Types of Shares and Debentures: A Beginner’s Guide to Investment Options

Debenture 

A Debenture is a unit of loan amount. When a company intends to raise the loan amount from the public it issues debentures. A person holding debenture or debenture is called a debenture holder. A debenture is a document seal of the company. It is acknowledgement of the loan received by the company equal to the nominal value of the debenture. It bears the date of redemptions and rate and mode of payment of interest.

 

A debenture holder is the creditor of the company. A Debenture is a long-term Debt Instrument issued by governments. The Debenture has some similarities with Bonds but the terms and conditions of securitization of Debentures are different from that of a Bond. A Debenture is regarded as an unsecured because there are no pledges (guarantee) or liens available on particular assets. Nonetheless, a Debenture is backed by all the assets which have not been pledged otherwise. Normally, Debentures are referred to as freely negotiable Debt Instruments. The Debenture holder functions as a lender to the issuer of the

Debenture. In return, a specific rate of interest is paid to the Debenture holder by the Debenture issuer similar to the case of a loan.

Types of Debentures

1. Types of Debentures on The Basis of Record Point of View
• Registered Debentures - These are the debentures that are registered with the company. The amount of such debentures is payable only to those debenture holders whose name appears in the register of the company.
• Bearer Debentures - These are the debentures which are not recorded in a register of the company. Such debentures are transferable merely by delivery. Holder of bearer debentures is entitled to get the interest.
2. Types of Debentures on The Basis of Security
• Secured or Mortgage Debentures - These are the debentures that are secured by a charge on the assets of the company. These are also called mortgage debentures. The holders of secured debentures have the right to recover their principal amount with the unpaid amount of interest on such debentures out of the assets mortgaged by the company.
• Unsecured Debentures - Debentures which do not carry any security with regard to the principal amount or unpaid interest are unsecured debentures. These are also called simple debentures.
3. Types of Debentures on The Basis of Redemption
• Redeemable Debentures - These are the debentures which are issued for a fixed period. The principal amount of such debentures is paid off to the holders on the expiry of such period. These debentures can be redeemed by annual drawings or by purchasing from the open market.
• Non-redeemable Debentures - These are the debentures which are not redeemed in the life time of the company. Such debentures are paid back only when the company goes to liquidation.
4. Types of Debentures on The Basis of Convertibility
• Convertible Debentures - These are the debentures that can be converted into shares of the company on the expiry of pre-decided period. The terms and conditions of conversion are generally announced at the time of issue of debentures.
• Non-convertible Debentures - The holders of such debentures cannot convert their debentures into the shares of the company.
5. Types of Debentures on The Basis of Priority
• First Debentures - These debentures are redeemed before other debentures.
• Second Debentures - These debentures are redeemed after the redemption of first debentures.

Share 

A certificate giving the person or company listed a portion of ownership in a stock, mutual fund, or some other investment vehicle. A share is the smallest unit of ownership. They may be bought or sold on or off an exchange.

A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares. Today, brokerages have electronic records that show ownership details. Owning a "paperless" share makes conducting trades a simpler and more streamlined process, which is a far cry from the days were stock certificates needed to be taken to a brokerage before a trade could be conducted.

There are different types of shares

1. Equity shares: These shares are also known as ordinary shares. They are the shares which do not enjoy any preference regarding payment of dividend and repayment of capital. They are given dividend at a fluctuating rate. The dividend on equity shares depends on the profits made by a company. Higher the profits, higher will be the dividend, whereas lower the profits, lower will be the dividend.
2. Preference shares: These shares are those shares which are given preference as regards to payment of dividend and repayment of capital. They do not enjoy normal voting rights. Preference shareholders have some preference over the equity shareholders, as in the case of winding up of the company, they are paid their capital first. They can vote only on the matters affecting their own interest. These shares are best suited to investors who want to have security of fixed rate of dividend and refund of capital in case of winding up of the company.
• Cumulative Preference Shares - Cumulative preferred stock is a type of stock that requires a defined dividend payment. If the company does not pay the dividend, it still owes the missed dividends to the owner of the stock. Cumulative preference shares accumulate unpaid dividend.
• Noncumulative Preferred Stock - Preferred stock for which the publicly-traded company does not need to pay all dividends. If a company misses a dividend payment for any reason, it no longer owes the dividend to noncumulative preferred stockholders. That is, all dividends that were "skipped" are treated as if they never existed. Noncumulative preferred stocks are rare because they are unattractive to preferred stock investors.
3. Deferred shares: These shares are those shares which are held by the founders or pioneer or beginners of the company. They are also called as Founder shares or Management shares. In deferred shares, the right to share profits of the company is deferred, i.e. postponed till all the other shareholders receive their normal dividends. Being the last claimants of the profits, they have a considerable element of speculation or uncertainty and they have to bear the greatest risk of loss. The market price of such shares shows a very wide fluctuation on account of wide dividend fluctuations. Deferred shares have disproportionate voting rights. These shares have a small denomination or face value. Deferred shares are not transferable if issued by a private company. Deferred shareholders do not enjoy the right of priority to have shares offered in case of the issue of shares by the company. If the company goes into liquidation the deferred shareholders can get refund of capital and participate in the surplus capital, if any, after the rights of preference and equity shareholders have been satisfied.
4. Bonus shares: The word bonus means a gift given free of charge. Bonus shares are those shares which are issued by the company free of charge as bonus to the shareholders. They are issued to the existing shareholders in proportion to their existing share holdings. It is a kind of gift to the shareholders from the company. It is bonus in the form of shares instead of cash. It is given out of accumulated profits and reserves. These shares have all types of preferences which are available to the existing shares. For example. Two bonus shares for five equity shares. The issue of bonus shares is also termed as capitalization of undistributed profits. Bonus shares are a type of windfall gain to the equity shareholders. They are advantageous to the equity shareholders as they get additional shares free of cost and also, they earn dividend on them in future. Conditions for issue of bonus shares:
• Sufficient amounts of undistributed profits: There must be sufficient amounts of undistributed profits for the issue of bonus shares.
• Provision in the articles: There must be a provision in the articles of association regarding the issue of bonus shares. If there is a provision in the articles regarding the issue of bonus shares the company can issue bonus shares if there is no provision, the company cannot issue the bonus shares.
• Suitable Resolution: The Board of Directors must pass a suitable resolution in the Board meeting for the issue of bonus shares.
• Shareholders’ approval: The shareholders must give formal approval for the issue of bonus shares in the Annual General Meeting.
• When a company can issue: A company can issue bonus shares only twice in a period of five years.
• Fully paid-up shares: Bonus shares can be issued only when the existing shares are fully paid up

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Sandeep Ghatuary

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