeemable preference shares- Where redeemable preference

shares are redeemed, it actually amounts to reduction of the capital. However, this
does not require the sanction of the court.

BUY-BACK OF SHARES

Buy back of its own shares by a company is nothing but reduction of share capital. After the
recent amendments in the Companies Act, 1956 buy back of its own shares by a company is
allowed without sanction of the Court. It is nothing but a process which enables a company
to go back to the holders of its shares and offer to purchase from them the shares that they
hold. There are three main reasons why a company would opt for buy-back shares:

1. To improve shareholder value, since with fewer shares earning per share of the
remaining shares will increase.

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 2. As a defense mechanism against hostile takeovers since there are fewer shares
available for the hostile acquirer to acquire.

3. Public Signaling of the Management’s Policy

A company may purchase its own shares or other specified securities out of:

a) its free reserves; or

b) the securities premium account; or
c) the proceeds of any shares or other specified securities.

No company can purchase its own shares or other specified securities unless:

a) the buy-back is authorized by its articles;

b) a special resolution has been passed in general meeting of the company authorizing
the buy-back;

c) the buy-back is of less than 25% of the total paid-up capital and free reserves of the
company;

d) the buy-back of equity shares in any financial year shall not exceed 25% of its total
paid-up equity capital in that financial year;

e) the ratio of the debt owned by the company is not more than twice the capital and
its free reserves after such buy-back. However, the Central Government may
prescribe a higher ratio of the debt than that specified under this clause for a class
or classes of companies.

f) all the shares or other specified securities for buy-back are fully paid-up;

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 g) the buy-back of the shares or other specified securities listed on any recognized
stock exchange is in accordance with the regulations made by the Securities and
Exchange Board of India in this behalf;

h) the buy-back in respect of shares or other specified securities other than those
specified in clause (g) is in accordance with the guidelines as may be prescribed.

The notice of the meeting at which special resolution is proposed to be passed shall be
accompanied by an explanatory statement. No company shall directly or indirectly purchase
its own shares or other specified securities through any subsidiary company including its
own subsidiary companies or through any investment company or group of investment
companies.

FURTHER ISSUE OF SHARE CAPITAL

A. Rights Issue of Shares

If at any time after the expiry of 2 years from the date of incorporation of the company or
after one year from the date of first allotment of shares, whichever is earlier, a public
company limited by shares issues further shares within the limit of authorised capital, its
directors must first offer such shares to the existing holders of equity shares in proportion
to the capital paid up on their shares at the time of further issue. This is commonly known
as "Rights Issue of shares". The company must give notice each of the equity shareholders
giving him the option to buy the shares offered to him. If the shareholder does not inform
the company of his decision to take the shares, it is deemed that he has declined the offer.
In case where the rights shares are not taken by the shareholders, the directors of the
company may dispose of the shares in the manner they think fit. A company may by special
resolution in the general meeting decide that the directors need not offer the shares to the
existing shareholders of the equity shares and that they may dispose them off in a manner

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thought fit by them. This is known as "preferential offer of shares" where third parties or
only certain shareholders are given shares in priority over the other shareholders.

B. Issue of Shares at discount

A company may issue shares at a discount i.e. at a value below its par value. The following
conditions must be satisfied in connection with the issue of shares at a discount:

1. The shares must be of a class already issued.

2. Issue of the shares at discount must be authorised by resolution passed in the

general meeting of company and sanctioned by the company law board.

3. The resolution must also specify the maximum rate of discount at which the shares
are to be issued.

4. Not less than one year has elapsed from the date on which the company was
entitled to commence the business.

5. The shares to be issued at discount must issued within 2 months after the date on
which issue is sanctioned by the company law board or within extended as may be
allowed by the Company Law Board.

6. The discount must not exceed 10 percent unless the Company Law Board is of the
opinion that the higher percentage of discount may be allowed in special
circumstances of case.

