SOURCES OF CAPITAL

Corporate Accounting

Submitted by- Josna Jose

IInd B.COM FT (A)
1320
 INDEX
o Introduction
o Types of shares
o Equity shares
o Features of equity shares
o Advantages and disadvantages of equity shares
o Preference shares
o Features of preference shares
o Advantages and disadvantages of preference shares
o Types of preference shares
o Difference between equity shares and preference shares
o Sub division of share capital of company
o Short notes
o Debentures
o Features of debentures
o Difference between shares and debentures
o Types of debentures
o Journal entries
o Conclusion

2
INTRODUCTION
Capital is the financial resource required by a company to carry out its operations, fund its growth,
and achieve its business objectives. The capital that a company raises can come from various
sources.

Classification of capital

Debt Capital
Equity Debt
capital capital

Equity Preference debentures loans

3
share share
TYPES OF SHARES
Equity Shares
Equity Shares also known as Common Shares represent ownership in a company. Shareholders who hold
equity shares are the true owners of the company and are entitled to the residual profits (dividends) and
assets of the company after all obligations have been met. Equity shares provide companies with a source of
permanent capital and offer investors the potential for high returns, but they come with higher risks and
uncertainty. Equity shareholders play a crucial role in the company's governance and growth, benefiting from
the company’s success and bearing the risks if the company faces challenges.

Features:
• Ownership:Equity shareholders are the owners of the company. They have a claim on the company's assets and profits, but after creditors and
preference shareholders are paid.
• Voting Rights:Equity shareholders have the right to vote at the Annual General Meeting (AGM) or Extraordinary General Meeting (EGM) on key
issues, such as the election of directors and approval of major decisions.
• Dividend:Dividends for equity shareholders are not fixed. They depend on the company's profitability. If the company performs well,
shareholders may receive high dividends, but if the company performs poorly, the dividend may be lower or even nothing at all.
• Risk and Return:shares carry a higher risk compared to preference shares or debt instruments because, in case of liquidation, equity
shareholders are the last to get paid.
• Transferability:Equity shares are generally freely transferable. This means that shareholders can sell or transfer their shares to others in the
stock market (if listed) or through private transactions.

4
 ADVANTAGES
1.Ownership and control:
Equity shareholders are the owners of the company and have voting rights. They participate in important decisions, such
as the election of directors and major policy decisions.
2.No Fixed Obligation:
The company is not required to pay a fixed dividend. If the company is not profitable, no dividend is paid to equity
shareholders. This gives the company flexibility during tough times.
3.Potential for High Returns:
Equity shareholders have the potential to earn high returns through dividends (when declared) and capital
appreciation (increase in share price). The value of equity shares can rise significantly if the company performs well.
4.Transferability:
Equity shares,especially if listed on a stock exchange, are freely transferable. Shareholders can buy or sell their shares
easily in the market, providing liquidity.
5.Long-term Investment:
Equity shares represent permanent capital for the company, and shareholders can benefit in the long run as the
company grows and becomes more profitable.
6.Limited Liability:
Shareholders' liability is limited to the amount unpaid on their shares. They are not personally liable for the company’s
debts
5
beyond their investment.
DISADVANTAGES
1.Risk of Loss
Equity shareholders bear the highest risk in case of company failure. If the company goes bankrupt or liquidates, equity
shareholders are the last to receive any payouts, after creditors and preference shareholders.
2.No Guaranteed Returns:
Unlike debt instruments or preference shares, equity shares do not offer guaranteed dividends or fixed returns. Shareholders
might not receive dividends if the company is not profitable.
3.Dilution of Control:
When a company issues additional equity shares, existing shareholders' control and ownership can get diluted. This may affect
their influence on decision-making.
4.Market Fluctuations:
The price of equity shares can be volatile, influenced by market conditions, investor sentiment, and the company’s performance.
Shareholders might face capital loss if the share price drops.
5.Dividend Uncertainty:
Dividends depend on the company’s profitability and are not guaranteed. Shareholders may face periods with no dividends if
the company faces financial difficulties.
6.Limited Voting Power (in Some Cases):
Some companies may issue different classes of shares, giving some equity shareholders more voting rights than others, leading
to limited control for certain shareholders.
6
 Preference Shares
Preference Shares also known as Preferred Stock are a type of equity share that gives shareholders
preferential treatment in certain areas over ordinary (equity) shareholders. They have priority in receiving
dividends and claim over assets in case of liquidation, but typically do not carry voting rights. Preference
shares provide a blend of characteristics from both equity shares and debt instruments. They offer fixed
income (like debt) but ownership rights (like equity) to a limited extent. They are ideal for investors looking
for steady returns with lower risk than equity shares but without the control and growth potential of common
stock.

