Spread the love

This article is written by Usha G of Christ Academy Institute of Law, Bengaluru, an intern under Legal Vidhiya


The capital plays an important role for the incorporation or development of the company. The capital includes share capital which is received when a company issue shares to shareholders as well as the debt capital which the company obtains from issuing debentures to creditors. A company’s capital can be described as the money or goods used to invest in a business or other source of income in order to generate capital. In other terms, the money, property and other valuable assets which collectively represent the wealth of an individual or business are called capital of a company. Through this research paper we’ll be briefly discussing about the shares and debentures under company law.

Keywords: Company, Share Capital, Debt Capital, Shareholders, Debenture Holders, Share Capital, Debenture Bond, Business, Investing.  


Capital is the lifeblood for running the affairs of a company which can be raised, inter alia, by issuing shares, debentures and bonds. In actuality, debentures and shares are financing instruments that support the company’s capital arrangements. Under the Companies Act, 2013, they are jointly referred to as “securities”. Where, Debentures indicate lenders’ investment in a company with minimal risk and return, while shares represent ownership in a company with entrepreneurial risks and rewards.

This Shares, share capital and debentures, bonds are distinct financial instruments with unique characteristics. Shares are the company-owned capital. Debentures & bonds are the borrowed capital of the company. But however, they are different ways to raise capital to the company.

The Companies (Share Capital & Debentures) Rules, 2014 and Chapter IV of the Companies Act, 2013 (section 43 to section 72) include the legal provisions pertaining to these instruments. These regulations will be explored in this research article.


  1. To Provide a comprehensive overview of the legal provisions and regulations governing shares, share capital, debentures, and debenture bonds under company law.
  2. To Analyse the different types of shares, share capital and debentures and their characteristics.
  3. To Explore the legal remedies available to investors in case of non-compliance or disputes.


The research paper is based on the assumption that ‘Companies with diverse portfolios of financial instruments, including a mix of shares and debentures, exhibit a more resilient financial structure.’


A share capital is required for any company that is limited by shares. The amount invested in a company to enable it to conduct its business is referred to as its share capital. Particular conditions can be applicable for alterations or increases in the share capital. The capital of a company may be split up into smaller shares that belong to different classes.

Section 2(84) defines share as a share in the share capital of a company and includes stock”. A company’s share capital is divided into smaller units, each with a specific face value. These units are all referred to as shares.

According to the definition of “share,” “stock” is included in the statement. When a company agrees to combine the fully paid-up shares of many members at their request into a single fund, that fund is referred to as “stock.” To put it simply, “stock” is a grouping or bundle of fully paid-up shares. A limited company with a share capital may, in accordance with Section 61 (1) (c), convert all or any of its fully paid-up shares into stock and then convert that stock back into fully paid-up shares of any denomination after fulfilling prescribed formalities.[1]

Nature of share:[2]

  1. A share is a shareholder’s interest in the company expressed as a monetary sum, both for liability and interest purposes. It also includes a set of mutual covenants that are signed by all of the shareholders collectively.[3]
  2. A share is a right to participate in the profits made by a company, while it is a going concern and declares a dividend and in the assets of company when it is wound up.[4]
  3. A share is not a sum of money but a bundle of rights and liabilities; it is an interest measured by a sum of money. These rights and liabilities are regulated by the articles of a company.
  4. Section 44 of the Companies Act provides that a share or other interest of any member in a company is a movable property transferable in the manner provided by the articles of the company[5].
  5. In India, a share is regarded as goods. According to the Sale of Goods Act of 1930, “goods” include stock and shares as well as any movable property other than actionable claims and money.

Kinds of share:

A company may only issue two types of shares in accordance with the Companies Act of 2013. According to Section 43 of the Act, a company limited by shares may only have two types of share capital:

                            (a) equity share capital

                                                  (i) with voting rights, or

  (ii) with differential rights as to dividend, voting, or other matters, in compliance with the regulations and subject to any prescribed requirements;

                             (b) preference share capital (It means a part of share capital with a preferential right with respect to dividends, etc.)

Additionally, a company may issue Global Depository Receipts (GDRs) in accordance with section 41.

Issue of shares:

Companies limited by shares have to issue shares to raise the necessary capital for their business operation. Issue of shares can be made in 3 ways: [6]

  • By private placement of shares;
  • By allotting entire shares to an ‘Issue-House’, which in turn, offers the shares for sale to the public; and
  • Through a prospectus- inviting the public to subscribe for shares in the company.


