Chapter -2
Sources of Corporate Finance
Chapter : 1 Introduction to Corporate Finance
Chapter: 2 Source of Corporate Finance
Chapter: 3 Issue of Shares
Chapter: 4 Issue of Debentures
Chapter: 5 Deposits
Chapter: 6 Correspondence with Members
Chapter: 7 Correspondence with Debenture holders
Chapter: 8 Correspondence with Depositors
Chapter : 9 Depository and Interests
Chapter : 10 Dividend and Interest
Chapter: 11 Financial Markets
Chapter: 12 Stock Exchange
Q.1 A) Select the correct answer from the options given below and rewrite the statement.
1. ................. is a smallest unit in the total share capital of the company.
a) Debenture
b) Bonds
c) Share
Ans: Share
2. The benefit of Depository Receipt is ability to raise capital in ................. market.
a) National
b) Local
c) International
Ans: International
3. ................. are residual claimants against the income or assets of the company.
a) Bondholders
b) Equity Shareholders
c) Debenture Holders
Ans: b) Equity Shareholders
4. ................. participate in the management of their company.
a) Preference shareholders
b) Depositors
c) Equity shareholders
Ans: c) Equity Shareholders
5. ................. shares are issued free of cost to existing equity shareholders.
a) Bonus
b) Right
c) Equity
Ans: Bonus
6. The holder of preference share has right to receive ................. rate of divided.
a) fixed
b) fluctuating
c) lower
Ans: Fixed
7. Accumulated dividend is paid to ................. preference shares.
a) redeemable
b) cumulative
c) convertible
Ans: Cumulative
8. The holder of ................. preference shares have right to convert their shares into equity shares.
a) cumulative
b) convertible
c) redeemable
Ans: Convertible
9. Debenture holders are ................. of the company.
a) creditors
b) owners
c) suppliers
Ans: Creditors
10. ................. is paid on borrowed capital.
a) Interest
b) Discount
c) Dividend
Ans: Interest
11. Debenture Holder get fixed rate of ................. as return on their investment.
a) interest
b) dividend
c) discount
Ans: Interest
12. Convertible debentures are converted into................. after a specific period.
a) equity shares
b) deposits
c) bonds
Ans: Equity share
13. Retained earnings are ................. source of financing.
a) internal
b) external
c) additional
Ans: Internal
14. The holder of bond is ................. of the company.
a) secretary
b) owner
c) creditor
Ans: Creditors
15. Company can accept deposits from public, minimum for ................. months.
a) six
b) nine
c) twelve
Ans: a) Six
16. Company can accept deposits from public, maximum for ................. months.
a) 12
b) 24
c) 36
Ans: C) 36
17. A depository receipt traded in ................. is called American Depository receipt.
a) London
b) Japan
c) U.S.A.
Ans: C) U.S.A
B) Match the pairs.
|
Group ‘A’ |
Group ‘B’ |
|
a) Equity
Share Capital |
1) Agreement |
|
b) Debenture
Trustees |
2) Capitalisation
of Profit |
|
c) Preference
Shareholders |
3) Bold
Investor |
|
d) Debenture
Certificate |
4) Venture
Capital |
|
e) Bonus
Shares |
5) Document
of Ownership |
|
|
6) Capitalisation
of Loan |
|
|
7) Safe
Capital |
|
|
8) Instrument
of Debt |
|
|
9) Trust
Deed |
|
|
10) Cautious
Investor |
Ans:
|
Group ‘A’ |
Group ‘B’ |
|
a) Equity
Share Capital |
1) Venture Capital |
|
b) Debenture
Trustees |
2) Trust Deed |
|
c) Preference
Shareholders |
3) Cautious Investor |
|
d) Debenture
Certificate |
4) Instrument of Debt |
|
e) Bonus
Shares |
5) Capitalisation of profit |
|
|
C) Write a word or a term or a phrase which can substitute each of the following statement.
