Module III: Corporate Fund Raising

Share/Equity Capital – Meaning and Nature of

Shares, Kinds of Shares

Rights issue, Bonus Issue - Rationale, mechanism

Allotment –Principles & procedure

Sweat Equity Shares

Issue of shares at premium and discount

Calls on shares, Forfeiture of shares

Debenture/Debt Capital –Concept, Meaning and

Kinds

Shareholder vis-à-vis Debenture holder

Share Meaning - Section 2 (84) of the Companies Act, 2013

defines Share. Share means a share in the share capital of a company and
includes stock. Shares represent a shareholder’s ownership stake in a
business. Shares are the units into which the absolute share capital of a firm
is split into or divided into. Therefore, the share is a fractional portion of the
share capital and comprises the ground of ownership interest in a company.
The persons who contribute money through shares are called shareholders.
Shares are issued by companies to raise money from investors who tend to
invest their money. This money is then used by companies for the development
and growth of their business. It indicates a shareholder’s interest in the business,
calculated for the goals of dividend and liability. It ties together several rights
and liabilities. These shares come with a variety of entitlements in addition to
ownership rights. Some shares come with voting rights, a priority dividend
right, a share of the company’s surplus earnings, a share of the company’s
losses, etc.
The entitlement to a dividend, which a business pays out of profit, is a
characteristic of all share variations.

What is a stock
A stock, usually referred to as equity, is a type of security that denotes a tiny
portion of a company’s ownership. A share is a small portion you possess when
you buy stock from a corporation; you become a shareholder when you do so.

Types of Shares
Shares can be further categorized into two types. These are:
 Equity shares
 Preference shares
They vary based on their profitability, voting rights and treatment in the event
of liquidation.
Equity Shares Meaning
These are also known as ordinary shares and comprise the bulk of the shares
being issued by a particular company. Equity shares are transferable and are
traded actively by investors in stock markets. As an equity shareholder, you are
not only entitled to voting rights on company issues but also have the right to
receive dividends.
These dividends, however, are not fixed. Equity shareholders also partake in
any losses faced by the company, limited to the amount they had invested.
Equity shares can be further divided based on:
 Share capital
 Definition
 Returns
Classification of Equity Shares based on Share Capital
Here is a look at the classification of equity shares based on share capital:
 Authorised Share Capital: Every company, in its Memorandum of
Associations, requires to prescribe the maximum amount of capital that
 can be raised by issuing equity shares. The limit, however, can be
increased by paying additional fees and after the completion of certain
legal procedures.
 Issued Share Capital: This implies the specified portion of the
company’s capital, which has been offered to investors through the
issuance of equity shares. For example, if the nominal value of one stock
is Rs 200 and the company issues 20,000 equity shares, the issued share
capital will be Rs 40 lakh.
 Subscribed Share Capital: The portion of the issued capital, which has
been subscribed by investors is known as subscribed share capital.
 Paid-Up Capital: The amount of money paid by investors for holding
the company’s stocks is known as paid-up capital. As investors pay the
entire amount at once, subscribed and paid-up capital refer to the same
amount.
Classification of Equity Shares based on Definition
Here is a look at the equity share classification based on the definition:
 Bonus Shares: Bonus share definition implies those additional stocks
which are issued to existing shareholders free-of-cost, or as a bonus.
 Rights Shares: Right shares meaning is that a company can provide new
shares to its existing shareholders - at a particular price and within a
specific period - before being offered for trading in stock markets.
 Sweat Equity Shares: If as an employee of the company, you have made
a significant contribution, the company can reward you by issuing sweat
equity shares.
 Voting and Non-Voting Shares: Although the majority of shares carry
voting rights, the company can make an exception and issue differential
or zero voting rights to shareholders.
Classification of Equity Shares based on Returns
Based on returns, here is a look at the types of shares:
 Dividend Shares: A company can choose to pay dividends in the form of
issuing new shares, on a pro-rata basis.
 Growth Shares: These types of shares are associated with companies
that have extraordinary growth rates. While such companies might not
 provide dividends, the value of their stocks increases rapidly, thereby
providing capital gains to investors.
 Value Shares: These types of shares are traded in stock markets at prices
lower than their intrinsic value. Investors can expect the prices to
appreciate over some time, thus providing them with a better share price.
Preference Shares Meaning

