Sources of Raising

Capital
Meaning of Capital

 The term "Capital" has variety of meanings. It may mean one

thing to an economist, one to an accountant, while another to a
businessman or a lawyer. A layman views capital as the money,
which a company has raised by issue of its shares. It uses this
money to meet its requirements by way of acquiring business
premises and stock-in-trade, which are called the fixed capital
and the circulating capital respectively.
 The phrase "loan or borrowed capital" is sometimes used to
mean money borrowed by the company and secured by issuing
debentures. This, however, is not the proper use of the word
"capital".
 In relation to a company limited by shares, the word "capital" means the
share capital i.e., the capital in terms of rupees divided into specified
number of shares of a fixed amount each. For e.g. share capital of a
company is Rs. 1,00,000 which can be divided into 10,000 shares of Rs. 10
each or 1,000 shares of Rs. 100 each, whichever is feasible to the company.
 Share capital is not an essential clause for the formation of a company under
the Companies Act but where the memorandum provides for "Share Capital",
it is synonymous with the term "Capital" and the memorandum must state the
amount of capital and its division into various types, number and value of
shares. Companies limited by guarantee or unlimited companies or companies
u/s 25 of the Companies Act, 1956 need not have share capital.
Division of Share capital
USE OF THE WORD "CAPITAL" IN
DIFFERENT SENSES
In Company Law, the "Capital" is the share capital of a company, which is
classified as:
(a) Nominal, Authorised or Registered Capital: This is the sum stated in the
memorandum of association of a company limited by shares as the capital of the
company with which it is registered. It is the maximum amount which the
company is authorized to raise by issuing shares. This is the capital, on which the
company had paid the prescribed fee at the time of registration; hence it is also
called Registered Capital. As and when this is increased, fees for such increase
will have to be paid to the Registrar in accordance with table in Schedule X
appended to the Companies Act.
 (b) Issued Capital: It is that part of the authorised or nominal capital which
the company issues for the time being for public subscription and allotment.
This is computed at the face or nominal value.
 (c) Subscribed Capital: It is that portion of the issued capital at face value
which has been subscribed for or taken up by the subscribers of shares in the
company. It is clear that the entire issued capital may or may not be
subscribed.
 (d) Called up Capital: It is that portion of the subscribed capital which has
been called up or demanded on the shares by the company e.g., where Rs. 5
has been called up on each of 40,000 shares of a nominal value of Rs. 10, the
called up capital is Rs. 2,00,000.
 Uncalled Capital: It is the total amount yet called or demanded company on
the shares subscribed, which the shareholders are liable as and when called,
e.g., capital Rs.
 (f) Paid-up-Capital: It is part of total called up amount which is paid the
shareholder e.g., above, only 1,90,000 is actually by the shareholders the
paid-up capital taken Rs. 1,90,000 only.
 (g) Unpaid Capital: It is the total of the called-up capital remaining unpaid
Rs. 10,000 from above or difference between called up and capital.
 (h) Reserve Capital: It is that part of the uncalled capital of a company which the
limited company has decided by special resolution in terms of Section 99 of the
Companies Act, 1956, not to call except in the event and for the purpose of the
company being wound up. For instance, in the above example, out of the Rs. 5 per
share uncalled capital, Rs. 2 per share may be resolved to be kept as reserve
capital. (Reserve capital should not be confused with capital reserve, which is
created out of profits).
 (i) Capital Reserve: Capital Reserve is created out of profits or earnings. As
oppose to revenue reserve, Capital reserve is not ordinarily available for
distribution among the share holders of the company as dividend. Capital reserve
may be statutory capital reserve or non statutory capital reserve. Statutory
Capital Reserves includes "securities premium account" "the capital redemption
reserve account etc. Non-Statutory Capital Reserve may include revaluation
reserve, reserve created on sale of capital assets, assets replacement reserve etc.
 (j) Preference and Equity Share Capital: The share capital of a public
company may consist of only two kinds of shares i.e. preference shares and
equity shares.
 Equity share capital may be with similar rights or with different rights as to
dividend, voting or otherwise in accordance with the Companies (Issue of
Share Capital with Differential Voting Rights) Rules, 2001.
 A preference share has a preference in regard to payment of fixed amount of
dividend or fixed rate of dividend and preferential right of the repayment of
capital in the event of winding up of company. With regard to payment of
dividend, preference shares may be cumulative or non cumulative. Equity
shareholders are entitled to the residue of the divisible profits, if any, after
the preference shareholders have received their fixed rate of dividend
(Section 85).
 (k) Fixed and Circulating Capital: Fixed capital comprises of that part of
capital which is invested in fixed assets acquired for retention and use, e.g.,
land, buildings, plant and machinery, whereas circulating or floating capital
is that part of capital which is invested in acquiring current assets like stock
of goods, bills of exchange, cash, etc. It is required for use in the day-to-day
business operations and keeps on circulating.
For which type of capital a company pays the prescribed fees at the time of
registration:
A. Subscribed Capital
B. Authorized Capital
C. Paid up capital
D. Issued Capital
Which of the following can be distributed among the shareholders:
a) Reserve Capital
b) Capital Reserve
c) Revenue Reserve
d) Debenture Capital
External Source of Capital:
Owned Capital
 The capital raised by the company with the help of owners (shareholders) is
called owned capital or ownership capital. The shareholders purchase shares of
the company and supply necessary capital. It is one form of owned capital.
 Another form of owned capital is retained earnings. It is also known as
ploughing back of profit. It is a reinvestment of profit in the business b the
company itself. Retained earnings are an internal source of finance.
 Owned capital is regarded as permanent capital, as it is returned only at the
time of winding up of the company.
 Owned capital in the form of share capital, provides an initial source of capital
for a new company. It can be raised a time later to satisfy the additional capital
needs of a company.
 This owned capital can be raised by :
a) Equity Shares
b) Prefrential Shares
Borrowed Capital