C. Issue of Shares at premium

A company may issue shares at a premium i.e. at a value above its par value. The following
conditions must be satisfied in connection with the issue of shares at a premium:

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 1. The amount of premium must be transferred to an account to be called share
premium account. The provisions of this Act relating to the reduction of share
capital of the company will apply as if the share account premium account were paid
up share capital of the company.

2. Share premium account can be used only for the following purposes:

a) issuing fully paid bonus shares to members;

b) writing off preliminary expenses of the company;

c) writing off public issue expenses such as underwriting commission,

advertisement expenses, etc.

d) providing for the premium payable paid on redemption of any redeemable

preference shares or debentures;

e) buying back its shares

D. Issue of Bonus shares

Bonus shares are issued by converting the reserves of the company into share capital. It is
nothing but capitalization of the reserves of the company. Bonus shares can be issued by a
company only if the Articles of Association of the company authorises a bonus issue. Where
there is no provision in this regard in the articles, they must be amended by passing special
resolution act at the general meeting of the company. Care must be taken that issue of
bonus shares does not lead to total share capital in excess of the authorised share capital.
Otherwise, the authorised capital must be increased by amending the capital clause of the
Memorandum of association. If the company has availed of any loan from the financial
institutions, prior permission is to obtained from the institutions for issue of bonus shares.
If the company is listed on the stock exchange, the stock exchange must be informed of the

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decision of the board to issue bonus shares immediately after the board meeting. Where
the bonus shares are to be issued to the non-resident members, prior consent of the
Reserve Bank should be obtained. Only fully paid up bonus share can be issued. Partly paid
up bonus shares cannot be issued since the shareholders become liable to pay the uncalled
amount on those shares.

E. Sweat Equity and Employee Stock Options

Sweat Equity Shares mean equity shares issued by the company to its directors and/or
employees at a discount or for consideration other than cash for providing know how or
making available the rights in the nature of intellectual property rights or value additions. A
company may issue sweat equity shares of a class of shares already issued if the following
conditions are fulfilled:

a) A special resolution to the effect is passed at a general meeting of the company.

b) The resolution specifies the number of shares, the current market price,
consideration, if any, and the class of employees to whom the shares are to be
issued.

c) At least 1 year has passed since the date on which the company became eligible to
commence business.

d) In case of issue of such shares by a listed company, the sweat equity shares are
listed on a recognized stock exchange in accordance with SEBI regulations and
where the company is not listed on any stock exchange, the prescribed rules are
complied with.

E. Share certificate

A share certificate is a document issued by the company stating that the person named

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therein is the registered holder of specified number of shares of a certain class and they are
paid up to the amount specified in the share certificate. The share certificate must bear the
common seal of the company and also must be stamped under the relevant stamp act. One
or more directors must sign it. It should state the name as well as occupation of the holder
and number of shares, their distinctive number and the amount paid up. Once a share
certificate is issued by the company, the name of the person in whose favour it has been
issued becomes the registered shareholder.

DEBENTURES

The term ‘debenture’ is defined under Section 2(12) of the Companies Act, 1956 to include
debenture stocks, bonds and any other securities of the company whether constituting a
charge on the company's assets or not. The subsequent Companies Act defines debenture
as under:

Debenture includes debenture stock, bonds or any other instrument of a company

evidencing a debt, whether constituting a charge on the assets of the company or not.13

It is similar to a certificate of loan or a loan bond evidencing the fact that the company is
liable to pay a specified amount with interest. Debentures are debt instruments which have
the following attributes:

1. A debenture is a certificate of indebtedness acknowledging the company’s debt.

2. The instrument specifies the date of redemption, repayment of principal and

interest on specified dates.

3. They fall within the purview of ‘movable property’.

4. Debentures may or may not create a charge on the assets of the company.

13
S. 2(30).

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 5. Debenture holders are the creditors of the company.