1. The ‘real masters’ of the company.
Ans: Equity Shareholders
2. A document of title of ownership of shares.
Ans: Shareholders
3. The holders of these shares are entitled to participate in the surplus profit.
Ans: Participating Preference share
4. A party through whom the company deals with debenture holder.
Ans: Debenture Trustees
5. Name the shareholders who participate in the management.
Ans: Equity Shareholders
6. The value of share which is written on the share certificate.
Ans:Face Value
7. The value of share which is determined by demand and supply forces in the share market.
Ans: Market Value
8. The policy of using undistributed profit for the business.
Ans: Retained Earning
9. It is an acknowledgement of loan issued by company to depositor.
Ans: Deposited Receipts
10. A Dollar denominated instrument traded in USA.
Ans: American Depository Receipts (ADR)
11. The Depository Receipt traded in country other than USA.
Ans: Global Depository Receipts (GDR)
12. Money raised by company from public for minimum 6 months to maximum 36 months.
Ans: Public Deposit
13. Credit extended by the suppliers with an intention to increase their sales.
Ans: Trade Credit
14. The credit facility provided to a company having current account with bank.
Ans: Overdraft
D) State whether the following statements are true or false.
1. Equity share capital is known as venture capital.
Ans: True
2. Equity shareholders enjoy fixed rate of dividend.
Ans: False
3. Equity shareholders are described as ‘shock absorber’ when company has financial crisis
Ans: True
4. Debenture holders have right to vote at general meeting of the company.
Ans: False
5. Bond holders are owners of the company.
Ans: False
6. Depository bank stores the shares on behalf of GDR holder..
Ans: True
7. Financial institutions underwrite the issue of securities.
Ans: True
8. Cash credit is given against hypothecation of goods or any security.
Ans: True
9. Trade credit is major source of long term finance.
Ans: False
E) Find the odd one.
1. Debenture, Public deposit, Retained earnings.
Ans: Retained Earning
2. Face value, Market value, Redemption value.
Ans: Redemption Value
3. Share Certificate, Debenture Certificate, ADR.
Ans: ADR
4. Trade Credit, Overdraft, Cash Credit.
Ans: Trade Credit
F) Complete the sentences.
1. The finance needed by business organization is termed as ….. .
Ans: Capital
2. The convertible preference share holders have a right to convert their shares into...........
Ans: Equity Share
3. Equity shareholders elect their representatives called .......................... .
Ans: Director
4. Bonus shares are issued as gift to .......................... .
Ans: Equity Share holders
5. The bond holders are .......................... of the company.
Ans: Creditors
6. Depository receipt traded in a country other than USA is called .......................... .
Ans: GDR
7. First Industrial policy was declared in the year .......................... .
Ans: 1948
8. When goods are delivered by supplier to customer on basis of deferred payment it is called as .................. .
Ans: Trade Credit
G) Select the correct option from the bracket:
|
Group ‘A’ |
Group ‘B’ |
|
a) Equity
Share Capital |
1) ----------- |
|
b)
--------------- |
2) Dividend
at fixed rate |
|
c) Debenture |
3) ------------ |
|
d) ------------------ |
4) Accumulated
corporate profit |
|
e) Public
Deposit |
5) --------------- |
(Fluctuating rate of dividend, Preference shares, Interest at fixed rate, Retained earnings, Short term loan.)
Ans:
|
Group ‘A’ |
Group ‘B’ |
|
a) Equity
Share Capital |
1) |
|
b) |
2) Dividend
at fixed rate |
|
c) Debenture |
3) Interest at fixed rate |
|
d) Retained earnings |
4) Accumulated
corporate profit |
|
e) Public
Deposit |
5) Short term loan |
H) Answer in one sentence.
1. What is a share ?
Ans: A share is a part of share capital of a company. It is known as ownership securities
2. What are Equity shares ?
Ans: Shares that are not preference shares are called equity shares i.e. these shares do not have preferential right for payment of dividend and repayment of capital
3. What are preference shares ?
Ans: Preferences shares are Shares that carry preferential right as to payment of : a) Dividend and b) Repayment of capital
4. What are retained earnings ?
Ans: ''The process of accumulating corporate profits and their utilization in business is called retained earnings.''
