Share capital (or equity capital) is money supplied to the company by shareholders. The law regulates how companies are able to raise money from the public. Unlike a loan which is expected to be repaid, share capital remains the property of the company. The company does not pay interest on share capital. However, shareholders will normally have an expectation of a dividend if the company makes a profit.
Nature of capital: Debt capital is a company may borrow includes issuing debentures or entering into a company charge; Share capital is like supply.
Payment: The company is contractually bound to pay a fixed rate of interest to debenture holders regardless of the company’s performance and profitability, while the amount of dividend payable for ordinary shares, if any depending on the company’s profitability and dividend policy, is generally determined by the directors.
Repayment: Debenture holders have a right of repayment in full on maturity of the loan, while shareholders have no right to return of their capital. The claims of debenture holders as creditors take priority over shareholders for return of their investment during liquidation. Shareholders are only repaid from surplus, if any, left after the payment of creditor’s claims.
Interest/Dividends: Company normally obliged to pay interest irrespective of whether it makes a profit in Debt capital; If in Share capital, company will pay a dividend only if it has made a profit.
Voting: As a loan, debt capital does not normally carry voting rights in Debt capital. Shares regularly carry voting rights in share capital.
Taxation: The cost incurred in raising debt capital together with the interest payments for debentures will generally be tax deductible for the company, while these advantages do not extend to dividends.
Gearing (the ratio of debt capital compared with share capital): A high proportion of debt capital (the company is highly geared) can make the return to shareholders uncertain. A low proportion of debt capital (the company has a low gearing) makes return to shareholders more certain.
Case 1: Debt capital includes private loans for shareholders, bank loans and offering debentures to public. Share capital can be raised by issuing more shares by the companies to gain more funds for the businesses. There are many obligations if Numine Ltd raises fund such as disclosure obligations are required. Section 709 reveals four types of disclosure document: prospectus, a short form prospectus, an offer information statement and a profile statement. Numine Ltd needs to prepare prospectus because the amount of money to be raised is over 10 millions. The prospectus is a Numine Ltd has to follow several standards of disclosure for prospectus imposed by the Corporations Act:
S 710-General disclosure test: S 710 requires the prospectus to provide all information that investors and their professional advisers would reasonably require to make an informed assessment of the rights and liabilities attaching to securities offered, the assets and liabilities of the body, the financial position and…