Share Capital & Debentures

Share capital is the legal and financial heartbeat of a company — the pool of resources that defines its ownership structure, its relationship with investors, and the very nature of the corporate entity. In the CS Executive exam, few topics generate marks as consistently as share capital and debentures. The examiner tests both the procedural (how shares are issued, forfeited, re-issued, or bought back) and the substantive (what rights attach to different share classes, how capital reduction works, what charges can be created). The Companies Act, 2013, devotes an entire section — Sections 2, 4, 45, 46, 48, 53–61, and 68–70 — to this subject, making it one of the most heavily codified areas of the entire CS syllabus. For a practicing Company Secretary, every aspect of capital structure is live work: drafting prospectuses, managing share transfers, registering charges, navigating buy-back procedures, and ensuring the company’s capital records are always audit-ready.

This note covers the complete landscape: equity and preference share classes, sweat equity and ESOPs, bonus and rights issues, buy-back mechanics, debenture types and charge registration, stock splits, and capital reduction — all grounded in the specific provisions of the 2013 Act and the Companies (Share Capital and Debenture) Rules, 2014.

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🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Types of Share Capital:

Category	Type	Key Feature
Ownership	Equity Share Capital	Voting rights, residual profit sharing
Ownership	Preference Share Capital	Fixed dividend, priority over equity in liquidation
Issuance	Authorised Capital	Maximum capital the company can issue (stated in MoA)
Issuance	Issued Capital	Capital actually offered/issued to shareholders
Issuance	Paid-up Capital	Capital actually called and paid by shareholders
Called-up Capital	Called-up Capital	Portion of issue price that has been called by company

Key Section References:

• Section 2(84): Definition of “share” — a share is a moveable property, transferable in the manner provided in the Act
• Section 44: Equity and preference — rights determined by terms of issue
• Section 45: Company’s power to vary shareholders’ rights — where share capital is divided into classes, the variation of rights requires consent of 75% of that class (Special Resolution of that class)
• Section 53: Prohibition on issue of shares at a discount (except under a scheme of dilution for employees)

Sweat Equity Shares:

• Section 54: Sweat equity shares can be issued to employees or directors at a discount — used to reward exceptional contribution
• Maximum: 15% of paid-up capital in a year, up to 25% cumulatively
• Lock-in: 3 years from date of allotment

ESOP (Employee Stock Option Scheme):

• A scheme under which the company grants employees the right to buy shares at a predetermined price (exercise price), after a vesting period
• Governed by Section 62(1)(b) and the SEBI (Share Based Employee Benefits) Regulations, 2014
• Minimum vesting period: 1 year

Bonus Shares:

• Section 63: Bonus shares issued from accumulated reserves (Securities Premium + Capital Redemption Reserve + Free Reserves)
• Requires: Sufficient reserves + passed a Bonus Resolution + consent of RBI (if listed)
• Key rule: Reserves used must have been realised in cash (e.g., revaluation reserves do NOT qualify)

Rights Issue:

• Section 62(1)(a): Existing shareholders have the right to subscribe to new shares in proportion to their existing holdings
• Rights shares must be offered at a price not less than the fair market value

Buy-back of Shares:

• Section 68: A company may buy back its own shares
• Sources: Free reserves only (not out of proceeds from a fresh issue)
• Maximum buy-back: 25% of total paid-up capital in a financial year
• Process: Special Resolution → Deposit of 20% of buy-back consideration with SEBI/Recognised Stock Exchange → Payment within 30 days

Debentures — Quick Facts:

Type	Feature
Convertible	Can be converted to equity shares (fully or partly)
Non-Convertible	Pure debt — cannot be converted
Secured	Backed by charge on assets
Unsecured	No security
Redeemable	Due for repayment on a fixed date
Irredeemable	Perpetual — never repaid during company’s life

⚡ High-Yield Point: When share capital is divided into different classes, any variation of class rights requires a Special Resolution passed by members of that class. The company must also provide a 21-day option to members of that class to exit at fair value if they dissent. This is tested frequently in the context of preference shareholders’ rights.