5. What is a debentures ?
Ans: A debenture is a certificate of loan taken by a company. They are also known as creditorship securities
6. What is a bond ?
Ans: ‘A bond is an interest bearing certificate issued by the government or business firm, promising to pay the holder a specific sum at a specified date.’
7. In which country can ADR be issued ?
Ans: American Depository Receipts can be issued in USA
8. In which country can GDR be issued ?
Ans: Global Depository Receipts can be issued in other then USA
9. What are convertible debentures ?
Ans: Convertible debentures give right to holder to convert them into equity shares after a specific period of time. Such right is mentioned in the debenture certificate.
10. What are cumulative preference shares ?
I) Correct the underlined word/s and rewrite the following sentences.
1. Owned capital is temporary capital.
Ans: Permanent
2. Equity shares get dividend at fixed rate.
Ans: Fluctuating
3. Preference shares get dividend at fluctuating rate.
Ans: Fixed
4. Retained earnings is an external sources of finance.
Ans: Internal
5. Debenture Holder is owner of the company.
Ans: Creditors
6. Bond is a source of short term finance.
Ans: Long term
7. Depository Receipt traded in USA is called as Global Depository Receipt.
Ans: American Depository Receipts
Q.2 Explain the following terms / concepts.
1. Borrowed Capital
Ans: (a) It is that capital which is borrowed from creditors. It is also known as debt capital.
(b) It is collected by way of issue of debentures, fixed deposits, loan from bank/financial institutions, etc.
2. Owned capital
Ans: (a) It is that capital which is contributed by shareholders.
(b) This capital is collected by issue of equity shares and preference shares.
3. Ploughing back of profit
Ans: (a) A part of net profit, which is not distributed to shareholders as dividend is retained by company in the form of ‘Reserve Fund’. Company converts it’s reserves into ‘bonus share capital’ and capitalizes it’s profit.
(b)This capitalization of profit by issue of bonus shares is known as ploughing back of profit or self financing.
4. Overdraft
Ans: (a) A company having current account with bank is allowed overdraft facility. The borrower can withdraw funds as and when needed.
(b) He is allowed to overdraw on his current account, up to the credit limit which is sanctioned by bank.
5. Trade credit
Ans: (a) Trade credit is not cash loan. It results from a credit sale of goods / services, which has to be paid at a future date after the sale takes place.
(b) In other words, when goods are delivered by supplier to a customer and the payment is made after some time, it is called as trade credit
Q.3 Study the following case / situation and express your opinion.
(1) The Balance-sheet of a Donald Company for the year 2018-19 reveals equity share capital of Rs. 25,00,000 and retained earnings of Rs. 50,00,000.
a) Is the company financially sound ?
b) Can the retained earnings be converted into capital ?
c) What type of source retained earning is ?
Ans:
i) As per the Balance sheet of Donald Company, It has sufficient equity share capital and retained earning. Thus the company has financially sound. There is no financial problem.
ii) Yes, Donald Company has sufficient amount of retained earning. Therefore, the company can be converted retained earning into capital.
iii) Retained earning is sum total of accumulated profit which are reinvested in the business. Company converts it’s reserves into ‘bonus share capital’ and capitalises it’s profit. This capitalisation of profit by issue of bonus shares is known as ploughing back of profit or self financing.
(2) Mr. Satish is a speculator. He desires to take advantage of growing market for company's product and earn handsomely.
a) According to you which type of share Mr. Satish will choose to invest ?
b) What does he receive as return on investment ?
c) State any one right which he will enjoy as a shareholder.
Ans: i) According to me, Mr. Satish should invest in Equity shares. So that he can take the overall benefit of the profits and also enjoy all the rights and can participate in the management of the company.
ii) He may receive the dividend as a return on investment. But, the dividend received by the equity shareholder is fluctuating. It depends on the profit of the company.
iii) The right which he
will enjoy as a shareholder are as follows:
a) Right to
vote: It is the basic right of equity shareholders through which they elect
directors, alters Memorandum and Articles of Association, etc.
b) Right to
share in profit: It is an important right of equity shareholders. They have the
right to share in profit when distributed as dividends.
c) Right to
inspect books: Equity shareholders have the right to inspect statutory books of
their company.
d) Right to transfer shares: Equity shareholders enjoy the right to transfer the shares as per the procedure laid down in the Articles of Association.
