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‘Securities’ Under Companies Act 2013.

  • March 19, 2024
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‘Securities’ are Capital Instruments  issued by  a  Company  for fund raising .  As per section 2 (81) of the Companies  Act 2013 “securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956).

The clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 defines ‘Securities’ to include:

 (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

 (i,a) derivative;

(i,b) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

 (i,c)security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

 (i,d) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities;

(ii,a) such other instruments as may be declared by the Central Government to be securities;

and

(iii) rights or interest in securities.

1. Share

As section 2 (81) of the Companies  Act 2013 “share” means a share in the share capital of a company and includes stock.

Share may be ‘Equity Shares, or ‘ Preference Shares’.

Types of Equity Shares

(i)Equity Shares with voting rights – shares which allow each holder to participate and vote in all meetings of the company and thus, run the operations of the company.

(ii)· Equity Shares with Differential Voting Rights (“DVRs”) – shares carrying superior voting rights (i.e., multiple votes on an equity share), inferior voting rights (i.e., a fraction of the voting right on an equity share or shares with differential rights as to dividend).

(iii)Employee Stock Options (“ESOPs”) – ESOPs are benefits given to employees of a company to purchase, or to subscribe for, the shares of the company at a future date at a pre-determined price.

(iv)  Sweat Equity Shares – equity shares which are issued by a company as a reward to its employees for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called for consideration other than cash.

Types of Preference Shares

(i) Participating and non – participating preference shares – right to a fixed preferential dividend and a right to participate in surplus profits.

(ii) Cumulative and non – cumulative preference shares – right to claim dividend fixed at a sum or percentage for the past and current year out of future profits; and

(iii)  Redeemable preference shares – obligation on the company to redeem the shares after a specified limit.

2. Scrips

A scrip issue is an offer of free shares to current owners of a company’s stock or it is another name for bonus issue.

3. Stocks

A form of financial securities that represents a part-ownership in a company. Stocks are a way to own a percentage or fraction of the company that provides certain rights to the stockholder.

Stock vs Share: Key Differences

Point of Comparison

Stocks

Shares

Definition

Stocks represent part ownership of a company A stock is a financial instrument representing part ownership in single or multiple organizations.

A share is a single unit of stock. It’s a financial instrument representing the part ownership of a company.

Denomination

The value of two different stocks can be different

The value of each share of a company will be the same

Paid-up Value

Stocks are always fully paid-up

Shares may or may not be fully paid-up

Original Issue

Stocks are not a part of the original issue; shares are later converted to stocks

Shares are a part of the original issue

Types

Stocks are usually divided into two major types- common and preferred stocks. These categories can be further divided into growth, value, income, blue-chip etc.,

Shares are categorized into common shares and preference shares.

 

4. Bonds

Bonds are debt financial instruments that companies use to raise funds for their operations on a long term basis secured by physical assets.

5. Debentures

“Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not;

[Provided that—

(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and

(b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve Bank of India, issued by a company,

shall not be treated as debenture.

6. Derivative

As per section 2(33) “derivative” means the derivative as defined in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956.

clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956  says : “derivative” includes— (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities;

Note:

In Sahara India Real Estate v. Securities & Exchange Board Of India, one of the issues of the case was whether the hybrid Optionally Fully Convertible Debentures of the company fall within the definition of “securities” within the meaning of Companies Act, SEBI Act and SCRA so as to vest SEBI with the jurisdiction to investigate and adjudicate. It was held that although the OFCDs issued by the two companies are in the nature of ‘hybrid’ instruments, it does not cease to be a “Security” within the meaning of Companies Act, SEBI Act and SCRA. It says although the definition of “Securities” under section 2(h) of SCRA does not contain the term “hybrid instruments”, the definition provided in the Act is an inclusive one and covers all “Marketable securities”.