ICAI Notes: Share Capital and Debentures | Corporate & Other Laws for CA Intermediate PDF Download

 Page 1


 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
SHARE CAPITAL 
AND DEBENTURES 
 
 
At the end of this chapter, you will be able to: 
?
Know about the Kinds of Share Capital 
?
Explain the basic requirements for issue of Share Certificates, 
Voting Rights and Variation of Shareholders’ Rights 
?
Explain Calls on Unpaid Shares 
?
Know about the Time Period permitted for delivery of 
Certificates of Securities 
?
Understand the application of Securities Premium Amount 
?
Identify prohibition on issue of Shares at a Discount 
?
Understand the issue of Sweat Equity Shares, Issue and 
Redemption of Preference Shares and creation of Capital 
Redemption Reserve Account  
?
Know about the Transfer and Transmission of Securities, 
Refusal to Register and Appeal against Refusal 
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
SHARE CAPITAL 
AND DEBENTURES 
 
 
At the end of this chapter, you will be able to: 
?
Know about the Kinds of Share Capital 
?
Explain the basic requirements for issue of Share Certificates, 
Voting Rights and Variation of Shareholders’ Rights 
?
Explain Calls on Unpaid Shares 
?
Know about the Time Period permitted for delivery of 
Certificates of Securities 
?
Understand the application of Securities Premium Amount 
?
Identify prohibition on issue of Shares at a Discount 
?
Understand the issue of Sweat Equity Shares, Issue and 
Redemption of Preference Shares and creation of Capital 
Redemption Reserve Account  
?
Know about the Transfer and Transmission of Securities, 
Refusal to Register and Appeal against Refusal 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 4.2 
 
?
Explain the concepts relating to the Alteration of Share 
Capital and Notice to Registrar thereof 
?
Understand the concept relating to Further issue of Share 
Capital 
?
Know about the issue of Bonus Shares, Reduction of Share 
Capital, Buy-Back of Shares and applicable restrictions 
thereon 
?
Know about issue of Debentures and creation of Debenture 
Redemption Reserve Account  
?
Identify the Punishments and penalties for various offences 
including impersonation. 
  
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
SHARE CAPITAL 
AND DEBENTURES 
 
 
At the end of this chapter, you will be able to: 
?
Know about the Kinds of Share Capital 
?
Explain the basic requirements for issue of Share Certificates, 
Voting Rights and Variation of Shareholders’ Rights 
?
Explain Calls on Unpaid Shares 
?
Know about the Time Period permitted for delivery of 
Certificates of Securities 
?
Understand the application of Securities Premium Amount 
?
Identify prohibition on issue of Shares at a Discount 
?
Understand the issue of Sweat Equity Shares, Issue and 
Redemption of Preference Shares and creation of Capital 
Redemption Reserve Account  
?
Know about the Transfer and Transmission of Securities, 
Refusal to Register and Appeal against Refusal 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 4.2 
 
?
Explain the concepts relating to the Alteration of Share 
Capital and Notice to Registrar thereof 
?
Understand the concept relating to Further issue of Share 
Capital 
?
Know about the issue of Bonus Shares, Reduction of Share 
Capital, Buy-Back of Shares and applicable restrictions 
thereon 
?
Know about issue of Debentures and creation of Debenture 
Redemption Reserve Account  
?
Identify the Punishments and penalties for various offences 
including impersonation. 
  
© The Institute of Chartered Accountants of India
 
 
SHARE CAPITAL AND DEBENTURES 
 
a
    
 4.3 
 
 
This chapter explains the provisions contained in Chapter IV (comprising Section 
43 to 72) of the Companies Act 2013 (hereinafter referred to as the Act or this Act) 
regarding the ‘Share Capital and Debentures’, along with relevant procedural 
aspects explained in the Companies (Share Capital and Debentures) Rules, 2014. 
 
1. INTRODUCTION 
Chapter IV Consists of sections 43 to 72 as well as the Companies (Share 
Capital and Debentures) Rules, 2014. 
Finance, the lifeblood for running the affairs of a company, can be raised, inter-alia, 
by issuing shares and debentures. In fact, shares and debentures are financial 
instruments which help in arranging funds for the company. Under the Companies 
Act, 2013, they are jointly referred to as “securities” . 
Shares represent ownership interest in a company with entrepreneurial risks and 
rewards whereas debentures depict lenders’ interest in the company with limited 
risks and returns. 
Sometimes, after the issue of capital, a company may either alter or reduce the 
share capital depending upon the exigencies of the situation. The company has to 
follow the requisite provisions for alteration or reduction of share capital.  
Share Capital and Debentures 
(Sections 43-72)
Concepts relating to Shares 
(Sections 43-70) 
Concepts relating to Debentures 
(Section 71)
CHAPTER OVERVIEW W
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
SHARE CAPITAL 
AND DEBENTURES 
 