Features:
• Priority in Dividend:Preference shareholders are entitled to receive a fixed dividend before any dividends are
paid to equity shareholders. This dividend is often expressed as a percentage of the face value of the share.
• Fixed Dividend: The dividend paid to preference shareholders is generally fixed and predetermined. Unlike equity
shares, which have variable dividends, the dividend on preference shares remains the same unless the company
defaults or chooses to skip the dividend payment.
• Preference in Liquidation:In the event of company liquidation, preference shareholders have a priority claim on the
company’s assets over equity shareholders. However, they are still subordinate to debt holders and creditors.
• No Voting Rights:Typically, preference shareholders do not have voting rights in the company’s general meetings.
They are not involved in the decision-making process, unlike equity shareholders who can vote on company matters.

7
ADVANTAGES

1.Fixed Dividend:Preference shareholders receive a fixed dividend, providing a more predictable and stable income stream
compared to equity shares. This fixed return is especially attractive for income-focused investors.
2.Priority Over Equity Shareholders:
In the event of liquidation, preference shareholders are paid before equity shareholders. This provides a level of security for
investors, as they have a priority claim on the company’s assets.
3.Cumulative Dividends:
Many preference shares are cumulative, meaning if the company skips dividends in any given year, they accumulate and
must be paid in the future before dividends can be paid to equity shareholders. This ensures that preference shareholders
don’t miss out on dividends entirely.
4.Lower Risk:
• Since preference shares provide a fixed dividend and have a priority claim in liquidation, they carry lower risk compared
to equity shares, making them an attractive option for risk-averse investors.
5.No Impact on Control:
Preference shareholders typically don’t have voting rights, so issuing preference shares does not dilute the control or
decision-making power of existing equity shareholders. The company's management retains full control.
6.Convertible into Equity Shares:
Some preference shares are convertible into equity shares after a specific time or under certain conditions. This provides the
opportunity
8
for capital appreciation if the company performs well and the value of equity shares increases.
 DISADVANTAGES

1.No Voting Rights:Preference shareholders typically do not have voting rights in the company’s general meetings. This means they
have no say in the company's decisions, such as electing directors or voting on important company policies, which limits their
influence on management.
2.Fixed Dividend: While a fixed dividend is an advantage for some, it can also be a limitation. The company is obligated to pay
a fixed dividend to preference shareholders, even if the company is facing financial difficulties. This can strain the company’s cash
flow, especially in tough times, as it cannot reduce or skip dividends without specific provisions (except in non-cumulative shares).
3.Limited Capital Appreciation:Preference shares usually do not offer the same potential for capital appreciation as equity
shares. If the company performs well and its share price rises, preference shareholders do not benefit from this price increase. They
only receive a fixed dividend and do not participate in any growth of the company beyond this.
4.Dividend Payments Are Not Guaranteed (for Non-Cumulative Shares):
In the case of non-cumulative preference shares, if the company fails to pay dividends in a particular year, shareholders have no
right to claim those unpaid dividends in the future. This makes the return less reliable compared to other fixed-income investments.
5.Priority Over Equity Shareholders, But Still After Debt Holders:
Although preference shareholders have priority over equity shareholders in case of liquidation, they are still subordinate to
creditors and debenture holders. This means they might not receive their full investment back if the company is in serious financial
trouble.
6.Limited Growth Potential:Preference shares do not participate in the company’s growth potential to the same extent as equity
shares. The investor is restricted to receiving only the fixed dividend, even if the company’s profits rise significantly.
9
 TYPES OF PREFERENCE SHARES
1.Cumulative preference share: Cumulative preference shares are a special type of shares that entitles the shareholders to
enjoy cumulative dividend payout at times when a company is not making profits. These dividends will be counted as
arrears in years when the company is not earning profit and will be paid on a cumulative basis, the next year when the
business generates profits.
2.Non-cumulative preference shares: These types of shares do not accumulate dividends in the form of arrears. In the case
of non-cumulative preference shares, the dividend payout takes place from the profits made by the company in the current
year. If there is a year in which the company doesn’t make any profit, then the shareholders are not paid any dividends for
that year and they cannot claim for dividends in any future profit year.
3.Participating preference shares: These types of shares allow the shareholders to demand a part in the surplus profit of
the company at the event of liquidation of the company after the dividends have been paid to the other shareholders.
4.Non-participating preference shares: These shares do not yield the shareholders the additional option of earning
dividends from the surplus profits earned by the company. In this case, the shareholders receive only the fixed dividend.
5.Redeemable Preference Shares: Redeemable preference shares are shares that can be repurchased or redeemed by the
issuing company at a fixed rate and date. These types of shares help the company by providing a cushion during times of
inflation.
6.Non-redeemable Preference Shares: Non-redeemable preference shares are those shares that cannot be redeemed
during the entire lifetime of the company. In other words, these shares can only be redeemed at the time of winding up of
the company.
7.Convertible Preference Shares: Convertible preference shares are a type of shares that enables the shareholders to
convert their preference shares into equity shares at a fixed rate, after the expiry of a specified period as mentioned in the
memorandum.
8.Non-convertible Preference Shares: These type of preference shares cannot be converted into equity shares. These
10
shares will only get fixed dividend payout and also enjoy preferential dividend payout during the dissolution of a company.
DIFFERENCE BETWEEN EQUITY SHARES AND PREFERENCE SHARES

