Business Finance – Shares, Bond and Debenture

Business financing involves the sourcing and management of fund by enterprise.

The basic instruments of financing business include:

• Shares
• Debentures
• Bonds

Shares

A Share is the individual portion of a public limited company’s capital owned by a shareholder. Shares are divided majorly into two. These are:

• Ordinary Shares
• Preference Shares

A. Ordinary Shares

Ordinary shareowners are normally owners of the business who hold the voting control of the company and the right to participate in the profit. They are considered last. They do not have fixed dividend. Their dividends are flexible depending on the performance of the company. There are Preferred Ordinary Shares, Deferred Ordinary shares and Non-voting Ordinary Shares. They are explained below:

(i) Preferred Ordinary Shares

They are shareowners who have a right to a fixed dividend that must be paid after the payment of dividends to the preference shareholders.

(ii) Deferred Ordinary Shares

They are shareowners whose rank for dividend comes after the preferred ordinary shareholders have been considered. They are entitled to profit only after ordinary and preferred ordinary shareowners have been considered.

(iii) Non-Voting Ordinary Shares

These are those whose equity does not have a vote though they are entitled to a share of the profit.

B. Preference Shares

They are those whose owners’ claim must be settled out of profit available for dividend. Also, they must be paid back their capital before any ordinary shareholder in case of winding up. Forms of preference shares are explained below:

(i) Cumulative and Non-cumulative Preference Shares

In cumulative, if the profits of the business is not sufficient to pay the fixed dividend for a particular years; the dividend will be paid from the profit made in the subsequent years; whereas the arrears of non-cumulative cannot be claimed.

(ii) Participating and Non-participating Preference Shares

In participating preference shares, the holders participate in the sharing in the balance of profits with the ordinary shareholders after received the fixed dividend whereas Non-participating preference shareholders are only entitled to their fixed rate of dividends.

(iii) Redeemable and Irredeemable Preference Shares

Redeemable shares can be acquired by ordinary shareholders while non-redeemable shares cannot be purchased by ordinary shareholders.

Differences between Preference Shareholders and Ordinary Shareholders

Difference between Shares and Stocks

1. Shares are units of capital transferable only in their totality or entirety whilestock is the mass of the capital from which any part is transferable.
2. Shares may be partly paid butstock must be paid full.
3. Shares are usually numbered whilestocks are not identified in this way.

Debenture

Debenture is a document issued by a company, acknowledging the fact that the company is liable to pay a specified amount with interest. The amount raised becomes part of the company capital structure. The debenture holder are creditors, they are outsiders and as such have no voting right in the Annual General Meeting.

Categories of Debentures

Debentures may be classified into different categories from different points of view:

A. Redemption

From the point of view of redemption, debentures can be classified as Redeemable and Irredeemable.

Redeemable debentures are those that will be repaid by the company within or at the end of the specified period while Irredeemable debentures are those that are repayable only at the time of winding up of the company.

B. Security

From the point of security, debentures can be classified into Mortgage and Naked or simple debentures.

Mortgage debentures are those that are secured. A mortgage deed is signed by the company and the representatives or trustees of the debenture-holders while Simple or naked debentures are those that carry no security in which case, debenture-holders have the position of unsecured creditors of the company.

C. Record

From the point of view of record, debentures may be classified as Registered and Bearer debentures

In the case of registered debentures, the company maintains a register of debenture- holders in which a record of the names, addresses and holdings of all the debenture-holders is maintained while bearer debentures are transferable by mere delivery because the company keeps no record of their holders.

D. Priority

From the point of view of priority, debentures can be classified into First debentures and second debentures

The debentures which have to be repaid and on which interest has to be paid in preference to other debentures are known as first debentures while second debentures is the one which will be paid and on which interest will be paid after the first debentures have been dealt with.

E. Convertibility

From the point of view of convertibility, debentures may be classified into Convertible and Non-convertible.

Convertible debentures are those debentures which are convertible into shares at the option of the debenture holders according to the terms of the issue while Non-convertible debentures do not confer any such right on the debenture-holders and hence cannot be converted into shares.

Bonds

Bond is a debt instrument in which an investor loans money to an entity (corporate or governmental that borrows the fund) for a definite period of time at a fixed interest rate. Bonds are some of the instruments used in the money and capital market to finance short and long term projects and activities. Bonds are otherwise called fixed income securities. This is because they have fixed interest rates.

The issuer will state the interest rates that will be paid and the loaned funds (principal) that are to be returned. The interest is usually paid every six months (semiannually). The bond ranges from 90 days (Treasury bill) to 30 years (government bond).