Business Laws · The Companies Act, 2013

Share Capital and Debentures: CA Foundation Business Laws

Updated 4 October 2026

Share capital is the money a company raises by issuing shares; debentures are a loan the company takes. To solve questions, identify the instrument, then apply the rule: premium goes to the securities premium account (s.52), bonus shares need s.63 conditions, and buy-back needs s.68 limits. Finish with a conclusion.

Understand Share Capital and Debentures

A company raises money in two broad ways. It can sell ownership, which is share capital. Or it can borrow, which includes debentures. A shareholder is an owner. A debenture holder is a lender.

Share capital is of two kinds: equity and preference. Preference shareholders get a fixed dividend first and get their capital back first if the company is wound up. Equity shareholders get what remains and carry the voting power. Terms you must know at Foundation level: authorised capital (the maximum in the memorandum), issued capital (offered to the public or others), subscribed capital (the part taken up) and paid-up capital (the amount actually paid by shareholders).

Shares vs debentures. A share gives ownership, a dividend that depends on profit, and usually voting rights. A debenture gives a creditor's position, interest that is payable whether or not there is profit, and no voting rights. Debentures may be secured on assets. On winding up, debenture holders are paid before shareholders.

When a company issues shares above face value, the extra amount is a premium. Section 52 requires an amount equal to the premium received to go to a securities premium account. The Act treats this account like paid-up capital, so it can be used only for the purposes the section lists. These include issuing fully paid bonus shares, writing off preliminary expenses, writing off share or debenture issue expenses, commission or discount, providing for premium on redemption of redeemable preference shares or debentures, and buy-back under s.68.

Three special topics are tested often. Sweat equity shares (s.54) reward directors or employees for know-how or value addition. Bonus shares (s.63) are free shares issued by capitalising reserves. Buy-back (s.68) lets a company purchase its own shares or other specified securities. Each has fixed conditions. Learn them as short checklists.

Key rules to remember

Securities premium: Premium = Issue price − Face value; credited to Securities Premium Account; Section 52(1): an amount equal to the premium received must be transferred to the securities premium account.
Buy-back: size limit: Buy-back ≤ 25% of (paid-up capital + free reserves); Section 68(2)(c). For equity shares in a financial year, the 25% is applied to total paid-up equity capital of that year.
Buy-back: board-only route: Buy-back ≤ 10% of (total paid-up equity capital + free reserves) → Board resolution is enough; Section 68(2)(b) proviso. Above this, a special resolution at a general meeting is needed.
Buy-back: debt-equity test: Secured + unsecured debts after buy-back ≤ 2 × (paid-up capital + free reserves); Section 68(2)(d). The Central Government may notify a higher ratio for a class of companies.
Buy-back: timelines: Complete within 1 year of resolution; destroy shares within 7 days of completion; no new issue of same kind for 6 months; no new offer within 1 year of closure of the previous offer; file return within 30 days; Sections 68(4), (7), (8), (10) and the proviso to s.68(2). Exceptions to the 6-month bar: bonus issue and discharge of subsisting obligations such as conversion of warrants, stock options, sweat equity, or conversion of preference shares or debentures.
Bonus shares: sources: Free reserves, securities premium account or capital redemption reserve; never revaluation reserve; Section 63(1) and its proviso.
Bonus shares: conditions: Articles authorise + general meeting authorises on Board recommendation + no default on deposits or debt securities + no default on employee statutory dues + partly paid shares made fully paid + prescribed conditions; Section 63(2). Bonus shares cannot be issued in lieu of dividend (s.63(3)).
Sweat equity conditions: Special resolution + resolution states number of shares, current market price, consideration (if any) and class of directors or employees + class already issued; Section 54(1). Listed companies follow SEBI regulations; others follow prescribed rules.

How to solve Share Capital and Debentures questions

Use this method for any theory or problem-type question on share capital, debentures, premium, sweat equity, bonus shares or buy-back.

1Read the facts and name the instrument: equity share, preference share, debenture, sweat equity, bonus share or buy-back.
2State the rule in one or two plain sentences, with the section number if you are sure of it.
3List the conditions as short points. Use the checklists from the key rules above.
4Tick each condition against the facts given. Note which are met and which are broken.
5Check any numbers: the 25% limit, the 10% limit, the 2:1 debt ratio and the premium amount.
6Write the conclusion clearly, for example: the buy-back is allowed, or not allowed, and why.
7If the question asks for a difference, write it in points: nature, return, voting, repayment, security.

Quickest way: Checklist then compute

When to use it: Use when a case question gives numbers and asks whether a buy-back or bonus issue is valid.

Write the checklist heading: Authority, Source, Limit, Debt ratio, Fully paid, Timing.
Compute 25% of (paid-up capital + free reserves) and compare with the buy-back amount.
Compute 10% of (paid-up equity capital + free reserves) to decide if a Board resolution alone is enough.
Compute the debt limit as 2 × (paid-up capital + free reserves) and compare with debts after buy-back.
Write one line of conclusion. Examiners reward a clear final answer.