 Only owned capital is not sufficient to carry on all business activities of a joint
stock company. A company needs borrowed capital to supplement its owned
capital.
 Every trading company is entitled to borrow money. However, it is a normal
practice to have an express provision in the Memorandum of Association,
enabling a company to borrow money. Memorandum authorizes company to
exercise borrowing powers whereas Articles of Association provides as to how
and b whom these powers shall be exercised.
 The power to borrow money is normally exercised by the Board of Directors of
the company.
 A private company may exercise its borrowing powers immediately after
incorporation. However, the public company cannot exercise its borrowing
power until it secures a certificate of commencement of business.
 The capital may be borrowed for short, medium, or long term requirements. It
is better to raise borrowed capital at a later stage of a company’s business when
a company wants to expand or diversify its business and it requires additional
capital.
This additional capital can be raised by :
a) issue of debentures
b) Financial Institutions
c) Other medium short term sources.
Methods of Raising Finance

Public Issue of Shares: The company can raise a substantial

amount of fixed capital by issue of shares- equity and
preference. In India, however, equity shares are more popular
as compared to preference shares. The issue of shares requires
a number of formalities to be completed such as approval of
prospectus by S.E.B.I., appointment of underwriters, bankers,
and registrars to the issue, filing of the prospectus with the
registrar of the company.
2.Rights Issue of Shares: A Right issue is issue of shares to the
existing shareholders of the company through a Letter of Offer
made in first instance to the existing shareholders on pro data
basis. The shareholders have a choice to forfeit this right partially or
fully. The company, then issue this additional capital to public. This
is an inexpensive method as underwriting commission, brokerage
are very small. Rights issue prevents dilution of control but it may
conflict with the broader objective of wider diffusion of share capital.
3. Private Placement of Shares: This is a method of raising
funds from a group of financial institutions and others who are
ready to invest in the company.

4. Issue of Debentures: There are companies who collect

long term funds by issuing debentures- convertible, or, non
convertible. Convertible debentures are very popular in the
Indian market
.
 Long Term Loans: The company may also obtain long
term loans from banks and financial institutions like I.D.B.I.,
I.C.I.C.I., and so on. The funding of term loans by financial
institutions often acts as an inducement for the investors to
sub- scribe for the shares of the company. This is, because,
the financial institutions study the project report of the
company before sanctioning loans. This creates confidence
in the investors, and they too, lend money to the company
in form of shares, debentures, fixed deposits, and so on.
 Accumulated Earnings (Reserves): The Company often
resorts to ploughing back of profits that, is, retaining a part
of profits instead of distributing the entire amount to
shareholders by way of dividend. Such accumulated
earnings are very useful at the time of replacements, or,
purchases of additional fixed assets.
 According to Section 81 of the Companies Act, whenever a
public limited company proposes to increase its subscribed
capital by the allotment of further shares, after the expiry of
two years from the formation of the company or the expiry
of one year from the first allotment of shares in the
company, whichever is earlier, the following conditions or
procedure must be followed:
 Such shares must be offered to holders of equity shares in proportion, as nearly
as circumstances admit, to the capital paid-up on those share.
 The offer must be made by giving a notice specifying the number of shares
offered.
 The offer must be made to accept the shares within a period specified in the
notice being not than 15 days.
 Unless the articles of association of the company provide otherwise, the notice
must also state that the shareholder has the right to renounce all or any of the
shares offered to him in favor of his nominees.
Shares so offered to existing shareholders are called Right Shares
as the existing equity shareholders of the public company have a
first right of allotment of further shares. The offer of such shares to
the existing equity shareholder is known as Privileged
Subscription or Right Issue. The prior right of the shareholders is
also known as pre-emptive right. After expiry of the time specified
in the notice or on receipt of earlier information from the
shareholder declining to accept the shares offered, the Board of
Directors may dispose them off in such a manner as they think most
beneficial to the company.
Advantages of Rights Issue

