Basics of Capital Market,Types of Shares and Debentures notes-CSEET
Basics of Capital Market,Types of Shares and Debentures:
ICSI CSEET: The Council of the ICSI has released a notice regarding CSEET on the day of the inauguration of ICSI Golden Jubilee Celebrations on 4th Oct 2017.
The Gazette Notification on the Company Secretaries (Amendment) Regulations, 2020 has been published on 3rd February 2020 in the Official Gazette of India and the same shall be applicable from the said date of publication.
Now ICSI Published a notice regarding CSEET Test which going to start from 2020 May.
We are now going to discuss the details of CSEET Paper-3 Economics and Business Environment notes – Basics of Capital Market,Types of Shares and Debentures
Basics of Capital Market,Types of Shares and Debentures notes:
The history of the capital market in India dates back to the eighteenth century when East India Company securities were traded in the country. Until the end of the nineteenth century, securities trading was unorganized and the main trading centres were Bombay(now Mumbai) and Calcutta (now Kolkata). Of the two, Bombay was the chief trading centre wherein bank shares were the major trading stock. During the American Civil War (1860-61). Bombay was an important source of supply for cotton. Hence, trading activities flourished during the period, resulting in a boom in share prices. This boom, the first in the history of the Indian capital market, lasted for a half a decade. The first joint stock company was established on 1850. The bubble burst on July 1, 1865, when there was tremendous slump in share prices.
Trading was at that time limited to a dozen brokers, their trading place was under a banyan tree in front of the Town Hall in Bombay. These stockbrokers organized an informal association in 1875- Native Shares and Stock Brokers Association. Bombay. The stock exchanges in Calcutta and Ahmedabad, also industrial and trading centres; came up later. The Bombay Stock Exchange was recognized in May 1927 under the Bombay Securities Contracts Control Act, 1925.
Indian remained largely inactive till the 1970s. Partial liberalisation of the economy and pro-capital market policies during the 1980s infused some life into the markets, but it was only the economic liberalisation of the 1990s that provided a lasting impetus. Today, segments of India’s capital markets are comparable with counterparts in many of the advanced economies in terms of efficiency (price discovery), tradability (low impact cost), resilience (co-movement of rates across product classes and yield curves), and stability. In particular, their ability to withstand several periods of stress, notably the Asian financial crisis in 1997-98, the global financial crisis in 2007-09 and the “taper tantrum” episode in 2013, is a sign of their increasing maturity.
Types of Shares and Debentures
Types of Shares
Equity share capital
Equity shares, also known as ordinary shares or common shares represent the owners’ capital in a company. The holders of these shares are the real owners of the company. They have a control over the working of the company. Equity shareholders are paid dividend after paying it to the preference shareholders. The rate of dividend on these shares depends upon the profits of the company. They may be paid a higher rate of dividend or they may not get anything.
Equity share is a main source of finance for any company giving investors rights to vote, share profits and claim on assets. Various types of equity share capital are authorized, issued, subscribed, paid up, rights, bonus, sweat equity etc. The expression of the value of equity shares are in terms of face value or par value, issue price, book value, market value, intrinsic value, stock market value etc.
Normally, a company is started with equity finance as its first source of capital from the owners or promoters of that company. After a certain level of growth, there is a requirement for more capital for further growth. The company then finds an investor in the form of friends, relatives, venture capitalists, mutual funds, or any such small group of investors and issue fresh equity shares to these investors.
A point comes where the company reaches a very big level and requires huge capital investment for business growth. Initial Public Offer (IPO) is the offer of shares which the company makes to the general public for the first time. And Follow on Public Offer (FPO) is more such offers in future to the public
Types of Equity Share Capital / Shares:
- Authorised Share Capital : It is the maximum amount of capital which a company can issue. The companies can increase it from time to time. However, for that we need to comply with some formalities also have to pay some fees to the legal bodies.
- Issued Share Capital : It is that part of authorized capital which the company offers to the investors.
- Subscribed Share Capital : It is that part of issued capital which an investor accepts and agrees upon.
- Paid up Capital : It is the part of the subscribed capital, which the investors pay. Normally, all companies accept complete money in one shot and therefore issued, subscribed and paid capital becomes one and the same. Conceptually, paid-up capital is the amount of money which a company actually invests in the business.
- Rights Shares : These shares are those which a company issues to it’s existing shareholders. The company issues such kind of shares in order to protect the ownership rights of the existing investors.
- Sweat Equity Shares : Sweat equity shares are issued to exceptional employees or directors of the company for their exceptional job in terms of providing know-how or intellectual property rights to the company.
Preference Share Capital
Preference shares, more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stock holders are entitled to be paid from company assets before common stockholders. Most preference shares have a fixed dividend, while common stocks generally do not. Preferred stock shareholders also typically do not hold any voting rights, but common shareholders usually do.
Types of Preference Shares:
- Cumulative Preference Shares : Preference dividend is payable if the company earns adequate profit. However, cumulative preference shares carry additional features which allow the preference shareholders to claim unpaid dividends of the years in which dividend could not be paid due to insufficient profit.
- Non-Cumulative Preference Shares : The holders of non-cumulative preference shares will get preference dividend if the company earns sufficient profit but they do not have the right to claim unpaid dividend which could not be paid due to insufficient profit.
- Redeemable Preference Shares : Redeemable preference shares are those shares which are redeemed or repaid after the expiry of a stipulated period.
- Participating Preference Shares : Participating preference shareholders are entitled to share the surplus profit and surplus assets of the company in addition to preference dividend.
- Non-participating Preference Shares : Non-participating preference shareholders are not entitled to share surplus profit and surplus assets like participating preference shareholders.
- Convertible Preference Shares : The holders of convertible preference shares are given an option to convert whole or part of their holding into equity shares after a specific period of time.
- Non-convertible Preference Shares : The holders of non-convertible preference shares do not have the option to convert their holding into equity shares i.e. they remain as preference share till their redemption.
A company may raise long-term finance through public borrowings. These loans are raised by the issue of debentures. “A debenture is a document under the company’s seal which provides for the payment of principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the company’s property or undertaking and which acknowledges a loan to the company”.
A debenture holder is a creditor of the company. A fixed rate of interest is paid on debentures. The interest on debentures is a charge on the profit and loss account of the company. The debentures are generally given a floating charge over the assets of the company. When the debentures are secured, they are paid on priority in comparison to all other creditors.
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.
Bearer Debentures are those which are payable to the bearer thereof. These can be transferred merely by delivery. Interest is paid to the person who produces the interest coupon attached to such debentures.
Registered Debentures are those which are payable to the persons who appear in the Register of Debenture holders. These can be transferred only by executing a transfer deed. Interest is paid to the registered holder.