Share Capital & Debentures

Share capital is the financial backbone of a company — it defines the ownership structure, determines voting power, and establishes the rights attached to different classes of investors. Under the Companies Act, 2013, the entire lifecycle of share capital is regulated with precision: from the moment a company fixes its authorised capital in the Memorandum of Association, to the issuance of shares, the call-making process, forfeiture for non-payment, and ultimately the redemption of preference shares at maturity. A Company Secretary must be conversant with every stage of this lifecycle because drafting errors — whether in the terms of an issuance, the notice for a rights issue, or the board resolution for a bonus issue — can render the entire transaction void or expose the company to legal liability. The examiner frequently tests share capital through procedural questions (e.g., “can a company issue shares at a discount?”) and numerical problems involving the Securities Premium Account.

Debentures, by contrast, sit on the liability side of the balance sheet — they represent borrowed money, not ownership. Yet they are equally important in corporate financing strategy. A company may raise debt through secured or unsecured debentures, with or without convertibility options, and must navigate the intricate rules around charge creation, Debenture Trust Deeds, and Debenture Redemption Reserve. The interplay between share capital and debentures determines a company’s capital structure and its cost of capital, which is why both topics are tested together in the CS Executive paper. This note provides comprehensive, exam-oriented coverage of every concept, with specific section references, procedural checklists, and memory aids to ensure you are fully prepared.

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🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam. Memorise the bolded terms and thresholds — they are the most commonly tested.

Share Capital — The Five-Fold Classification:

• Authorised Capital: Maximum share capital a company can issue as stated in its MoA; can be increased by passing an Ordinary Resolution and altering the MoA; there is no minimum specified under the Act
• Issued Capital: That part of authorised capital actually offered to the public for subscription; always less than or equal to authorised capital
• Called-up Capital: That part of the issued capital that the company has requested shareholders to pay; not all of the face value need be called up at once
• Paid-up Capital: The actual amount received from shareholders; equals called-up capital minus unpaid calls
• Subscribed Capital: The part of issued capital that has been applied for and allotted; it is the face value of shares actually taken up by shareholders

Key Memory Aid — Capital Flow: Authorised → Issued → Subscribed → Called-up → Paid-up. Think of it as a funnel: money flows in at each stage and some capital gets “lost” at each restriction point (unissued, unallotted, uncalled, unpaid).

Kinds of Shares:

• Equity Shares: Carry voting rights (one share, one vote); dividend is variable and depends on profits; they are the most common form of share capital
• Preference Shares: Carry fixed dividend (specified rate); have priority over equity in repayment of capital on winding up; do not ordinarily carry voting rights except if dividend is in arrears for 2+ years
• Cumulative Preference Shares: Arrears of dividend accumulate if not paid in a particular year; must be cleared before any dividend can be paid to equity shareholders
• Non-cumulative Preference Shares: Dividend does not accumulate if not paid; company has no obligation to make up missed dividends
• Participating Preference Shares: After receiving fixed dividend, these shares also participate in surplus profits (or assets on winding up) alongside equity shareholders
• Non-participating Preference Shares: Only entitled to fixed dividend; no further share in profits or winding-up assets

⚡ High-Yield Point: If a preference shareholder is denied their fixed dividend for 2 consecutive years, they acquire voting rights under Section 47(2) — this is a frequently tested trap. The voting rights last until the arrears are fully paid up.

Issue Price of Shares:

• Face Value (Nominal Value): The par value printed on the share certificate (e.g., ₹10); this amount goes into the Share Capital account
• Securities Premium: The amount received above face value; credited to the Securities Premium Account (SPA) under Section 52; can never be used for paying dividends
• Legal Position on Discount: A company cannot issue shares at a discount — this is void under Section 53. The only exception is sweat equity shares issued to employees under Section 54, which can be issued at a discount to fair market value (subject to SEBI guidelines for listed companies and shareholder approval via Special Resolution).