 It ensures that the control of the company is preserved in the hands of

the existing shareholders.
 The expenses to be incurred, otherwise if shares are offered to the
public, are avoided
 There is more certainty of the shares being sold to the existing
shareholders.
 It betters the image of the company and stimulates enthusiastic
response from shareholders and the investment market.
 It ensures that the directors do not misuse the opportunity of issuing
new shares to their relatives and friends at lower prices on the one
hand and on the other get more controlling rights in the company.
Concept of Shares

Section 2(46) defines a share as “a share in the

share capital of a company and includes stock
except where a distinction between stock and share
is expressed or implied”.
This definition does not bring out the meaning of a
share in its true perspective.
A share signifies the following:

 The interest of a shareholder in the company; the right to receive dividend,

attend meetings, vote at the meeting and share in the surplus assets of the
company, if any, in the event of the company being wound up [Bacha F.
Guzdar vs. Commissioner of Income Tax, Bombay, L. R. 617 SC];
 The liability of the shareholder in the company to pay calls on shares until fully
paid up;
 The right of the shareholder to transfer the shares subject to the articles of
association (For this purpose s.82 classifies shares as movable property,
transferable in the manner provided in the articles);
 Binding covenants on the part of the company as well as the shareholder, as
given in the articles of the company
 Thus, a share of a company in the hands of a shareholder
signifies a bundle of rights and obligations [Viswanath vs.
East India Distilleries (1957) 27 Comp. Cas. 175]. But a
share is not a negotiable instrument. [C.I.T. vs. Associated
Industrial Dev. Co. (1969) 2 Comp. L.J. 19]
 Section 83 requires that each share in a company having a
share capital must be distinguished by its distinctive
number. [The Companies (Amendment) Act, 1999
amended s.82 to the effect that for the word ‘shares’, the
words ‘shares and debentures’ shall be substituted.]
 Share vs. Stock

 The share capital of a company is divided into a number of indivisible units of

specified amount. Each of such unit is called a ‘share’. Thus, if the share capital
of the company is 5,00,000 divided into 50,000 units of 10 each, unit of 10 shall
be called a share of the company.
 The term ‘stock’ may be defined as the aggregate of fully paid-up shares of a
member merged into one fund of equal value. It is a set of shares put together
in a bundle. The ‘stock’ is expressed in terms of money and not as so many
shares. Stock can be divided into fractions of any amount and such fractions
may be transferred like share. Such fractions, unlike the shares, bear no
distinctive numbers.
Kinds of Shares

Company may issue different types of shares with different rights and
liabilities attached to them so as to satisfy the needs of different types of
investors. In such a case, the rights attached to the different classes of
shares are called “class rights”. The class rights normally relate to voting,
dividends, return of capital or share in the surplus assets of the company
(the last two rights being available at the time of winding up) and are
invariably set out in the articles of the company.
The most common classes of shares are:
 1. Preference Shares;
 2. Equity or Ordinary Shares;
 3. Deferred or Founders’ Shares.
Preference Share

A preference share is one which carries the following two

rights, over holders of equity shares:
1. A preferential right in respect of dividends at a fixed
amount or at a fixed rate,
2. A preferential right in regard to repayment of capital on
winding up.
The preference or priority of the preference shareholders is in
relation to the rights of equity shareholders [s.85].
Participating and Non-participating Shares

If a preference share carries either one or both of the following rights then
it is known as a participating share:
1. To participate further in the profits either along with, or after payment
of a certain rate of dividends on equity shares,
2. To participate in the surplus assets at the time of winding up [s.85].
Thus, if a preference share does not carry either of these rights, then it will
be known as a non-participating share. It should be remembered that,
preference shares are always presumed to be non-participating unless,
expressly described as participating.
Cumulative and Non-cumulative Preference
Shares

 If a preference share carries the right for payment of arrears of dividend

from future profits, then such a share is known as cumulative
preference share. Thus, dividends not paid in any year or years
accumulate and are paid out whenever profits are available.
 If a preference share does not carry the right to dividend in arrears,
then such a preference share is known as non-cumulative or simple
share. Thus, if no profits are available in a year, the holders get nothing
nor can they claim unpaid dividend in subsequent years. It should be
remembered that preference shares are always presumed to be
cumulative unless expressly described as non-cumulative.
Redeemable and Irredeemable Shares

A preference share which can be redeemed upon the resolution of the board of
directors, if the articles so provide, is known as redeemable preference share (s.80).
A company can issue redeemable preference shares if it complies with the
following requirements:
 1. Such shares are to be issued as redeemable preference shares; shares issued
earlier cannot be converted into redeemable preference shares;
 2. There must be authority in the articles to issue redeemable preference shares;
 3. The shares can be redeemed only when they are fully paid up;
Where the shares are redeemed out of profits, a sum equal to the nominal amount
of the shares redeemed is to be transferred out of profits to the “Capital
Redemption Reserve Account.”
No company limited by shares can issue any preference shares which are
irredeemable or are redeemable after the expiry of ten years from the date
of issue. Also, once the company has redeemed the shares, or it is about to
redeem them, it may issue new shares up to the same nominal amount and
it will be presumed that the preference shares were never redeemed.
In such a situation, the company’s capital is not deemed to be increased
and, therefore, no stamp duty is to be paid. This privilege is available only
if the redemption takes place within one month after the making of the
fresh issue [s.80 (4)].
Non-compliance with the provisions of s.80 will render the company and
every officer of the company who is in default liable to a fine up to 10,000.
Equity Share

