Shares and Debentures - The Capital Raising Tools for Companies

Running a startup is an unrealistic idea until you have a huge amount of money/capital to invest in the assets and infrastructure. Making huge investments alone is quite impossible for any individual or group and here comes the need for them to ask for help (capital) from the outsiders (investors) in lieu of the shares/debentures in the company. 

However, there are other ways for a company to get loans but the most preferred way of raising the capital for them is by issuing the shares and debentures in their company to potential investors. There is a cyclic process of development, the more the investors invest in companies, the more the companies will yearn profits which will lead the company to progress. The company earning good will give more profits to its stakeholders who are owning shares and debentures in the company. 

Shares and Its Kinds

Shares are granted by the company in lieu of the investment made by the investor and thus the investor/shareholder becomes a partial owner in the company. The entire capital needed by the company is divided into smaller units that have the same monetary value. These units or Shares are offered to the investors in lieu of capital given by them. Further the transaction of shares is authenticated by the purchase issued by the company to the shareholder. The purchase is called ‘Share Certificate’. 

The value of shares for purchase is called ‘Share Price’ and the actual value of the shares that is written in the books of account is called Par/Nominal/Face value of the shares. From the overall profit earned a part is kept with the company and the rest is diffused in between the shareholders in the form of ‘Dividend’. 

‘Dividends’ are the returns of the investment made by the investor. 

Also Read:- All You Need to Know About Debentures, Its Types, Advantages and Disadvantages

Kinds of Shares

• Equity Shares - One cannot redeem the shares once they have invested in it. The only way here to get the money before the dividend is by selling the shares to another investor who is interested in the deal. While dispersing the dividends equity shareholders will get their percentage after the preference shareholders are done. Equity Shareholders have Voting Rights in the Company. 

• Preference Shares - Such shareholders are paid dividends at a fixed rate and get an upper-hand when it comes to paying dividends. Such shareholders have on voting rights in the company’s major decisions. 

Debentures and Its Kinds

A business needs capital to progress and therefore it takes loans from the potential investors in lieu of Debentures. Debentures can be held by banks, financial institutions, and individual investors. People or groups owning debentures are called ‘Debenture Holders’ in the company and the proof of ownership they hold is called 'Debenture Certificate’.

Debenture holders in the company are also denoted as ‘Creditors’. The group of debenture holders is paid no matter if the company is in a loss or profit. Interests are paid to the investors (on regular intervals or upon maturity) and the loan amount is repaid to them upon maturity of ‘Loan Bond’. They are denied any voting rights in the company.    

Kinds of Debentures

Depending on the nature of payment or maturity period, below mentioned are some types of debenture:

1. Redeemable Debentures
2. Irredeemable Debentures
3. Bearer Debentures
4. Registered Debentures
5. Convertible Debentures
6. Naked Debentures

Shares V/S Debentures

Though both are the mediums of raising capital for the company there is a difference in the pattern the profit is distributed among the Types of Shares and Debentures.

• Returns

Shares - The rate of dividend is entirely based on the profits earned by the company.

Debentures - The rate of interest is fixed no matter if the company is in profit or loss.

• Payment Policies

Shares - Shareholders are paid after debenture holders get their interest.

Debentures - Debenture holders get the priority over shareholders when it comes to payment of interest or dividend.

• Obligations

Shares - The dividend earning of the shareholder entirely depends on the profit earned by the company. The company is not obliged to pay if there is no profit.

Debentures - The company is obliged to pay interest to the debenture holders no matter the company is in profit or loss. It is anyways the interest on the loan that the company has taken and it needs to repay.

• Companies Exiting

Shares - Shareholders might lose their part of ownership in companies’ profits if the company winds up its business.

Debentures - Companies while winding up their business are liable to pay the entire amount of the investment to debenture holders.

• Right To Vote

Shares - Shareholders enjoy the right to vote in the major decisions of the company.

Debentures - Debenture holders are denied any voting rights in the major decisions of the company.

• Companies Exiting

Shares - Shareholders might lose their part of ownership in companies’ profits if the company winds up its business.

Debentures - Companies while winding up their business are liable to pay the entire amount of the investment to debenture holders.

• Risk

Shares - The risk of losing the profit is more are the shareholders are paid from the residual profit of the company.