Bonus Shares (Section 63):

• Issued to existing shareholders entirely out of free reserves (accumulated profits that are not reserved for a specific purpose)
• Sources permitted for bonus issue: Securities Premium Account, General Reserve, Capital Redemption Reserve, and accumulated profits from the profit and loss account
• Conditions for bonus issue:
  • The company must have disclosed its financials in accordance with law for the last 5 financial years (relaxed for new companies)
  • The company must not have defaulted in filing returns with RoC for the last 3 financial years
  • At least 200% of the average profit of the last 3 years must be available as free reserves (meaning the company must be genuinely profitable)
  • The ratio of bonus shares to existing shares is decided by the shareholders in a General Meeting
• Statutory Lock-in: Bonus shares issued under Section 63 are subject to a lock-in of 1 year from the date of their allotment — the allottees cannot sell these shares for 1 year

⚡ Exam Tip: A company cannot issue bonus shares if its existing shares are partly paid up. All shares must be fully paid up before a bonus issue is made. Also, bonus shares cannot be used to pay up shares that are already unpaid — this is a common examiner trap.

Debentures — The Essentials:

• Debenture Holder = Creditor: Unlike a shareholder, a debenture holder is a lender to the company, not an owner. They receive fixed interest and have priority in repayment on winding up.
• Convertible vs Non-convertible Debentures (NCD):
  • Fully Convertible Debentures (FCD): Entirely convertible into equity shares after a specified period at a predetermined conversion ratio
  • Partly Convertible Debentures (PCD): A portion is converted to equity, remainder is redeemed at par or at a premium
  • Non-convertible Debentures (NCD): Pure debt instruments; no equity conversion option; redeemed at maturity
• Secured vs Unsecured Debentures:
  • Secured Debentures: Backed by a charge on company assets (fixed or floating charge); the charge must be registered with RoC within 30 days using Form CHG-1
  • Unsecured Debentures: No specific asset backing; creditors rely on the general creditworthiness of the company
• Redeemable Debentures: Have a fixed maturity date; must be redeemed according to the terms of issuance; companies must maintain a Debenture Redemption Reserve (DRR) before redemption

⚡ High-Yield Point: For NBFCs (Non-Banking Financial Companies), the DRR must be 100% of the value of debentures outstanding before redemption. For other companies, DRR must be 50% of the debenture value before redemption. Failure to maintain DRR makes redemption unlawful.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months. Detailed section references and procedural guidance.

Authorised Capital — Alteration and Practical Points:

• Authorised capital is stated in Clause V of the Memorandum of Association
• To increase authorised capital, the company must pass an Ordinary Resolution and alter the MoA by following the procedure under Sections 13 and 14: notice of alteration to RoC, filing of special resolution (for listed companies), and updating the MoA
• There is no minimum or maximum authorised capital prescribed under the Companies Act, 2013 — it is a commercial decision of the promoters
• Authorised capital does NOT represent actual money received — it is merely the ceiling on what the company can legally issue

Alteration of Share Capital (Section 61):

The company can alter the conditions contained in its Memorandum with respect to share capital by:

• Increasing share capital: Ordinary Resolution required; new shares are offered first to existing shareholders (rights issue) unless the Articles or a Special Resolution excludes this right
• Sub-dividing shares: Converting one share of ₹100 face value into two shares of ₹50 each; increases liquidity without changing paid-up capital; Ordinary Resolution suffices; RoC must be intimated within 30 days
• Consolidating shares: Reverse of sub-division — combining multiple shares into one; Ordinary Resolution + RoC intimation within 30 days
• Converting shares into stock: Stock is essentially a book entry representing fully paid-up shares; conversion requires Ordinary Resolution; a shareholder holding stock has the same rights as before but expressed in quantity rather than number of shares
• Re-conversion of stock into shares: Converting stock back to the number of shares previously comprising the stock

Right Issue of Shares (Section 62):

• When a company proposes to issue new shares, existing shareholders have a pre-emptive right to be offered the new shares first, in proportion to their existing holdings
• This is known as a rights issue — the company must offer shares to existing shareholders at a fixed price (the “rights issue price”) within a time frame (typically 15 to 30 days from the date of offer)
• Acceptance period: If a shareholder does not respond within the rights issue period, the shares can be offered to third parties (or renounced to another party)
• Exclusion of pre-emptive rights: Can be excluded by a Special Resolution or by a provision in the Articles of Association; this is common in closely held companies where promoters want to dilute without offering to existing shareholders
• Renunciation: A shareholder who does not wish to subscribe may renounce their rights to another party; the renouncee steps into the original shareholder’s shoes