Common mistakes in Share Capital and Debentures

Saying debenture holders are owners of the company.
Students link any security with ownership.
Fix: Remember: shares = owners, debentures = lenders. Debenture holders get interest and usually have no voting rights.
Treating securities premium as free money the company can use anywhere.
It looks like a surplus or profit.
Fix: Section 52 treats it like paid-up capital. List only the permitted uses: bonus shares, preliminary expenses, issue expenses, redemption premium and buy-back.
Issuing bonus shares out of revaluation reserve.
Students think all reserves are alike.
Fix: The proviso to s.63(1) bars capitalising reserves created by revaluation of assets. Allowed sources are free reserves, securities premium and capital redemption reserve.
Mixing up the 25% and 10% buy-back limits.
Both are percentages of capital plus free reserves.
Fix: 25% is the maximum buy-back. 10% is only the line below which a Board resolution is enough, without a special resolution.
Forgetting that bonus shares cannot be issued in lieu of dividend.
Bonus shares feel like a reward to shareholders, similar to a dividend.
Fix: Quote s.63(3) directly. Bonus shares must come out of the permitted reserves, not replace a dividend.
Missing the time rules for buy-back.
Many small time limits look alike.
Fix: Use the memory line: 1 year to complete, 7 days to destroy, 6 months no same-kind issue, 30 days to file the return, 1 year gap between offers.

Worked examples

Example 1

Alpha Ltd has paid-up capital of ₹40,00,000 and free reserves of ₹60,00,000. It wants to buy back its shares for ₹20,00,000. Total debts after buy-back will be ₹1,50,00,000. Can it proceed, and does it need a special resolution? Assume the other conditions are met.

Show the solution

Paid-up capital plus free reserves = ₹40,00,000 + ₹60,00,000 = ₹1,00,00,000.
Size limit under s.68(2)(c): 25% of ₹1,00,00,000 = ₹25,00,000. The buy-back of ₹20,00,000 is within this limit.
Debt test under s.68(2)(d): debts must not exceed twice the paid-up capital and free reserves. Limit = 2 × (₹40,00,000 + ₹60,00,000) = ₹2,00,00,000. Debts of ₹1,50,00,000 are within this limit. Note that the section tests the ratio of debts after the buy-back, so use the debt figure after the buy-back.
Resolution: the Board-only route needs the buy-back to be 10% or less of paid-up equity capital and free reserves. Assuming all the paid-up capital is equity, 10% of ₹1,00,00,000 is ₹10,00,000. ₹20,00,000 exceeds this.
So a special resolution at a general meeting is required, and the notice must carry the explanatory statement under s.68(3).

Answer: Yes, Alpha Ltd can proceed, as the size and debt tests are met. Because the buy-back exceeds the 10% limit, it needs a special resolution at a general meeting.

Example 2

Beta Ltd issues 10,000 equity shares of ₹10 each at ₹15 per share. All money is received. Compute the securities premium and state how it may be used.

Show the solution

Premium per share = ₹15 − ₹10 = ₹5.
Total premium = 10,000 × ₹5 = ₹50,000.
Share capital credited = 10,000 × ₹10 = ₹1,00,000.
Section 52(1): ₹50,000 must be transferred to the securities premium account.
Under s.52(2), it may be used for fully paid bonus shares, writing off preliminary expenses, writing off expenses, commission or discount on issue of shares or debentures, providing for premium on redemption of redeemable preference shares or debentures, or buy-back under s.68.

Answer: Securities premium is ₹50,000, held in the securities premium account and usable only for the purposes listed in s.52.

Exam tips

Write the section number only when you are sure. A correct rule in plain words still earns marks.
For differences between shares and debentures, give at least four points in a short two-column style list: ownership, return, voting, repayment or security.
For buy-back case questions, show your calculations. Step marks are given even if the conclusion is wrong.
Learn the bonus share conditions as a six-point checklist. Questions often hide one default in the facts.
End every answer with a one-line conclusion that restates the result.

Practice questions from The Companies Act, 2013

Share Capital and Debentures: frequently asked questions

What are the types of share capital in CA Foundation?

Shares are of two kinds: equity and preference. Capital is also described as authorised, issued, subscribed and paid-up. Know the meaning of each term and how they differ.

What is the difference between shares and debentures?

A shareholder is an owner and gets a dividend that depends on profit. A debenture holder is a lender and gets interest, usually with no voting right. On winding up, debenture holders are paid before shareholders.

Who can get sweat equity shares?

A company can issue sweat equity shares to its directors or employees, of a class already issued. The issue needs a special resolution, which must state the number of shares, current market price, consideration if any, and the class of directors or employees.

Can a company buy back its own shares?

Yes, under s.68, if the conditions are met. These include authority in the articles, a Board or special resolution, a 25% size limit, a debt ratio of at most 2:1, and fully paid-up shares. Shares bought back must be destroyed within seven days of completion.

Can bonus shares be issued from revaluation reserve?

No. Section 63 bars bonus issues by capitalising reserves created by revaluation of assets. Free reserves, securities premium and capital redemption reserve are allowed.