Companies which are raising funds from angel investors or through venture capital funds are in dilemma which instrument is required to be issued against the investment. The decision is taken by the investors in general to which instrument they should get against their investment. However, the promoters of the company should be aware on the rights and obligations that goes to the investors against the instruments issued. Majority of the investors prefer to have the convertible instruments such as convertible preference shares, convertible debentures, convertible notes, bonds as these instruments carry the preferential rights and also the liquidation preference.
As per the provisions of the Companies Act, 2013 the share capital of a company limited by shares will be of two kinds namely (Section 43)
Explanation for the purpose of this Section–
“Equity share capital” with reference to any company limited by shares means all share capital which is not preference share capital”
“Preference Share capital” with reference to any company limited by shares, means that part of the issued share capital of the company which carries or would carry a preferential right with respect to
“Deemed Preference capital”
Explanation three to this section is quite confusing as this explanation leads certain capital as deemed preference capital. Explanation reads as (iii) capital shall be deemed to be preference capital, notwithstanding that it is entitled to either both of the following rights, namely;-
By the explanation above it means that any instrument including equity shares having the special rights to dividend or liquidation preference such instrument shall be deemed to be preference capital.