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Block 3 ECO 08 Unit 3
Block 3 ECO 08 Unit 3
CAPITAL
Structure
8.0 Objectives
8.1 Introduction
8.2 Meaning and Types of Share Capital
83 Meaning and Types of Shares
8.3.1 Meaning of a Share
8.3.2 Types of Sharcs
Meaning of Stock
Meaning and Types of Debentures
8.5.1 Meaning and Characteristics
8.5.2 Types of Debentures
Let Us Sum U p
Key Words
Answers to Check Your Progress
Terminal Quest' , . s
8.0 OBJECTIVES
After studying this unit, you should be able to:
a explain the meaning of shares and types of shares
a describe the Gpes of capital
a distinguish between shares and stock
a explain the meaning of debenture
classify debentures
e distinguigh between shares and debentures
a explain the meaning of the term 'deposits'
list the rules regarding acceptance of deposits by companies.
8.1 INTRODUCTION
You have learnt that a public company raises the necessary funds by issuing shares and
debentures and by accepting deposits from the public. In this unit you will learn about
the meaning of share capital, various types of shares, meaning and types of debentures
and the rules regarding the acceptance of deposits from the public.
Equity share capital. Thus a public limited cornpiny can issue only two types of shares
- (a) Equity shares and (b) preference shares.
Equity Shares: All shares which are not preference shares are 'equity shares'. These
shares carry no special privileges arid their rights and liabilities are governed by the
articles of association of the company. In the eyes of law, equity shareholders are not
the owners of the company, because a company has its own independent legal entity.
Dividend is paid to the holders of these shares after the preference &vidend at a fixed
rate has been paid. The rate of dividend payable on these shares is not fixed and keeps
on changing from year to year depending on the amount of profits available for
distribution. On the liquidation of the company, the claims of equity shareholders are
satisfied only after satisfying all other claims. Equity shareholders have a right to vote
on various resolutions in proportion to his share of the paidlup equity capital, whereas I
SHARE STOCK
..........................................................................................................
6) Read the following carefully and put a tick ( d )mark against correct answer.
i) The authorised share capital of the company is:
a) specified in the memorandum of association
b) specified in the articles of association
c) not specified anywhere ,
to the Registrar
b) is required t o be given within 30 days
. to thc Registrar.
c) is not required to be givcn to anyone
, except the shareholders ( )
v) A company may convert all or any of its fully paid up shares into stock:
+ a) by passing a special resolution
1 I, ( )
h) by passing an ordinary resolution ( 1
c) with the approval of the Company Law Board ( 1
d) with the permission.of the Central Government. ( )
7) State whether the followingstatements are.True or False.
I) Share capital means the capital raised by the company by the issue of shares and
d-ocntures.
ii) Reserve capital o l a company IS available for the creditors o n the winding up of
the company.
iii) Shares a n d stock can be directly issued to the public.
iv) Any cornp<rnycan convert its shares into stock whenever i t desires.
) Equity .;harcholdcrs have a right to rcccivc dividend at a fixed rate.
vi) Preference shareholdrrs have, generally, no voting rights.
vil) A conipanycanr .tissue irredeemable preference shares.
viii)Reur.emable F:cference shares cannot be redeemed nut of the proceeds of a
fresh ~\sut.of shares made for the purpose of redemption.
Figure 8.2
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8.6 DIFFERENCE-~E~TWEEN
SHARES
ANL) DEBENTURES
You have learnt that just as sh;trcs arc uniform parts of Ihc share capital. dcbenturcs
are uniform part of the loan citpital of u company, But it is nrccssnry to distinguish
between ashare and a debenture h e c i ~ i ~ the
s e rights and privilcgesas also the liabilities
accompanying these instruments ilrc very much diffcrcnt from onc another. T h e main
points of differcncc are as foilows:
Share and 1.oan Capital 1) Shareholders arc owners of the company whereas the debenture holders are I
creditors of the company. Therefore, while the shareholders have a multi-faceted
interest in the welfare of the company, the debenturehdders have a very limited
interest (limited to receiving interest on time) in the company.