(3) Mr. Rohit, an individual investor, invests his own funds in the securities. He depends on investment income and does not want to take any risk. He is interested in definite rate of income and safety of principal.
a) Name the type of security that Mr. Rohit will opt for.
b) What does he receive as return on his investment ?
c) The return on investment which he receives is fixed or fluctuating ?
Ans: i) Mr. Rohit, an individual investor, invests his own funds in the securities. He depends on investment income and does not want to take any risk. So according to me, he should opt for preference shares.
ii) He will
receive the dividend as a return on investment. The dividend received by
preference shareholders is fixed. They get dividends prior to equity
shareholders.
iii) Return on investment on preference shares is always fixed, regular, and steady. But they don't have the right to participate in the management of the company. Only equity shareholder has the rights as they are the real owner of the company.
Q.4 Distinguish between the following.
1. Equity shares and Preference shares.
Ans:
|
Points |
Equity
Shares |
Preference
Shares |
|
Meaning |
Shares that
are not preference shares are called equity shares i.e. these shares do not
have preferential right for payment of dividend and repayment of capital. |
Preferences
shares are Shares that carry preferential right as to payment of : a)
Dividend and b) Repayment of capital. |
|
Rate of Dividend
|
Equity shares
are given dividend at fluctuating rate depending upon the profits of the
company. |
Preference
shareholders get dividend at fixed rate. |
|
Voting Rights |
Equity
shareholders enjoy normal voting right. They participate in the management of
their company. |
Preference
shareholder do not enjoy normal voting right. They can vote only on matters
affecting their interest. |
|
Return of
Capital |
Equity
capital can not be returned during the life time of the company. (except in
case of buy back) |
A company can
issue redeemable preference shares, which can be repaid during the life time
of the company. |
|
Nature of
Capital |
Equity
capital is known as 'Risk Capital.' |
Preference
capital is ‘Safe Capital’ with stable return. |
|
Nature of
investor |
The investors
who are ready to take risk invest in equity shares. |
The investors
who are cautious about safety of their investment, invest in preference
shares. |
|
Face value |
The face
value of equity shares is generally ` 1/- or ` 10/- it is relatively low. |
The face
value of preference shares is relatively higher i.e. ` 100/- and so on. |
|
Right and Bonus
issue |
Equity
shareholder is entitled to get bonus and right issue. |
Preference
shareholders are not eligible for bonus and right issue. |
2. Share and Debenture.
Ans:
|
Points |
Shares |
Debentures |
|
Meaning |
A share is a
part of share capital of a company. It is known as ownership securities. |
A debenture
is a certificate of loan taken by a company. They are also known as
creditorship securities. |
|
Status |
A holder of
shares is the owner of company. Therefore share capital is owned capital. |
A holder of
debenture is creditor of the company. Debenture capital is loan capital or
borrowed capital. |
|
Nature |
It is
permanent capital. It is not repaid during the life time of the company |
It is temporary
capital. Generally it is repaid after a specific period. |
|
Voting Rights |
Shareholders
being owners enjoy normal voting rights in general meeting. They participate
in the management of the company. |
Debenture holders
being creditors, do not have any voting right. They can not participate in
the management of the company. |
|
Return on
Investment |
Return on
shares is called dividend. Equity shareholders receive divided at fluctuating
rate where as preference shareholders receive divided at fixed rate. |
Return on
debenture is called interest. It is fixed at the time of issue. Interest is
paid even when company has no profit. |
|
Security |
Share capital
is unsecured capital. No security is offered to the shareholder. |
Debenture
capital being loan capital is secured by creating a charge on Company’s
property. |
|
Time of Issue |
Shares are
issued in the initial stages of the company formation. |
Debentures
are issued at a later stage, when the company has properties to offer as
security. |
|
Suitability |
Shares are
suitable for long term finance. |
Debentures
are suitable for medium term finance. |
3. Owned capital and borrowed capital.
Ans:
|
Points |
Owned
Capital |
Borrowed
Capital |
|
Meaning |
It is that
capital which is contributed by shareholders. |
It is that
capital which is borrowed from creditors. It is also known as debt capital. |
|
Sources |
This capital
is collected by issue of equity shares and preference shares |
It is
collected by way of issue of debentures, fixed deposits, loan from
bank/financial institutions, etc. |
|
Status |
The
shareholders are owners of the company |
The debt
holders are creditors of the company. |
|
Voting Rights |
The equity
shareholders enjoy normal voting right at the general meeting. |
The creditors
do not enjoy voting rights at the general meeting. |
|
Return on
Investment |
The
shareholders get dividend as income on their investment. Rate of dividend is
fluctuating in case of equity shares but fixed in case of preference shares. |
The debt
capital holders get interest as income on their investment. Interest is paid
at fixed rate. |
|
Repayment of
Capital |
The
shareholders do not enjoy priority over creditors. They are eligible for
repayment of Capital only after making payment to creditors at the time of
winding up of the company. |
The creditors
get priority over the shareholders in case of return of principal amount at
the time of winding up of the company. |
|
Change of Assets |
The
shareholders do not have any charge on the assets of the company |
The secured
debenture holders have a charge on assets of the company. |
Q.5 Answer in brief.
1. What is public deposit ?
Ans: Public deposit is an important source of financing short term requirements of company. Companies receive fixed deposits from the public for the period ranging from 6 months to 36 months. Such deposits are called as Public Deposits.
Under this method, general public is invited to deposit their savings with the company for varied period. Interest is paid by companies on such deposits. The company issues ‘Deposit Receipt’ to depositor.
The terms of deposit are mentioned in the ‘Deposit Receipt’. Deposit Receipt is an acknowledgement of debt/loan by the company. Deposits are either secured or unsecured loans offered to the company.
2. What is Global Depository Receipt ?
Ans: A Global Depository Receipt (GDR) is a financial instrument that represents shares in a foreign company and is traded on international stock exchanges. GDRs are typically issued by a foreign company, deposited with a global depository bank, and then made available for purchase by investors around the world. They are a way for foreign companies to raise capital and expand their investor base beyond their home country.
Investors who purchase GDRs effectively own a claim on the underlying shares of the foreign company, but they are trading the GDRs on international exchanges rather than the company's domestic stock market. GDRs are denominated in a currency such as U.S. dollars or euros, making them accessible to global investors without the need to deal with the foreign company's local currency or regulatory requirements.
GDRs are popular among international investors looking to diversify their portfolios by investing in foreign companies, and they provide foreign companies with access to a broader pool of potential investors and a way to raise capital in international markets.
3. What is trade credit ?
Ans: No business can be run without ‘credit’. Credit is the soul of business. Trade credit financing is major source of short term financing.
Manufacturers, wholesalers and suppliers of goods or materials are called ‘trade creditors’. They sell tangible goods to other business concerns on the basis of deferred payment i.e. future payment credit is extended by these business concerns with an intention to increase their sales. The business firm extends credit, also because of custom that has been built up overtime.
Trade credit is not cash loan. It results from a credit sale of goods / services, which has to be paid at a future date after the sale takes place. In other words, when goods are delivered by supplier to a customer and the payment is made after some time, it is called as trade credit.
4. What are the schemes for disbursement of credit by bank ?
Ans: Banks offer a variety of credit schemes for individuals and businesses. Here's a brief overview of common credit schemes:
1. Personal Loans: Unsecured loans for various personal expenses.
2.Home Loans: Financing for buying or building homes, secured by the property.
3. Auto Loans: Loans for purchasing vehicles, secured by the vehicle itself.
4.Business Loans: Funding for business purposes, such as working capital or expansion.
5.Education Loans: Financial assistance for educational expenses, often with student-friendly terms.