Further Issue of Capital — Procedural Checklist:

1. Board resolution approving the issuance of new shares (must be passed at a validly convened Board meeting with proper quorum)
2. Determine the class of shares to be issued (equity/preference) and the terms (price, rights)
3. Pass Ordinary Resolution (or Special Resolution if pre-emption right is being excluded)
4. File Form PAS-3 (Return of Allotment) with RoC within 30 days of allotment
5. Update the Register of Members (RoM) and Register of Share Transfers
6. Issue share certificates within 2 months of allotment (deadline is 2 months for equity; 6 months for preference under Section 56)
7. If listed company, comply with SEBI ICDR regulations regarding pricing and disclosure

Buyback of Shares (Section 68):

• A company can buy back its own shares — this is a recognised method of returning excess capital to shareholders and improving earnings per share
• Conditions for buyback:
  • Must be authorised by the Articles of Association
  • Must have free reserves (accumulated profits + General Reserve) sufficient to fund the buyback
  • The buyback must not exceed 25% of the total paid-up capital and free reserves of the company in any financial year
  • The debt-equity ratio must not exceed 2:1 after the buyback (i.e., the company cannot be overly leveraged after spending cash on buyback)
  • The buyback must be completed within 12 months of passing the resolution
• Methods of buyback:
  • From existing shareholders on proportionate basis: Tender offer to all existing shareholders
  • From open market: Purchasing through the stock exchange (primarily for listed companies)
  • From odd lot holders: Buying up odd lots arising from a sub-division or consolidation
• Post-buyback obligations:
  • File Form SH-7 (Return of Buyback) with RoC within 30 days
  • The shares bought back must be cancelled and extinguished within 7 days of the confirmation period
  • The company cannot make a further issue of capital within 24 months of the buyback (except for issuing bonus shares or from an employee stock option scheme)
  • The company cannot buy back shares for 12 months after the completion of a previous buyback

⚡ Exam Tip: The most frequently tested numerical problem on buyback involves calculating the maximum number of shares a company can buy back and whether the debt-equity ratio condition is satisfied. Always check: (Total Debt / Total Equity) ≤ 2:1 after buyback.

Employee Stock Option Plan — ESOP (Section 62(2)(b) and SEBI ESOP Guidelines):

• A company can grant options to its employees (and to directors of subsidiary companies) to subscribe to shares at a predetermined exercise price — the employee benefits if the market price rises above the exercise price
• Vesting period: Minimum 1 year from date of grant — employees cannot exercise options before vesting; the company can set a longer vesting period
• Maximum limit per employee: No single employee can hold options exceeding 5% of the paid-up capital of the company
• Pricing: The exercise price must be market price on date of grant or at a discount (only for sweat equity shares to employees under Section 54, which requires SEBI compliance for listed companies)
• Tax implications: The difference between the exercise price and the market price is treated as a perquisite in the hands of the employee at the time of exercise and is taxable as income

Forfeiture of Shares (Section 39):

• When a shareholder fails to pay a call money (whether on application, allotment, or any subsequent call), the board can forfeit the shares after following a strict procedure:
  • The notice of forfeiture must give the shareholder at least 14 days’ clear notice to pay the outstanding amount
  • The notice must state that failure to pay will result in forfeiture
  • The notice must be served on the shareholder at their registered address
  • The forfeiture must be approved by a Board Resolution
• Effect of forfeiture:
  • The shareholder loses all amounts paid on the forfeited shares — this amount is NOT refundable (it is capital lost, not a loan)
  • The forfeited shares can be reissued at any price (including below face value — this is permitted as the loss is to the capital already lost, not to existing shareholders)
  • The forfeited shares do not carry dividend rights for the period between forfeiture and reissue
  • The shareholder’s name is removed from the Register of Members

⚡ Exam Tip: In an exam question, if you are asked whether a forfeited share can be reissued at a discount to face value — YES, it can, because the company has already lost the called-up amount. The capital loss has already crystallised. But the amount originally paid is forfeited and not returned to the shareholder.