The capital raised by the company through the issuance of shares is referred to as share capital. Share capital is not a necessary condition of incorporation of a company. But the memorandum of the company will state the amount of capital with which the company is to be registered and the number of shares into which it is to be divided. Even though the payment is represented by the issuance of a share, the share capital is distinct from the membership fee. Share capital may or may not be available to unlimited and limited companies. However, companies that are limited by shares are required to have share capital. In a strict sense, share capital is the nominal value of issued shares (that is, the sum of their par values, as indicated on share certificates).

Kinds of share capital:

The term ‘share capital’ denotes the amount of capital raised or to be raised by the issue of shares by a company and is used in many expressions. The usual different expressions of share capital found in the capital structure of a company are particularly known as “Classification of share capital”, which are as follows:

  1. Nominal or Authorised share Capital [Section2(8)]: Such capital as is authorised by the memorandum of a company to be the maximum amount of share capital of the company.
  2. Issued share capital [Section 2(50)]: It is that part of the authorised or nominal capital which the company issues for the time being for public subscription and allotment.
  3. Subscribed share capital [Section 2(86)]: It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company.
  4. Called-up share capital [Section 2(15)]: It is that portion of the subscribed capital which has been called up or demanded on the shares by the company.
  5. Paid-up share capital [Section 2(64)]: Amount that members have paid on their shares, excluding any premium.

Reduction of share capital:

Section 66 of companies act, 2013 contains procedures with respect to reduction of share capital. The section provides that subject to confirmation by the Tribunal on an application by the company, a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, reduce the share capital, may:

(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up, e.g., where a share of Rs. 10 on which Rs. 5 has been paid is treated as a share of Rs. 5 fully paid up. In this way the shareholder is relieved from liability on the uncalled capital; or

(b) with or without decreasing or eliminating the obligation on any of its shares,

(i) remove any paid-up share capital that has been lost or is not supported by assets that are readily available;

(ii) Repay any paid-up share capital that exceeds the needs of the company.

In Tamil Nadu Newsprint and Papers Ltd. vs. Registrar of Companies[7], the Madras High Court allowed the company to reduce its capital which was found to be in excess of its needs by permitting it to pay the same partly in cash and partly in the form of non-convertible debentures.

In a scheme for reduction of capital, it is permissible for a company to reduce its share capital in a disproportionate manner and consideration payable to different shareholders at different rates – In re RS Livemedia (P.) Ltd.,[8]

Where a company affects reduction of its capital, as aforesaid, it may alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

The Reduction of share capital without the sanction of tribunal:

There are some cases in which there is reduction of share capital and no confirmation by the Tribunal is necessary. These are:

  • Buy-back of its own shares by a company under Section 68.
  • Forfeiture of shares – A company may, in pursuance of its articles, forfeit shares for non-payment of calls.
  • Surrender of shares – It may be accepted by the company under the circumstances where its forfeiture is justified.
  • Diminution of capital – Section 61 (2) clearly states that diminution of capital does not amount to reduction of capital.
  • Redemption of redeemable preference shares [section 55].

Purchase of shares of a member by the company under section 242 – The Tribunal may order the purchase of shares of any member by the company, under certain circumstances.


The share capital of a company is divided into a number of indivisible units of a fixed amount. These units are known as shares.

  • As already noted, a share represents a unit into which the share capital of a company is divided.
  • Thus, for example if the share capital of the company is ₹ 5 lakhs divided into 50,000 units of ₹10, each unit of ₹ 10 shall be called a share of the company.
  • The term ‘share capital’ on the other hand may be defined as the total or authorized amount of capital that can be raised by the company, in accordance with its capital clause of the MOA (Memorandum of association).
  • The share capital is expressed in terms of money and not as so many shares.
  • Share capital can be divided into fractions of any amount and such fractions may be transferred like shares.

In Shree Gopal Paper Mills Ltd. v. CIT[9] The learned Judge observed:

The statutory meaning of share includes the three phases of the share,

  1. share when it is a part of the share capital still remaining unexploited by the company;
  2. share when it is exploited by the company finding a shareholder and
  3. lastly, when the share is converted into stock.