Preferential shareholders receive preference in receiving profits of a company as

compared to ordinary shareholders. They have the right to receive profits of the
company before the ordinary shareholders. Also, in the event of liquidation of a
particular company, the preferential shareholders are paid off before ordinary
shareholders. Here are the different types of shares in this category:

 Cumulative and Non-Cumulative Preference Shares: In the case of

cumulative preference shares, if a particular company doesn’t declare an
annual dividend, the benefit is carried forward to the next financial year.
Non-cumulative preference shares don't provide for receiving outstanding
dividends benefits.
 Participating/Non-Participating Preference Share: Participating
preference shares allow shareholders to receive surplus profits, after
payment of dividends by the company. This is over and above the receipt
of dividends. Non-participating preference shares carry no such benefits,
apart from the regular receipt of dividends.
 Convertible/Non-Convertible Preference Shares: Convertible
preference shares can be converted into equity shares, after meeting the
requisite stipulations by the company’s Article of Association (AoA),
while non-convertible preference shares carry no such benefits.
 Redeemable/Irredeemable Preference Share: A company can
repurchase or claim redeemable preference share at a fixed price and
time. These types of shares are sans any maturity date. Irredeemable
preference shares, on the other hand, have no such conditions.

Rights Issue as Per the Companies Act, 2013

When a company needs additional capital and keeps the voting rights of
the existing shareholders proportionately balanced, the company issues
Rights shares. The issue is called so as it gives the existing shareholders a
pre-emptive right to buy new shares at a price that is lesser than market
price. The Rights issue is an invitation to the existing shareholders to buy
new shares in proportion to their existing shareholding.
Reason for Rights Issue
 As the company expands, it looks for ways of capital expansion, so the
company turns to the issue of shares. In place of issuing shares to the
public at large, which will bring about an imbalance in the voting rights
of the existing shareholders, the company resorts to issuing additional
shares to the existing shareholders in proportion to its current
shareholding. So this resolves the purpose of additional capital while
letting existing shareholders retain their voting rights.
Procedure for Rights Issue
According to Section 62 (1) of the Companies Act 2013, the procedure
for issue of shares is as follows:
 Issue of notice of Board meeting: According to Section 173(3) of the
Companies Act 2013, the notice for the board meeting has to be sent
minimum 7 days prior to the board meeting and must specify the agenda
for the meeting.
 Convene the First Board Meeting: The Board meeting is held, and the
resolution for issuing rights shares is passed. The rights issue does not
require the approval of shareholders, and hence the board can proceed
towards the issue.
 Issue Letter of Offer: On the passing of the resolution, the letter of offer
is issued to all shareholders, and the same is sent through registered post
or speed post. For shareholders to accept the offer a window period of 15
– 30 days is given that is to say the maximum time the shareholders can
take to accept the offer is 30 days and the minimum period is 15 days.
The offer is considered declined if it is not accepted before the expiry
period. The offer must be open at least three days after the issue of the
letter of offer.
 Receive application money: The shareholders must send the accepted
application along with application money.
 Convene the Second Board Meeting: The company must convene the
second board meeting, the notice of which must be sent 7 days prior to
the board meeting. The required quorum must be present, and the
resolution for the allotment of shares must be passed. On passing the
resolution for allotment of shares, the allotment of shares must be done
within 60 days of receiving the application money for the same.
 File the forms with ROC: The company must file prescribed forms with
ROC, within 30 days from the allotment of the shares with the Registrar
 of Companies. The certified true copy of the Board Resolution and the
list of the allottees must be attached to the form.
 Issue of Share Certificates: The share certificates must be issued; if the
shares are in Demat form, then the company must inform the depository
immediately on allotment of shares. If the shares are held in physical
form, then the share certificates must be issued within 2 months from the
date of allotment of shares. The share certificate must be signed by at
least 2 directors.