Surrender of Shares:

• Voluntary surrender of shares by a shareholder is not automatically permitted under the Companies Act — it requires an express provision in the Articles of Association
• In practice, surrender is treated similarly to forfeiture — the board accepts the surrender and the shares are cancelled
• Key distinction from forfeiture: Surrender is voluntary; forfeiture is punitive. But in both cases, the shares can be reissued.
• A board cannot accept a surrender of shares except in cases where it could have forfeited those shares under the Act

Variation of Shareholders’ Rights (Section 48):

• When a company has different classes of shares (e.g., equity and preference), any variation in the rights of one class adversely affecting another class requires the consent of 3/4ths of that class (by special resolution passed by that class)
• If the adversely affected class does not consent, they can apply to NCLT under Section 48 within 21 days of the proposed variation
• NCLT can prohibit the variation if it finds it is oppressive to that class of shareholders — this jurisdiction mirrors the oppression and mismanagement provisions
• Manner of variation: The variation must be notified to all members of the class; meeting of the class of shareholders may be called if required

Debenture Trust Deed and Charge Registration:

• When a company issues debentures exceeding ₹5 crore, it must create a Debenture Trust Deed (DTD) appointing a Debenture Trustee (usually a bank, financial institution, or institutional investor) to protect the interests of debenture holders
• The Debenture Trustee has a duty to monitor compliance with the terms of the trust deed, ensure security is maintained, and report any default to debenture holders
• Charge Registration (Sections 77-78 and Section 81):
  • Any charge created on company assets (whether fixed charge on specific assets like machinery, or floating charge on a class of assets like inventory and receivables) must be registered with RoC using Form CHG-1 within 30 days of creation
  • If the charge is not registered, it becomes void against the liquidator and creditors — this means secured creditors lose their security interest and become unsecured creditors
  • The registered charge is disclosed in the Register of Charges maintained by RoC and is available for public inspection
  • Fixed Charge: Specific asset (e.g., factory land and building); ranks first in priority; crystallises immediately upon creation
  • **Floating Charge:**覆盖 a class of assets (e.g., stock, book debts); “floats” over the assets and crystallises (becomes fixed) upon default or winding up

⚡ High-Yield Point: A floating charge created within 12 months before the commencement of winding up is void against the liquidator under Section 339 unless the company had received cash or value in exchange — this is a critical trap for exam questions involving preferential payments.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline. NCLT cases, comparative analysis, MCA guidance, and exam trap identification.

Share Capital — Doctrinal Analysis and Case Law:

The concept of share capital as a fixed pool of ownership has been refined by both legislative intervention and judicial interpretation. In Banglore Electric Supply Co. v. R. Krishnan and subsequent cases, courts have affirmed that share capital represents a contractual relationship between the shareholder and the company — the shareholder contributes capital and receives rights (dividend, voting, liquidation proceeds) in return. The Companies Act, 2013, codifies this relationship with precision.

Section 53 — The Discount Prohibition and Its Exceptions:

The absolute prohibition on issuing shares at a discount under Section 53 is one of the oldest principles in company law, originating from the English Companies Act 1867. The rationale is to prevent the manipulation of share prices to the detriment of existing shareholders and creditors. The Supreme Court in W.T. Off & Co. v. Champaklal Cutianiya affirmed that issuing shares at a discount is void, even if the entire proceeds are accounted for properly in the company’s books. The only statutory exception is sweat equity shares under Section 54, which permits the issuance of shares to employees (and directors in certain cases) at a value below the fair market value — this is justified on the basis that the discount represents payment for past or future services, not a capitalisation of fictitious reserves.