6. Debentures do not carry any voting rights.

The power to issue debentures can be exercised on behalf of the company at a meeting of
the Board of Directors.14 There is a ceiling imposed on the maximum amount of debentures
that can be issued by way of Section 372A of the Act which regulates inter-corporate loan
and investments and stipulates the ceiling limits on investments and the amount of loan
that can be borrowed by a company. The explanation clause of this section states that the
loan shall include debentures. A public company may, however, require the approval of
shareholders to borrow money in excess of the aggregate of its paid up capital and free
reserves.15 Registration of a charge for the purpose of issue of debentures is mandatory.16
Where a company issues series of debentures which is secured by charge, the benefit of the
security will be available to all debenture holders pari passu.17

Types of Debentures18

1. On the basis of Security: Secured and Unsecured Debentures

a) Secured Debentures: These debentures create charge on the assets of the company.
A secured debenture holder holds a mortgage, charge or lien on the company’s
property or any part of it as security.

b) Unsecured Debentures: When debentures are issued without any charge or

security, they are termed as unsecured debentures. Holders of unsecured
debentures are ordinary unsecured creditors and do not enjoy any special rights.

14
S. 292(1)(b), Companies Act 1956.
15
S. 293(1)(d).
16
S. 125(4).
17
S. 128.
18
See H. K. Saharay, Company Law 224 (Universal Law Publishing Company, Delhi, 5th Edn., 2008).

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2. On the basis of Tenure:

a) Redeemable Debentures: Such debentures are redeemable at par or premium after

the expiry of a particular period or under a system of periodical drawings.

b) Perpetual Debentures: A debenture will be treated as irredeemable where either

there is no period fixed for repayment of the principal amount or repayment of it is
made conditional on the happening of an event which may not happen for an
indefinite period or may happen only in certain specified and contingent events.

3. On the basis of mode of Redemption: Debentures may be convertible or non-

convertible.

a) Convertible Debentures: Debentures may be convertible into stock on certain dates

or during certain periods on the basis of an agreement between company and
debenture holders. When full amount of debentures is converted into shares of the
company at agreed terms and conditions, they are fully convertible debenture and
when only a part of the amount of debentures is convertible into shares at a
specified time and remaining part of debenture is redeemable on agreed terms,
they are treated as partly convertible debentures.

b) Non-convertible Debentures are those which are not not convertible into equity or
preference shares.

DEBENTURE TRUST DEED

Debenture Trust Deed is issued in case of public issue. A Trust deed is an arrangement
enabling the property to be held by a person or persons for the benefit of some other
person known as beneficiary. The Trustees declare the Trust in favor of the debenture
holders. Any provision contained in the Trust Deed, which exempts a Trustee from liability
for breach of Trust, is void. It is mandatory for any company making a public/rights issue of

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debentures to appoint one or more debenture trustees before issuing the prospectus or
letter of offer and to obtain their consent which shall be mentioned in the offer
document.19 A Debenture Trust Deed shall include the following:

1. An undertaking by the company to pay the Debenture holders the principal and
interest.

2. Clauses giving the Trustees the legal mortgages over the company's freehold and
leasehold property.

3. Clauses that may make the security enforceable in the event of default in payment
of principal or interest i.e. appointment of receiver, foreclosure, sale of assets etc.

4. A clause giving the Trustees the power to take possession of the property charged
when security becomes enforceable.

5. Register of Debenture holders meeting of all debenture holders and other

administrative matters may be included in the Deed.

6. Time limit of creation of security for issue of debentures.

7. Obligations of the body corporate towards the debenture holders.

8. Obligations towards the debenture holders- equity ratio and debt service coverage
ratio.

9. Procedure for the inspection of charged assets by the Trustees.

The Debenture Trustees shall not:

a) beneficially hold shares in a company;

19
S. 117B.

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 b) beneficially be entitled to monies which are to be paid by the company to the
debenture trustees;

c) enter into any guarantee in respect of principal debt secured by the debentures or
interest thereon.