‘Equity share’ means a share which is not a preference share (s.85). The rate of
dividend is not fixed. The Board of directors recommends the rate of dividend
which is then declared by the members at the AGM. Before recommending
dividend on equity shares, the BOD have to comply with the provisions of law as
regards depreciation, transfer of a minimum amount to reserves, etc.
Benefits of Investing in Equity Shares

Potential to Earn a High Income

When you invest in equity shares, you have a two-fold earning potential:
1. Capital appreciation due to the increase in stock price.
Once a company issues shares, they are listed on a stock exchange to allow
investors to trade in them. Based on the demand and supply of a particular
share, its price can go up or down. If you have purchased a share at a lower
amount and its demand increases while the supply remains limited, then you
have an opportunity to generate wealth.
For example, let’s say that you purchase a share of a pharmaceutical company
at a market price of INR 100. After a year, the demand for the stock of the
company increases since most investors expect the pharmaceutical sector to
grow and the stock price increases to INR 150. This gives you an opportunity to
earn capital appreciation at a rate of 50% within one year.
2. Regular income if the company declares dividends.
 If the company decides to share profits by declaring a dividend, then
shareholders have the right to claim them. If you are invested in
companies that declare dividends every year, it can add to your regular
income.
Protection Against Inflation

A product that was worth INR 50 in 2010 will cost much more ten years
later. As time passes, money loses value and we have to spend more to
buy the same goods and services. This phenomenon is called inflation.
For instance, bank fixed deposit rates have varied between six and nine
percent between 2011 and 2020. On the other hand, stock investments
have shown the potential of generating double-digit returns if we look at
compounded annual returns of market indices such as the Nifty Bank
Index that clocked a compounded annual return of around 13.44%
and Nifty FMCG Index that gave a compounded annual return of around
15.24%.
Diversification Across Assets

 In the simplest terms, investing is about purchasing assets that have

the potential of generating profits. The different investment options
available can be categorised into asset classes like equity, bonds, real
estate, commodities, among others. These asset classes are
categorized based on the risk to the capital, tax treatment, and the
approximate return potential.
 Hence, it is prudent to invest in a mix of asset classes such that
negative performance of one does not impact your total returns. Even
if the interest on fixed deposits falls but the value of stocks you have
purchased rise, you can still generate reasonable returns. This concept
is referred to as diversification. By spreading your investments across
different asset classes, you reduce risks and generate relatively steady
returns.
Deferred or Founders’ Shares

A pure private company can issue shares of a type other than those discussed
above (s.90). Thus, it may issue what are known as deferred shares. As deferred
shares are normally held by promoters and directors of the company, they are
usually called founders’ shares. They are usually of a smaller denomination, say
one rupee each. However, they are generally given equal voting rights with equity
shares, which may be of higher denomination, say 10 each.
As regards payment of dividend to holders of such shares, the articles usually
provide that these shares will carry a dividend fixed in relation to the profits
available after dividends have been declared on the preference and equity shares.
Thus, the promoters, founders and directors have a very direct interest in the
success of such a company: the greater the profits of the company, the higher their
dividends.
Sweat Equity Shares
The expression “sweat equity shares” means equity shares issued by the company
to employees or directors at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
Sweat shares are offered to certain employees or directors of the company for the
following reasons –
 Remarkable contribution and efforts of an employee or a director in completion
of any project
 Technical expertise in the field
 Value addition to the company through extraordinary contribution and gaining
intellectual property rights
The companies tend to offer sweat equity shares to the employees to attract and
retain the talent who helps the company grow. When an employee has sweat
equity shares, he or she can receive a part of the company’s profit as a return on
their investment.
Borrowing

 Every trading company has an implied power to borrow but it is wise to

include an express power to borrow in the objects clause of the Memorandum.
Non-trading companies, however, must be expressly authorised to borrow by
their Memorandum.
 A power to borrow, whether express or implied, includes the power to charge
the assets of the company by way of security to the lender. The Companies Act
does not expressly empower companies to borrow money. Therefore, most of
the companies expressly provide for such borrowing powers in the
Memorandum.
 In such cases, where Memorandum authorises the company to borrow, the
Articles provide as to how and by whom these powers shall be exercised. It
may also fix up the maximum amount which can be borrowed by the company.
Debentures

The word debenture is derived from the Latin word ‘debere’, which means to borrow or
take a loan. It is a debt instrument that may or may not be secured by any collateral.
Governments or companies use them for raising capital by borrowing money from the
public. In simple words, it is a legal certificate that says how much the investor has
invested (principal amount), the interest to be paid and the schedule of payments. The
investor receives the principal and interest at the end of maturity.
Features of a Debenture