What is 'Bonus Share'

Definition: Bonus shares are additional shares given to the current shareholders
without any additional cost, based upon the number of shares that a shareholder
owns. These are company's accumulated earnings which are not given out in the
form of dividends, but are converted into free shares.

Principal: The fundamental idea behind bonus shares is that the stock price of
the company gets reduced in the same proportion as the bonus issue. This means
that if a company declares a bonus issue of 1:1 then the number of shares of the
company effectively doubles. In this case, since the number of shares has
doubled, the stock price of the company will become half of what it was before
the issue.
Let us understand this with an example,
Assume you bought 10 shares of AU Small Finance Bank Ltd. for INR 12,860
on June 1, 2022. The company then distributed a 1:1 bonus on June 9, 2022, so
received 10 additional shares. Does this mean that you would own 20 shares,
each worth INR 1,286? No, the price of INR 1,286 on the stock would come
down to INR 613 (INR 1,286/2) as closing price on June 9, 2022 and you would
have 20 shares worth the same investment of INR 12,860. There are times when
the share price isn’t exactly half of what it was earlier. This happens due to
supply and demand for the stock, which also impact the price.

Companies issue bonus shares to encourage retail participation and increase

their equity base. When price per share of a company is high, it becomes
difficult for new investors to buy shares of that particular company. Increase in
the number of shares reduces the price per share. But the overall capital remains
the same even if bonus shares are declared.
The company issues bonus shares out of profits or where it has accumulated
large cash reserves that cannot be immediately utilized. When a company issues
bonus shares out of profit or reserves, it reflects that the company is financially
strong enough to issue more equity shares and has made profits.
Also, bonus shares are a great way of rewarding shareholders, especially when
companies are short of cash and hence cannot pay out cash
dividends. Moreover, when a company issues bonus shares it is also of the view
that it will be able to service the expanded capital quite easily in the future, thus
giving an indirect indication to investors that the future outlook is also good for
the company.

What is Sweat Equity?

Typically, promoters of a company dedicate time and effort to the growth of a
company. It is only fair for promoters, founders, or key employees to be
rewarded for resolute perseverance. In addition to value creation and monetary
benefits, sweat equity is considered a form of compensation.
What is Sweat Equity?
Sweat equity refers to the non-cash contribution of a person to a business
venture or project. It commensurate the physical efforts, mental labour, and time
dedicated to value creation. It is important to note that sweat equity and equity
capital are distinctly different. Equity capital is the financial commitment of
the shareholders whereas sweat equity is the efforts involved with developing a
business or a particular activity.
What is the importance of sweat equity shares?
Sweat equity shares are issued in multiple scenarios, each serving a different
purpose.
 Employee Retention: To retain talent, companies offer sweat equity
shares to their employees with a retention period. Employees are eligible
to purchase such shares only on completion of a specified number of
years with the company.
 Raise Capital: Sweat equity is an efficient method to raise capital
without affecting the outstanding debt of the company. Excessive debt
can have an impact on the financial health of the company.
 Boosts Performance: Sweat equity shares are also offered in exchange
for accomplishing certain parameters. Parameters may include a specified
 level of return on equity or earning per share over a multi-year time
frame.
In conclusion, sweat equity enhances the valuation of a company irrespective of
the initial monetary contribution. Parallelly, it increases the stake of an
individual in the ownership of a company leading to a personal interest in the
performance of the company. Sweat equity shares can benefit the company in
multiple instances based on the business requirement.

Allotment of shares
You know that a public limited company invites subscriptions from the public
and for this purpose a prospectus is issued. In response to this invitation, the
prospective investors offer to buy shares by submitting the prescribed
application form. If the application is accepted by the company, it proceeds to
allot him the shares. With the issue of the latter of allotment, the offer stands
accepted thereby giving rise, to a legally binding contract between the company
and the shareholder. Thus, an allotment is the acceptance by the company of the
offer to purchase shares. The term 'Allotment' has nowhere been defined; in the
Companies Act. It may be said that allotment is an appropriation by the Board
of directors of a certain number of shares to a specified person in response to his
application. In other words, allotment means the appropriation out of the
previously unappropriated capital of a company, of a certain number of shares
to a person.
No company can proceed to allot shares to the public until the minimum
subscription (which is 90%.thc issue amount) has been subscribed, and the sum
payable on applications for it has been received by the company in cash. If the
company does not receive the minimum subscription of 90% of the issue
amount, the entire subscription will be refunded to the applicants within 90 days
from the date of closure of the issue. If there is a delay in refund of such amount
by more than ten days, the company is liable to pay interest at the rate of 15%
per annum for the delayed period.