Debentures - The risk of profit earning is NIL as they get timely interests and loan repayment on contract maturity regardless of the company’s condition in the market.

• Redeemability

Shares - The shares once purchased are non-redeemable except in the case of preference shares.

Debentures - They can only be redeemed upon maturity. Interests are paid at regular intervals or in any other pattern decided.

• Maturity

Shares - Shares have no maturity period and therefore are paid only upon closing.

Debentures - Debentures have a maturity period that is mentioned on the debenture certificate and the company is required to repay upon maturity of those debentures.

Also Read:- Equity Shares: Classification, Benefits & Drawbacks

In the End

By the above discussion, it is evident that both shareholders and Debenture holders can be called investors of the company. Every company tries very hard to maximize the returns to shareholders and also to pay interest to debenture holders in time. By increasing the shareholder’s wealth company makes its shareholders loyal to the company for a lifetime.

Debenture holders and shareholders both are contributors to the progress of any company. Clearly debenture holders are a priority at the time of payment but a company never fails to bring in profits for its shareholders as well. In the worst cases, this happens that shareholders are left barehanded. Companies always try to yearn profit for themselves and their shareholders so that they (companies) can sustain for long. In fact, the right to vote is a benefit given to the shareholders because they are the ones who will be equally affected by the progress or breakdown of the companies.

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SAG RTA: Benefits As Preferred Choice of Investors & MF Houses

SAG Infotech is a well-respected company known for providing reliable tax software. For over 20 years, they have been a leader in their field in India, consistently setting high standards for other companies. After establishing their reputation for excellence in tax software, they are now expanding their services to offer a new Registrar and Share Transfer Agent to help the public.

SAG RTA is a project of SAG Infotech and is the first company in India to be recognized by the SEBI as a qualified Registrar and Transfer Agent. SEBI is the organization that oversees mutual fund activities, ensuring that everything runs smoothly and fairly. Before a company can become an RTA, SEBI carefully examines its capabilities to make sure it meets all necessary standards.

 

SAG RTA is excited to announce that we have completed the SEBI investigation, making us the first RTA Agent in India to achieve this milestone.

SAG RTA is committed to meeting the needs of its clients and is focused on offering excellent services to both individuals and businesses that work with them.

Below-mentioned is the reasons why one should opt for SAG RTA services and how they are benefitted

1. Top Class RTA Services - SAG RTA offers a wide range of services to its clients related to their investments. They help with everything from converting physical share certificates into electronic form to keeping track of transactions and managing investor information. The RTA also assists with share transfers, handles questions from investors, and processes dividend payments. Additionally, they guide you through the process of opening a Demat Account, which is necessary for holding shares electronically. Essentially, SAG RTA acts as a helpful link between mutual fund companies and investors, ensuring smooth communication and service.    
2. Availability of Entire RTA Application Forms - SAG RTA offers a variety of application forms that investors, mutual fund companies, public companies, and related organizations need to follow the rules for mutual funds. You can easily download RTA forms from the SAG RTA website. Some important forms that you can download and submit include requests to change your address, name, or signature, as well as a form for transferring securities.     
3. Uniques Dashboard Availability (Individuals and Professionals) - SAG RTA provides all its clients, whether they are investors or professionals, with a special login feature on the website. This means that even professionals like CAs and CSs can easily access their own dashboards online. 
4. Firm Links With National Depositories - SAG RTA has good connections with the two major national depositories, CDSL and NSDL. This is beneficial for mutual fund companies and investors who work with RTA, as it makes it simple for them to submit applications to these large depositories through the RTA Official portal.   
5. Affordable Services - SAG RTA offers a full range of services related to RTA while keeping things affordable for its clients. One of the key benefits of choosing SAG RTA is its competitive pricing, which makes it a favourite among customers looking for reliable services without breaking the bank.     
6. Expert Backend Support - Clients can easily contact us by phone or text message to get information or ask questions about Mutual Funds. SAG RTA has a knowledgeable team dedicated to helping Mutual Fund companies manage their client interactions. In addition to providing support to customers, our team assists the company in verifying and maintaining its Mutual Fund information and presenting it to the necessary authorities when required.    
7. Timely Updates - Lastly, the company makes sure to keep its users informed about what's happening in the Mutual Fund market, including new laws, rules, and any changes to application forms. SAG RTA is recognized for following all the guidelines set by the government regarding Mutual Fund management and smoothly adjusts to any updates in the laws provided by the authorities.

