Chapter Five

CAPITAL AND FINANCING COMPANIES

Outcome:

1. Describe the process of raising capital and

capital maintenance

Course: Business Law

Course Code:BSBL4211
Specialization: Common
 Classifications of Capital:

 Public Finance (Capital):

deals with the requirements, receipts and
disbursements of funds in the government institutions.
 Private Finance (Capital):
concerned with requirements, receipts and
disbursements of funds in case of an individual, profit
seeking business organizations like general
partnership, limited partnership and limited liability
company (LLC)

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The required capital for a business can be
classified under two categories; they are:
 Fixed Capital :

required to create production facilities through

purchases of fixed assets.

such as plant, machinery, land, building, furniture

etc.

 Working Capital:

needed for short term purposes for the purposes for

the purchase of raw material, payments of wages
and other day – to – day expenses etc
Sources of finance :
1. According to period :

Short Term Source: Bank Credit, Customer Advances, Trade Credit and Commercial Papers

Medium Term Source: Issues of Preference Share, Debentures, Bank Loan and Fixed
Deposit.

Long Term Source: Issue of Share, Loans from specialized Financial Institutions and
Debenture
2. According to Ownership:
Owned Capital: Share Capital, Retained Earnings, Profits and Surplus.
Borrowed Capital: Debentures, Bonds, Public Deposits and Loans
Share Capital: The unit of ownership of a company is usually termed as "Share" with a
single unit represented by equity in the form of company's capital structure.
 The persons who owns the share is known
as "Shareholders"
 The distribution of shares in a company
indicates the distribution of ownership in
the company.
 The share value of a company or the
investment is based on the price at which
a share is sold in the market.
 The share price is a basic measure used
to identify the company’s worth in terms
of market value.
Corporations issues stocks/shares to raise the money
for capital and meeting operating expenses such as
purchase of plant and equipment, inventories,
advertising expenses, etc.
The types of stocks/shares corporations issue are:
1. Common Stocks/Shares
2. Preferred Stocks/ Share
Common stock or shares, also referred to as ordinary shares, represent the
final residual interest in a company’s assets after all other claims, including
other equity interests, have been satisfied.
These shares represent the greatest level of risk to an investor should the
company fail, as all other claims against the company’s assets would need to
be paid first.
On the other hand, these shares also represent potentially the greatest
rewards, as all the profits not otherwise allocated to debt and equity holders
would belong to the common shareholders.
Preferred stocks, also known as preference shares, have special rights and
privileges over the common stock in terms payment of dividend at fixed rate
prior to common stock.

• The other privilege the preferred shareholders is that they have the rank
ahead of the common shareholders in the priority of payment in the event
of liquidation of company, but they would still be subordinated to the
debt holders (bonds).
• The preferred shareholders do not have voting right in company’s
management and they are not considered in residual interest.
Equity Shares and Preference Shares

Basis of Equity Shares Preference Shares

Distinction
Rate of May vary depending on the Paid at fixed rate
Dividend profits
Arrears of No Accumulation Get Accumulated for
Dividend Cumulative Preference Shares
Preferential After Before Equity Shares
Rights
Winding Up Only paid when preference Have right to return of capital
share capital is paid fully before equity shares, which
means Safer.
Voting Rights Voting Rights No Voting Rights

Management Have rights to participate No rights to participate

Participation
Bonds Payable:
Bonds Payable is one of the sources of long-term financing especially when
amount to be borrowed is significant. corporations use bonds with formal
promise to pay interest usually every six months (semiannually) and to pay the
principal sum or face value on specified maturity date.

Types of Bonds Payable:

There are many types of bonds with different features for sale in the
marketplace. Some of the more common ones are listed below:
i) Registered Bonds
ii) Coupon or Bearer Bonds
iii) Term or Serial Bonds
iv) Secured or Unsecured Bonds
v) Callable or Convertible Bonds
 Types of Bonds

• Registered bonds: Such bonds are registered in the investor’s name. If

the bond is sold, the certificate is cancelled and a new one is issued.

• Coupon or bearer bonds: The bond is not registered in the investor’s

name, so whoever holds the bond will receive the interest and face
value at maturity.

• Term or serial bonds: Bonds that mature on a single date are term
bonds, while those that mature in installments are serial bonds.
Secured and unsecured bonds: Secured bonds have security or
collateral that was assigned to the issue. For example, mortgage bonds
are secured by claims against real estate. If the issuer defaults on
payments, the security can be seized through a court order and used
to satisfy the amounts owed to the bondholders. Debentures are
bonds that are not secured and are often issued by school boards and
municipalities.
Callable or convertible bonds: Callable bonds give the issuer the right
to call and retire the bonds before maturity. Convertible bonds allow
the holder to convert the bonds into capital such as the common
shares in the company. Convertible debt gives rise to some interesting
accounting challenges in terms of the embedded debt and equity
characteristics for these types of securities
 Debenture:

 The debentures are also a type of debt instrument, which is

not secured by physical assets.
 backed only by the creditworthiness and reputation of the
issuer.
 In case, the companies needs to raise their capital they will
issue this type of bonds to secure capital.
 debentures are documented in an indenture.
Debentures and Shares :

Shares Debentures

Shares is a part of owned capital Debentures is an acknowledgement of a

Debt

Shareholders are paid dividend Debentures holders are paid interest

Rate of Dividend depends upon divisible Fixed rate of interest is paid on

profits and policy of the directors debentures irrespective of profit or loss

Shareholders have voting rights. They Debenture holders are only creditors.
have control over the company They have no say in the company
 Securities and Bonds

 A company may in consideration of the amounts borrowed by it, issue tradable securities or
bonds pursuant to the provisions of the Capital Market Law and the rules specified by the
Regulations.