 
At the end of this chapter, you will be able to: 
?
Know about the Kinds of Share Capital 
?
Explain the basic requirements for issue of Share Certificates, 
Voting Rights and Variation of Shareholders’ Rights 
?
Explain Calls on Unpaid Shares 
?
Know about the Time Period permitted for delivery of 
Certificates of Securities 
?
Understand the application of Securities Premium Amount 
?
Identify prohibition on issue of Shares at a Discount 
?
Understand the issue of Sweat Equity Shares, Issue and 
Redemption of Preference Shares and creation of Capital 
Redemption Reserve Account  
?
Know about the Transfer and Transmission of Securities, 
Refusal to Register and Appeal against Refusal 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 4.2 
 
?
Explain the concepts relating to the Alteration of Share 
Capital and Notice to Registrar thereof 
?
Understand the concept relating to Further issue of Share 
Capital 
?
Know about the issue of Bonus Shares, Reduction of Share 
Capital, Buy-Back of Shares and applicable restrictions 
thereon 
?
Know about issue of Debentures and creation of Debenture 
Redemption Reserve Account  
?
Identify the Punishments and penalties for various offences 
including impersonation. 
  
© The Institute of Chartered Accountants of India
 
 
SHARE CAPITAL AND DEBENTURES 
 
a
    
 4.3 
 
 
This chapter explains the provisions contained in Chapter IV (comprising Section 
43 to 72) of the Companies Act 2013 (hereinafter referred to as the Act or this Act) 
regarding the ‘Share Capital and Debentures’, along with relevant procedural 
aspects explained in the Companies (Share Capital and Debentures) Rules, 2014. 
 
1. INTRODUCTION 
Chapter IV Consists of sections 43 to 72 as well as the Companies (Share 
Capital and Debentures) Rules, 2014. 
Finance, the lifeblood for running the affairs of a company, can be raised, inter-alia, 
by issuing shares and debentures. In fact, shares and debentures are financial 
instruments which help in arranging funds for the company. Under the Companies 
Act, 2013, they are jointly referred to as “securities” . 
Shares represent ownership interest in a company with entrepreneurial risks and 
rewards whereas debentures depict lenders’ interest in the company with limited 
risks and returns. 
Sometimes, after the issue of capital, a company may either alter or reduce the 
share capital depending upon the exigencies of the situation. The company has to 
follow the requisite provisions for alteration or reduction of share capital.  
Share Capital and Debentures 
(Sections 43-72)
Concepts relating to Shares 
(Sections 43-70) 
Concepts relating to Debentures 
(Section 71)
CHAPTER OVERVIEW W
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 4.4 
Both the shares and debentures are presented in the Balance Sheet on the liabilities 
side of the issuer company and on the assets side of the investor and lender 
respectively. 
Legal provisions relating to these instruments are covered under Chapter IV of the 
Companies Act, 2013 (comprising sections 43 to 72) and the Companies (Share 
Capital & Debentures) Rules, 2014 as amended from time to time along with 
endorsement in the company formation documents or approved at the suitable 
company forum, wherever necessary. 
2. SHARE CAPITAL-TYPES  
WHAT ARE SHARE AND STOCK? 
Share – Definition & Description 
Section 2(84) of the Act defines share as a share in the share capital of a company 
and includes stock. 
Capital of a company is termed as share capital, which is divided into units; having 
a certain face value. Each such unit is termed as share.  
New London & Brazilian Bank v. Brockle Bank
1
  
A share is not a sum of money..., but is an interest measured in a sum of money, 
and made up of various rights, contained in the contract, including the right to a 
sum of money of a more or less amount.  
Around two decade later, J. Farwell in landmark case of Borland’s Trustee v Steel 
Brothers & Co Ltd
2
 place his trust in the opinion stated above, and observe that 
share is the interest of a shareholder in the company measured by a sum of money, 
for the purpose of liability in the first place and of interest in the second, and also 
consists of a series of mutual covenants entered into by all the shareholders inter 
se in accordance with the provisions of the Companies Act and the Articles of 
Association. 
  
 
1
 (1882) 21 Ch D 302 (F) 
2
 (1901) 1 Ch 279 
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
a
    
 
CHAPTER 
4 
 
 
 
 
 
SHARE CAPITAL 
AND DEBENTURES 
 
 
At the end of this chapter, you will be able to: 
?
Know about the Kinds of Share Capital 
?
Explain the basic requirements for issue of Share Certificates, 
Voting Rights and Variation of Shareholders’ Rights 
?
Explain Calls on Unpaid Shares 
?
Know about the Time Period permitted for delivery of 
Certificates of Securities 
?
Understand the application of Securities Premium Amount 
?
Identify prohibition on issue of Shares at a Discount 
?
Understand the issue of Sweat Equity Shares, Issue and 
Redemption of Preference Shares and creation of Capital 
Redemption Reserve Account  
?
Know about the Transfer and Transmission of Securities, 
Refusal to Register and Appeal against Refusal 
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 4.2 
 
?
Explain the concepts relating to the Alteration of Share 
Capital and Notice to Registrar thereof 
?
Understand the concept relating to Further issue of Share 
Capital 
?
Know about the issue of Bonus Shares, Reduction of Share 
Capital, Buy-Back of Shares and applicable restrictions 
thereon 
?
Know about issue of Debentures and creation of Debenture 
Redemption Reserve Account  
?
Identify the Punishments and penalties for various offences 
including impersonation. 
  
