Capital is needed by companies, both private and public to increase their productivity or market reach or to purchase latest modern equipment and machines. So, companies go for Initial Public Offering (IPO) and if they had already gone for IPO they go for Follow – on Public Offer (FPO). In FPO or IPO, they generally sell their shares and debentures to the investors.
To raise the capital these marketable instruments are issued by the companies. Each issued share goes to the public. They are traded in everyday stock market and the value of the company is decided by the value of the shares at the end of the day.
A company to put its share in the market have to first prepare a memorandum in which the authorized capital is to be written down which is further to be verified by the competent authority which is SEBI.
Types of Shares:
1. Equity Shares: they are generally issued and traded in everyday stock market. Their returns are not fixed.
Types of Equity Shares:
a. Blue Chip Shares: The big companies which have the potential to dictate the terms come under this umbrella. These companies are never fixed as performance of these companies may fall apart sometimes.
b. Income Shares: The companies coming in this area, are generally stable and do not vary much in their performance.
c. Growth Shares: These companies have secured their positions in specific industry; their shares have less dividend payout ratio and thus, more growth potential.
d. Cyclical Shares: The share of the companies coming into this umbrella varies with the economy. A definite business cycle keeps on operating and the performance keeps on operating with the stages of the cycle.
e. Defensive Shares: The shares of the company do not vary with the economy.
f. Speculative Shares: The shares of a company which has usually more speculation than others and they cannot be categorized into one category only and may overlap with blue chip shares.
Another classification is given by investor Peter Lynch:
a. Slow growers: These are the companies having growth rate equal to the industrial growth rate or higher than GDP.
b. Fast Growers: Newly started companies having good growth rate.
c. Stalwarts: The big companies having and whose dividend payout is high.
d. Cyclicals: The shares of these companies are not going through the business cycle or varying to the business cycle.
e. Turn-around: The shares of those big companies whose performance were very bad in the past but a sudden turn around takes place and they started performing very good.
f. Asset Plays: these shares generally do not have recognition instead of having a large asset base.
2. Preference Shares: It has the qualities of both equity shares and debentures. As in case of debentures, fixed rate of dividends is paid to the preference shareholder, despite the profits earned by the company it is liable to pay interest to the preference shareholders.
Types of Preference Shares:
a. Cumulative and Non-cumulative Shares: Let us say that a company was not doing well for 4 years but suddenly in the 5th year it started performing well. Then, the persons having cumulative shares will get the interest of past 5 years but the persons having non-cumulative shares will get only the interest of the 5th year.
b. Redeemable and Non-redeemable: Redeemable shares could be matured during the lifetime of the company or before the company closes down , they have a maturity period but the non-redeemable shares mature only after closing down of the company.
c. Convertible and Non-convertible: Shares that could be converted into other kinds of shares and security say equity shares or debentures is known as convertible shares and if they are not convertible on their maturity they are known as non-convertible shares.
d. Participating and Non-participating: In case of winding up of the company, the debenture holders were paid up first, then the preference shareholders and then the equity shareholders were paid up, after this if any surplus amount is left, it is distributed equally to equity shareholders and participating shareholders if investors have participating preference.
These are also the capital market instruments which are used to raise the medium and long term capital funds in the public. These are the debt instruments which acknowledges a loan to the company and is executed under the common seal of the company and the deed shows the amount of loan and date of repayment.
Types of debentures:
1. On point of view of record:
a. Registered debentures: These debentures are registered with the company and the amount is payable only to those debentures holders whose names are registered with the company.
b. Bearer debentures: These debentures are not registered with the company, these are transferable merely by delivery and the debenture holder will get the interest.
2. On the basis of security:
a. Secured or mortgaged debentures: These are secured by a charge on the assets of a company. The principle amount and the unpaid interest could be recovered by the holder out of the assets mortgaged by the company.
b. Unsecured debentures: They do not get any security in reference to principal amount or unpaid interest. They are simple debentures.
3. On the basis of Redemption:
a. Redeemable Debentures: They are issued for a fixed period and the principle amount is paid off only at the expiry of that period or at the maturity.
b. Non-redeemable debentures: They are matured only after the liquidation or closing down or winding up of the company.
4. On the basis of convertibility:
a. Convertible debentures: These can be converted to shares after the expiry of the period i.e; on their maturity.
b. Non –Convertible debentures: These cannot be converted to shares on their maturity.
5. On the basis of priority:
a. First debentures: These are redeemed before other debentures.
b. Second debentures: These are redeemed after the redemption of the first debenture.
Authored by: Vaibhav Luthra, Faculty of Law, Delhi University