 The articles of association of the company may contain a provision prohibiting the
issuance of securities or bonds or limiting the power of the company to issue them.

 A security or bond shall not be divisible nor shall it be owned jointly by more than one
person except in the case of inheritance.
 Securities and Bonds

 A company shall observe the provisions relating to the increase of share capital when it
issues securities or bonds which will automatically be converted to shares on the due date
of their maturity or are capable of conversion.

 If the terms of issue include capability of conversion of the securities or bonds to shares,
they shall not be converted before the lapse of at least two (2) years of the date of their
issuance and the holders of the securities or the bondholders,

 After the lapse of such period, shall have the option to accept their conversion to shares
or to recover their value.
 Securities and Bonds

 All securities or bonds of each issue shall enjoy equal rights, The most important of
these rights are:
1. The right to recover their value from the funds of the company
2. The right to attend the general meeting of holders of securities or bondholders and to
inspect the financial statements and obtain a copy thereof
3. The right to convene a general meeting of holders of securities or bondholders
especially pursuant to a request of ten percent (10%) of holders of securities or
bondholders for consideration of the financial statements and matters
4. The right to peruse the minutes of the general meetings of the company.
 Securities and Bonds
 The meeting of the general meeting of holders of securities or bondholders shall not be
valid unless such general meeting is attended, in person or by proxy, by a number of
holders of securities or bondholders representing at least two-thirds of the securities or
bonds of the issue, failing which a second general meeting shall be convened.

 The second general meeting shall be valid if it is attended by a number representing

one third of the holders of securities or bondholders, provided that such second general
meeting shall be held within thirty (30) days of the date of the first general meeting.

A proxy for attending the meeting of such general meeting must be made in writing
failing which it will not be valid.
Contribution to Capital and Division of Profit & Losses

 Contribution to share capital shall be in the form of money, contributions in

kind consisting of personal or real property , property rights or services or
labor,

 The value of all the contributions to the share capital of the company shall be
specified in terms of money in its Constitutive Documents.

 If the contribution in kind of one of the partners or shareholders has been

overvalued, such partner or shareholder must pay to the company the difference
in cash.
 Contribution to Capital and Division of Profit & Losses

 Distribution of the profits and losses shall be in the proportion of the contribution
to the share capital unless the Constitutive Documents provide otherwise.
 Any provision which deprives a partner or a shareholder from participation in the
profits or exempts him/her from losses shall be null and void.
 Any partners in a commercial company shall not without prior approval of all
partners, perform to their benefit or to the benefit of third parties businesses
similar to those of the company. (Partners in joint ventures and shareholders in
joint stock companies shall be exempt from this restriction.)
 Questions:
Multiple Choice

2. Mr. Mohamad, Mr. Zakriya, and Mr. Qais

From the following details, identify which one is are interested in starting a Joint Stock
considered to be medium term source of finance:
Company together. Under the above
circumstances, which of the following ways
a)Issues of Preference Share
can they contribute their capital?
b)Issues of Debentures
a.Cash or Kind
c)Bank Loan
b.Personal Property
d)All the Above.
c.Option (a) and (b)
d.Service of Partners.

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Questions:

3. Identify the listing requirements for a 4. When the bondholder becomes a shareholder?
Joint Stock Company in a third market?
a.If the company earns a high profit
a) Closed Joint Stock Company.
b)Joint Stock Companies & b.If the company pays high interest to bondholders
Shareholders’ equity is not less than 50 c.If the company declares a dividend to
% of paid up capital. shareholders
c) Public Joint Stock Companies and
d.If the company converts the bonds after the
investment funds fail to satisfy regular maturity date
market
d)All of the Above.

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 Short Answer Questions:
1. Name the different sources of finance
2. Write any four differences between Debentures and Shares?
3. What is meant by under subscription and over subscription of shares?
Long Answer Questions:
1. Explain in detail about the various difference between Equity Shares and
Preference Shares
Case Lets:
1. Mr. Adil with his other friends started a Joint Stock Company called Al Miami
Company (SAOG) at Barka.
a) What must be the capital requirement for starting a Joint Stock Company?
b) How can Mr. Adil and friends contribute to their capital?

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 Reference
ROYAL DECREE No.18/2019 PROMULGATING THE COMMERCIAL
COMPANIES LAW
CONTACT INFORMATION:

Name of the Staff : Mutahar Hussain Kazim

Office: BS201
Email: mutahar@act.edu.om

VERSION HISTORY

Version No Date Approved Changes incorporated

01 Sem. (I) 2022/2023

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