Procedure of Allotment
When the company receives from bankers all the share applications, a share
application list is prepared. You should remember that only the names of such
applicants should be recorded who have paid the application money because an
application without application money is void. The directors will see that all the
legal rules regarding allotment have been complied with, then they will proceed
with the allotment of shares. If the issue has been just fully subscribed, then
there is no problem in allotment, the directors can allot to each applicant the
number of shares asked for. But the real difficulty arises in case of over-
subscription. An issue is said to be oversubscribed if the number of shares
applied for is greater than the number of share available for allotment. In case of
over-subscription, the applicants will have to be allotted less number of shares
than applied for, it is known as partial allotment. A scheme of basis of allotment
is framed in consultation with the stock exchange where the shares are to be
listed. In its guidelines the Government has emphasised that the scheme of
allotment should be framed in such a manner that the interests of genuine small
investor are promoted and the widest dispersal of the shareholding takes place.
In order to ensure that no one corners a major portion of the shares available,
the multiple application from the same person have been prohibited. In case of
over-subscription, the shares are allotted either by draw of lots (lottery): or on
pro-rata basis i.e. by alloting shares to each applicant in the proportion to the '
number of shares applied for. In order to ensure that an applicant may not refuse
to accept a smaller number than applied for, the application form usually
contain a clause saying "I/We agree to accept such shares or any smaller
number that may be allotted to me/us." . You should remember that when lesser
number of shares are allotted to an applicant, the excess application on money is
not refunded to him but it is transferred to his allotment amount and adjusted
against the allotment money due from him, In case of under-subscription, the
Board of directors has only to ensure that the minimum subscription has been
received, then they can proceed with the allotment work. When the Board of
directors pass a resolution confirming the allotment and, if for some reason, no
shares are allotted to an applicant, then a letter of regret is sent to him along
with a crossed cheque for the refund of the share application money

Issue of Shares at Premium

Company’s capital consists of shares that can be utilised to earn more capital for
the company. Public companies issue shares to the public so that they can
subscribe to their share capital while private companies opt for initial public
offering or IPO to offer shares to the public.
Companies can issue shares at face value of the share, while there is an option
for issue of shares at a value which is more than the face value/par value or
nominal value of the shares. Such type of share issue is known as issue of shares
at premium.
The difference between the face value/par value or nominal value of shares and
the price of shares issued at premium is the premium amount.
It is generally issued by companies that have an excellent financial record, are
well managed and have a great reputation in the market.
The profit earned from the issuance of shares at premium is called as capital
profit and is credited to a separate account which is known as the Securities
Premium Account. There are no restrictions in the Companies Act on the issue
of shares at a premium, but there are restrictions on its disposal.
The Securities Premium Account may be applied by the company– (a) towards
the issue of unissued shares of the company to the members of the company as
fully paid bonus shares; (b) in writing off the preliminary expenses of the
company; (c) in writing off the expenses of, or the commission paid or discount
allowed on, any issue of shares or debentures of the company; (d) in providing
for the premium payable on the redemption of preference shares or of any
debentures of the company; or (e) for the purchase of its own shares or other
securities.

