This article is written by Kamakshi Lasaria of 5th Semester of MIT World Peace University, an intern under Legal Vidhiya
ABSTRACT:
This research paper will simplify the terms related to shares and debentures with the help of company law and will enhance the implementation in the world of stocks, shares and debentures are commonly used terms when it comes to investing. In business, debt and equity are the two main ways companies raise money for growth and expansion. When a company chooses equity, they issue shares to the public. Anyone who buys shares becomes a part-owner of the company.This capital encompasses both share capital, which is acquired through the issuance of shares to shareholders, and loan capital, obtained by issuing debentures to creditors. In the context of a company, capital refers to the cash or goods utilised to generate income, whether through investment in a business or other income-generating assets. Shares, on the other hand, represent units of ownership interest in a corporation or financial asset. It is important to note that owning shares does not grant direct control over the day-to-day operations of the business. However, shareholders are entitled to an equal distribution of any declared profits in the form of dividends. On the other hand, when a company opts for debt, they borrow money from the public and agree to pay interest regularly. In this case, debentures are issued to the public and those who buy them are known as creditors. Shares represent the share capital of a company and give shareholders the right to own a specific portion of the company’s capital. Debentures, on the other hand, are financial instrument that represents a company’s debt to external parties and offer a fixed interest rate. Nowadays, many people invest in shares or debentures with the hope of getting better returns, so it’s important to understand the investment securities.
KEYWORDS: Stocks, Shares, Capital, Investment, Debentures, Profits and Interest.
INTRODUCTION:
This capital includes both share capital acquired by issuing shares to shareholders and loan capital obtained by issuing debentures to creditors. In a company, capital is the cash or goods used to produce income, whether it is through investment in a company or other income-producing assets. Share capital is the right of the shareholders to own a specific proportion of the company’s capital. Shareholders are entitled to receive an equal share of any declared profits as dividends. When a company decides to take on debt, it borrows money from the general public and agrees to pay interest on that money regularly. In this case, the debt is issued to the general public and the creditors are called debentures. Debentures are a type of financial instrument that represents a company’s debt to outside parties and provides a fixed interest rate to the general public. Company law regulates the legal framework within which companies operate and conduct their business. It covers a wide range of legal principles and regulations that govern the establishment, structure and operation of companies. Provisions relating to shares, share capital, bonds and debentures are central parts of company law. These components play a crucial role in shaping the financial structure and operations of the company.
Shares and share capital: Shares represent an interest in a company and are the basic units through which ownership is distributed. Companies issue shares to raise capital for various purposes such as expansion, investment or repayment of debt. Share capital is the total value of a company’s issued shares and is an important part of a company and its financial structure. Shareholders holding these shares have certain rights, including voting at general meetings, receiving dividends and participating in the company and its profits. Common stock typically provides voting rights and residual claims to the company and its assets and profits. On the other hand, preference shares may have special benefits, such as a preferential right to receive dividends or liquidated income. The allocation and characteristics of shares are defined by the company and the company’s statutes, which are the main document that determines the internal rules of the company.
Bond and bonds: Bonds are bonds issued by companies to raise money. When an investor buys a bond, they are lending money to the company. In return, the company undertakes to pay regular interest and repay the capital on the due date. Bonds are a long-term form of borrowing for businesses and offer a fixed interest rate, making them an attractive investment for certain investors looking for a predictable income stream. Bonds are a type of bond that is transferable and can be traded on the open market. These bonds are transferable instruments that allow investors to buy and sell them before their maturity. Bonds can have different terms, including different interest rates, maturity and redemption features. Under corporate law, the issuance and terms of bonds are usually regulated to protect the interests of both the company and its bondholders.
A company’s ability to issue bonds and the terms of the bond agreement are often defined in its articles of incorporation and require compliance with applicable laws and regulations. In summary, stocks, share capital, bonds and debentures are an integral part of corporate finance and management. The regulations surrounding these instruments aim to strike a balance between facilitating the acquisition of capital by companies and protecting the interests of shareholders and bondholders. Understanding these regulations is critical for investors, corporate executives and corporate lawyers.
DEFINITIONS AND EXPLANATIONS UNDER COMPANY LAW:
Under the Companies Act 2013 in India, the term ‘shares’ is defined in Section 2 (84) of the Act. This description is straightforward and emphasises that a share is an element of a company’s share capital. The term ‘share capital’ refers to the total value of the shares issued by a company.[1]
- Share Capital: This is the total value of finances raised by a company through the allocation of shares. Share capital is a critical element of a company’s fiscal structure, and it represents the power interest of the shareholders. Share- This refers to an individual unit of power in a company. When individualities or realities purchase shares, they become shareholders and acquire certain rights and boons, similar to advancing rights, tips, and a share in the company’s gains.
- Stock: The description explicitly mentions that ‘share’ includes ‘stock’. In commercial terms, ‘stock’ refers to the aggregate shares that a person holds in a company. While the term ‘stock’ is more generally used in the environment of the U.S. commercial system, in India, it’s honoured as part of the broader description of” share.” Shares serve as a way for companies to raise capital by allowing individualities and institutional investors to invest in the business.