Criteria Equity Shares Preference Shares

Equity shares represent ownership in the company and give shareholders voting Preference shares provide a fixed dividend and offer priority in dividend payments and liquidation,
Definition
rights. but generally do not carry voting rights.

Ownership & Equity shareholders are owners and have voting rights in company decisions, such
Preference shareholders are not considered owners and usually do not have voting rights.
Control as electing directors.

Dividend Dividends on equity shares are variable and depend on the company’s profits. Preference shares offer a fixed dividend, regardless of the company’s profits.

Priority in Equity shareholders are paid last in case of liquidation, after creditors and
Preference shareholders are paid before equity shareholders in case of liquidation.
Payment preference shareholders.

Risk High risk, as dividends are not guaranteed and depend on company performance. Lower risk compared to equity shares due to fixed dividends and priority in liquidation.

Potential for higher returns, as equity shareholders can benefit from capital gains
Return Potential Limited return potential; fixed dividends and no benefit from company growth beyond the fixed rate.
if the company performs well.

Capital Equity shareholders have the potential for capital appreciation if the company’s
No potential for capital appreciation; investors receive only the fixed dividend.
Appreciation stock value increases.

Convertibility Equity shares are not convertible into other forms of shares. Some preference shares can be converted into equity shares (convertible preference shares).

Participation in Equity shareholders benefit from any surplus profit in the form of additional
Preference shareholders receive only the fixed dividend and do not participate in additional profits.
Profit dividends.

Equity shares have no fixed maturity date; they exist as long as the company Preference shares may be either redeemable (redeemed after a set time) or irredeemable
Duration
operates. (perpetual).

Suitable for investors looking for growth and long-term investment, with potential Suitable for investors seeking stable income with lower risk, as they offer a fixed return but no
Suitability
for high returns but higher risk. participation in company growth.

11
SUB-DIVISION OF SHARE CAPITAL OF COMPANY
Share capital can be classified into categories which are as follows:
Authorised Capital:
Authorised capital is referred to as the amount that a company is entitled to issue as per the limits set by its Memorandum of
Association. The company is unable to raise any amount which is more than the share capital limit set forth in the
Memorandum of Association (MoA).The authorised capital can also be referred to as the normal or registered capital and it can
be increased or decreased as per the rules laid down in the Companies Act.There is no such rule that a company needs to use or
issue all of the available authorised share capital for public subscription. The company can issue share capital based on the
requirement, but it must not be more than the limits prescribed for the authorised share capital.
Issued Capital:
Issued capital is referred to as that part of the authorised capital that is issued to the public for subscription which includes
shares allotted to the vendors and the signatories of the company’s memorandum. The authorised capital that is not offered for
public subscription is referred to as unissued capital and it can be issued to the public at a later date.
Subscribed Capital:
It is referred to as that part of the issued capital that is actually subscribed by the public. The issued capital and subscribed
capital becomes equal when the shares issued for public subscription are subscribed fully by the public.
In the long run, subscribed capital becomes less than or equal to the issued capital. In cases where the number of shares
subscribed is less than offered, then the company will allot shares for which subscription is received, and in case it is more,
allotment becomes equal to the offer. The concept of oversubscription is not reflected in the books