Promise
 It is a written promise by the issuing company that owes the specified money to the
holder.
Face Value
 The face value of debenture is generally the high denomination of Rs.100 or in the
multiples of Rs.100
Time of Repayment
 It is a debt instrument that the company issues with a maturity date mentioned in the
certificate. Basically, it provides the time of repayment of the principal amount and
interest on the maturity date.
Interest rate
 The holders receive a fixed rate of interest payment periodically, either half-yearly or
annually. The rate of interest of this instrument varies depending on the company, the
current market conditions and the nature of business operations.
Assurance of repayment
 As per the deed, this long term debt instrument carries an assurance of repayment on
the specified due date. Also, they can be redeemed at par, premium or discount.
Listing
 It needs to be listed with at least one stock exchange.
Parties to Debenture
 Company – is the entity that borrows money.
 Trustee – is the party through which the company deals with the holders. The
company creates an agreement between trustees and holders known as ‘Trust Deed’.
This deed consists of company obligations, rights of holders, etc.
 Debenture Holders – are individuals or parties that provide loans to the company and
receive a ‘debenture certificate’ as evidence of participation.
No Voting Rights
 The holders are the creditors of the company, and they have no voting rights in the
general meetings of the company until the company asks for their opinion in
exceptional circumstances.
Types of a Debenture

Convertible Debenture
Convertible debentures are where the holders have the right to convert their debenture
holdings into equity shares of the company. The company specifies the details about the rights
of holders, trigger date of conversion, conversion date and other terms and conditions at the
time of issue. They are further classified as –
Partly Convertible Debentures
The issuing company can partly convert them into equity shares. The company decides the
conversion ratio and the date of conversion when issuing the instrument. The holders enjoy the
rights of both creditors and shareholders of the company.
Fully Convertible Debentures
The issuing company can fully convert them into equity shares. The conversion rate and the
time of conversion are decided while issuing the instrument. Upon conversion, the holders
enjoy the same status as the company shareholders.
Non Convertible Debentures
 Non Convertible Debentures are the regular debt instrument that does not allow
holders to convert their debt into equity. The interest rate is usually higher for such
instruments than their regular counterparts. Thus, these instruments retain their debt
character.
On the basis of security, Debentures are
classified into following categories

(A) Secured Debentures –The instruments which are secured as there is a

charge on the fixed assets of the company. This is to secure the debenture
holder as and when the issuer makes a defaults in the payment of either the
principal or interest amount, the assets of the issuer can be sold of in order to
do away with the liability to the debenture holders by repayment. In
Companies Act, 2013 there is a provision in Section 71(3) which says that a
company has right to issue secured debenture subjected to the conditions of
the government of India.

(B) Unsecured Debentures– These type of debentures are unsecured in the

way that if there is a default in payment of the principal amount or interest
amount the debenture holder will have be along with other unsecured lenders
and hence could not sell any property or anything for repayment hence they
are also called naked debentures.
on the basis of Redeemability, Debentures are
classified into following categories:

(A)Redeemable Debentures -The debentures which are issued with the option
of redemption on demand or after serving notice or at a fixed date or through
a system of periodical drawing. Usually debentures are of redeemable nature
and after redemption they can either be cancelled or can be reissued. The
priorities and rights of the person who is reissued the debentures shall be
same as the debentures were never redeemed.
(B)Perpetual or Irredeemable Debentures –an irredeemable debenture is a
type of debenture in which there is not fixed time for the issuer to repay the
amount. The debenture holder does not have right to demand for the payment
of principal amount until and unless the company does not default in making
payment of the interest regularly. If a company is going into liquidation it has
to pay for all the debenture whether redeemable or irredeemable.
on the basis of Registration, Debentures
are classified into following categories:

(A) A Registered Debentures- The debentures which are made in the name of a
particular individual who is registered by the company as the debenture holder
on there register of debenture holders and also his name appears on the
debenture certificate. These debentures can be transferred in the similar way
as shares are transferred by due means of proper instrument which includes
stamped duly, executed and satisfying the demands under Section 56 of the
Companies Act, 2013.