The power of shares represents a commensurable stake in the company’s means, earnings, and decision-making processes. The terms and conditions related to the allocation and power of shares are generally outlined in the company’s papers of association, which is a crucial document regulating the internal affairs of the company. Understanding the description of shares under the Companies Act 2013 is essential for both companies and investors, as it lays the foundation for the legal and nonsupervisory frame governing the allocation and operation of shares in Indian pots. Under the Indian Companies Act, 2013, a bond is defined in Section 2(30) of the Act. Under this section, a bond includes shares, bonds or other instruments evidencing the debt of a company, whether or not they constitute a debt against the means of the company. This is the correct description in the Companies Act 2013, Debentures include bonds, debentures or other documents evidencing the debt of a company, whether or not they constitute a debt on the means of the company. This description is broad and includes colourful instruments that represent the company and its debt. Whether it’s a traditional debenture, debenture, debenture or any other fiscal instrument that constitutes a debt obligation, all fall under the description of debentures in the Companies Act 2013.
Bonds are essential for businesses because they give an occasion to raise plutocrats through the allocation of debt securities. Investors who buy these bonds advance plutocrats to the company in exchange for regular interest payments and prepayment of star at maturity. The terms of the bonds, including interest rates, redemption features and other applicable details, are generally set out in a bond fund or bond agreement, and these documents are subject to the Companies Act and other applicable regulations laws in India.
TYPES AND OBLIGATIONS:
TYPES:
Shares can be astronomically divided into two types, common shares and preferred shares. Common shares provide voting rights and a share of residual profits, while preferred shares may have special benefits equivalent to preference in recording a bonus or liquidation income. The law defines the process of issuing shares and defines the conditions under which new shares can be created and distributed. The authority to issue shares usually rests with the company and the board, and in some cases, it may have the blessing of shareholders.
Share capital.
Share capital is the total value of a company’s issued shares. It is an important part of the company and its tax structure and represents the majority of shareholders. The Companies Act 2013 contains rules for the maintenance and review of share capital.
Rights of shareholders.
The law determines the protection of these rights and the score of the company to the shareholder’s review of share capital. Companies can change their share capital for various reasons, such as restructuring or tax reasons. The law provides a framework for changes in share capital, including obtaining the blessing of shareholders and following non-control procedures.
Share Buybacks.
In this process, a company removes its shares from its shareholders, which results in a reduction in the total number of outstanding shares.
Debentures and Debentures Bonds.
The bonds constitute long-term lending to companies and are governed by special obligations under the Companies Act 2013.
Description and Types:
Legally, bonds include bonds, debentures or other instruments evidencing corporate debt. There are colourful links, each with its characteristics. Companies issue bonds to raise financing, attracting investors who want to promote plutocrats in exchange for regular interest payments.
Allotment and terms:
The law defines the conditions and procedures for issuing bonds. The terms of a bond, including interest rates, maturities and redemption features, are defined in a bond trust or indenture, which is a legal document that governs the relationship[2] between a company and bondholders. A Bond Trustee protects the interests of bondholders, companies must appoint a bond manager. The manager acts as an intermediary between the company and the bondholders, ensuring compliance with the terms of the bond agreement and representing the bondholders and their interests[3].
Security of bonds:
Bonds can be secured or discounted. Covered bonds are secured by the company’s special funds that provide security to the bondholders. The law regulates the creation of payments to the company and the means to secure the obligations.
Redemption of bonds:
Companies must redeem bonds when they come due. The Act specifies the procedures for the redemption of bonds, including the establishment of a bond redemption fund to ensure that the bonds mature until financing is available.
OBLIGATIONS:
Bonds are transferable and exchangeable debt instruments. They are tradable with open demand, allowing investors to buy and sell them before they expire. The Limited Liability Companies Act, 2013 contains provisions for the issue and trading of debentures.
Bonds and intercompany credit limits:
The law sets limits to the company’s borrowing capacity to protect the interests of creditors and shareholders.[4] Bond allocations are subject to these restrictions, which companies do not donate excessively.
Compliance and regulatory framework:
- Regulatory authorities- The Securities and Exchange Board of India (SEBI) plays a key role in regulating the allotment and trading of securities, including stocks and bonds. SEBI’s guidelines and regulations are designed to ensure transparency, cover the interests of investors and maintain the integrity of capital applications.
- Notification terms- Companies must act improperly based on strict risk conditions when issuing shares or bonds. This includes providing accurate and comprehensive information in the prospectus or offering document so that investors can form an informed opinion. Business management
- Corporate governance- The principles under the Companies Act and SEBI regulations emphasise transparency, accountability and fairness in the company and its operations. Companies must follow these principles to protect the interests of shareholders and bondholders.
- Part of the government- The board plays a key role in the decision-making process related to stocks and bonds.[5] These responsibilities include determining the allocation of shares, approving the terms of bonds, meeting legal requirements and ensuring the company’s overall taxation.