⚡ Exam Tip: Buy-back requires free reserves as the source — not fresh issue proceeds. Many students lose marks by suggesting buy-back is permissible out of a new equity issuance. Also note the 20% deposit requirement with SEBI/recognised stock exchange as a protective measure against misuse.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Equity Share Capital — Rights and Features:

Equity shareholders are the residual owners of the company. They bear the ultimate risk and enjoy the ultimate reward:

• Voting Rights: One vote per equity share on ordinary resolutions; enhanced voting on Special Resolutions as applicable
• Dividend Rights: Entitled to dividend out of distributable profits after preference dividends are paid
• Capital Rights: On winding up, they receive the residue of assets after all creditors and preference shareholders are paid
• Pre-emptive Right: Right to be offered new shares in proportion to existing holdings before outsiders (Section 62(1)(a))

Preference Share Capital — Rights and Features:

Preference shareholders have a priority claim on dividends and capital (but no voting rights unless dividend is in arrears for ≥2 years — Section 47(2)):

• Fixed Dividend: Right to a fixed percentage dividend before equity shareholders receive anything
• Arrears of Dividend (Cumulative Preference Shares): Unpaid dividends accumulate and must be cleared before equity shareholders receive any dividend
• Capital Redemption: On winding up, preference shareholders are repaid before equity shareholders
• No voting rights in normal circumstances (but can vote on resolutions affecting their specific rights)
• Participating Preference Shares: Some preference shares carry a right to participate in surplus profits/assets beyond the fixed dividend — this must be explicitly stated in the terms of issue

Types of Preference Shares:

Type	Feature
Cumulative	Arrears of dividend accumulate and are paid before equity dividend
Non-Cumulative	Dividend not paid in one year lapses — not accumulated
Participating	Entitled to additional dividend/share of surplus on winding up
Non-Participating	Only fixed dividend entitlement
Redeemable	Repaid on a fixed/pre-determined date
Irredeemable	Not repayable except on winding up (now prohibited — Section 55)

Section 55 — Redemption of Preference Shares: Under the Companies Act, 2013, preference shares can only be redeemed out of:

• Distributable profits (Dividend equalisation reserve must be created first)
• Proceeds of a fresh issue of preference shares made for the purpose
• Capital Redemption Reserve (created from distributable profits when shares are redeemed from capital)

Sweat Equity Shares — Detailed Rules:

Sweat equity shares (Section 54) represent the reward of intellectual capital — rewarding employees and directors who have contributed exceptional expertise or created significant value beyond their regular compensation.

Conditions for Issue:

• Must be issued for non-cash consideration (intellectual property, brand value, technical know-how)
• Requires a Special Resolution passed at a general meeting
• Must comply with the Companies (Share Capital and Debenture) Rules, 2014
• The valuation of non-cash consideration must be done by a registered valuer

Accounting Entry for Sweat Equity:

Sweat Equity Shares A/c         Dr.    [Nominal value]
   To Securities Premium A/c             [Excess of issue price over nominal]
   To Sweat Equity Allottees A/c        [Amount payable on allotment, if any]

Or, where issued at a discount:

Sweat Equity Shares A/c         Dr.    [Nominal value]
   To Discount on Sweat Equity A/c     [Discount]
   To Allottees A/c                        [Amount received]

ESOP — Mechanics and Accounting:

Vesting and Exercise:

• An employee is granted an option today, but can exercise (buy the shares) only after the vesting period
• Vesting period: minimum 1 year from date of grant
• Exercise period: typically 5-7 years from date of vesting

Accounting Treatment (as per Ind AS 102 / IFRS 2 equivalent):

• At grant date: Expected value of options is estimated and recognised as an expense over the vesting period
• At exercise: Employee pays the exercise price → shares are allotted → equity share capital is increased

