Answer the following questions.
1. What is share and state it’s features ?
Meaning: The share capital of a company is divided into many units of small denominations. Each such unit is called as a share. In other words, a share is a small part of the total capital of a company. A person holding such shares is known as shareholders.
Definition: According to section 2 (84) of the Companies Act, 2013 “Share means a share in the share capital of the company and includes stock”.
Following are the features of Shares:
1. Meaning: Share is the smallest unit in the total share capital of a company.
2 Ownership: The owner of the share is called a shareholder. It shows the ownership of a shareholder in the company
3 Distinctive Number: Unless dematerialised, each share has a distinct number for identification. It is mentioned in the Share Certificate.
4. Evidence of title: A share certificate is issued by a company under its common seal. It is a document of title of ownership of shares. A share is not any visible thing. It is shown by share certificate or in the form of Demat share.
5. Each share has a value expressed in terms of money. There may be:
(a) Face value: This value is written on the share certificate and mentioned in the Memorandum of Association.
(b) Issue price: It is the price at which the company sells its shares.
(c) Market Value: This value of a share is determined by demand and supply forces in the share market. Rights A share confers certain rights on its holder such as the right to receive the dividend, the right to inspect statutory books, the right to attend shareholders’ meetings, and the right to vote at such meetings, etc.
7. Income: A shareholder is entitled to get a share in the net profit of the company. It is called a dividend.
8. Transferability: The shares of a public limited company are freely transferable in the manner provided in the Articles of Association
9. Property of Shareholder: Share is a movable property of a shareholder.
10. Kinds of Shares: A Company can issue two kinds of shares:
(a) Equity shares.
(b) Preference shares.
2. What is an equity share ? Explain it’s features.
Meaning: Equity shares are also known as ‘ordinary shares’. For legal reasons, a company can not exist without equity shares.
Definition: Companies Act 1956 defines equity share as “those shares which are not preference shares.”
Features of Equity shares are as follows:
1. Permanent capital: Equity shares are irredeemable shares. The amount received from Equity Shares is not refundable by the company during the lifetime. Equity shares become redeemable only in the event of winding up of the company. Equity shareholders provide long term and permanent capital to the company.
2. Fluctuating Dividend: Equity shares do not have a fixed rate of dividend. The rate of dividend depends upon the amount of profit earned by the company. If the company earns more profit, the dividend is paid at a higher rate. On the other hand, if there is insufficient profit, the Board of Directors may postpone the payment of dividends. The shareholders can not compel them to declare and pay the dividend. The income of equity shares is irregular and uncertain. They get dividends which are always fluctuating.
3. No preferential right: Equity shareholders do not enjoy preferential rights with respect to the payment of dividends. It means equity shareholders are paid dividends only after the dividend on preference shares has been paid. At the time of winding up of the company also, the equity shareholders are paid in the last. They are the last claimants. If no surplus amount is available after paying debts and preference shares, equity shareholders will not get anything. Thus, equity shareholders stand second in case of getting dividends on their shares as well as getting back their capital at the time of liquidation of the company.
4. Rights: Equity shareholders enjoy certain rights. These include the right to share in profit, when distributed as a dividend, is the most important right of equity shareholders. If the company is successful and makes a handsome profit, they have the advantage of a large dividend. The right to vote is the basic right of equity shareholders by which they elect directors, amend Memorandum, Articles, etc. Right to inspect books of account of their company of which they are owners. The right to transfer shares is one of the most important rights of the shareholder.
5. Control: The control of the company is vested in equity shareholders. They are often described as real masters of the company. It is because they enjoy the exclusive voting rights. The voting rights of equity shareholders are protected as far as possible. Equity shareholders may exercise their voting rights by proxies, without attending a meeting in person. The Act provides the right to cast vote in proportion to the number of shareholdings. Equity shareholders participate in the management of the company. They elect their representatives called Directors on the Board for the management of the company.
6. Risk: Equity shareholders bear maximum risk in the company. They are described as ‘shock absorbers’ when a company has a financial crisis. If the income of the company falls, the rate of dividends also comes down. Due to this, the market value of equity shares goes down resulting in capital loss. Thus, equity shareholders are the main risk-takers.
7. Residual claimants: Equity shareholders are owners and they are residual claimants to all earning after expenses, taxes, etc. have been paid. Although equity shareholders are the last claimants they have the advantage of receiving entire earnings that are leftover.
8. Face value: The face value of equity shares is low, in comparison to preference shares. It is generally Rs.l0/- per share or even Rs.1/- per share.