(B) Bearer Debentures- These shares on the other hand are negotiable
instrument are made out to bearer and so are transferrable by only delivery
like share warrants. The person to whom a beared debenture is transferred
becomes a "holder in due course" and he has a right to recover and receive the
principal amount along with interest on it.
Rules And Guidelines on Debentures

 SEBI (ICDR) Regulations 2009[2]

Under the SEBI Regulation 2009, "specified securities" means equity shares and
convertible securities. The "convertible securities" is defined as a security
which is exchangeable with or converted in equity shares of the company after
date of maturity with or without the option of the debenture holder and it also
includes convertible preference share or convertible debt instrument. Thus the
conditions to be discussed below are specified for equity shares but are also
applicable to public issue of convertible debt instruments also.
Public Deposits

 Section 2 (31) of Companies Act and Rule 2(1)(v) DEFINITION OF

DEPOSIT ‘Deposit’ includes any receipt of money by way of deposit or
loan or in any other form, by a company.
 But does not include; Any amount received from the CG or a SG, or
any amount received from any other source whose repayment is
guaranteed by the CG or a SG, or any amount received from a local
authority, or any amount received from a statutory authority
constituted under an Act of Parliament or a State Legislature;
Eligibility

 A Public company having a net worth of not less than Rs. 100 Cr. or a
turnover of not less than Rs. 500 Cr. and which has obtained the prior
consent of the company in General Meeting by means of a Special
Resolution and filed the said resolution with the ROC and where
applicable, with the RBI before making any invitation to the public for
acceptance of Deposits;

 Provided that an eligible company, which is accepting deposits within

the limits specified u/s 180(1)(c), may accept deposits by means of an
ordinary resolution.
Types of deposit

 1. Acceptance of deposit from Members: Any company (whether

private or public) can accept deposits from its members, subject to
the passing of a resolution in general meeting and the commencement
of this Act or payment of interest on such deposits. [Section 73].
 2. Acceptance of deposits from the Public: Only a public company,
having a net worth of not less than Rs. 100 Cr. OR a turnover of not
less than Rs. 500 Cr., can accept deposits from the Public. Such kind
of public company, shall be referred to as ‘Eligible Company.
 Section 73: Prohibition on Acceptance of Deposit from Public
 Section 74: Regarding Repayment of Deposits
 Section 75: Damages for Fraud
 Section 76: Acceptance of Deposit from Public by certain companies
 Section 76A: Penalty for violation of the provision
Right Issue

Rights Issue: Rights issue is an invitation to the existing shareholders to

subscribe for further shares to be issued by a company. A right simply
means an option to buy certain securities at a certain privileged price
within a certain specified period. The Company Act, 1956 lays down the
manner in which further issue of shares, whether equity or preference, is to
be made so as to ensure equitable distribution of shares without disturbing
the established equilibrium of shareholding in the company.
Bonus Shares

Bonus shares are an additional number of shares given by the company to its
existing shareholders as “BONUS” when they are not in the position to pay a
dividend to its shareholders despite earning decent profits for that quarter. Only a
company has the right to issue bonus shares to their shareholders, which has
earned massive profit or large free reserves that cannot be utilized for any
particular purpose and can be distributed as dividends. However, these bonus
shares are given to the shareholders according to their existing stake in the
company.
For example:
If a company declares one for two bonus shares, it would mean that an existing
shareholder would get two additional shares for one existing share.
Suppose a shareholder holds 2,000 shares of the company. When the company
issues bonus shares, he will receive 1000 bonus shares, i.e. (2000 *1/2 = 1,000).
Private placement

A private placement is a sale of stock shares or bonds to pre-selected

investors and institutions rather than on the open market. It is an alternative to
an initial public offering (IPO) for a company seeking to raise capital for expansion.
Process for private placement
1. To approve the list of identified persons to whom the securities are to be
allotted.
2. To approve the draft offer letter.
3. To approve the Notice for conducting Extra Ordinary General Meeting.
Private Placement under Section 42 of the Companies Act, 2013 shall be made
only to a select group of persons. Whose number shall not exceed fifty or such
higher number as may be prescribed excluding the qualified institutional buyers
and employees of the company being offered securities under a scheme of
employees’ stock option.
As Per Section 42, an offer or invitation to subscribe securities under private
placement shall not be made to persons more than two hundred in the aggregate
in a financial year.
Allotment of Shares

• As per Section 39, no allotment of any securities of a company offered to the public
for subscription shall be made unless-The amount stated in the prospectus as the
minimum amount has been subscribed and
• The sums payable on application for the amount so stated have been paid to and
received by the company by cheque or other instrument.
 As per SEBI ICDR Regulation, the minimum subscription for public company issuing
shares to public is 90%. Minimum subscription received must be 90% of the public
issue. If the subscription is less than 90%, shares cannot be allotted and application
money received must be refunded as stated below:
1. Non-underwritten issue: Within 15 days from the date of closure of the issue.
2. Underwritten Issue: Within 70 days from the date of closure of the issue of underwriters fail
to make up shortfall within 60 days of the closure of the issue.
 If application money is not refunded within the period stated above, interest is payable
for the delay.
Calls On Shares

 37 Subject to the terms of allotment of any shares, the board may from time to time
make calls on the members in respect of any monies unpaid on their shares (whether
in respect of nominal value or premium). Each member shall (subject to receiving at
least 14 clear days’ notice specifying when and where payment is to be made) pay to
the Company the amount called on his shares as required by the notice. A call may be
required to be paid by instalments. A call may be revoked in whole or part and the
time fixed for payment of a call may be postponed in whole or part as the board may
determine. A person on whom a call is made shall remain liable for calls made on him
even if the shares in respect of which the call was made are subsequently transferred.
 38 A call shall be deemed to have been made at the time when the resolution of the
board authorising the call was passed.
 39 The joint holders of a share shall be jointly and severally liable to pay all calls in
respect of it.
FORFEITURE AND SURRENDER