Every company limited by shares is required by company law to have nominal, authorized, or registered share capital, that gives rise to the first stage. One of the key components of the company’s charter is this capital. The capital so indicated is to be divided into shares of a definite amount, and it is to be mentioned in the memorandum of association. The capital is often set at certain round numerals based on the needs of the company as determined by the promoters.


A debenture is an instrument acknowledging a debt issued under the common seal of the company and is a contract for the repayment of the principle sum and interest at a specified till the time the principal sum is repaid.

Section 2(30) of the Companies Act, 2013 defines the term ‘debenture’ as follows: “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.”

However, as per Companies (Amendment) Act, 2017,

(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;

(b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture.

“Debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of those conditions is a debenture – Levy v. Abercorris Co.[10]

Whereas A bond is a fixed-income instrument that represents a loan given by the bond’s buyer (investor) to the bond’s issuer (borrower). Generally, debenture bonds are backed by a collateral security or assets that the investors have a right over if the issuer fails to repay the debt. Such bonds are called secured bonds. A bond is referred to as unsecured if it is not supported by any asset or collateral.

It is challenging to define “bonds” and “debentures” exactly in India due to the degree of interchangeability between the terminology. Debentures are financial instruments that are issued for short-term financing by both public and private sector undertakings (PSUs). Bonds are debt instruments that are issued for both short- and long-term funding by governments, banks, and public sector companies. There are numerous exceptions to the aforementioned definitions because “bonds” and “debentures” are essentially the same in India.[11]


The features of a debenture are as follows:

1. It is a movable property.

2. It is issued by the company and is in the form of a certificate of indebtedness.

3. It usually specifies the date of redemption. It also provides for the repayment of principal and interest amount at a specified date.

4. It generally creates a charge on the undertaking or undertakings of the company

Kinds of debentures:

Debentures are generally classified into different types on the basis of: (1) Convertibility (2) Security (3) Redemption ability (4) Registration of Instrument.

1. Based on convertibility, Debentures may be classified into following categories:

 (A) Non-Convertible Debentures (NCD): These instruments retain the debt character and hence cannot be converted into equity shares.

(B) Partly Convertible Debentures (PCD): A part of these instruments is converted into Equity shares in the future at notice of the issuer. The issuer decides the ratio for conversion. This is usually decided at the time of subscription.

 (C) Fully convertible Debentures (FCD): Upon notice from the issuer, these are fully convertible into equity shares. The issuer determines the conversion ratio. Following conversion, the investors have the same standing as regular shareholders in the company.

(D) Optionally Convertible Debentures (OCD): At the time of issuance, the issuer and the investor agree on a price, at which the investor may elect to convert the OCD into shares.

 2. Based on Security, debentures are classified into:

(A) Secured Debentures: The issuing company’s fixed assets are charged in order to secure these instruments. Therefore, the issuer’s assets may be auctioned to cover the investors’ liability if he fails to pay the principal or interest amount due. According to Section 71(3) of the Companies Act of 2013, a company may issue secured debentures, but only on the terms and conditions that the Central Government may specify through regulations.

(B) Unsecured Debentures: Also known as naked debentures, these instruments are unsecured in the sense that investors must be held jointly with other unsecured creditors of the company in the event that the issuer defaults on payment of the principal amount or interest.

 3. On the basis of Redeemability, debentures are classified into:

 (A) Redeemable Debentures: These are debentures that are issued with the stipulation that they must be redeemed on a specific date, upon demand, following notice, or in accordance with a system of periodic withdrawals. Debentures can typically be redeemed for cash, at which point they can be cancelled or reissued. The reissued debentures’ holder will be endowed with the same rights and privileges as if they had never been redeemed.

(B) Perpetual or Irredeemable Debentures: An irredeemable debenture is one in which there is not a specific amount of time within which the company must repay the money. If the company continues to operate and does not fall behind on its interest payments, the holder of the debenture cannot demand payment. All debentures, regardless of their redeemability, become payable in the event that the company enters liquidation. However, a company is no longer permitted to issue perpetual or irredeemable debentures as per the Companies Act, 2013.

 4. On the basis of Registration, debentures may be classified as

 (A) A Registered Debentures: Registered debentures are made out in the name of a specific individual who is listed as the holder on the company’s Register of Debenture Holders and whose name is on the debenture certificate. These debentures can be transferred in the same way as shares by using a valid transfer document that has been properly executed, stamped, and complies with all other conditions listed in Section 56 of the Companies Act of 2013.