9.Market Value : There is more fluctuation in the market value of equity shares in comparison to other securities. Therefore, equity shares are more appealing to the speculators.
10. Bonus Issue: Bonus shares are issued as a gift to equity shareholders. These shares are issued free of cost to existing equity shareholders. These are issued out of accumulated profits. Bonus shares are issued in proportion to the shares held. Thus capital investment of (ordinary) equity shareholder tends to grow on its own. This benefit is available only to the equity shareholder.
3. Define preference shares. What are the different types of preference shares.
As the name Indicates, these shares have certain privileges and preferential rights distinct from those attaching to equity shares. The shares which carry the following preferential rights are termed as preference shares.
A preferential right as to the payment of dividends during the lifetime of the company.
A preferential right as to the return of capital in the event of winding up of the company.
1. Cumulative preference shares: Cumulative preference shares are those shares on which dividend goes on accumulating until it is fully paid. This means, if the dividend is not paid in one or more years due to inadequate profit, then such unpaid dividend gets accumulated. The accumulated dividend is paid when the company performs well. The arrears of dividends are paid before making payment to equity shareholders The preference shares are always cumulative unless otherwise stated in the Articles of Association. It means that if the dividend is not paid in any year or falls short of the prescribed rate, the unpaid amount is carried forward to next year, and so on until all arrears have been paid.
2. Non-cumulative preference shares: Dividend on these shares does not accumulate. This means the dividend on shares can be paid only out of profits of that year. The right to claim dividends will lapse if company does not make a profit in that particular year. If the dividend is not paid in any year, it is lost.
3.Participating preference shares: The holders of these shares are entitled to participate in surplus profit besides preferential dividends. The surplus profit which remains after the dividend has been paid to equity shareholders up to a certain limit is distributed to preferenCe shareholders.
4.Non-participating preference shares: The preference shares are deemed to be non-participating if there is no clear provision in the Articles of Association. These shareholders are entitled only to a fixed rate of a dividend prescribed in the issue.
5. Convertible preference shares: These shareholders have a right to convert their preference shares into equity shares. The conversion takes place within a certain fixed period.
6. Non-convertible preference shares: These shares cannot be converted into equity shares.
7. Redeemable preference shares: Shares that can be redeemed after a certain fixed period are called redeemable preference shares. A company limited by shares, if authorized by Articles of Association, issues redeemable preference shares. Such shares must be fully paid. These shares are redeemed out of divisible profit only or out of a fresh issue of shares made for this purpose.
8. Irredeemable preference shares: Shares that are not redeemable i.e. payable only on the winding up of the company are called irredeemable preference shares. As per the Companies Act (Amendment made in 1988), the company can not issue irredeemable preference shares.
4. What are preference shares? State it’s features.
As the name indicates, these shares have certain preferential rights distinct from
those attached to equity shares.
The shares which carry following preferential rights are termed as preference shares:
a) A preferential right as to payment of dividend during the life time of company.
b) A preferential right as to the return of capital in the event of winding up of company.
Features of Preference Shares :
1. Preference for dividend : Preference shares have the first charge on the distributable amount of annual net profit. The dividend is payable to preference shareholders before it is paid to equity shareholders.
2. Preference for repayment of capital : Preference shareholders have a preference over equity shareholders in respect of return of capital when the company is liquidated. It saves preference shareholders from capital losses.
3. Fixed Return : These shares carry dividend at fixed rate. The rate of dividend is pre-determined at the time of issue. It may be in the form of fixed sum or may be calculated at fixed rate. The preference shareholders are entitled to dividend which can be paid only out of profits. If the directors, in financial crisis, decide not to pay dividend, the preference shareholders have no claim for dividend.
4. Nature of Capital : Preference shares do not provide permanent share capital. They are redeemed after certain period of time. A company can not issue irredeemable preference shares. Preference capital is generally raised at a later stage, when the company gets established. These shares are issued to satisfy the need for additional capital of the company. Preference share capital is safe capital as the rate of dividend and market value does not fluctuate.
5. Market Value : The market value of preference share does not change as the rate of dividend payable to them is fixed. The capital appreciation is considered to be low as compared with equity shares.
6. Voting rights : The preference shares do not have normal voting rights. They do not enjoy right of control on the affairs of the company. They have voting rights on any resolution of the company directly affecting their rights e.g. : Change in terms of repayment of capital, dividend payable to them are in arrears for last two consecutive years, etc.
7. Risk : The investors who are cautious, generally purchase preference shares. Safety of capital and steady return on investment are advantages attached with preference shares. These shares are boon for shareholders during depression period when interest rate is continuously falling.