 44 If a call or any instalment of a call remains unpaid in whole or in part after it has
become due and payable, the board may, at any time thereafter during such time as
any part of such call or instalment remains unpaid, give the person from whom it is
due not less than 14 clear days’ notice requiring payment of the amount unpaid
together with any interest which may have accrued and any costs, charges and
expenses incurred by the Company by reason of such non-payment. The notice shall
name the place where payment is to be made and shall state that if the notice is not
complied with the shares in respect of which the call was made will be liable to be
forfeited.
 45 If that notice is not complied with, any share in respect of which it was sent may,
at any time before the payment required by the notice has been made, be forfeited by
a resolution of the board to that effect. The forfeiture shall include all dividends or
other monies payable in respect of the forfeited share which have not been paid
before the forfeiture. When a share has been forfeited, notice of the forfeiture shall be
sent to the person who was the holder of the share before the forfeiture. An entry
shall be made promptly in the Register opposite the entry of the share showing that
notice has been sent, that the share has been forfeited and the date of forfeiture,
which shall be deemed to occur at the time of the passing of the relevant board
resolution. No forfeiture shall be invalidated by the omission or neglect to send that
notice or to make those entries.
 46 Subject to the provisions of the Statutes, a forfeited share shall be deemed to be
the property of the Company and may be sold, re-allotted or otherwise disposed of on
such terms and in such manner as the board determines, either to the person who
was the holder before the forfeiture or to any other person. At any time before sale,
re-allotment or other disposal, the forfeiture may be cancelled on such terms as the
board thinks fit. Where for the purposes of its disposal a forfeited share is to be
transferred to any person, the board may authorise any person to execute an
instrument of transfer of the share to that person. Where for the purposes of its
disposal a forfeited share held in uncertificated form is to be transferred to any person,
the board may exercise any of the powers of the Company under Article 8. The
Company may receive the consideration given for the share on its disposal and may
register the transferee as holder of the share.
 47 A person, any of whose shares have been forfeited, shall cease to be a member in respect of any
share which has been forfeited and shall, if the share is held in certificated form, surrender the
certificate for any forfeited share to the Company for cancellation. The person shall remain liable to the
Company for all monies which at the date of forfeiture were presently payable by him to the Company in
respect of that share with interest on that amount at the rate at which interest was payable on those
monies before the forfeiture or, if no interest was so payable, at the rate determined by the board, not
exceeding 15 per cent per annum or, if higher, the appropriate rate (as defined in the Act), from the date
of forfeiture until payment. The board may waive payment wholly or in part or enforce payment without
any allowance for the value of the share at the time of forfeiture or for any consideration received on its
disposal.
 48 The board may accept the surrender of any share which it is in a position to forfeit on such terms
and conditions as may be agreed. Subject to those terms and conditions, a surrendered share shall be
treated as if it had been forfeited.
 49 The forfeiture or surrender of a share shall involve the extinction at the time of forfeiture or
surrender of all interest in and all claims and demands against the Company in respect of the share and
all other rights and liabilities incidental to the share as between the person whose share is forfeited or
surrendered and the Company, except only those rights and liabilities expressly saved by these Articles,
or as are given or imposed in the case of past members by the Statutes.
All-about Forfeiture of Shares

a. Forfeiture of shares is the process by which the directors of a company cancel the
power of a shareholder if he does not pay his call money when the company demands
for it.
b. For a valid forfeiture following conditions is necessary:
a. The Articles of Association must authorise the forfeiture of shares.
b. The directors may pass a resolution forfeiting the shares.
c. The company will give 14 days’ notice; after 14 days if the shareholder does not pay the
company will forfeit his shares and strike his name from the register of shareholders.
d. The power of forfeiture must be exercised bona fide and for the benefit of the Company.
e. Forfeiture of fully paid shares: The clause of Table F on forfeiture do not make specific
provision for forfeiture of fully paid up shares. However, in Shyam Chand v. Calcutta Stock
exchange Association [1945] 2.I.L.R. Cal 313.
TRANSFER OF SHARES

 51 Without prejudice to any power of the Company to register as shareholder a

person to whom the right to any share has been transmitted by operation of law, an
instrument of transfer may be in any usual form or in any other form which the board
may approve. An instrument of transfer shall be signed by or on behalf of the
transferor and, unless the share is fully paid, by or on behalf of the transferee. An
instrument of transfer need not be under seal.
 52 The board may, in its absolute discretion, refuse to register the transfer of a share
which is not fully paid, provided that the refusal does not prevent dealings in shares in
the Company from taking place on an open and proper basis.
 54 If the board refuses to register a transfer of a share, it shall send the transferee
notice of its refusal within two months after the date on which the instrument of
transfer was lodged with the Company, together with reasons for the refusal.
 55 No fee shall be charged for the registration of any instrument of transfer or other
document relating to or affecting the title to a share.
 56 The Company shall be entitled to retain an instrument of transfer which is
registered, but an instrument of transfer which the board refuses to register (except in
the case of fraud) shall be returned to the person lodging it when notice of the refusal
is sent.
TRANSMISSION OF SHARES