2) A shareholder enjoys the rights of proprietorship of a company whereas a .
debentureholder can enjoy the rights of a lender only.
3) A shareholder has a right of control over the working of the company by attending
and voting in the general meeting. They are able to decisively influence the
composition of Board of Directors and other senior management positions. The .
debentureholders do not have any voting right, and therefore, they are unable to
exercise any such influence.
4) A shareholder is entitled to receive dividend when there are profits. The rate of
dividend varies from year to year depending upon the amount of profit. On the
'other hand, the debentureholders are entitled to interest a t a fixed rate which the
company must pay whether or not there are profits.
5) A debentureholder gets a fixed rate of interest per annum payable on'fixed datesv
whereas a shareholder gets a dividend far higher if the company earns good profits.
6) In respect of shares, dividend is payable only when the proposal t o pay dividend is
passed by the shareholders at the annual general meeting of the company. There is
no need of such approval in the case of payment of interest on debentures.
7) Dividend on shares is not a charge against profit, Interest on debentures, on the
other hand, is a charge against profits and is deducted from profits for the purpose
of calculating tax liability.
8) A khareholder has a claim on the accumulated profits of the cefnpany and is
normally rewarded with bonus shares whereas a debentureholder has no s u c h
claims whatsoever after he has been paid the interest amount.
9) Shareholders cannot be paid back (except in case of redeemable preferenceshares)
so long as the company is a going concern. Debentures are normally issued for a
specified period after which they are repaid.
10) A company cannot purchase its own shares from the market whereas it can
purchase its own debentures and cancel them or re-issue them.
11) In the event of winding up, shareholders cannot claim payment unless all qutside
creditors have been paid in full. Dcbcnturcholdcrs being secured creditors gpt
- priority in payment over the shareholders.
.........................................................................................................
1) Fill in the blanks:
i) A debenture 1s the .............................................capital of the company.
ii) A is the .............................................of the company and
debentureholder is ....................................................of the company.
iii) Convertible debenture arc converted into ..............................................
iv) Debentureholders ...........................vote at the meetings of thc company.
v) As regards return of princ~pal,debentures will have a ...............................
claim as compared to shares.
vi) Debentures usually have a .................................................
on the assets
of the company.
5) State whether the following statements are True o r False.
i) A registered debenture is regarded as a negotiable instrument.
ii) A debentureholder has the right to votejn the meetings of the company.
I
,4 conipiiny niay acrel~tsliort-term dcposits repay:\blc not earlier than thrcc months
hut 11otlatcr than six months subject t o thc following two condition.s:
i\) -1"hcfurlds arc nc~:dcd to mcct short, term rquiremont, and
b ) l'hc rrmtlunt of \ucll \hurt-l~trniJeposits cf1jt.snut exceed ten per ccnt of the paid-
up capital and Frcc rcscrvcs.
However, in no case, a company shall accept deposits repayable before three Share and Loan Capital
months.
5) A company cannot accept or renew deposits payable on demand.
6) &Acompany can accept deposits upto 25% of the aggregate of its paid-upcapital and
free reserves. In addition, it can also raise upto 10% of the paid-up capital and free
reserves in the form of any deposit against an unsecured debenture or from its
0 shareholders or any deposit guaranteed by the Directors of the company.
A finance company is allowed to raise deposits upto ten times the amount of its
capital and free reserves.
Paid-up Capital for this purpose will include both preference and equity capital.
7) No government company shall accept any deposits in excess of thirty-five per cent
of its paid-up capital and free reserves.
8) No company shall invite or accept or renew any deposits in any form, on a rate of
interest exceeding fourteen per cent per annum (w.e.f. 1.4.87).