Issue of Shares at A Discount

When shares are issued at a price lower than the face value, they are said to be
issued at discount. Thus, the excess of the face value over the issue price is the
amount of discount. For example, if a share of ` 10 is issued at Rs.9 then Rs.(10
– 9) = Rs.1 is the discount. As per companies Act 2013, a company shall not
issue shares at a discount except as provided in section 54 for issue of sweat
equity shares. Any share issued by a company at a discounted price shall be
void. Where a company contravenes the provisions of this section, the company
shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees and every officer who is in default shall
be punishable with imprisonment for a term which may extend to six months or
with fine which shall not be less than one lakh rupees but which may extend to
five lakh rupees, or with both

Calls on shares
When a company issues shares, the applicants are generally not required to pay
the full value of the shares in one instalment. To start with they are required to
pay the application money only. The balance amount is to be paid later on.
Some amount is payable at the time of allotment. It is termed as 'allotment
money'. The balance amount is called by the company in instalments. Each
instalment is termed as a 'call'. You must remember that the amount paid on
application and allotment are not termed as calls.
A call may be defined as a demand by the company on the shareholders to pay
whole or part of the balance remaining unpaid on each share, at any time during
the life-time of the company.
Essentials of a Valid Call- According to the Act, the unpaid money on a share
is a debt due from member. Therefore, once a call has been made, the
shareholder is under an obligation to pay the amount called. But the liability to
pay this debt will not arise until a valid call has been made. The essentials of a
valid call are as follows:
i)the call must be made under a resolution of the Board of directors, the
resolution must be passed in a properly convened meeting of the directors,
ii) The resolution must specify the amount of call, and the time and place of
payment of calls.
iii) Call should be made on a uniform basis, on all shares, falling under the same
class i.e., no differentiation should be made between shareholders of the same
class.
iv) The power to make call is in the nature of trust and therefore, the directors
must exercise this power in good faith and for the benefit of the company. The
directors should not make calls for their own benefit, if it is for their own
benefit, it shall be an invalid call.
v) The call must be made according to the provisions of the articles of
association, some of the rules are: a) The maximum amount per call shall not be
more than 25 per cent of the nominal value of shares. b) There must be at least
one month's interval between two calls. c) At least fourteen days' notice must be
given to each member. d) The directors have the discretion to revoke or
postpone a call. If a call is made in contravention to the rules mentioned above,
it is termed as an invalid call and the shareholders are not bound to pay it.
Payment of Calls in Advance Section 92(1) of the Companies Act empowers
the company to receive from shareholders the money not yet called up. It
provides that a company may, if so authorised by its articles, accept from any
member the whole or a part of the amount remaining unpaid on any shares held
by him, although no part of that amount has been called up. However, the
shareholder shall not be entitled to any extra voting rights in respect of the
money paid in advance until the same become payable by a valid call. You must
note that advance calls should be received only for the benefit of the company.

Forfeiture of shares
 You have learnt that the company does not require the shareholders to pay the
full amount of shares in one instalment. It makes calls on them as and when the
money is needed. If a shareholder fails to pay a valid call within the stipulated
time, the company has two options: (1) the company may file a suit for the
recovery of the amount, or (2) the company may forfeit the shares. The first
option is a lengthy process. Therefore, the company generally decides to forfeit
such shares. The term 'forfeiture' means taking them away from the member. It
deprives the shareholder of his property. The shares can be forfeited only if
there is a provision to this effect in the articles of the company. You must note
that shares can be forfeited only for non-payment of any call or instalment of a
call and not for any other debt due from a member. The following rules are
applicable relating to the forfeiture of shares:
i) The power to forfeit shares must be given in the articles of the company.
ii) Shares can be forfeited only for non-payment of calls. A forfeiture on
any other ground is invalid.
iii) The company must serve a proper notice on the defaulting member
asking him to pay the amount within a fixed period, failing which the
shares shall be forfeited. The shareholder must be given at least fourteen
days’ notice to pay the amount. The notice must indicate the exact
amount to be paid. If there is a slight defect in the notice, the forfeiture
will become invalid.
iv) The Board of directors must pass a resolution for the forfeiture of shares.
v) The power for forfeiture must be exercised in good faith and for the
benefit of the company. A forfeiture for the purpose of relieving a friend
from liability shall be invalid.
Effects of Forfeiture
a) The shareholder ceases to be a member of the company in respect of such
shares. He loses all his rights. The money paid on such shares is forfeited. On
forfeiture, his name is removed from the register of members.
b) The shareholder cannot be sued by the company for unpaid calls. The
articles of the company may, however, make him liable for the unpaid calls.
Any action must be taken within three years from the date of forfeiture
c) The former shareholder can be placed on the 'B' list of contributories, if the
company is wound up within twelve months of the date of forfeiture.
d) After forfeiture, the shares become the of the company and the company can
dispose them of in any manner it likes. Generally, the forfeited shares are
reissued. If the shares have, been forfeited wrongfully, the concerned
shareholder can sue the company for cancelling the forfeiture. But if it is not
possible on account of the reissue of forfeited shares, he can sue the company
for damages.