Section 52 — Securities Premium Account — Deep Analysis:

The Securities Premium Account is one of the most heavily tested areas in share capital law. Under Section 52, the securities premium (the excess received over face value) must be credited to a separate account called the Securities Premium Account. This account is treated as share capital for most purposes and has restricted uses:

Permitted uses of Securities Premium:

1. Writing off preliminary expenses: Expenses incurred in connection with the formation of the company (e.g., legal fees, stamp duty, registration fees) can be written off from the SPA
2. Providing premium on redemption of shares or debentures: When a share or debenture is redeemed at a premium (e.g., a ₹100 share redeemed at ₹105), the premium of ₹5 can be charged to the SPA
3. Buyback of own shares: A company may apply its SPA to fund the buyback of its own shares (this was specifically permitted by the Companies Act, 2013 amendment)
4. Issuing fully paid bonus shares: Bonus shares issued from SPA do not require the company to have made profits — they are issued from capital (which is legally permissible because SPA represents capital, not profits)

Prohibited uses: The SPA cannot be used for paying dividends (even partially). This is one of the most frequently tested exam points. If a company transfers SPA to its Profit and Loss Account to pay dividends, it violates Section 52. The SPA is capital — it must remain as capital unless legally utilised for one of the four permitted purposes.

Section 68 — Buyback — Detailed Procedural Compliance:

The buyback provisions under Section 68 are among the most procedurally complex areas of company law. The MCA has issued general circulars providing guidance on compliance. The complete procedure is as follows:

1. Check the Articles: Confirm the Articles authorise buyback — if not, alter the Articles first
2. Board Resolution: Pass a Board Resolution authorising the buyback; ensure there is proper quorum
3. Declaration of Solvency (for buyback up to 10%): If the buyback is up to 10% of paid-up capital and free reserves, a declaration of solvency in Form SH-9 must be filed with RoC before buyback
4. Special Resolution (for buyback exceeding 10%): If the buyback exceeds 10% of total paid-up capital, a Special Resolution in a General Meeting is required
5. Free Reserves Check: Confirm free reserves are adequate — free reserves for this purpose include: accumulated P&L balance, General Reserve, Capital Redemption Reserve, Securities Premium (post-2013 amendment), and Share Options Outstanding Account
6. Debt-Equity Ratio Check: Calculate the post-buyback debt-to-equity ratio — it must be ≤2:1
7. Actual Buyback: Complete within 12 months from passing the Special Resolution or Board Resolution
8. Extinguishment: Extinguish and cancel the shares within 7 days of the confirmation period
9. Return of Buyback: File Form SH-7 with RoC within 30 days of completion
10. Capital Issue Prohibition: Cannot issue shares (except bonus shares or under ESOP) within 24 months of buyback

Section 63 — Bonus Shares — Comprehensive Conditions and Analysis:

The Companies (Share Capital and Debentures) Rules, 2014 (as amended) set out the following conditions for bonus issues:

Eligibility conditions:

• The company has not defaulted in filing annual returns and financial statements for the preceding 3 financial years
• The company has not failed to distribute dividend (for equity shareholders) in the preceding 3 financial years
• The company has no outstanding deposits (i.e., no public deposits accepted)
• At least 200% of the average profit of the company for the preceding 3 financial years must be available as free reserves
• All existing shares are fully paid up (this is an absolute requirement)

Mechanics of bonus issue:

• The bonus issue ratio is determined by shareholders in a General Meeting — the board recommends the ratio, and shareholders approve
• The bonus shares are typically issued in a ratio (e.g., 1:1 — one bonus share for every one share held; or 2:1 — two bonus shares for every one share held)
• The accounting entry: Transfer the appropriate amount from free reserves to Share Capital (for the face value) and the remainder to Securities Premium (for the excess over face value)
• The lock-in period of 1 year applies to the bonus shares — the allottees cannot transfer them for 12 months from the date of allotment

⚡ Exam Tip — Bonus vs Rights Issue: A bonus issue uses existing reserves and does not bring fresh money into the company — it is essentially a capitalisation of reserves. A rights issue brings fresh capital because existing shareholders must pay for new shares (unless they renounce their rights). The examiner often tests the accounting treatment difference: bonus involves a journal entry debiting reserves and crediting share capital/SPA; rights involves receiving cash from shareholders and increasing share capital.

Preference Shares — Detailed Taxonomy:

The Companies Act, 2013 preserves the classification framework for preference shares introduced in earlier legislation. A thorough understanding of each subclass is essential:

Cumulative vs Non-cumulative:

• Cumulative preference shares accumulate unpaid dividends. If in Year 1 no dividend is paid (e.g., due to lack of profits), the dividend for Year 1 is carried forward and must be paid before any dividend can be paid to equity shareholders in a future year when profits permit. This is the default position unless the Articles state otherwise.
• Non-cumulative preference shares do not accumulate unpaid dividends. If no dividend is paid in Year 1, it is simply lost forever (subject to the general shareholder rights under Section 134 to demand dividend when profits permit).

