Key Takeaways:
- Understand the legal definition, features, and types of companies as per Companies Act, 2013.
- Grasp foundational concepts relating to share capital and debentures.
- Build the conceptual clarity needed for typical exam questions, including MCQs and comparative analyses.
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Definition of a Company (Companies Act, 2013)
The Companies Act, 2013 defines a company under Section 2(20) as “a company incorporated under this Act or any previous company law.” In essence, a company is a legally recognized association of persons formed with a common objective, registered as per the law, and granted a distinct legal identity.
Characteristics of a Company
a. Separate Legal Entity
A company is distinct from its members. It can own property, enter contracts, sue, and be sued in its own name. This principle was famously established in the case of Salomon v. Salomon & Co. Ltd.
b. Limited Liability
Members’ liability is generally limited to the unpaid amount, if any, on their shares. Creditors cannot claim the personal assets of shareholders to recover company debts.
c. Perpetual Succession
The company’s existence is uninterrupted by changes in membership. Even if all shareholders change, the company remains unaffected unless formally wound up.
Types of Companies
a. Private Company
Restricts the right to transfer shares and limits members to 200. It can't invite the public to subscribe to its securities.
b. Public Company
No restriction on membership; may invite the public to invest. Minimum seven members are required, but there’s no upper limit.
c. Government Company
At least 51% of the paid-up share capital is held by the central or state government(s). Examples include ONGC and SAIL.
d. Holding Company
Controls the composition of the Board of Directors or holds more than half of the total share capital of another company (the subsidiary).
e. Subsidiary Company
A company controlled by another (the holding company) through ownership or management control.
f. Small Company
Defined by the Companies Act, 2013, as a company (other than a public company) whose paid-up share capital does not exceed ₹4 crore and turnover does not exceed ₹40 crore (thresholds are periodically revised).
Share Capital: Concepts and Types
Share capital refers to the amount contributed by shareholders in exchange for ownership in the company. Let’s understand its various forms:
- Authorized (Nominal) Capital: The maximum capital a company is permitted to raise as per its Memorandum of Association.
- Issued Capital: Portion of authorized capital offered to investors for subscription.
- Subscribed Capital: Part of issued capital that investors have agreed to purchase.
- Called-up Capital: Amount that the company has requested shareholders to pay on the shares subscribed.
- Paid-up Capital: Actual amount paid by shareholders in response to calls made by the company. This is the real capital at the company’s disposal.
Confused by the sequence? Consider this: Authorized capital is the umbrella limit, issued capital is what’s offered to the public, subscribed capital is what the public agrees to take, and paid-up capital is what the public has actually paid for.
Debentures
Meaning
A debenture is a long-term debt instrument issued by a company to borrow money. Debenture holders are creditors, not owners. Debentures typically carry a fixed rate of interest, and their repayment is prioritized over shares during liquidation.
a. Secured and Unsecured Debentures
Secured debentures are backed by the company’s assets. In case of default, debenture holders can claim these assets. Unsecured debentures (often called naked debentures) have no such backing.
b. Convertible and Non-Convertible Debentures
Convertible debentures can be converted into shares after a specified period, giving holders a potential ownership stake. Non-convertible debentures remain pure debt instruments throughout their tenure.
c. Redeemable and Irredeemable Debentures
Redeemable debentures are repaid by the company after a fixed term. Irredeemable debentures (perpetual debentures) have no fixed date of repayment; they are rare in modern practice due to regulatory restrictions.
Shares vs Debentures
| Basis | Shares | Debentures |
|---|---|---|
| Nature | Ownership (equity or preference) | Debt instrument |
| Status | Shareholder is an owner | Debenture holder is a creditor |
| Return | Dividend (variable, depends on profits) | Interest (fixed, paid even if no profit) |
| Repayment | No repayment except in liquidation | Repaid as per terms (redemption) |
| Voting Rights | Equity shareholders have voting rights | No voting rights |
| Security | No security; risk is higher | Often secured against assets |
Exam Focus
a. Match the Following (Sample)
| Column A | Column B |
|---|---|
| Authorized Capital | (i) Maximum capital company can raise |
| Secured Debenture | (ii) Backed by company's assets |
| Public Company | (iii) Can invite public to subscribe shares |
| Convertible Debenture | (iv) Can be converted into shares |
b. Sample MCQs
- Which one of the following is not a feature of a company?
A. Separate legal entity
B. Unlimited liability
C. Perpetual succession
D. Limited liability
Correct Answer: B - Who is the real owner of a company?
A. Debenture holders
B. Shareholders
C. Creditors
D. Government
Correct Answer: B - Paid-up capital is always
A. more than authorized capital
B. less than or equal to issued capital
C. more than subscribed capital
D. less than called-up capital
Correct Answer: B - Debenture holders are entitled to
A. Dividend
B. Interest
C. Bonus shares
D. Profit sharing
Correct Answer: B
Mastering these foundational concepts sets a strong base for advanced topics like share issue procedures, company amalgamation, and holding company accounts. Don't hesitate to revisit these basics—most exam errors occur when students overlook the fundamentals.