 58 If a member dies, the survivor or survivors where he was a joint holder, and his personal
representatives where he was a sole holder or the only survivor of joint holders, shall be the only
persons recognised by the Company as having any title to his interest. Nothing in these Articles shall
release the estate of a deceased member (whether a sole or joint holder) from any liability in respect of
any share held by him solely or jointly with other persons.
 59 A person becoming entitled by transmission to a share may, on production of any evidence as to his
entitlement reasonably required by the board and subject to these Articles, elect either to be registered
as the holder of the share or to have another person nominated by him registered as the transferee. If
he elects to become the holder, he shall send notice to the Company to that effect. If he elects to have
another person registered and the share is a certificated share, he shall execute an instrument of
transfer of the share to that person. If he elects to have himself or another person registered and the
share is an uncertificated share, he shall take any action the board may require (including without
limitation the execution of any document) to enable himself or that person to be registered as the
holder of the share. All the provisions of these Articles relating to the transfer of shares apply to that
notice or instrument of transfer as if it were an instrument of transfer executed by the member and the
death or bankruptcy of the member or other event giving rise to the transmission had not occurred.
 60 The board may at any time send a notice requiring any such person to elect either
to be registered himself or to transfer the share. If the notice is not complied with
within 60 days, the board may after the expiry of that period withhold payment of all
dividends or other monies payable in respect of the share until the requirements of
the notice have been complied with
 61 A person becoming entitled by transmission to a share shall, on production of any
evidence as to his entitlement properly required by the board and subject to the
requirements of Article 59, have the same rights in relation to the share as he would
have had if he were the holder of the share, subject to Article 242. That person may
give a discharge for all dividends and other monies payable in respect of the share, but
he shall not, (except with the authority of the board), before being registered as the
holder of the share, be entitled in respect of it to receive notice of, or to attend or vote
at, any meeting of the Company or to receive notice of, or to attend or vote at, any
separate meeting of the holders of any class of shares in the capital of the Company.
Share Certificate

A share certificate is an instrument in writing, that is a legal proof of the ownership of

the number of shares stated in it. Every company, limited by shares, whether it is public
or private must issue the share certificate to its shareholders except in the case where
the shares are held in dematerialisation system. The share certificate contains the
following details in it, they are:
• Company name
• Date of issue
• Details of the member
• Shares held
• Nominal value
• Paid up value
• Definite number.
 The share certificate is issued by the company within 3 months of the
allotment of shares to the applicants, which is issued under the common seal
of the company. Normally, the holder of the share certificate is regarded as the
member of the company.
Share Warrant

A share warrant is a negotiable instrument, issued by the public limited company

only against fully paid up shares. It is also termed as a document of title because
the holder of the share warrant is entitled to the number of shares mentioned in it.
There is no compulsion of the issue of share warrants by the company. Although
if the public company wants to issue share warrants, then previous approval of
the Central Government (CG) is required, along with that the issue of a share
warrant must be authorized in the articles of association of the company.
 The holder of the share warrant can take a share certificate only if he
surrenders the share warrant and pays the required fee for the issue of share
certificate. Thereafter, the company will cancel the warrant and issue a new
share certificate to him as well as the company will enter his name as the
member of the company, in the register of members, after which he will
become a member of the company.
 Generally, the holder of the share warrant is not the member of the company,
but if the articles of association of the company provide it, then the bearer is
deemed to be the member of the company.
Key Differences Between Share Certificate
and Share Warrant

The following are the major differences between Share Certificate and Share
Warrant:
1. A share certificate is the documentary evidence which proves the possession
of the shares. A share warrant is the document of title which states that the
holder of the instrument is entitled to the shares.
2. The issue of share certificate is compulsory for every company limited by
shares but the issue of a share warrant is not compulsory for every company.
3. A Share Certificate is issued against the shares, regardless of the fact that the
shares are fully paid up or partly paid up. Conversely, Share Warrant is issued
by the public company only against fully paid up shares.
1. Share Certificate can be issued by both public and private companies, whereas
Share Warrant is issued only by the public limited company.
2. Share Certificate is to be issued within 3 months of the allotment of shares,
but there is no such time limit specified in the Companies Act for the issue of
Share Warrant.
3. A share certificate is not a negotiable instrument. As opposed to share
warrant, is a negotiable instrument.
4. For the issue of a share warrant, prior approval of Central Government is a
must. On the other hand, Share Certificate does not require such type of
approval.
5. A share certificate can be originally issued, but a share warrant cannot be
issued originally.