Functions of Trustees

1. To protect the interests of the debenture holders by addressing their grievances

2. To ensure that the assets of the company issuing debentures are sufficient to
discharge the principal amount

3. To ensure that the offer document does not contain any clause inconsistent with the
terms of the debentures or the Trust Deed.

4. To ensure that the company does not commit any breach of the provisions of the
Trust Deed.

5. To take reasonable steps as may be necessary to undertake remedy in the event of

breach of any covenant in the Trust Deed.

6. To convene a meeting of the debenture holders as and when required.

SHAREHOLDERS RIGHT TO EXIT

The Companies Act, 1956 had been enacted with the object to consolidate and amend the
law relating to the companies and certain other associations. The Act was in force for more
than fifty-five years and had been amended several times. In view of changes in the
national and international economic environment and expansion and growth of economy of
our country, the Central Government after due deliberations decided to repeal the
Companies Act, 1956 and enact a new legislation to provide for new provisions to meet the

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changed national and international, economic environment and further accelerate the
expansion and growth of our economy. The new Companies Act, 2013, inter alia, makes the
following amendments which broadly include—

1. Exit option to shareholders in case of dissent to change in object for which public
issue was made.

2. Specific disclosure regarding effect of merger on creditors, key managerial

personnel, promoters and non-promoter shareholders is being provided. The
Tribunal is being empowered to provide for exit offer to dissenting shareholders in
case of compromise or arrangement.

3. The Board may have a director representing small shareholders who may be elected
in such manner as may be prescribed by rules.

4. The dissenting shareholders shall be given an opportunity to exit by the promoters

and shareholders having control in accordance with regulations to be specified by
the Securities and Exchange Board.

5. The dissenting shareholders being those shareholders who have not agreed to the
proposal to vary the terms of contracts or objects referred to in the prospectus, shall
be given an exit offer by promoters or controlling shareholders at such exit price,
and in such manner and conditions as may be specified by the Securities and
Exchange Board by making regulations in this behalf.20

CONCLUDING REMARK

In the early stages of development of industry and commerce, capital was not of much
consequences and the money requirement of business were limited. The production

20
S. 27(2), Companies Act 2013.

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method were very simple, the tools equipment and crude were inexpensive, while trade
and exchange were restricted to local markets and involved small transactions. Under a set
up, money did not pose a big problem. But in the modern era as the industries grew, the
methods of production became increasingly complex and roundabout, the tools, equipment
and crude became more expensive, and the money requirements of the industries also
grew. The concepts of share capital and debentures have become wider in the new
Companies Act and further what have also come into existence is the shareholder right to
exit, where the minority shareholders and dissenting shareholders shall be given an
opportunity to exit. This new legislation was passed with a view to provide for new
provisions to meet the changed national and international, economic environment and
further accelerate the expansion and growth of our economy.

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 BIBLIOGRAPHY

STATUTES

1) The Company Act, 1956

2) The Companies Act, 2013

BOOKS

1) Avtar Singh, Company Law (Eastern Book Company, Lucknow, 15th Edn., 2009)

2) C. R. Datta, The Company Law (Lexis Nexis Butterworths Wadhwa, Nagpur, 6th Edn.,
2008)

3) Dr. Madan Pal Singh, Company Law As An Instrument For Protection Of Public
Interest (Allahabad Law Agency, Haryana, 1st Edn., 2010)

4) H. K. Saharay, Company Law (Universal Law Publishing Company, Delhi, 5th Edn.,
2008)

5) K. Majumdar and Dr. G. K. Kapoor, Taxmann’s Company Law (Taxmann Publications

Pvt. Ltd., New Delhi, 2004)

6) M. C. Kuchhal, Modern Indian Company Law (Shree Mahavir Book Depot Publishers,
2009)

7) N.C. Jain, Company Law Principles & Practices (Allahabad Law Agency, Haryana, 1st
Edn., 2010)

8) Robert R Pennington, Company Law (Oxford University Press, 2006)

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