Unit 1: Shares & debentures

Shares may be issued at par (face value), at a premium (above face value) or, rarely, at a discount (only sweat equity is permitted under the Companies Act, 2013).

• Securities premium is credited to the Securities Premium Account and may be used only for purposes in Section 52 (issuing bonus shares, writing off preliminary expenses, premium on redemption, buy-back).
• Oversubscription: excess applications are rejected and refunded, or allotted pro rata with excess money adjusted against allotment.

If a shareholder fails to pay calls, the shares may be forfeited: share capital is debited with the called-up amount, unpaid calls are credited, and the amount received is credited to Share Forfeiture Account. Forfeited shares may be re-issued, even at a discount up to the amount forfeited. The balance left in Share Forfeiture Account after re-issue is transferred to Capital Reserve.

• Buy-back (Section 68): a company buys its own shares out of free reserves, securities premium or proceeds of a fresh issue (of a different kind). Limit: generally up to 25% of paid-up capital and free reserves; debt-equity ratio after buy-back must not exceed 2:1.
• Redemption of preference shares (Section 55): only fully paid shares, out of profits or a fresh issue; if out of profits, an equal amount is transferred to the Capital Redemption Reserve (CRR).
• Rights issue: new shares offered to existing shareholders in proportion to their holdings, usually at a price below market.

A debenture is a certificate of debt carrying fixed interest. Debentures may be issued at par, premium or discount and redeemed at par or premium. Redemption methods: lump sum, instalments (drawing lots), purchase in the open market, or conversion into shares. A Debenture Redemption Reserve may be required by law for certain companies. Underwriting is a guarantee by underwriters to subscribe to the shares not taken up by the public, in return for a commission (maximum 5% on shares and 2.5% on debentures).

Profit earned from the date of purchase of a business to the date of incorporation is pre-incorporation profit — a capital profit transferred to Capital Reserve (a loss is treated as goodwill).