Debenture Meaning
If a company needs money without reducing its equity status, the Company
selects a Debentures Issue. It is a debt to the Company. Debentures are written
instruments of debt that companies issue under their common seal. They are
similar to a loan certificate. According to Companies Act, 2013, debenture
includes debenture stock, bonds and any other securities of a company whether
constituting a charge on assets of the company or not . [sec.2(30)].
Debentures are issued to the public as a contract of repayment
of money borrowed from them. These debentures are for a fixed period and a
fixed interest rate that can be payable yearly or half-yearly. Debentures are also
offered to the public at large, like equity shares. Debentures are actually the
most common way for large companies to borrow money. It is similar to
borrowing money that needs to be repaid over a while. Debentures have a fixed
interest rate. Both organizations and governments often issue debentures to raise
funds or capital. A debenture is one of the financial market tools that help
businesses to raise money in the market to grow their business. The word
debenture is derived from the Latin word “debere” meaning to borrow or
borrow money. Debenture holders do not get any voting rights. This is because
they are not instruments of equity, so debenture holders are not owners of the
company, only creditors. The interest payable to these debenture holders is a
charge against the profits of the company. So these payments have to be made
even in case of a loss. Debenture holders bear very little risk since the loan is
secured and the interest is payable even in the case of a loss to the company.

Types of Debentures
There are various types of debentures that a company can issue, based on security,
tenure, convertibility etc. Let us take a look at some of these types of debentures.

 Secured Debentures: These are debentures that are secured against an

asset/assets of the company. This means a charge is created on such an asset
in case of default in repayment of such debentures. So in case, the company
does not have enough funds to repay such debentures, the said asset will be
sold to pay such a loan. The charge may be fixed, i.e. against a specific
assets/assets or floating, i.e. against all assets of the firm.
 Unsecured Debentures: These are not secured by any charge against the
assets of the company, neither fixed nor floating. Normally such kinds of
debentures are not issued by companies in India.
 Redeemable Debentures: These debentures are payable at the expiry of their
term. Which means at the end of a specified period they are payable, either
in the lump sum or in installments over a time period. Such debentures can
be redeemable at par, premium or at a discount.
 Irredeemable Debentures: Such debentures are perpetual in nature. There is
no fixed date at which they become payable. They are redeemable when the
company goes into the liquidation process. Or they can be redeemable after
an unspecified long time interval.
 Fully Convertible Debentures: These shares can be converted to equity
shares at the option of the debenture holder. So if he wishes then after a
specified time interval all his shares will be converted to equity shares and
he will become a shareholder.
 Partly Convertible Debentures: Here the holders of such debentures are
given the option to partially convert their debentures to shares. If he opts for
the conversion, he will be both a creditor and a shareholder of the company.
 Non-Convertible Debentures: As the name suggests such debentures do not
have an option to be converted to shares or any kind of equity. These
debentures will remain so till their maturity, no conversion will take place.
These are the most common type of debentures.

Difference b/w shares & debentures

Shareholder -
 A shareholder is a member of company.
 A share holder has a voting rights.
 Dividend on shares is to be paid only when the company has earned
profits.
 Share holders can not be issued at a discount.
 Share holders can not be paid back their amount.
Debenture holder -
 A debenture-holder is only a creditor of the company.
 A debenture-holder has no such rights.
 Interest on debenture is payable whether there are profits or not.
 Debentures can be issued at discount.
 Debentures are normally redeemable.