This article is written by Abhishek Yadav, Maharaja Agrasen Institute of Management Studies, Rohini
This article basically deals with the topic of classification of corporate securities which includes the definition of securities according to the security contract act, 1956 and their various types.
WHAT IS SECURITIES?
Security, in business economics, written evidence of ownership conferring the right to receive property not currently in possession of the holder. The most common types of securities are stocks and bonds, of which there are many particular kinds designed to meet specialized needs. If we talk about kinds of securities, then there are various types of securities available other than stocks and bonds Basically Securities allude to an investment that can be unreservedly traded in the market and gives a privilege or guarantee on an asset and all future cash flows produced by that asset.
ACCORDING TO SECTION 2(H) OF SECURITIES CONTRACT (REGULATION) ACT, 1956 :
SECURITIES INCLUDE – shares, scrip’s, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
CLASSIFICATION OF SECURITIES
Securities can be divided into government securities and corporate securities on the basis of source of the issue.
CLASSIFICATION OF COMPANY SECURITIES
Organizations issue various kinds of shares to clean up assets from different investors. Before Companies Act, 1956 public companies used to give three sorts of shares, for example, Preference Shares, Ordinary Shares and Deferred Shares. The Companies Act, 1956 has restricted the kind of shares to just two-Preference share and Equity Shares.
Equity shares, otherwise called ordinary shares or common shares speak to the proprietors’ capital in an organization. The holders of these shares are the genuine proprietors of the organization. They have a command over the working of the organization. Equity shareholders are delivered a profit in the wake of paying it to the preference shareholders. The pace of profit on these shares relies on the benefits of the organization.
As the name proposes, these shares have certain preferences when contrasted with a different type of shares. These shares are given two preferences. There is a preference for the instalment of profit. At whatever point the organization has distributable benefits, the profit is first paid on preference share capital.
Different investors are delivered dividend just out of the rest of the benefits, assuming any. The second preference for these shares is the reimbursement of capital at the hour of liquidation of the organization. In the wake of paying outside loan bosses, preference share capital is returned. Equity shareholders will be covered just when preference share capital is returned.
These shares were prior given to promoters or founders for administrations rendered to the organization. These offers were known as Founders Shares since they were ordinarily given to founders. These shares rank last so far as an instalment of dividend and return of capital is concerned. Preference shares and equity shares have needed as to instalment of dividend.
These shares were by and large of a little division and the administration of the organization stayed in their grasp by temperance of their voting rights. These shareholders attempted to deal with the organization with proficiency and economy since they got dividend just finally.
NO PAR STOCK/SHARES
No par stock methods shares having no assumed worth. The capital of an organization giving such shares is partitioned into various determined shares with no particular category. The share endorsement of the organization basically expresses the number of shares held by its proprietor without referencing any presumptive worth.
The estimation of an share can be controlled by partitioning the genuine total assets of the organization with the absolute number of shares of the organization. Dividend on such shares is paid per share and not as a level of fixed ostensible estimation of shares.
SHARES WITH DIFFERENTIAL RIGHTS
“Shares with differential rights” means that shares issued with differential rights in accordance with section 86 of the Companies Act.
Section 86 of the companies Act, as amended by the Companies (Amendment) Act, 2000, provides that the new issue of the share capital of a company limited by shares basically of two kinds namely:
EQUITY SHARE CAPITAL
With voting rights,
With differential rights as to dividend, casting a ballot or in any case as per such rules and subject to such conditions as might be recommended.
PREFERENCE SHARE CAPITAL
Sub-clauses (i) and (ii) in clause (a) above were inserted by the Companies (Amendment) Act, 2000 which came into effect on 13th December 2000.
Subsequently, section 88 of the Companies Act was precluded which restricted issue of equity shares to unbalanced rights.
Nonetheless, it must be noticed that the issue of shares with differential rights as allowed by the Companies (Amendment) Act, 2000 is associated with equity shares just and not the preference shares.
The term ‘sweat equity’ signifies equity shares gave by an organization to its employees or chiefs at a markdown or for thought other than money for giving ability or making accessible rights in the idea of intellectual property rights (state, patent or copyright) or worth increments, by whatever name called.
The thought behind the issue of sweat equity is that a representative or executive works best when he has ‘feeling of belongingness’ and is plentifully remunerated.
One of the methods of rewarding him is by offering him portions of the organization at low costs, where he is working. It is named as ‘sweat equity’ as it is earned by difficult work (sweat) of employees and it is likewise alluded to as ‘sweat equity’ as employees become upbeat on the issue of such offers. The reason for sweat equity is to guarantee more dedication and support of employees.
DEBENTURES OR BONDS
An organization may raise long haul account through public borrowings. These advances are raised by the issue of debentures. A debenture is an affirmation of a debt. As per Thomas Evelyn.
“A debenture is a record under the organization’s seal which accommodates the instalment of a chief entirety and intrigue subsequently at ordinary interims, which is generally made sure about by a fixed or drifting charge on the organization’s property or undertaking and which recognizes a credit to the organization’s property or undertaking and which recognizes an advance to the organization”.
A debenture-holder is a loan boss of the organization. A fixed pace of intrigue is paid on debentures. The interest on debentures is a charge on the benefit and misfortune record of the organization. The debentures are commonly given a drifting charge over the benefits of the organization. At the point when the debentures are made sure about, they are paid on need in contrast with every single other creditor.
These are the types of securities of the government securities and corporate securities. As we have already understood that Government securities are bonds and securities given by the government towards meeting their budgetary shortages. These securities are considered as perhaps the most secure type of investment as sovereign assurances back these. Investors can purchase and offer these securities to procure capital gains and appreciate a steady premium instalment on the presumptive worth of their investment. On the other hand, the corporate securities can be as the- debentures, shares, loans from institution’s, public deposits. And all these for the purpose of making fixed capital, joint-stock organizations mobilize funds from the public in the form of ordinary or equity share or preference shares.