8. Face Value : Face value of preference shares is relatively higher than equity shares. They are normally issued at a face value of Rs. 100/-.
9. Rights or Bonus Issue : Preference shareholders are not entitled for Rights or Bonus issues.
10. Nature of Investor : Preference shares attract moderate type of investors. Investors who are conservative, cautious, interested in safety of capital and who want steady return on investment generally purchase preference shares.
5. What is Debenture ? Discuss the different types of debentures.
Meaning: Debentures have occupied a significant position in the financial structure of the companies. It is one of the main sources of raising debt capital to meet long term financial needs. Debentures represent borrowed capital. The debenture holders are creditors of the company. The debenture holder gets a fixed rate of interest as a return on his investment. The Board of Directors has the power to issue debentures. The term ‘debenture’ has come from Latin word ‘debare’, which means to ‘owe”.
Definition: Palmer defines a debenture as – “an instrument under seal evidencing debt, the essence of it being admission of indebtedness”.
Types of Debentures:
Secured debentures : The debentures can be secured. The property of the company may be charged as security for a loan. The security may be for some particular asset (fixed charge) or it may be the asset in general (floating charge). The debentures are secured through ‘Trust Deed’.
Unsecured debentures : These are the debentures that have no security. The issue of unsecured debenture is now prohibited by the Companies (Amendment) Act, 2000
Registered debentures : Registered debentures are those on which the name of holders are recorded. A company maintains a register of debenture holders in which the names, addresses, and particulars of holdings of debenture holders are entered. The transfer of debentures, in this case, requires the execution of regular transfer deed.
Bearer debenture : Name of holders are not recorded on the bearer debentures. Their names do not appear on the register of debenture holders. Such debentures are transferable by mere delivery. Payment of interest is made by means of coupons attached to the debenture certificate.
Redeemable debentures : Debentures are mostly redeemable i.e. payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at a fixed date at the end of a specific period or by installments during the lifetime of the company. The provision of repayment is normally made in a trust deed.
Irredeemable debentures : These kinds of debentures are not repayable during the lifetime of the company. They are repayable only after the liquidation of the company, or when there is a breach of any condition or when some contingency arises.
Convertible debentures : Convertible debentures give the right to the holder to convert them into equity shares after a specific period. Such right is mentioned in the debenture certificate. The issue of convertible debenture must be approved by special resolution in a general meeting before they are issued to the public. These debentures are advantageous for the holder. Because of this conversion right, the convertible debenture holder is entitled to equity shares at a rate lower than market value, and even he participates in the profit of the company.
Non-convertible debentures: Non-convertible debentures are not convertible into equity shares on maturity. These debentures are normally redeemed on the maturity date. These debentures suffer from the disadvantage that there is no appreciation in value.
6. Define Debenture and explain the features of debentures.
The word debenture is derived from the Latin word, ‘Debare’ which means to owe something to someone’. A debenture is an acknowledgement of debt issued by a company under its common seal” It also means that debenture is a proof of loan taken by the company on certain terms and conditions.
Features of Debentures are as follows:
Promise : Debenture is a written promise by the company that it owes a specified sum of money to ‘ holder of the debenture.
Face value : The face value of debenture normally carries high denomination. It is Rs.100/— or multiples of Rs.100.
Time Of repayment : Debentures are issued with the due date stated in the ‘Debenture Certificate’. A debenture provides for the repayment of the principal amount on the maturity date.
Interest : A fixed-rate of interest is agreed upon and is paid periodically in case of debentures. The rate of interest that the company offers depends upon the market conditions and nature of the business.
Assurance of repayment : Debentures constitute a long term debt. They carry an assurance of repayment on the due date.
Parties to debentures: There are certain parties to debentures such as-
a) Company : This is the entity that borrows money.
b) Trustee : This is a party through whom the company deals with debenture holders. The company makes an agreement with trustees and debenture holders. It is known as ‘Trust Deed’. It contains the obligations of the company, the rights of debenture holders, etc.
c) Debenture holders : These are the parties who provide loans and receive a ‘debenture certificate’ as evidence of participation.
Rights Of Rights of Debenture holder:
Debenture holders have no right to vote at the general meetings of the company.
Terms of issue of debentures :
a) Debentures can be issued at par, at a premium, and even at discount.
b) According to the Companies Act, a company can not issue debentures carrying voting rights.
c) According to the Companies Act, Sec 292 (1), the Board of Directors has the power to issue debentures.
Security: Debentures can be secured with some property of the company.
Listing: Debentures must be listed with at least one recognized stock exchange.