Equity shares represent ownership in a company and provide shareholders voting rights and claim to residual assets. They are a permanent capital source as they have no maturity date. Preference shares have fixed dividends and preference over equity shares but do not provide voting rights or claim to residual assets. Debentures are a type of loan that pays fixed interest and must be repaid by a specified maturity date. Term loans are long-term loans directly from banks or financial institutions, often secured by company assets.

2. EQUITY SHARES
 Equity shares also known as Ordinary shares.
 Equity shares represent the ownership position in a
company. The shareholders of equity shares are the
legal owner of the company.
 Equity shares are the source of the permanent capital
since they do not have a maturity date.
 shareholders are entitled for dividend.
 The amount or rate of dividend is not fixed: the
company’s board of directors decides it.
 An ordinary share is known as variable income
security

3.  Authorized Share Capital represents the maximum
amount of capital, which a company can raise from
shareholders. The portion of the authorized share
capital, which has been offered to shareholders, is called
Issued Share Capital.
 Subscribed Share Capital represents that part of the
issued share capital, which has been accepted by
shareholders. The amount of subscribed share capital
actually paid up by shareholders to the company is
called Paid-Up Share Capital.
 The company’s earnings, which have not been
distributed to shareholders and have been retained in
the business, are called Reserves and Surplus.

4. Features of Equity Shares
1. Maturity:
 Equity shares provide permanent capital to the
company and cannot be redeemed during the life time
of the company
2. Claims on Income:
 Equity shareholders have a residual claim on the
income of a company. They have a claim on income
left after paying dividend to preference shareholders.

5. 3. Claim on Assets:
 Ordinary shareholders have a residual claim on
the company’s assets in the case of liquidation.
4. Right to control:
 Ordinary shareholders have the legal power to
elect directors on the board. Ordinary
shareholders are able to control management
of the company through their voting rights and
right to maintain proportionate ownership.

6. 5. Voting rights:
 Ordinary shareholders are required to vote for
election of directors and change in the
memorandum of association.
 An ordinary share holder has votes equal to the
number of shares held by him.
 Shareholders may vote in person or by proxy. A
proxy gives a designated person right to vote on
behalf of a shareholder at the company’s
annual general meeting.

7. 6. Pre-emptive Right:
 The law grants shareholders the right to
purchase new shares in the same proportion as
their current ownership.
7. Limited Liability:
 Ordinary shareholders are the true owners of
the company, but their liability is limited to the
amount of their investment in shares.

8. Advantages of equity shares
 Advantages to company:
1. Long-term and Permanent Capital
2. No Fixed Burden on the company's resources
3. Credit worthiness
4. Risk Capital
5. Dividend Policy

9.  Advantages to Investors:
1. More Income
2. Right to Participate in the Control and Management
3. Capital profits
4. An Attraction of Persons having Limited Income

10. Disadvantages of equity shares
 Disadvantages to company
1. Dilution in control
2. Trading on equity not possible
3. Over-capitalization
4. No flexibility in capital structure
5. High cost
6. Speculation

11.  Disadvantages to investors
1. Uncertain and Irregular Income
2. Capital loss During Depression Period
3. Loss on Liquidation

12. RIGHT ISSUE OF EQUITY SHARES
 A rights issue is a way in which a company can sell new
shares in order to raise capital. The law in India
requires that the new ordinary shares must be first
issued to the existing share holder.

13. Advantages of Right Issue
1. It gives existing shareholders securities called
"rights", which give the shareholders the right to
purchase new shares at a discount to the market
price.
2. Issue involves less flotation cost as the company can
avoid the underwriting commission.
3. In the case of profitable companies, the issue is more
likely to be successful since the subscription price is
set much below the current market price.

14. Disadvantages
 Share holders who fail to exercise their rights may lose
in terms of decline in their wealth.
 The value of each share will be diluted as a result of
the increased number of shares issued.
 Another disadvantage is for those companies whose
share holding is concentrated in the hands of financial
institutions, because of the conversion of loan into
equity. They would prefer public issue of shares rather
than the right issue.

15. PREFERENCE SHARES
 Preference shares are a long term source of finance for
a company.
 They are neither completely similar to equity nor
equivalent to debt.
 The law treats them as shares but they have elements
of both equity shares and debt.
 For this reason, they are also called ‘hybrid financing
instruments’. These are also known as preferred stock,
preferred shares, or only preferred in different part of
the world.

16. Features of Preference Shares
1. Fixed Dividends
 Preference shares have fixed dividends. Also preference
dividends are not tax deductible.
2. Preference over Equity
 Preference share dividend has to be paid before any
dividend payment to ordinary equity shares & at the
time of liquidation also, these shares would be paid
before equity shares.
3. No Share in Earnings
 Preference shareholders can not claim on the residual
earnings and residual assets.

17. 4. Fixed Maturity
 Like debt, preference shares also have fixed maturity
date.
5. Cumulative dividend
 It requires that all past unpaid preference dividend be
paid before any ordinary dividends are paid.
6. Dividend from PAT
 Preference share dividend is paid out of the profits left
after all expenses and even taxes.