© The Institute of Chartered Accountants of India
 
 
SHARE CAPITAL AND DEBENTURES 
 
a
    
 4.3 
 
 
This chapter explains the provisions contained in Chapter IV (comprising Section 
43 to 72) of the Companies Act 2013 (hereinafter referred to as the Act or this Act) 
regarding the ‘Share Capital and Debentures’, along with relevant procedural 
aspects explained in the Companies (Share Capital and Debentures) Rules, 2014. 
 
1. INTRODUCTION 
Chapter IV Consists of sections 43 to 72 as well as the Companies (Share 
Capital and Debentures) Rules, 2014. 
Finance, the lifeblood for running the affairs of a company, can be raised, inter-alia, 
by issuing shares and debentures. In fact, shares and debentures are financial 
instruments which help in arranging funds for the company. Under the Companies 
Act, 2013, they are jointly referred to as “securities” . 
Shares represent ownership interest in a company with entrepreneurial risks and 
rewards whereas debentures depict lenders’ interest in the company with limited 
risks and returns. 
Sometimes, after the issue of capital, a company may either alter or reduce the 
share capital depending upon the exigencies of the situation. The company has to 
follow the requisite provisions for alteration or reduction of share capital.  
Share Capital and Debentures 
(Sections 43-72)
Concepts relating to Shares 
(Sections 43-70) 
Concepts relating to Debentures 
(Section 71)
CHAPTER OVERVIEW W
© The Institute of Chartered Accountants of India
a
 
 
 
CORPORATE AND OTHER LAWS 4.4 
Both the shares and debentures are presented in the Balance Sheet on the liabilities 
side of the issuer company and on the assets side of the investor and lender 
respectively. 
Legal provisions relating to these instruments are covered under Chapter IV of the 
Companies Act, 2013 (comprising sections 43 to 72) and the Companies (Share 
Capital & Debentures) Rules, 2014 as amended from time to time along with 
endorsement in the company formation documents or approved at the suitable 
company forum, wherever necessary. 
2. SHARE CAPITAL-TYPES  
WHAT ARE SHARE AND STOCK? 
Share – Definition & Description 
Section 2(84) of the Act defines share as a share in the share capital of a company 
and includes stock. 
Capital of a company is termed as share capital, which is divided into units; having 
a certain face value. Each such unit is termed as share.  
New London & Brazilian Bank v. Brockle Bank
1
  
A share is not a sum of money..., but is an interest measured in a sum of money, 
and made up of various rights, contained in the contract, including the right to a 
sum of money of a more or less amount.  
Around two decade later, J. Farwell in landmark case of Borland’s Trustee v Steel 
Brothers & Co Ltd
2
 place his trust in the opinion stated above, and observe that 
share is the interest of a shareholder in the company measured by a sum of money, 
for the purpose of liability in the first place and of interest in the second, and also 
consists of a series of mutual covenants entered into by all the shareholders inter 
se in accordance with the provisions of the Companies Act and the Articles of 
Association. 
  
 
1
 (1882) 21 Ch D 302 (F) 
2
 (1901) 1 Ch 279 
© The Institute of Chartered Accountants of India
 
 
SHARE CAPITAL AND DEBENTURES 
 
a
    
 4.5 
Example 1 - Sun Bakers Limited has authorised share capital of ` 50.00 lakh. The 
face value of each unit of capital or ‘share’ is ` 10. In this case, it can be said that 
the company has 5.00 lakh shares of ` 10 each. When these shares (either in part 
or whole) are allotted to various persons, they, on the date of allotment, become 
shareholders of the company.   
Note: Company limited by share or those which having share capital has to quote 
in their memorandum - The share capital of the capital is _ _ _ _ _ rupees, divided 
into _ _ _ _ _ shares of _ _ _ rupees each. 
Stock - Description 
The definition of ‘share’ states that the term ‘share’ includes ‘stock’. If a company 
undertakes to aggregate the fully paid up shares of various members as per their 
requests and merge those shares into one fund, then such fund is called ‘stock’. In 
more simple words we can say that ‘stock’ is a collection or bundle of fully paid-
up shares.  
Section 61 (1) (c) of the Act, empower a limited company having a share capital to 
convert all or any of its fully paid-up shares into stock, and reconvert that stock 
into fully paid-up shares of any denomination.  
Students are advised to take note of - What make stock different?  
Stock is stated in lump sum whereas a ‘share’ being the smallest unit is having face 
value. Originally shares are issued to the shareholders while in case of stock, the 
fully paid-up shares of the members are converted into ‘stock’ afterwards. Thus, 
‘stock’ is not issued originally but is obtained by conversion of fully paid -up shares.    
KINDS OF SHARE CAPITAL [SECTION 43] 
Broadly, there are two kinds of share capital of a company limited by shares; Equity 
share capital and Preference share capital. Equity Share capital can be further 
segregated into two categories based upon rights. Following diagram depicts kinds 
of share capital;  
© The Institute of Chartered Accountants of India