DIFFERENCES:
- Difference between Share and Share Capital.
| Share | Share Capital |
| An offer addresses possession in an organisation and is a unit of measure for the proprietorship interest of an investor in that organisation. | It offers capital, then again, alludes to the complete worth of the offers given by an organisation. It addresses the aggregate sum of capital that the organisation has raised by giving offers. |
| Offers are individual units of possession that are traded by financial backers in the open market. | Offer capital is a more extensive term that envelops the all-out worth of all offers given by an organisation. |
| Offers can be traded in the securities exchange, permitting financial backers to move proprietorship between one another. | Offer capital isn’t straightforwardly adaptable. It addresses the general proprietorship construction of the organisation and can change when new offers are given or existing offers are repurchased by the organisation. |
| The reason for an offer is to address proprietorship in the organisation and to give investors certain freedoms, like democratic privileges and an offer in the organisation’s benefits through profits. | Offer capital is a wellspring of assets for the organisation. It addresses the cash that the organisation has gotten from giving offers, and this capital is utilised for different business exercises, like development, venture, or obligation reimbursement. |
| There are different types of shares, such as common shares and preferred shares, each with its own set of rights and privileges. | Share capital includes the total value of all types of shares issued by the company. |
- Difference between Debenture and Debenture Bonds.
| Debenture | Debenture Bonds |
| Debentures are debt fiscal instruments issued by private companies, but any collaterals or physical means don’t back them up. | Bonds are debt fiscal instruments issued by large pots, fiscal institutions and government agencies that are backed up by collaterals or physical means. |
| The proprietor of a debenture is called a debenture holder. | The proprietor of a bond is called a bondholder. |
| Debentures don’t get secured by the collateral or physical means of the issuing company. Lenders buy these instruments solely grounded on the character of the issuing company. | Bonds get secured by the collateral or physical means of the issuing company. |
| Debentures are generally short to medium term investments and their term is generally lower than bonds. | Bonds are long term investments and their term is generally more advanced than debentures. |
| Private companies generally issue debentures for their immediate capital conditions | Large pots, fiscal institutions and government agencies issue these bonds for their long term capital conditions. |
CASE LAWS:
Shares:
- Saloman v. Salomon and Co. Ltd. (1897): This milestone case laid out the rule of corporate character. Mr. Saloman consolidated an organisation to move his business to it, and he turned into a larger investor. At the point when the organisation failed, the issue emerged concerning the organisation’s risk. The court decided that the organisation is a different licit substance, unmistakable from its investors, and in this manner, investors weren’t in and by responsible for the organisations scores.
- Foss v. Harbottle (1843): This case laid out the standard that, in specific conditions, just the actual organisation can bring an activity for a wrong committed against it. Investors cannot bring an exertion for an out- base that’s viewed as a commercial injury, as it’s the organisation’s on the whole right to sue.
Debentures:
- Residents Protection Co. v. Parsons (1881): This case featured the idea of drifting charges. The court decided that as long as the organisation is working inside the ordinary course of business, it can utilise and discard resources subject to the drifting charge. In any case, upon a particular occasion of default, the drifting charge solidifies into a proper charge, getting the debenture holder’s privileges.
- Financial backers Remuneration Plan Ltd v. West Bromwich Building Society (1998): While not straightforwardly connected with debentures, this case tended to the obligation of care owed by monetary to financial backers. It underscored the obligation of organisations, including those responsible for debentures, to give precise and complete data. This has suggestions for debenture backers in guaranteeing that data in the plan or proposition archive is solid.
General Corporate Regulation with Suggestions for Offers and Debentures:
- Satyam PC Administrations Ltd. Misrepresentation (2009): While not a case regulation, the Satyam outrage had huge ramifications for corporate administration. The organisation swelled its budget summaries, influencing investors and debenture holders. This episode prompted an expanded examination of corporate administration rehearses and stricter guidelines, influencing how organisations deal with their funds and speak with partners.
CONCLUSION:
To conclude, the arrangements of offers, share capital, debentures, and debenture securities under corporate regulation structure a complete system that oversees the monetary construction, gathering pledges exercises, and financial backer assurance in organisations. The Organizations Act 2013, alongside administrative oversight from bodies like SEBI, guarantees that the company works with straightforwardness, responsibility, and decency, adjusting the interests of investors, debenture holders, and different partners. Understanding and conforming to these arrangements are fundamental for companies trying to raise capital and for financial backers hoping to take part in the capital business sectors.
[1] Edurev https://edurev.in/t/115500/Information-Memorandum-Share-Capital–Company-Law last visited on 13/11/2023.
[2] Investopedia https://www.investopedia.com/terms/t/termbond.asp last visited on 13/11/2023.
[3] Burlington’s Legal https://burlingtonslegal.com/insight/guidance-on-general-duties-and-obligations-of-a-director-of-a-uk-company/ last visited on 13/11/2023.
[4] SSO https://sso.agc.gov.sg/Act/CoA1967?ProvIds=pr162- last visited on 13/11/2023.
[5] McKinsey https://www.mckinsey.com/capabilities/strategy-and-corporate-finance/our-insights/boards-and-decision-making last visited on 13/11/2013.
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