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Key Difference Between Allotment of Shares And Issue of Preference Shares

When a company looks to raise capital, share allotment and share issue serves as two major criteria for it. The primary difference between allotment and issues of shares is such that the process of allotment is the method of share distribution within the company whereas the issues of share enable a company to dilute its equity by offering its shares to general public or shareholders, who can later hold them or transfer to another investor.

What Does It Mean By Allotment of Shares? 

The process of allotment refers to the distribution of shares among the interested shareholders either through a lottery scheme or some type of algorithm for allotment. The allocation process also decides the overall composition of the shareholding among investors, which is also helpful in determining the bargaining power (majority or minority) of shareholders. 

Three most popular types of Allotment of Shares process that are commonly practised by companies include: 

Share Allotment via Initial Public Offering (IPO)

When a company is listed on a stock exchange by doing an IPO and starts trading shares to the general public. A large number of investors, i.e., the general public gets involved in such kind of share allocation process, unlike a very limited number of private investors in a company. 

Allotment via Rights Issue or Bonus Issue

When shares are allocated among the existing shareholders of a company as opposed to the new ones. In case of rights issues, shares are generally offered at a discounted price to shareholders by the company. On the other hand, in case of a bonus issue, shares are allocated to existing shareholders instead of dividend payment. 

Read Also:- A Brief Overview of Employee Stock Option Plan (ESOP)

Bulk Share Allotment to individual or Institution

Companies can also issue shares to a particular selected party like an institutional shareholder, venture capital firm or business angel. Such type of allotment generally results in a change of ownership status since a bulk amount of shares are distributed. 

What Does It Mean By Issue of Preference Shares?

A legal transfer of ownership of the shares by a company to its investors is known as the issues of shares. Once a company issues shares to investors, then it is at the hand of investors completely whether they want to hold their shares or transfer their ownership by selling the shares to other investors. 

Initially, when a company gets incorporated, a number of its shares are issued which is dependent upon a number of factors. A legal document called ‘Prospectus’ is used to specify all relevant information related to the issue of shares. Companies can also seek professional advice to decide how much shares they wanted to issue to the public. 

Authorised Share Capital

Authorized share capital is also known as the registered share capital. This is the maximum amount of capital that a particular company is allowed to raise from the public via the issue of shares. The registered share capital of a company should also be mentioned in the Certificate of Incorporation, which is a legal document to declare the formation of a company. During a single issue, the entire number of authorized shares cannot be issued by the company. 

Dilution of Control

Once shares are issued to the general public during an IPO event, then become shareholders of the company. This can also result in a change in the ownership structure of the firm. Hence, it is at the hand of existing owners of the firm how much control they want to forgo by deciding the number of shares that are issued during an IPO event. 

The price at which shares are issued is equally important as the number of shares issued during an IPO event. The pricing should be attractive so that prospective investors can purchase it without sending any negative signals into the market. Companies operating in a high growth market with a unique product can put their share prices high as opposed to ones operating in a competitive market. 

Read Also:- All You Need to Know About Debentures, Its Types, Advantages and Disadvantages

Structure of The Company

The private or public structure of the company also affects the number of shares that can be issued. Regulations for issuing shares are minimum for private companies whereas in case of public companies a nominal value is specified which must be at least £50,000 of the issued share capital. 

Funding Requirements And Company Size 

Large scale companies have more funding or capital requirements when compared to small ones. Furthermore, when a company is well established, it can easily attract more funding since investors are more willing to put their money in already established corporate entities for getting more profits. 

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Details of a Demat Account - Introduction, Benefits and Steps to Acquire One

A large number of shares are bought and purchased by the investors with SEBI being the regulatory body in the whole process. In line with the protocols of legal authorities, such shares are present in either physical or electronic form. Physical Shares or Share certificates have a paper presence whereas electronic shares are in the dematerialized form stored in the Demat Account of the concerned Investor.  