18. Advantages of Preference Shares
Advantages from Company point of view
1. Fixed Return
2. No Voting Right
3. Flexibility in Capital Structure
4. No Charge on Assets
5. Widens Capital Market

19. Advantages from Investors point of view:
1. Regular Fixed Income
2. Preferential Rights
3. Voting Right for Safety of Interest
4. Lesser Capital Losses
5. Fair Security

20. Disadvantages of Preference Shares
Disadvantages for companies
1. Higher Rate of Dividend
2. Financial Burden
3. Dilution of Claim over Assets
4. Adverse effect on credit-worthiness
5. Tax disadvantage

21. Disadvantages for Investors
1. No Voting Right
2. Fixed Income
3. No claim over surplus
4. No Guarantee of Assets

22. Classification of Preference Share
1.Cumulative and Non-cumulative Preference
shares
 In the case of Cumulative preference shares, dividend
in arrears for the years in which company earned no
profits or insufficient profits receives the dividend in
the year in which company earns profits.
 But, If company does not have any profits in a year, no
dividend will be paid to non-cumulative preference
shareholders.

23. 2. Redeemable and Irredeemable Preference Shares
 Redeemable preference shares can be redeemed on or
after a fixed period after giving a proper notice of
redemption to preference shareholders. while
Irredeemable preference shares are those shares which
cannot be redeemed during the lifetime of the
company.
3.Convertible and Non-convertible preference shares
 Preference shareholders are given a right to covert their
holding into ordinary shares such shares are known as
convertible preference shares. The holders of non-
convertible preference shares have no such right of
conversion.

24. 4. Participating and Non-participating Preference
Shares
 The holders of participating preference shares have a
right to participate in the surplus profits of the
company remained after paying dividend to the
ordinary & preference shareholders at a fixed rate. The
preference shares which do not have such right to
participate in surplus profits, are known as non-
participating preference shares.

25. DEBENTURES
 A debenture or a bond is long-term promissory
note for raising loan capital. The firm promises to
pay interest and principal as stipulated.
 The purchaser of debenture is called lender or
debenture-holder.
 Although the money raised by the debentures
becomes a part of the company's capital structure,
it does not become share capital.

26.  Features of Debentures
1. Interest rate:
 The interest rate on a debenture is fixed and
known.
 Debenture interest is tax deductible.
2. Maturity:
 Debentures are issued for a specific period of
time.
3. Redemption:
 Debentures are mostly redeemable, they are
generally redeemed on maturity.

27. 4. Sinking fund:
 A sinking fund is cash set aside periodically for
retiring debentures.
 Periodic retirement of debt through sinking fund
reduces the amount required to redeem the
remaining debt at maturity.
5. Buy-back (call) provision:
 Buy-back provisions enable the company to
redeem debenture at a specified price before the
maturity date.
 Buy-back price may be more than par value.

28. 6. Indenture or debenture trust deed:
 An indenture is a legal agreement between the
company issuing debentures and the debenture
trustee who represents the debenture holders.
 Trustee ensures that the company will fulfill the
contractual obligations.
7. Security:
 Debentures are either secured or unsecured.
 A secured debenture is secured by a lien on the
company’s specific assets.
 When debentures are not protected by any security,
they are known as unsecured debenture.

29. 8. Yield
 The yield is related to its market price; Two types
of yield:
 The current yield on a debenture is the ratio of
the annual interest payment to the debenture’s
market price.
 The yield-to-maturity takes into account the
payments of interest and principal, over the life of
the debenture.
9. Claims on assets and income
 Debenture holders have a claim on the company’s
earning, prior to that of the shareholders.

30.  Types of Debentures
1. Non-convertible debentures (NCDs):
 NCDs are pure debentures without a feature of
conversion. They are repayable on maturity. The
investor is entitled for interest and repayment of
principal.
2. Fully-convertible debentures (FCDs):
 FCDs are converted into shares as per the terms of the
issue, with regard to the price and time of conversion.
3. Partly-convertible debenture (PCDs):
 The investor has advantages of both convertible and
non-convertible debenture blended into single
debenture.

31. Advantages of Debentures
1. Less costly
2. No ownership dilution
3. Fixed payment of interest
4. Reduced real obligation

32. Disadvantages of Debenture
1. Obligatory payments
2. Financial risk
3. Cash outflows
4. Restricted covenants

33. Term Loans:
 Term loans are obtained directly from the banks
and financial institutions for long term debt.
 They are obtained for financing large expansion.
Modernization or diversification projects.
 It has a maturity of more than one year.

34. Features:
1. Maturity:
 Financial institutions provide loan for a period of 6 to
10 years. This is the period during which the company
will not needs to make any payment.
2. direct negotiation:
 A firm negotiates term loans for project finance
directly with a bank or institutions.
3. security:
 The assets acquired using term loan funds secure
them. This is called primary security.
 If Current assets are secured then it is called secondary
security.

35. 4. Restrictive covenants:
 FI add a number of restrictive covenants on loan
from lenders.
 The borrowing firm has generally to keep the
lender informed by furnishing financial
statements and other information periodically.
The covenants may be categorized as follows:
1. Asset-related covenants
2. Liability-related covenants
3. Cash flow-related covenants
4. Control-related covenants

36. 5. Convertibility:
6.Repayment schedule:
 It specifies the time schedule for paying interest
and principal.
 It is also known as loan amortization schedule.
 It requires to repay the principal in equal
installment and pay interest on the unpaid loan.
 Thus, interest payment will decline over the years
and total loan payment will not be equal in each
period.