12
SUB-DIVISION OF SHARE CAPITAL OF COMPANY
Called up Capital:
It is referred to as that part of the subscribed capital for which the company has asked shareholders to pay. The company can
decide to ask the shareholders to pay in full or just a part of the face value of the shares.

Paid up Capital:
It is referred to as that part of the called up capital that is actually been paid by the shareholders. Called up capital and paid up
capital will be equal when all the shareholders have paid the call amount. In an event of non-payment of a called up amount by
shareholders, it is referred to as calls in arrears.
Uncalled Capital: It is that part of the subscribed capital that hasn’t yet been called upon by the company. The company
reserves the right to collect this amount when there is a requirement for funds.

Reserve Capital:
It is that part of the uncalled capital that a company may keep as a reserve which is only used in the event of winding up of a
company. The creditors have the access to such capital in case the company is winding up.

13
 0ver Subscription
Oversubscription of shares is a situation that occurs when a company receives more applications to
purchase their shares compared to the number of shares that they have issued. It is a situation in
which buyers show so much interest in a new stock that demand exceeds supply. Before issuing new
shares, underwriters study the market to understand the number of potential investors, people who
may or may not purchase these new shares. Based on such calculations, firms issue a fixed number
of shares.When investors order more than what has been issued, it creates an oversubscription. This
situation of oversubscription of shares may affect the prices of an individual share. Thus, the issuing
house or firm is responsible for dealing with this situation. They take the necessary measures to
manage this scenario.

Under Subscription
Undersubscription occurs when the number of shares or bonds that investors want to buy is less than
the amount that the company is offering. This situation often arises in cases where the public does
not have enough confidence in the company or where market conditions are unfavorable. Under
subscription can have several implications for the company offering the shares.An under subscription
can suggest to the market that investors lack confidence in the company‚’ growth
potential.Companies may not raise the funds they were targeting, which can affect their operations
and plans for future growth.The price of the shares can drop when the company eventually goes
14
public or when they attempt to sell bonds.
 Minimum Subscription
Minimum amount required to be subscribed by the public for a company's shares to be listed on a stock
exchange.Typically 90% of the issued capital.Ensures sufficient public participation and reduces the risk
of share price manipulation.- If the minimum subscription is not met, the company must refund the
application money to investors.
Calls in arrear
Calls in Arrear is unpaid or overdue installments on shares.It occurs when a shareholder fails to pay a call
(installment) on their shares by the specified due date.Company may charge interest on the overdue amount and
take legal action to recover the debt.Shareholder's rights, such as voting and receiving dividends, may be
suspended until the arrears are paid.
Calls in advance
Calls in Advance refer to the payment of share installments before the scheduled due date. This allows shareholders
to pay ahead of time, reducing their financial burden and demonstrating commitment to the company. By making
calls in advance, shareholders can avoid interest charges and potential penalties associated with late payments.

Forfeiture of shares
Forfeiture of shares occurs when a shareholder fails to pay calls (installments) on their shares, resulting in the
cancellation of their ownership. The company may then re-issue the forfeited shares to new investors, and the
original shareholder forfeits any amount already paid. Forfeiture is a penalty for non-payment, and it allows the
company to recover losses and maintain its capital structure.
15
 Debentures
A debenture is a type of debt instrument or bond issued by a company or government to raise capital. Unlike secured loans,
debentures are typically unsecured, meaning they are not backed by specific assets. Instead, they are backed by the general
creditworthiness and reputation of the issuer. When investors purchase debentures, they are essentially lending money to the
issuer in exchange for periodic interest payments and the return of the principal amount at maturity. Debentures are often
used by companies and governments as a way to secure long-term financing without having to pledge specific assets.

