Section 44 Of Companies Act 2013: Nature Of Shares And Debentures

Nature of shares & debentures with regard to section 44

What is a share?

A share, according to Section 2(84) of the Act, is "a share in a company's share capital, and includes stock unless where a distinction between stock and shares is indicated or implied."

A share, according to Halsbury's Laws of England, is a right to a specific amount of a company's share capital, which comes with certain rights and liabilities both while the company is operating and when it is being wound up. A share is a shareholder's interest in the company, measured in money, for the reasons of liability and interest in the first place, but also consisting of a series of mutual covenants entered into by all the shareholders inter se. It is a right to partake in a company's income while it is still operating and paying dividends, as well as its assets after it is liquidated.

Nature of Shares

According to Section 44 of the Companies Act 2013, concerning Nature of shares or debentures, shares or debentures or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company.

A share is a bundle of rights and liabilities, not an amount of money; it is a financial interest measured by a sum of money. The articles of incorporation govern these rights and obligations. A share or other interest in a company, according to Section 44 of the Companies Act, is a movable property transferable in the manner stipulated by the company's articles. In India a share is given the status of a “good”, the Sale of Goods Act of 1930 defines "goods" as "any movable property other than an actionable claim or money," which includes stock and shares. Every share in a company with a share capital shall be distinguished by its distinctive number, according to Section 45 of the Companies Act, 2013, but this provision does not apply to a share held by a person whose name is entered as holder of beneficial interest in such share in the records of a depository.

What is a Debenture?

Every share in a company with a share capital shall be distinguished by its distinctive number, according to Section 45 of the Companies Act, 2013, but this provision does not apply to a share held by a person whose name is entered as holder of beneficial interest in such share in the records of a depository.

As per Section 2(30) of Companies Act, 2013 “debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not; provide that –

i. the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and

ii. such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company, shall not be treated as debenture.

Nature of Debentures

i. Debentures are used as a kind of collateral security.

When a corporation secures a loan or overdraft facility from a bank or other financial institution, collateral security is used in addition to the primary security. Debentures issued as a collateral liability are a contingent responsibility for the corporation. This liability will only arise if the company fails on the loan plus interest.

ii. Debentures with a monetary value

Debentures are typically used to raise capital for a business. They are mostly used for cash transactions. Debentures can be sold at par, at a discount, or at a premium.

iii. Debentures issued for a non-cash consideration

This is a different sort of debenture offering. Sometimes a corporation requires expensive assets such as machinery, plants, and equipment. The corporation does not need to have money on hand at that moment to make the payment. As a result, rather than paying cash, the Company issues debentures to the seller in exchange for the purchase, with terms of payment other than cash.

Differences Between Shares and Debentures

The following are the major differences between Shares and Debentures:

1. The holder of shares is known as a shareholder while the holder of debentures is known as debenture holder.

2. Share is the capital of the company, but Debenture is the debt of the company.

3. The shares represent ownership of the shareholders in the company. On the other hand, debentures represent indebtedness of the company.

4. The income earned on shares is the dividend, but the income earned on debentures is interest.

5. The payment of dividend can be made only out of current profits of the business and not otherwise. Unlike the interest on debentures which has to be paid by the company to debenture holders, no matter company has earned profit or not.

6. Dividend is not a business expense and so is not allowed as deduction. On the contrary, interest on debentures is a expense and so allowed as a deduction.

7. In the event of winding up, debentures get priority of repayment over shares.

8. Shares cannot be converted as opposed to debentures are convertible.

9. There is no security charge created for payment of shares. Conversely, security charge is created for the payment of debentures. A trust deed is not executed in case of shares whereas trust deed is executed when the debentures are issued to the public.