As stated by the Laws of Companies Act 2013, the complete transaction of Shares and Securities will be in Demat Form effective from 2nd October 2018, which also means from 1 October 2019 no company will be allowed to transfer its shares and securities in physical form. Owing to this current amendment investors have to open a Demat Account under their name by submitting the Dematerialization request.   

An Registrar & Transfer Agent Service provider offers assistance such as dematerialization of shares, complete record-keeping, contact with the national depositories, expert assistance related to investment opportunities or assistance to any other query of the customer.

Demat Account

Dematerialization of Shares is a process in which shares owned by the investor are converted into electronic form and stored in the Demat Account of the respective investor. So clearly a Demat Account holds the shares and securities present in the electronic form to facilitate the investor with online visibility of his purchased shares.  

The concept of Demat Account was initiated by the Securities and Exchange Board of India (SEBI). SEBI is India’s largest regulatory body for all types of share transactions in the Indian market, operating since 1996 in India.

Demat Account is almost equivalent to a bank account. The only difference is that it holds shares, securities, bonds and mutual funds on behalf of the investor. Earlier, holding a Demat Account was recommended to those who trade with shares and securities on a regular basis. But from now onwards it is mandatory for every investor to get a Demat Account regardless of how frequently he is trading on shares. 

Before we jump into the step-wise procedure to open a Demat Account lets get familiar with the two crucial terms with regards to share transactions (i) Depositories and (ii) Depository Participant. 

National Depositories and Depository Participants 

National Depositories - Operating under the surveillance of SEBI, National Depositories are the organizations responsible for holding all the registered shares and securities in the country. There are two major depositories namely National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL). Transactions of all the registered shares and securities is possible only through these two main depositories.       

Depository Participants - These are organizations working as an intermediary between the investor and the main depositories. For opening a Demat Account, the investor needs to approach the Depository Participants. 

Steps to open a Demat Account

Step 1: Approach a DP which can be any financial institution like banks, brokers, etc. 

Step 2: Fill in the application form with accurate details for opening a Demat Account affixing the copies of the required documents.    

Step 3: Once the online documents are submitted by the investor, the officers from the DP comes for the in-person verification.   

Step 4: Once the information is checked for its authenticity, a unique account number is given to the applicant by the DP which is required by the investor to access his/her online Demat Account.   

The expense for opening a Demat Account

Following the completion of the account opening process, the Demat account holder gets an agreement copy from the concerned DP enlisting the terms and conditions, rules and regulations along with the applicable charges. Generally, the DPs offer free of cost Demat Account while there are some who charge a certain amount or some take refundable charges. 

The account holder is charged with the transaction fees along with the annual maintenance fees and the conversion fees (dematerialization of shares and securities). 

Read Also:- Complete Procedure For Dematerialisation Of Shares Under RTA

Points to remember while opening a Demat Account    

1. It takes 7-14 days for a Demat Account to get active.
2. Investors can open different accounts with different DPs. 
3. No minimum share limit is set for opening a Demat Account. 
4. It is mandatory to add a beneficiary while opening a Demat Account
5. KYC is mandatory before opening a Demat Account. 

KYC Conformity

Getting KYC done is mandatory if you want to have a Demat Account. As the process above says that the investor has to apply by submitting the application along with the valid documents to the concerned DP for availing a Demat Account. 

Identity Proof - The copy of any government authorized ID like Adhaar Card, PAN Card, Passport or Voter ID can be submitted by the applicant. 

Address Proof - Applicant’s residence proof like ration card, electricity bill, water bill or any ID Proof having the place of residence mentioned in it. 

Bank Details - It is a must for the applicant to submit his/her basic bank details like bank account number, etc. 

Benefits of owning a Demat Account

• A Demat account eliminates the chances of your shares, securities, bonds and debentures getting misplaced, robbed or damaged. 
• The charges on the transaction of shares is less if done via a Demat Account as compared to the physical one.
• A Demat Account has made transactions more easy and less time consuming for investors. 
• There are no restrictions on the number of shares you buy or sell via a Demat Account. 
• Online transactions and management is far convenient these days than physical transactions of shares. 
• More secure than physical shares transactions. 

Owing a Demat Account gives you all the above facilities simultaneously adhering to the compliance of the Government.

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