Fixed Interest Rate: Debentures typically pay a fixed interest rate, also known as the coupon rate, to the debenture holders. This is paid
periodically (e.g., annually or semi-annually).
•Unsecured: Most debentures are unsecured, meaning they are not backed by any specific assets of the issuer. The repayment relies on the
issuer's general creditworthiness.
•Maturity Period: Debentures have a fixed maturity period, after which the principal amount (face value) is repaid to the debenture holders.
The maturity period can range from a few years to several decades.
•Transferability: Debentures are often transferable, meaning investors can sell or transfer them to others before maturity in secondary
markets
•Fixed Interest Rate: Debentures typically pay a fixed interest rate, also known as the coupon rate, to the debenture holders. This is paid
periodically (e.g., annually or semi-annually).
•Priority in Bankruptcy: In the event of liquidation or bankruptcy, debenture holders typically have a higher claim on the company's assets
than shareholders, but a lower claim than secured creditors.
•Voting Rights: Debenture holders typically do not have voting rights in the issuing company, as they are creditors rather than owners.
•Risk: As an unsecured instrument, debentures carry some risk, particularly if the issuer faces financial difficulties. However, they are usually
less risky than stocks because they offer a fixed income.

16
DIFFERENCE BETWEEN SHARES AND DEBENTURES

Feature Shares Debentures

Nature Ownership in the company Debt instrument, loan to the company

Dividends (variable) and capital appreciation (increase in

Returns Fixed interest payments
share price)

Risk Higher risk (value fluctuates with company performance) Lower risk (priority in liquidation)

Repayment Not repaid, shareholders can sell their shares Repaid after a set period (principal and interest)

Priority in
Last to be paid after all debts are cleared Paid before shareholders in case of liquidation
Liquidation

Control Shareholders have voting rights and influence in decisions No voting rights, no influence in company control

Example Common stock, preferred stock Corporate bonds, convertible debentures

17
 TYPES OF DEBENTURES
1.Secured Debentures: These are backed by the company’s assets (e.g., property, equipment, or other collateral). If the company
defaults, debenture holders have a claim on the assets.
2.Unsecured Debentures: These are not backed by any collateral. They are riskier than secured debentures because the
debenture holders don’t have a claim on specific assets in case of default.
3.Fixed-Rate Debentures: These debentures pay a fixed interest rate over their life. The interest amount remains the same
throughout the term.
4.Floating-Rate Debentures: The interest on these debentures is linked to a benchmark interest rate, such as LIBOR or the prime
rate. The rate may change periodically based on market conditions.
5.Zero-Coupon Debentures: These do not pay periodic interest. Instead, they are issued at a discount and redeemed at face
value. The difference between the issue price and the redemption price represents the return to the holder.
6.Redeemable Debentures: These debentures are repaid by the company at a specified future date. The company has the option
to redeem them before the maturity date, usually at a premium.
7.Irredeemable (Perpetual) Debentures: These do not have a fixed maturity date. The company does not have to repay the
principal amount and can pay interest indefinitely, unless the company decides to redeem them.
8.Convertible Debentures: These can be converted into a fixed number of shares of the company after a certain period. They
offer the debenture holder the option to convert their debt into equity.
9.Non-Convertible Debentures: These cannot be converted into equity. They are purely debt instruments, and the holder
receives fixed interest payments until maturity.
10.Bearer Debentures: These are not registered in the name of the holder, and whoever holds the physical debenture certificate
is considered the owner.
18
JOURNAL ENTRIES
Debentures issued at par:

Bank A/c dr
To debentures A/c

Debentures issued at a premium:

Bank A/c dr
To debentures A/c
To securities premium A/c

Debentures issued at a discount:

Bank A/c dr
Discount on issue of debenture A/c dr
To debentures A/c
 CONCLUSION
In conclusion, understanding the sources of capital and the different types of shares and debentures is essential for a company's financial
strategy. Equity capital and debt capital are the primary ways companies raise funds, each offering distinct advantages and risks.
Shares—whether equity or preference—play a vital role in shaping ownership and control, while debentures provide companies with a fixed-
interest financing option without affecting ownership.
By understanding the features, advantages, and limitations of shares and debentures, companies can effectively manage their capital structure to
foster growth, stability, and long-term success.
Proper management of share capital and debenture issuance is crucial for maintaining a balanced approach to financing and ensuring the
company’s financial health.

20
THANK YOU