SEBI Regulations on ESOP (for listed companies):

• Share options must be approved by the shareholders in a general meeting
• Maximum number of shares under ESOP: 5% of paid-up capital for unlisted companies; specific limits under SEBI regulations for listed companies
• The company must constitute a ESOP Committee (a sub-committee of the Board)

Bonus Shares — Detailed Rules and Procedures:

Sources of Bonus Issue (in order of quality):

1. Securities Premium Account — best quality (realised in cash)
2. Capital Redemption Reserve — also acceptable
3. General Reserve / Free Reserves — must be realised in cash

Steps in Bonus Issue:

1. Board recommends bonus issue
2. Shareholders pass Ordinary Resolution (Simple Majority) approving capitalisation of reserves
3. File Form MGT-14 with ROC within 30 days
4. Fix a record date for determining shareholders entitled to bonus
5. Allot bonus shares to entitled shareholders
6. File Form PAS-3 (Allotment filing) with ROC within 30 days

Conditions under Section 63(2):

• Bonus issue cannot be made if the company has failed to repay any deposits, debentures, or debts on maturity
• The bonus shares are subject to the same rights as the existing shares of that class
• Capital Redemption Reserve must be created if bonus is issued out of CRR (to protect the capital originally contributed by preference shareholders)

Rights Issue — Process and Legal Framework:

Section 62(1)(a) requires that new equity shares be offered to existing equity shareholders in proportion to their existing holdings. This is a fundamental protection of the pre-emptive right of shareholders.

Process:

1. Board passes a resolution approving the rights issue
2. Offer letter dispatched to shareholders specifying: number of shares offered, issue price, ratio, last date for acceptance
3. Shareholders have 21 days to accept or renounce (transfer their right to another person)
4. Unsubscribed shares are dealt with as per the articles (often offered to third parties)

Renunciation: A shareholder who does not wish to subscribe can renounce their rights to another person — this is called renunciation. The renunciation must be communicated within the prescribed period.

Buy-back of Shares — Detailed Procedures:

Section 68 is a complete code for the buy-back of shares by an unlisted company. For listed companies, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, also applies.

Statutory Conditions:

1. Buy-back must be authorised by the Articles of Association
2. Special Resolution must be passed (or a Board resolution if buy-back is ≤10% of paid-up capital AND the company has file-based net worth ≥ ₹100 crore)
3. Maximum quantum: 25% of total paid-up capital and free reserves in a financial year
4. Sources: Only out of free reserves only (not out of fresh capital raised for the purpose)

Procedural Steps:

1. Pass Special Resolution (or Board Resolution where permitted)
2. Deposit 20% of the buy-back amount with SEBI/Recognised Stock Exchange (for listed companies) at the time of filing the letter of offer
3. Dispatch letter of offer to shareholders (21-day acceptance window)
4. Complete buy-back within 30 days of the acceptance period
5. Cancel the bought-back shares and file Form SH-7 with ROC within 30 days

Accounting for Buy-back:

Share Capital A/c             Dr.    [Nominal value of shares bought back]
Securities Premium A/c        Dr.    [Premium paid over nominal value, if any]
   To Bank A/c                         [Total consideration paid]

Simultaneously:

General Reserve A/c           Dr.    [Amount equal to nominal value of cancelled shares]
   To Capital Redemption Reserve A/c

Penalties for Default: Any contravention of Section 68 makes the buy-back void and every officer in default is punishable with imprisonment up to 3 years and a fine of up to ₹1,00,000.

Charge Registration — Section 77:

A charge is a security interest created on a company’s property. When a company creates a charge (on its assets to secure a loan or debentures), it must register the charge with the Registrar of Companies within 30 days of creation.

