Share Capital and Debentures

Sweat Equity Shares are equity shares issued by a company to its directors or employees 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. Conditions for their issuance (Section 54 of Companies Act, 2013 and Rule 8 of Companies (Share Capital and Debentures) Rules, 2014) include: (a) authorization by a special resolution passed by the company; (b) the resolution specifies the number of shares, current market price, consideration, and class of directors/employees to whom such equity shares are to be issued; (c) if the equity shares are listed, the issue must be in accordance with SEBI regulations; (d) if unlisted, the valuation of intellectual property or value additions must be done by a registered valuer; (e) the shares are locked-in for three years from the date of allotment; (f) the company cannot issue sweat equity shares for more than 15% of the existing paid-up equity share capital in a year or shares of the value of rupees five crores, whichever is higher. However, for startups, this limit is 50% for the first ten years from incorporation.

Bonus shares are fully paid-up shares issued by a company to its existing shareholders free of cost, by capitalizing its reserves and surplus. They are issued in proportion to the shares already held by them. Conditions for issue of bonus shares (Section 63 of Companies Act, 2013) include: (a) authorization by Articles of Association; (b) recommendation by the Board and approval by shareholders in general meeting; (c) the company has not defaulted in payment of interest or principal in respect of fixed deposits or debt securities; (d) the company has not defaulted in respect of payment of statutory dues of the employees; (e) partly paid-up shares, if any, are made fully paid-up; (f) bonus shares cannot be issued in lieu of dividend. Bonus shares can be issued out of free reserves, securities premium account (collected in cash), or capital redemption reserve account.

A Rights Issue is an offer of shares by a company to its existing shareholders in proportion to their current shareholding. It aims to raise capital while maintaining the existing ownership structure. Existing shareholders have the right to accept, reject, or renounce their rights in favor of another person. A Private Placement, on the other hand, is an offer of securities or invitation to subscribe securities to a select group of persons (not exceeding 200 in a financial year, excluding Qualified Institutional Buyers and employees offered shares under ESOP) identified by the company, other than by way of a public offer. It is a faster way to raise capital from specific investors.

Shares represent ownership in a company, making shareholders owners, whereas debentures represent a loan taken by the company, making debenture holders creditors. Shares carry voting rights (equity shares) and a fluctuating return (dividend), while debentures generally do not carry voting rights and offer a fixed rate of interest. Shares are part of the company's capital, while debentures are a part of its debt. In winding up, debenture holders are paid before shareholders.

A company can buy back its own shares or other specified securities from: (a) its free reserves; (b) the securities premium account; or (c) the proceeds of any prior issue of shares or other specified securities. However, no buy-back can be made out of the proceeds of an earlier issue of the same kind of shares or other specified securities. The buy-back must be authorized by the Articles of Association, and a special resolution must be passed in a general meeting (unless the buy-back is 10% or less of the total paid-up equity capital and free reserves, then Board resolution suffices). The buy-back cannot exceed 25% of the total paid-up capital and free reserves, and the post-buy-back debt-equity ratio should not be more than 2:1. All shares for buy-back must be fully paid up.

Sweat Equity Shares are issued to directors or employees at a discount or for consideration other than cash, for providing know-how or creating intellectual property. They require a special resolution, can only be issued one year after commencement of business, must be valued by a registered valuer, and are locked-in for three years.

As per Section 52 of the Companies Act, 2013, the Securities Premium Account can be utilized only for specific purposes: (a) for issuing fully paid bonus shares to members; (b) for writing off preliminary expenses of the company; (c) for writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company; (d) for providing for the premium payable on the redemption of any redeemable preference shares or of any debentures of the company; or (e) for the purchase of its own shares or other securities under Section 68 (buy-back). It cannot be used for paying dividends.

Preference shares can be redeemed only if they are fully paid up. They can be redeemed either out of the profits of the company available for dividend or out of the proceeds of a fresh issue of shares made for the purpose of redemption. If shares are redeemed out of divisible profits, a sum equal to the nominal amount of the shares redeemed must be transferred to a 'Capital Redemption Reserve Account' (CRRA). The CRRA can be used only for issuing fully paid bonus shares. No company can issue irredeemable preference shares. The redemption must be completed within 20 years from the date of issue, with some exceptions for infrastructure projects.

The requirements for creating a Debenture Redemption Reserve (DRR) have been significantly relaxed. As per the latest amendments, DRR is not required for: (a) All India Financial Institutions regulated by RBI and Banking Companies; (b) Listed companies (both public and privately placed debentures); (c) Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs), whether listed or unlisted, for both public and privately placed debentures. For other unlisted companies issuing debentures on a private placement basis, a DRR of 10% of the outstanding value of debentures is required. Additionally, companies that are required to create DRR must invest or deposit, on or before April 30th of each year, at least 15% of the amount of debentures maturing during the financial year ending on March 31st of the next year, in specified securities or deposits.

When shares are forfeited due to non-payment of call money, the amount already received on such shares (e.g., application and allotment money) is credited to a 'Share Forfeiture Account'. The Share Capital Account is debited with the called-up amount of forfeited shares. Upon re-issue of forfeited shares, the bank account is debited with the re-issue price, and the Share Capital Account is credited with the paid-up value of re-issued shares. Any discount allowed on re-issue is debited to the Share Forfeiture Account. If the re-issue price is less than the original issue price (but not less than the called-up amount minus forfeited amount), the balance in the Share Forfeiture Account relating to re-issued shares (after adjusting any discount on re-issue) is transferred to the 'Capital Reserve Account', as it represents a capital profit.

Equity shares represent the ownership capital of a company, carrying voting rights and a right to a residual claim on profits and assets after all other claims are settled. The dividend on equity shares is not fixed and depends on the company's profitability and dividend policy. Preference shares, on the other hand, carry preferential rights regarding dividend payment (at a fixed rate) and repayment of capital in case of winding up, before any payment is made to equity shareholders. However, preference shareholders generally do not have voting rights, except in specific circumstances affecting their rights.

Authorized Capital (or Nominal/Registered Capital) is the maximum amount of share capital that a company is authorized to issue as per its Memorandum of Association. Issued Capital is that part of the authorized capital which the company has offered to the public for subscription. Subscribed Capital is that part of the issued capital which has been subscribed by the public. Paid-up Capital is that part of the subscribed capital for which payment has been received by the company. It represents the actual amount paid by shareholders.

Under Section 66 of the Companies Act, 2013, a company limited by shares may reduce its share capital by passing a special resolution and obtaining confirmation from the National Company Law Tribunal (NCLT). It may extinguish/reduce liability on unpaid shares, cancel lost paid-up capital, or pay off excess paid-up capital. Creditors' consent is usually required.

Yes, under Section 68, a company can buy back its shares using free reserves, securities premium account, or proceeds of a fresh issue of different shares. The buy-back cannot exceed 25% of the aggregate of paid-up capital and free reserves.

A rights issue is an invitation to existing shareholders to purchase additional new shares in the company, usually at a discount to the market price, in proportion to their existing holding. It allows them to maintain their percentage ownership.