9) Every deposit accepted by a company, shall unless renewed, be repaid in
accordance with the terms and conditions of such deposit. Where any deposit is
accepted by a company in contravention of the provisions of the Act or Rules made
by the Central Government, the deposit must be refunded within thirty days from
the dite of acceptance of such deposit. This period of 30 days may be extended by
the Central Government by another period but not exceeding 30 days.
10) If a company fails to make repayment of a deposit in accordance with the above
provisions, the company shall be punishable with a fine which shall not be less than
twice the amount not repaid and the court shall pay the .amount of deposit
remaining unpaid to the'depositor out of the amount of fine realised. In addition,
every officer of the company who is in default shall be punishable with
imprisonment for a t e r n which may extend to five years and shall also be liable to .
fine.
11) Where a company accepts o r invites any deposit in excess of the limits prescribed
or in contravention of the provisions of Section 58A(2) the punishment shall be:
a) where thecontravention relates to the acceptanceof deposit, the amount of fine
shall nct be less than the amount of the deposit so accepted.
b) where the contravention relates to the invitation of any deposit, the company
shall be punishable with fine which may extend to Rs. 1 lakh, but which shall not
be less than Rs. 5,000.
In both these cases of acceptance or invitation of deposit in contravention, every
officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to five years and shall also be liable to fine.
12) Every company accepting deposits is required to maintain one or more registeres of
deposits containing all the required information and should be preserved in good
order for a period of not less than eight calendar years from the financial year m
which the last entry is made in the register.
13) Every company accepting deposits shall also file Returns of Deposits as on 31st
March every year before 30th June every year with the Registrar of companies and
the Reserve Bank of India.
Section 58A has been amended by the Companies (Amendment) Act, 1988 to provide
that in the event of the failure of a company to repay any deposit or part thereof in
accordance with the terms and conditions of such deposit, the Company Law Board
may eitheron itsown motion o r on the application of the depositor, direct the company
to make repayment of such deposit forthwith or within such time and subject to such
conditions as may be specified in the order. However, before making any order the
CLB shall give a reasonable apportunity of being heard to the co6pany and to other
persons interested in the matter.
Whoevcr.fails to comply with any order made by CLB shall be punishable with .
imprisonment which may extend to thiee years ind shall also be liable to a fine of not
less than Rs. 50 for cvcry d i ~ yduring which such non-compliance continues.
Shnre and Loan Cspllol check' Your. Progress C
1) What is meant by deposits? ,
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months. The rate of interest payable on deposits is prescribed by the Company Law "."" ... ..
Board, at p e s e n t t h e rate of interest is 14%. The Government !>as laid down r d e s
regarding the acceptance of deposits from public and strict compliance is expected
failing which penalties shall be imposed. 4..
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Shnrc and Loan Capilal 5) Distinguish between shares and debentures.
6 ) State the manner, limits and conditions subject to which a company may accept
public deposits.
7) What are the consequences if a company contravenes any of the provisions of the
Companies (Acceptance of Deposit) Rules, 1975.
Note: These questions will help you to understand the unit better. Try to write
answers for them. But do not submit your answer to the University. These
ere for your practice only.
UNIT 9 ALLOTMENT OF SHARES
Structure
9.0 Objectives
9.1 1ntro.duction
9,2: Allotment of Shares
9.2.1 Notice of Allotment
9.2.2 Rules Regarding Allotment of Shares
9.2.3 P F O C ~ ~ofU Allotment
~C
9 2.4 Return a5 to Allotment
9.0 OBJECTIVES
After studying this unit, you should he able to:
9 explain the meaning of allotment of shares
@ describe the rules relating to allotment of shares
9 explain the consequences of irregular allotment
@ list the circumstances under which the shares can be issued a1 a discount and at a
premium
9 explain the meaning of a share certificate and a share warrant, and distinguish
between the two
9 explain the essentials of a valid call
@ describe the circumstances under which the shares can be forfeited and reissued
explain the rules for the surrender of shares.
4.1 INTRODUCTION
In Unit 8you learnt about the various kinds of shares and debentures +hatcilri be issucd