Types of Charge:

Charge Type	Description	Registration Form
Fixed Charge	Specific asset (building, machinery)	CHG-1
Floating Charge	Current assets generally (stock, receivables)	CHG-1
Negative Pledge	Clause in agreement preventing creation of further charges	N/A (not registrable as charge)
Equitable Mortgage	Created by deposit of title deeds	CHG-1

Consequences of Non-registration:

• The charge is void against the company’s liquidator and other creditors
• The amount secured becomes immediately repayable
• The secured creditor loses priority over floating charge holders who crystallise first

⚡ Study Strategy: The most common CS Executive question combines two or more of these: (a) conditions for bonus issue, (b) rights issue process, (c) buy-back steps. Practise a full narrative describing each process in sequence — the steps matter as much as the conditions. Also ensure you can draft the journal entries for bonus issue and buy-back cancellation of shares.

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

Capital Reduction under Section 66:

A company may reduce its share capital by:

• Extinguisishing or reducing liability on partly-paid shares (where shareholders are released from uncalled capital)
• Canceling paid-up capital that is lost or unrepresented by available assets (reducing face value of shares)
• Paying back excess capital to shareholders

Procedural Steps for Capital Reduction:

1. Special Resolution passed at a general meeting (Section 66(1))
2. Confirmation by NCLT (National Company Law Tribunal) — this is a critical step; NCLT must be satisfied that creditors’ interests are protected
3. File Form ST-2 (NCLT order) with ROC within 30 days
4. The company must publish notices in newspapers (one in English, one in vernacular) at least 21 days before the NCLT hearing

NCLT’s Role in Capital Reduction:

• NCLT can direct the company to add “and reduced” to its name
• NCLT can require the company to cash its shares at a specific value
• NCLT must ensure all creditors have either consented or been given an opportunity to object
• On reduction, the company’s share capital is reduced — this is recorded in the register of members and the financial statements

Stock Split (Sub-division of Shares):

Unlike capital reduction (which requires NCLT involvement), a stock split is a simpler operation:

• Section 61(1)(a): A company can subdivide (split) its shares into shares of a smaller face value
• Example: 1 share of ₹100 face value → 10 shares of ₹10 face value (no change in total capital)
• No NCLT required — only an Ordinary Resolution passed at a general meeting
• Filed in Form MGT-14 within 30 days

Difference between Stock Split and Bonus Issue:

Aspect	Stock Split	Bonus Issue
Capital	No change in total capital	Capital increases (new shares issued from reserves)
Reserves used	No	Yes
NCLT required	No	No
Resolution type	Ordinary	Ordinary
Effect on reserves	No change	Reserves reduced, share capital increased

Debentures — Types, Issuance, and Charge Registration:

Issue at Par:

Debenture A/c              Dr.    [Nominal value]
   To Debentureholders A/c           [Issue price]

Issue at Discount:

Debenture A/c              Dr.    [Nominal value]
   To Discount on Issue A/c          [Discount amount]
   To Debentureholders A/c           [Issue price received]

Issue at Premium:

Debenture A/c              Dr.    [Nominal value]
   To Securities Premium A/c         [Premium amount]
   To Debentureholders A/c           [Issue price received]

Charge Registration Process (Detailed):

When a company creates a charge to secure debentures (or any other loan):

1. Create the charge instrument (debenture trust deed for publicly issued debentures — governed by Section 71)
2. File Form CHG-7 (for registration of charge) within 30 days of creation
3. ROC issues a Certificate of Registration of Charge — this certifies the charge against the company’s assets
4. If the charge relates to debentures, Form CHG-9 (for satisfaction of charge) must be filed when the charge is discharged

Section 71 — Debenture Trust Deed: When debentures are publicly offered, the company must execute a Trust Deed in Form No. CHG-1 (as per the Companies (Registration of Charges) Rules, 2014), appoint a trustee (usually a financial institution or debenture trustee company registered with SEBI), and the trust deed must contain provisions for:

• Protection of debenture holders’ interests
• Covenants restricting further issuance of charges
• Events of default and remedies available to trustee

Section 53 — Prohibition on Share Issue at Discount:

Section 53 strictly prohibits a company from issuing shares at a discount except in the following scenario:

• A company that has already been in existence for at least 2 years can issue shares at a discount if:
  • The issue is offered to or under a scheme of dilution for employees under an ESOP (shares issued to employees at a discount under a recognised ESOP scheme)
  • The discount does not exceed 10% of the nominal value of the shares
  • The issue is sanctioned by a resolution passed by the company in a general meeting and confirmed by NCLT

This is a point of significant examination importance — shares cannot be issued at a discount simply because the board thinks the market price is low. The ONLY exception is employee dilution under an approved scheme.

Share Certificate vs. Share Warrant:

• Share Certificate: A document issued under the common seal of the company evidencing a member’s title to shares. Issued within 30 days of allotment or filing of transfer.
• Share Warrant: A document issued by a company that has been authorised by its Articles to do so (Section 114) — it entitles the bearer to the shares specified. The holder of a share warrant is treated as a member. Used primarily in the context of bearer debentures rather than equity shares.

Capital Redemption Reserve (CRR) — Detailed Treatment:

CRR is created when:

1. Preference shares are redeemed out of profits (Section 55): Transfer an amount equal to the nominal value of redeemed shares from Profit & Loss A/c or General Reserve to CRR
2. Buy-back of equity shares: Transfer an amount equal to the nominal value of shares cancelled from General Reserve to CRR

Purpose of CRR: CRR is a capital reserve — it cannot be used for dividend distribution. Its purpose is to ensure that the capital base is not eroded when preference shares are redeemed or equity is bought back.

Journal Entry for CRR Creation on Preference Redemption:

General Reserve / P&L A/c    Dr.    [Nominal value of shares redeemed]
   To Capital Redemption Reserve A/c

Forfeiture and Re-issue of Shares:

When a shareholder fails to pay the allotment money or call money, the company may forfeit their shares:

Forfeiture Entry:

Share Capital A/c                Dr.    [Called-up capital unpaid]
   To Share Forfeiture A/c               [Amount forfeited — to be held as capital reserve]
   To Calls in Arrears A/c                [Amount written off]

Re-issue of Forfeited Shares: Forfeited shares can be re-issued at a discount (which would otherwise be prohibited under Section 53) because the shares are not being issued fresh — they are being re-issued following forfeiture. The discount cannot exceed the amount previously forfeited on those shares.

Accounting on Re-issue:

Bank A/c                   Dr.    [Re-issue price]
Share Forfeiture A/c      Dr.    [Discount given, up to amount forfeited]
   To Share Capital A/c            [Nominal value]

Common CS Executive Examiner Traps:

1. Confusing CRR creation for preference redemption vs. buy-back — Both require CRR, but the source is different: preference redemption uses distributable profits; buy-back uses free reserves.
2. Incorrectly applying Section 53 (issue at discount) — Students frequently forget that the exception for ESOP employees is the ONLY scenario where discount issue is permitted, and it requires NCLT confirmation.
3. Buy-back from fresh issue proceeds — This is the single most common conceptual error. Buy-back must be from free reserves, not from proceeds of a new capital issue. The question explicitly says “out of the proceeds of a fresh issue” — that is always wrong.
4. Missing the NCLT confirmation requirement for capital reduction — Capital reduction under Section 66 is NOT complete without NCLT confirmation; the Special Resolution alone is insufficient.
5. Failing to register a charge within 30 days — If the 30-day window is missed, the charge is void against the liquidator. Late registration cannot cure the defect. If the charge was created before 30 days elapsed, the secured creditor loses priority.
6. Confusing stock split with bonus issue — Stock split does NOT involve reserves; it merely divides existing capital into smaller-denomination shares. Bonus issue involves issuing new shares from capitalised reserves.
7. Forgetting that sweat equity shares are locked in for 3 years — The lock-in applies from the date of allotment, not from the date of exercise. Know this for questions about when such shares can be transferred.