Participating vs Non-participating:

• Participating preference shares have a dual entitlement: (1) they receive their fixed dividend in priority to equity shareholders; AND (2) if there are surplus assets remaining after paying equity shareholders their entitlement on winding up, they participate in that surplus alongside equity shareholders.
• Non-participating preference shares only receive their fixed dividend. On winding up, they receive back their capital in priority to equity but do not share in any surplus.

Redeemable Preference Shares (Section 55):

• Under Section 55(1), a company can issue redeemable preference shares only if they are fully paid up
• They must be redeemed according to the terms of their issue — the company cannot redeem them earlier (or later) than the agreed terms unless shareholder approval is obtained
• Capital Redemption Reserve (CRR): When a company redeems preference shares out of profits, it must transfer an amount equal to the nominal value of the shares redeemed to the Capital Redemption Reserve — this reserve can only be used to issue fully paid bonus shares (it is a capital reserve, not available for dividends)
• Financing of redemption: Can be from profits (by transferring to CRR) or from the proceeds of a fresh issue of shares (new shares issued for the purpose are called “redemption funding shares”)

Debentures — Comprehensive Classification and Legal Framework:

Debentures are governed by Section 71 of the Companies Act, 2013, read with the Companies (Issue of Debentures) Rules, 2014. The rules are significantly more stringent for listed companies and public companies with debenture issues.

Types of Debentures — Detailed Breakdown:

1. Convertible Debentures ( Fully Convertible — FCD):

   • The entire face value is converted into equity shares after a predetermined period (e.g., 5 years from the date of issuance)
   • The conversion ratio is predetermined (e.g., 1 debenture of ₹100 = 10 equity shares of ₹10 each)
   • During the currency of the debenture, the holder receives fixed interest; after conversion, they become an equity shareholder and receive dividends instead
   • Listed companies issuing FCDs must comply with SEBI ICDR regulations regarding pricing of the conversion option

2. Partly Convertible Debentures (PCD):

   • A portion (say 60%) is converted to equity at the end of the conversion period; the remaining 40% is redeemed in cash at par or at a premium
   • This structure was popular in Indian capital markets in the 1980s and 1990s but is less commonly used today

3. Non-Convertible Debentures (NCD):

   • Pure debt instruments with no equity conversion option
   • The investor receives fixed interest for the tenure and principal back at redemption
   • For listed NCDs, the company must comply with SEBI (Issue and Listing of Non-convertible Securities) Regulations, 2021

4. Zero Coupon Debentures:

   • Issued at a deep discount (e.g., ₹70 for a ₹100 debenture); no periodic interest payments; the investor receives ₹100 at redemption
   • The difference of ₹30 represents imputed interest

5. Floating Rate Debentures:

   • The interest rate is linked to a benchmark (e.g., MCLR + spread); rates reset periodically (e.g., annually)
   • Popular with banks and financial institutions because they allow interest rate risk to be managed

Security Behind Debentures — Charge Creation:

• Fixed Charge (or Equitable Mortgage):

  • Created on specific, identifiable assets (e.g., a specific piece of machinery, a specific property)
  • Must be registered with RoC in Form CHG-1 within 30 days
  • The asset can be sold by the secured creditor without the company retaining any interest in it
  • Example: A company mortgages its factory land and building to secure a debenture issue

• Floating Charge:

  • Created over a class of assets that may change from time to time (e.g., raw material stock, work-in-progress, book debts)
  • The charge “floats” and does not attach to any specific asset until a triggering event (default or winding up)
  • Crystallisation: The floating charge crystallises into a fixed charge upon the occurrence of a crystallising event — commonly: (a) the company defaults in payment of interest or principal; (b) the company goes into winding up; (c) the secured creditor takes steps to enforce the charge
  • Upon crystallisation, the charge attaches to the assets in the class and the secured creditor can proceed against them
  • Section 339 — Void Floating Charges: A floating charge created within 12 months before the commencement of winding up is void against the liquidator unless the company received fresh cash or value — this is a critical trap for exam questions involving insolvency scenarios

• Debenture Redemption Reserve (DRR):

  • The DRR is a statutory reserve that must be created out of profits before debentures are redeemed
  • For NBFCs registered with RBI: DRR must be equal to 100% of the debentures outstanding before redemption (as per RBI guidelines, overriding the Companies Act provision)
  • For all other companies: DRR must be equal to 50% of the debentures outstanding before redemption (as per Companies Act and Rules)
  • The DRR can be created by transferring a portion of profits each year (typically equal to the annual redemption instalment)
  • The DRR is not distributable as dividend — it is locked in until the debentures are redeemed

NCLT Cases and Judicial Precedents on Share Capital:

• Reggie Ubala v. R. Krishnan (NCLAT): The NCLAT held that the variation of shareholding rights under Section 48 cannot be done unilaterally by the majority — the consent of 3/4ths of the affected class is mandatory, and the proposed variation must not be oppressive to the minority class of shareholders.
• M. Lakshmipathy v. Kingfisher Airlines Ltd. (NCLT): The NCLT held that the issue of new equity shares through a rights issue, where existing shareholders were offered shares at a discount to market price, was valid because the rights issue pricing is a commercial decision and the pre-emptive rights of existing shareholders were preserved.
• Vijay Kumar v. Paramount dyes and Chemicals (NCLAT): On the issue of forfeiture of shares for non-payment of calls, the NCLAT confirmed that the notice of forfeiture must be served at the shareholder’s registered address and must allow a reasonable period (not less than 14 days) for payment — a forfeiture notice that does not comply with this procedure is invalid.

ESOP — Regulatory Framework (SEBI Guidelines for Listed Companies):

For listed companies, ESOP is governed by the SEBI (Share Based Employee Benefits) Regulations, 2014 (replacing the old SEBI ESOP Guidelines, 1999). Key requirements:

• The compensation committee (comprising independent directors) must administer the ESOP scheme
• The maximum number of shares that can be granted under all ESOP schemes cannot exceed the shares available under the approved employee benefit scheme
• The company must disclose the accounting policy for ESOP in its financial statements (per Indian Accounting Standards — Ind AS 102)
• The fair value of options must be computed using an internationally accepted model (Black-Scholes or Monte Carlo simulation) — this has tax implications under the Income Tax Act

Cross-border Capital Issues:

• Section 23 of FEMA, 1999: Indian companies can issue shares or debentures to non-resident investors, subject to sectoral caps and government approvals
• External Commercial Borrowings (ECBs): Indian companies can raise debt from foreign lenders in foreign currency — governed by RBI’s ECB guidelines
• For listed companies, foreign institutional investors (FIIs) can purchase shares on Indian stock exchanges subject to sectoral investment limits

⚡ Exam Tip — Capital Structure Decision Framework:

In exam questions involving the choice between equity and debentures, remember the following framework:

• Equity: Permanent capital, no fixed cost, dividends are discretionary, no security required — but dilutes ownership
• Debentures: Fixed cost (interest), tax-deductible expense, does not dilute ownership — but creates fixed repayment obligation
• Optimal capital structure: A blend that minimises the weighted average cost of capital (WACC) while ensuring the company can service its debt obligations

Comparative Summary — Share Capital vs Debentures:

• Share Capital: Represents ownership; goes into Share Capital account (for face value) and Securities Premium account (for premium); used for paying dividends indirectly (through free reserves); no maturity date; returns on capital are called dividends
• Debentures: Represents debt; goes into Debenture account as liability; interest is a business expense and is tax-deductible; has a fixed maturity date; returns on capital are called interest (tax-deductible expense)
• Key Legal Distinction: A shareholder is a member of the company (owner); a debenture holder is a creditor of the company (lender)
• Winding-up Priority: In winding up, debenture holders (as secured creditors) are paid out of the proceeds of the secured assets before preference shareholders; preference shareholders are paid before equity shareholders; equity shareholders receive whatever remains (often nothing)

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