UNIT II

Prospectus and Allotment of Securities

Q1) What is a prospectus?

A1)  A prospectus is basically a formal and legal document issued by a body corporate which acts for inviting offers from the public for subscription or purchase of any securities. Every public company is entitled to issue the prospectus for its shares or debentures. But the same is not required for a private company.

Q2) In what ways can a public company issue securities?

A2)  A public company can issue securities in three ways as follows:

Q3) In what ways can a private company issue securities?

A3) A private company may issue securities in following two ways:

Q4) Describe briefly the application of Section 23.

A4)  Application of Section 23

This newly inserted provision lists out the mode and means by which private and public limited companies can issue securities, thus providing explicit means for issuance of securities by both public and private companies in India.  There is confusion and dilemma with respect to its application, which has not been up till now explicitly cleared up by any notification or legislation. It is believed that use of the word “May” with respect to private placement creates ambiguity. If this “May” is to be interpreted in its literal sense than it would mean that a private company issuing securities can also follow the procedure under Section 42 (private placement), Section 54 (issue of sweat equity shares), Section 62 (further issue of share capital), Section 71 (debentures) and Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 independently. But at the same time if the “May” in section 23(2) is to be interpreted and read as shall, it would become a mandatory provision and it would mean that if a company has to issue securities under the act, 2013 it has to be done as per the provision of section 23(2), that is every time any security, whether shares, debentures or employee stock options, are proposed to be issued either a private placement or a rights issue process will have to be followed by the private company, unless such shares are being issued as bonus shares.

Q5) What is Share capital?

A5) Share capital is known as owned capital of the company. It denotes the amount of capital raised by the issue of shares, by a company. Since it is the money of the shareholder, the shareholders are the owners of the company. The total share capital however divided into small parts and each part called as share. Share considered the smallest part of the total capital of a company.

Q6) What is a debenture?

A6) A Debenture is basically some of the loan amount the company was interested to raise from the public that is why it issues debentures. A person who has bought a debenture and holding it is called a debenture holder. A debenture holder is the creditor of the company. Debenture is a document issued under the seal of the company.

Q7) What are the characteristics of Debentures?

A7) Characteristics of Debentures 

1. Debenture is a movable property. It is in the form of a certificate of indebtedness of the company and issued by the company itself. It generally creates a charge on the undertaking or undertakings of the company. There is usually a specific date of redemption.

2. The debenture holders are creditors to the company and they do not have any claim of ownership of the company unlike share holders. The company is only under debt of the debenture holders.

3. As the debenture holders are not the owner of the company so they are not entitled with the administration and management of the company.

4. The debenture holder need not be concerned with the profits or loss of the company, they have a fixed rate of interest on the principal amount which they get every year irrespective of the financial condition of the company.

5. Debentures usually have a charge on the assets of the company, which means that if the company on liquidation is not able to repay the amount the debenture holders can sell of property of the company to recover money.

6. There is an undertaking given by the company to repay debenture holders the principal amount along with the interest at the state time.

7. The debenture holders cannot claim the privilege to vote in any meeting of the company.

8. When the company is winding up, the first priority of the company is to repay to the debenture holders of the company hence , there is no risk involved of loss of money of the debenture holders.

Q8) What are the different types of Debentures on the basis of convertibility?

A8) On the basis of convertibility, debentures are classified into following categories:

(A) Non Convertible Debentures-“ This type of debentures cannot be converted either into preference shares or equity shares. Non-convertible debentures can either be unsecured or secured. These type of debentures are usually redeemed only on the maturity of a predetermined period which may be 10 or 20 years. These instruments retain the debt character and cannot be converted into shares.

(B) Partly Convertible Debentures - Apart of these instruments are converted into equity shares in future at the notice of issuer. The issuer decides the ratio for conversion. The ratio is usually decided at the time of subscribing the debentures. If a debenture converts some of his debentures into share, he a member as other shareholders for those shares, amending the rights accordingly. Thus convertible debentures may be called as debentures which can be converted by the debenture holder after a specific time.

(C) Fully Convertible Debentures -These are those debentures which can be converted into equity or preference shares after a certain period at predetermined rate of exchange. If a debenture converts his debentures into share, he cease to be the creditor of the company and become a member as other shareholder, amending the rights accordingly. Thus convertible debentures may be called as debentures which can be converted by the debenture holder after a specific time. At the time of issue of debenture the rate at which the exchange takes place is decided . Till the time of conversion only the interest is paid to the debenture holder and after that the rights exercised would same as shareholder. In order to issue convertible debentures prior approval of the shareholders is mandatory. The sanction of central government also required for issuing convertible debentures.

(D) Optionally Convertible Debentures- It is a t the option of the debenture holder to convert these debentures into share. The price for such conversion is decided by the issuer and was consented upon by both parties at the time of issue of debenture.

Q9) What are the different types of Debentures on the basis of security?

A9) On the basis of security, debentures are classified into following categories:

(A) Secured Debentures- “The instruments which are secured as there is a charge on the fixed assets of the company. This is to secure the debenture holder as and when the issuer makes a defaults in the payment of either the principal or interest amount, the assets of the issuer can be sold off in order to do away with the liability to the debenture holders by repayment. In Companies Act, 2013 there is a provision in Section 71(3) which says that a company has right to issue secured debenture subjected to the conditions of the government of India.

(B) Unsecured Debentures-“ These type of debentures are unsecured in the way that if there is a default in payment of the principal amount or interest amount the debenture holder will have be along with other unsecured lenders and hence could not sell any property or anything for repayment hence they are also called naked debentures.

Q10) What are the different types of Debentures on the basis of redeemability?

A10) On the basis of Redeemability, debentures are classified into following categories:

(A)Redeemable Debentures- The debentures which are issued with the option of redemption on demand or after serving notice or at a fixed date or through a system of periodical drawing. Usually debentures are of redeemable nature and after redemption they can either be cancelled or can be reissued. The priorities and rights of the person who is reissued the debentures shall be same as the debentures were never redeemed.

(B)Perpetual or Irredeemable Debentures- “an irredeemable debenture is a type of debenture in which there is not fixed time for the issuer to repay the amount. The debenture holder does not have right to demand for the payment of principal amount until and unless the company does not default in making payment of the interest regularly. If a company is going into liquidation it has to pay for the entire debenture whether redeemable or irredeemable.

Q11) What are the different types of Debentures on the basis of redeemability?

A11) On the basis of Registration, debentures are classified into following categories:

(A) A Registered Debentures- The debentures which are made in the name of a particular individual who is registered by the company as the debenture holder on their register of debenture holders and also his name appears on the debenture certificate. These debentures can be transferred in the similar way as shares are transferred by due means of proper instrument which includes stamped duly, executed and satisfying the demands under Section 56 of the Companies Act, 2013.

(B) Bearer Debentures- These shares on the other hand are negotiable instrument are made out to bearer and so are transferrable by only delivery like share warrants. The person to whom a beared debenture is transferred becomes a "holder in due course" and he has a right to recover and receive the principal amount along with interest on it.