(B) Bearer debentures: These are negotiable documents that can be transferred by simple delivery, much like share warrants. However, they will be payable to the bearer. Transferring a bearer debenture makes the recipient a “holder in due course,” who, despite evidence to the contrary, is entitled to collect and recover the principal amount as well as any interest that has accumulated.[12]


The major difference between the debenture and the debenture bond are discussed here;

01Debenture Bonds are debt financial instruments usually issued by financial institutions, large corporations, and government agencies having the backing of collaterals and physical assets.Debentures are debt financial instruments issued by private companies but are not backed by any collaterals or assets.
02The owner of a debenture bonds is called as bond holder.The owner of a debenture is called a debenture holder.
03Generally, the tenure is longer.The tenure is comparatively shorter.
04The risk level in bonds is lower as it is backed by collaterals.The risk level is comparatively higher as it’s not backed by any collateral.
05Bonds are generally secured by the collateral or assets of the issuing company.Debentures are generally unsecured and are not backed by any collateral.
06If the company is on the process of liquidation, the debenture bond holders are given priority over debenture holders for repayment of capital and interest amount.If the company is on the process of liquidation, the debenture holders are given less priority compared to bondholders for repayment of capital and interest amount.


An entrepreneur must raise resources, or capital, as an investment before incorporating a company. The amount of capital required will depend on the size of the project or business. Since it may be difficult to raise the capital on one’s own or even from friends and family, it has been acknowledged that funding can come from the public. SEBI has established guidelines that, if followed, allow funding to be legally raised from the public, and this environment from which financial requirements are raised, is known as the capital market.  The capital market is divided into two types- the primary market, where shares, bonds & debentures are offered to the public for the purpose of raising the required capital, and this has been briefly explained in the research article, while the secondary market refers to the trading avenue where pre-existing securities are traded among investors.


  1. Companies Act, 2013
  3. ICAI, https://resource.cdn.icai.org/66545bos53754-p1-cp4.pdf  (last visited Nov. 14, 2023).
  4. ICSI, https://www.icsi.edu/media/webmodules/publications/FinalCLStudy.pdf  (last visited Nov. 14, 2023).
  5. DEZERV, https://www.dezerv.in/bonds/bonds-vs-debentures/  (last visited Nov. 15, 2023).
  6. Kirti Dubey, “Share Capital: Exploring the backbone of Company Law”, RESEARCH GATE (2018) https://www.researchgate.net/publication/326295273_Share_Capital_Exploring_the_backbone_of_Company_Law.
  7. Sankalp Jain, Capital of a Company – Shares and Debentures, SSRN (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3894781  
  8. Borland’s Trustee v. Steel Bros., (1901)
  9. Bacha Guzdar v. CIT 57 Bom. L.R. 617 (SC).
  10. Tamil Nadu Newsprint and Papers Ltd. V. Registrar of Companies, 1995 (4) TMI 222
  11. In Re: R.S. Live Media Pvt. Ltd [2014] 187 Comp Case 243 (Delhi)
  12. Levy v. Abercorris Co. [1888] 37 Ch. D. 260-264.
  13. Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat (1971) 41 Comp Cases 1063
  14. Shree Gopal Paper Mills Ltd. v. CIT [1967] 37 Comp. Cas. 240 (Cal.).

[1] ICAI, https://resource.cdn.icai.org/66545bos53754-p1-cp4.pdf (last visited Nov. 14, 2023).

[2] ICSI, https://www.icsi.edu/media/webmodules/publications/FinalCLStudy.pdf (last visited Nov. 14, 2023).

[3] Borland’s Trustee v. Steel Bros., (1901)

[4] Bacha Guzdar v. CIT 57 Bom. L.R. 617 (SC).

[5] Companies act, 2013, § 44, No. 18, Acts of Parliament, 1949 (India).


[7] 1995 (4) TMI 222.

[8] [2014] 187 Comp Case 243 (Delhi)

[9] [1967] 37 Comp. Cas. 240 (Cal.).

[10] [1888] 37 Ch. D. 260-264.

[11] DEZERV, https://www.dezerv.in/bonds/bonds-vs-debentures/ (last visited Nov. 15, 2023).

[12] Calcutta Safe Deposit Co. Ltd. v. Ranjit Mathuradas Sampat (1971) 41 Com Cases 1063

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is of a personal nature.


Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *