Unit – IV

Joint Stock Companies

A company formed on the principle of limited liability carries on the face of it something like
prudence and caution. Its shareholders seem to say, "we have entered into a partnership, but it
is impossible to tell what may happen, and since the company may fail, we will not risk all
we possess in the undertaking.

In simple worlds, it can be described as an association of individuals who pool their financial
resources to run a business and these associations registered under the law It has its capital,
called share capital, divided into parts called the shares.

Company may be defined as an artificial person registered under law, with a distinctive name
and a common seal having capital divided into shares of small fixed denominations which are
transferable, carrying limited liability, an having a perpetual (continuous) succession.

Types of Companies:

1. From the point of view of incorporation

2.From the point of view of liability

3. From the point of view of incorporation

4. From the point of view of public interest

(1)Private company
(2)Public company
(3) Government company
Shares
Some Definitions:

Share: The total capital of the company is divided into convenient units of equal value
And each unit is called a share.
Shareholder: An individual who purchases/possesses the share/shares of the company is
called a shareholder of the company. Each share holder is issued a share certificate by The
company, indicating the number of shares purchased and value of each share.
Par value: The original value of the share, which is written on the share certificate, is called
Its par value. This is also called nominal value or face value of the share.
Dividend: When the company starts production and starts earning profit, after retaining some
profit for running expenses interest on loans, if raised, the remaining part of the profit is
divided among shareholders, and is called dividend. Dividend is usually expressed as certain
percentage of its par value or certain among per share.

Types Of Shares :

There are different types of shares. I have mentioned about the most popular shares which are
as follows:-
Equity shares: These shares are also known as ordinary shares. They are the shares which
do not enjoy any preference regarding payment of dividend and repayment of capital. They
are given dividend at a fluctuating rate. The dividend on equity shares depends on the profits
made by a company. Higher the profits, higher will be the dividend, where as lower the
profits, lower will be the dividend.

Preference shares: These shares are those shares which are given preference as regards to
payment of dividend and repayment of capital. They do not enjoy normal voting rights.
Preference shareholders have some preference over the equity shareholders, as in the case of
winding up of the company, they are paid their capital first. They can vote only on the
matters affecting their own interest. These shares are best suited to investors who want to
have security of fixed rate of dividend and refund of capital in case of winding up of the
company.

Bonus shares: The word bonus means a gift given free of charge. Bonus shares are those
shares which are issued by the company free of charge as bonus to the shareholders. They are
issued to the existing shareholders in proportion to their existing share holdings. It is a kind
of gift to the shareholders from the company. It is bonus in the form of shares instead of cash.
It is given out of accumulated profits and reserves. These shares have all types of preferences
which are available to the existing shares. For example. two bonus shares for five equity
shares. The issue of bonus shares is also termed as capitalization of undistributed profits.
Bonus shares are a type of windfall gain to the equity shareholders. They are advantageous to
the equity shareholders as they get additional shares free of cost and also they earn dividend
on them in future.

Conditions for issue of bonus shares:

(i) Sufficient amount of undistributed profits: There must be sufficient amount of

undistributed profits for the issue of bonus shares.
(ii) Provision in the articles: There must be a provision in the articles of association
regarding the issue of bonus shares. If there is a provision in the articles regarding the issue of
bonus shares the company can issue bonus shares if there is no provision, the company
cannot issue the bonus shares.

(iii) Suitable Resolution: The Board of Directors must pass a suitable resolution in the Board
meeting for the issue of bonus shares.

(iv) Shareholders approval: The shareholders must give formal approval for the issue of
bonus shares in the Annual General Meeting.

(v) When a company can issue: A company can issue bonus shares only twice in a period of
five years.

(vi) Fully paid up shares: Bonus shares can be issued only when the existing shares are
fully paid up.
37.2 TYPES OF SHARES
We have already explained that the price at which the company issues shares to the
shareholders is called its face value. Like other commodities, shares are also sold and
purchased in the market. This market is given a special name "Stock Exchange ". The price of
a share as quoted in the market is called the market value of the share. Like other
commodities, the market value of shares keeps on changing according to demand in the
market.
(i) When the market value of a share equals its face value, the share is said to be at par.
(ii) If the market value of a share is more than its face value, it is said to be above par (or at
premium). On the contrary, if the market price of a share is less than its face value

Let us take some examples

Example 1:Ram Lal has 200 shares of par value Rs. 10 each. The company declares an
annual dividend of 8%. Find the dividend received by Ram Lal.

Solution : Total par value of 200 shares owned by Ram Lal

= Rs. (200×10)=Rs.2000
Dividend = Rs. (2000×8%)
= Rs. 160

Right Shares
When a company offers new shares to the existing shareholders, they are generally offered at
much lower price than their current market price. This is because of two reasons

Firstly, the company wants to give the existing shareholders some advantage because of their
continued association with the company.
Secondly, the company wants to make the right issue a success, and therefore , it takes into
account the possible fall in the market value of company’s shares on account of right Issue.

Under Subscription of Shares:

Applications for shares received are less than the number of shares issued. For instance, a Company
issued 10,000 shares to the public and the Company received applications for 8000 shares from the
public. This situation is called Under-subscription.

Over Subscription of Shares :

A situation in which investors show so much interest in a new issue of a security that
demand exceeds supply. Before a new issue, underwriters canvass potential investors, who
may or may not book an order to buy a portion the new issue. If investors order more
shares than there are shares being issued, the security is said to be oversubscribed. This
may affect the price when the security is actually issued.

Calls in Advance :
A company may accept calls in advance if provided in articles. When a shareholder pays in
part or whole of the amount, not yet called upon his/her shares then amounts so received is
called calls in advance. Accounting of calls in advance: When the amount of calls-in-advance
is received, it is credited to a newly opened account 'Calls-in -advance A/c'. The entry will be
bank A/c dr
to calls in advance a/c (with the amount of call received in advance)

Calls in Arrears:

The term in arrears is also used in many contexts to refer to payments made at the end of a
period, as distinct from in advance, which are payments made at the start of a period.For
instance, rent is usually paid in advance, but mortgages in arrears (the interest for the period
is due at the end of the period). Employees' salaries are usually paid in arrears. When any
shareholder does not pay its call money to company on its due date. At that time, company
will deduct that calls in arrears from total called up capital for showing net paid up capital in
balance sheet

Issue of Shares at Premium

When the issue of shares is at a premium, the amount of premium may technically be called
at any stage of the issue of shares. However, premium is generally called with the amount due
on allotment, sometimes with the application money and rarely with the call money. The
premium amount is credited to a separate account called ‘Securities Premium Account’ and is
shown under the title ‘Equity and Liabilities’ of the company’s balance sheet under the head
‘Reserves and Surpluses’.

It can be used only for the following four purposes as laid down by Section 78 of The
Companies Act 1956:
(a) To issue fully paid bonus shares to the extent not exceeding unissued share capital of the
company;
(b) To write-off preliminary expenses of the company;
(c) To write-off the expenses of, or commission paid, or discount allowed on any of the
shares or debentures of the company
(d) To pay premium on the redemption of preference shares or debentures of the company.

Issue of Shares at Discount

Section 79 of the Companies Act, 1956 states that a company is permitted to issue shares at a
discount provided the following conditions are satisfied:

(a) The issue of shares at a discount is authorised by an ordinary resolution passed by the
company at its general meeting and sanctioned by the Company Law Board now Central
Government.

(b) The resolution must specify the maximum rate of discount at which the shares are to be
issued but the rate of discount must not exceed 10 per cent of the nominal value of shares.
The rate of discount can be more than 10 per cent if the Government is convinced that a
higher rate is called for under special circumstances of a case.

(c) At least one year must have elapse since the date on which the company became entitled
to commence the business.

(d) The shares are of a class which has already been issued.

(e) The shares issued within two months from the date of receiving sanction for the same
from the Government or within such extended period as the Government may allow.

Share forfeiture
Share forfeiture is the process by which the directors of a company cancel the power
of shareholder if he does not pay his call money when the company demands for it. Company
will give 14 days' notice; after 14 days if shareholder does not pay then company will forfeit
his shares and cut off his name from the register of shareholder.

Company will not pay his received funds from shareholder. In order to do a share forfeiture
the Articles of Association of the company should contain provision for that.

Debentures:

The capital is not only raised through shares, it is sometimes raised through loans, taken in
the form of debentures. A debenture is a written acknowledgment of a debt taken by a
company. It contains a contract for the repayment of principal sum by some specific date and
payment of interest at a specified rate irrespective of the fact, whether the company has a
profit or loss. Debenture holders are, therefore, creditors of the company. Of course, they do
not have any right on the profits declared by the company. Like shares, debentures can also
be sold in or purchased from the market and all the terms used for shares also apply in this
case; with the same meanings.
Types of Debentures:

 Registered Debentures: These are those debentures which are registered in the register of
the company. the names, addresses and particulars of holdings of debenture holders are
entered in a register kept by the company. Such debentures are treated as non-negotiable
instruments and interest on such debentures are payable only to registered holders of
debentures. Registered debentures are also called as Debentures payable to Registered
holders.

 Bearer Debentures: These are those debentures which are not registered in the register of
the company. Bearer debentures are like a bearer check. They are payable to the bearer and
are deemed to be negotiable instruments. They are transferable by mere delivery. No
formality of executing a transfer deed is necessary. When bearer documents are transferred,
stamp duty need not be paid. A person transferring a bearer debenture need not give any
notice to the company to this effect. The transferee who acquires such a debenture in due
course bonafide and for available consideration gets good title not withstanding any defect in
the title of the transfer-or. Interest coupons are attached to each debenture and are payable to
bearer.

 Secured Debentures: These are those debentures which are secured against the assets of
the company which means if the company is closing down its business, the assets will be sold
and the debenture holders will be paid their money. The charge or the mortgage may be fixed
or floating and they may be fixed mortgage debentures or floating mortgage depending upon
the nature of charge under the category of secured debentures. In case of fixed charge, the
charge is created on a particular asset such as plant, machinery etc. These assets can be
utilized for payment in case of default. In case of floating charge, the charge is created on the
general assets of the company.

The assets which are available with the company at present as well as the assets in future are
charged for the purpose. A mortgage deed is executed by the company. The deed includes the
term of repayment, rate of interest, nature and value of security, dates of payment of interest,
right of debenture holders in case of default in payment by the company. The deed may give
a right to the debenture holder to nominate a director as one of the Board of Directors. If the
company fails to pay the principal amount and the interest thereon, they have the right to
recover the same from the assets mortgaged.

 Unsecured Debentures: These are those debentures which are not secured against the
assets of the company which means when the company is closing down its business, the
assets will not be sold to pay off the debenture holders. These debentures do not create any
charge on the assets of the company. There is no security for repayment of principal amount
and payment of interest. The only security available to such debenture holders is the general
solvency of the company. Therefore the position of these debenture holders at the times of
winding up of the company will be like that of unsecured debentures. That is they are
considered with the ordinary creditors of the company.

 Convertible Debentures: These are those debentures which can be converted into equity
shares. These debentures have an option to convert them into equity or preference shares at
the stated rate of exchange after a certain period. If the holders exercises the right of
conversion, they cease to be the lender to the company and become the members. Thus
convertible debentures may be referred as debentures which are convertible into shares at the
option of the holders after a specified period. The rate of exchange of debentures into shares
is also decided at the time of issue of debentures. Interest is paid on such debentures till its
conversion. Prior approval of the shareholders is necessary for the issue of convertible
debentures. It also requires sanction of the Central Government.

 Non-Convertible Debentures: These are those debentures which cannot be converted

either into equity shares or preference shares. They may be secured or unsecured. Non-
convertible debentures are normally redeemed on maturity period which may be 10 or 20
years.

 Redeemable Debentures: These debentures are issued by the company for a specific
period only. On the expiry of period, debenture capital is redeemed or paid back. Generally
the company creates a special reserve account known as "Debenture Redemption Reserve
Fund" for the redemption of such debentures. The company makes the payment of interest
regularly. Under section 121 of the Indian Companies Act, 1956, redeemed debentures can be
re-issued.

 Irredeemable Debentures: These debentures are issued for an indefinite period which are
also known as perpetual debentures. The debenture capital is repaid either at the option of the
company by giving prior notice to that effect or at the winding up of the company. The
interest is regularly paid on these debentures. The principal amount is repayable only at the
time of winding up of the company. however, the company may decide to repay the principal
amount during its lifetime.

Difference Between Shares and Debentures:

The following are the main difference between a debenture and a share:

 A person having the debentures is called debenture holder whereas a person holding
the shares is called shareholder.
 Debenture holder is a creditor of the company and cannot take part in the management
of the company while a shareholder is the owner of the company. It is the basic
distinction between a debenture and a share.
 Debenture holders will get interest on debentures and will be paid in all
circumstances, whether there is profit or loss will not affect the payment of interest on
debentures. Shareholder will get a portion of the profits called dividend which is
dependent on the profits of the company. It can be declared by the directors of the
company out of profits only.
 Shares cannot be converted into debentures whereas debentures can be converted into
shares.
 Debentures will get priority is getting the money back as compared to shareholder in
case of liquidation of a company.
 There are no restrictions on issue of debentures at a discount, whereas shares at
discount can be issued only after observing certain legal formalities.
 Convertible debentures which can be converted into shares at the option of debenture
holder can be issued whereas shares convertible into debentures cannot be issued.
  There can be mortgage debentures i.e. assets of the company can be mortgaged in
favour of debenture holders. But there can be no mortgage shares. Assets of the
company cannot be mortgaged in favour of shareholders.

DISCOUNT/LOSS ON ISSUE OF DEBENTURES

The discount/loss on issue of debentures is a capital loss or a fictitious asset and, therefore, must
be written-off during the life time of debentures. The amount of discount/loss on issue of
debentures should normally not be written-off in the year of issue itself since the benefit of
the debentures would accrue to the company till their redemption. The discount/loss on it is,
therefore, treated as capital loss. The discount may be charged to Securities Premium A/c or
may be written-off over 3 to 5 years through statement of profit and loss as per guidelines
issued by ICAI. Section 78 of the Companies Act, 1956 also permits the utilisation of
‘Securities Premium Account’ and other capital profits for writing-off the discount/loss on
issue of debentures. In case, however, there are no capital profits or if the capital profits are
not adequate, the amount of such discount/ loss can be written-off against the revenue profits
every year by passing the following journal entry.

Profit and Loss Dr.

To Discount/Loss on Issue of Debentures A/c

(Discount/loss on issue of debentures written-off)

REDEMPTION OF DEBENTURES

Redemption of debentures means repayment of the loan due on debentureholders. The date,
the terms and the conditions are generally stated in the debenture certificate itself or in the
trust deed. On the due date or happening of the circumstances so specified , the company
becomes liable to pay the principle amount to the debentureholder.

METHODS OF REDEMPTION

Redeemable debentures are redeemed according to the terms of issue, that is at par ,
premium but never at discount . The following methods of redemption are available to the
company or to discharge its debenture liability.

i) In one lump sum : The repayment is made in one lump sum at the expiry of the
maturity period or redemption date .As the time of the redemption is known to the
company in advance, it can make arrangements to provide for large sums needed
for redemption from the earliest possible opportunity.

ii) By means of annual instalments: Under this method, a certain amount of

debentures are redeemed at regular intervals, say yearly, during the life of the
debentures. Thus redemption is done in instalments.
 iii) By conversion into shares : A company may issue convertible debentures giving
option to the debentureholders to exchange their debentures for equity shares or
preference shares in the company. When the debenture holders excercise this
option, and the company issues the shares, it is referred to redemption by
conversion

iv) Purchase in open market: When a company purchases its own debentures for the
purposes of cancellation, such an act of purchasing and cancelling the debentures
constitutes redemption of debentures by purchase in the open market.

Overview of Stock Exchange

A stock exchange is an exchange ( here stock brokers and traders can buy and sell shares of
stock, bonds, and other securities. Stock exchanges may also provide facilities for issue and
redemption of securities and other financial instruments and capital events including the
payment of income and dividends.

Most of the trading in the Indian stock market takes place on its two stock exchanges: the
Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has been
in existence since 1875. The NSE, on the other hand, was founded in 1992 and started trading
in 1994. However, both exchanges follow the same trading mechanism, trading hours,
settlement process, etc.

Role of SEBI

Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of
securities market. SEBI promotes orderly and healthy development in the stock market but
initially SEBI was not able to exercise complete control over the stock market transactions.

Objectives of SEBI:

The overall objectives of SEBI are to protect the interest of investors and to promote the
development of stock exchange and to regulate the activities of stock market. The objectives
of SEBI are:

1. To regulate the activities of stock exchange.

2. To protect the rights of investors and ensuring safety to their investment.

3. To prevent fraudulent and malpractices by having balance between self regulation of

business and its statutory regulations.

4. To regulate and develop a code of conduct for intermediaries such as brokers,

underwriters, etc.

SEBI performs following functions:

  SEBI keeps check on insiders who buy securities of the company and then takes strict
action on insider trading i.e. trading by insiders by using such information that is not
available to general public.

 SEBI also prohibits fraudulent unfair Trade Practices by not letting the companies
make misleading statements which might induce the investors.

 SEBI also undertakes steps in educating investors so that they can evaluate and make
correct decisions

 Manipulation of security prices to inflate or depress the market prices (price rigging)
and thereby cheating investors is prohibited by SEBI.

 SEBI promotes code of conduct and fair practices in the security market

 It registers and regulates mutual funds and working of those connected with stock exchange
in any manner e.g. Brokers, merchant bankers etc. SEBI also regulates the takeover of
companies and conducts the inquiries.

Company