6.Agricultural Loans: Credit for farmers to support agriculture-related activities.
7. Credit Cards: Cards allowing purchases on credit with monthly repayments.
8. Overdraft Facilities: Allows account holders to withdraw more than their account balance, up to a limit.
9.Export-Import Finance: Financing for international trade transactions.
10. Industrial Loans: Funding for large-scale industrial projects.
11. Microfinance and Small Loans: Small loans for individuals and microenterprises.
12. Gold Loans: Loans secured by gold assets or ornaments.
13. Personal Lines of Credit: Pre-approved credit limits for flexible borrowing.
Each scheme has unique features and eligibility criteria, serving different financial needs. Borrowers should choose the one that suits their requirements and financial circumstances.
5. State the features of Bonds.
Ans: Meaning: Bond is a debt security. It is a formal contract to repay borrowed money with interest. Bond is a loan. The holder of bond is a lender to the institution. He is a creditor of the company. He gets fixed rate of interest.
Thus a company borrows money and issues bonds as an evidence of debt. Interest is payable on bonds at fixed interval or on maturity of bonds.
Features
1. Nature of Finance : It is a debt Finance. It provides long term finance. The bonds can be issued for longer period i.e. 5 years, 10 years, 25 years, 50 years.
2. Status of bondholder : The bondholders are creditors. Since they are creditors and non-owners they are not entitled to participate in general meeting. They have no voting right and hence no participation in the management.
3. Return on bonds : The bondholder gets a fixed rate of interest. It is payable at regular interval or on the maturity of bond.
4. Repayment : Bonds have specific maturity date on when the principal amount is repaid.
Q.6 Justify the following statements.
1. Equity shareholders are real owners and controllers of company.
Ans:
Justification:
a) Equity shares are ordinary shares.
These are the shares that constitute the major part of the total share of the company.
The person holding equity share is known as 'Equity Shareholder'.
b)
Equity Shareholders are the real owners of the company and bear the ultimate risk
associated with ownership.
c)
They are often described as "Real Master of the company. They enjoy control
over the company. They have voting rights and can participate in the management
of the company.
d) Thus, it is rightly justified that equity shareholders are the real owners and controllers of the company.
2. Preference shares do not carry any voting right.
Justification:
a) Preference Shares are those shares which
enjoy certain privileges and preferential rights over equity shares. The person
holding preference share is known as 'Preference Shareholder'.
b)
Preference Shareholders do not have normal voting rights like equity shares.
c)
However, they can vote on any such matter which directly affects their interest as
investors.
d) Thus, it is rightly justified that, preference shares do not carry any voting right.
3. The debentures are secured by charge on assets of the company.
Justification:
a) Secured debentures are the debentures
which are secured by some charge on the assets or property of the company.
b)
The charge may be either a fixed charge or a floating charge.
c)
In case of a fixed charge, specific assets are mortgaged as security for the
debentures.
d)
Under floating charges, the debenture holders have a claim overall assets of the
company.
e) Thus, it is rightly justified that debentures are secured by a charge on assets of
the company.
4. Retained earning is simple and cheapest method of raising finance.
Justification:
a) Retained earnings are the earnings of
the company which are retained (reinvested) in the business.
b)
The sum of those profits accumulated over years is re-invested in the business,
rather than distributing it as a dividend to shareholders.
c)
The company can utilize such reserves for financing various projects such as
expansion, diversification, etc.
d)
It is an important source of internal financing. Thus, it is also known as 'Self
Financing' or 'Ploughing Back of Profits'.
e)
Thus, it is rightly justified that, retained earnings is the simple and cheapest
method of raising finance.
5. Public deposit is good source of short term financing.
Justification:
a) Public deposits are an important source
of financing short term requirements of the company. In other words, the
company accepts public deposits for meeting short term needs.
b)
When companies generally receive deposits from the public for the period ranging
from 6 months to 36 months, it is known as 'Public Deposits'.
c) It is considered a risky investment but
investors can earn a high return on public deposits. Deposits are either
secured or unsecured loans offered by the company.
d) Thus, a public deposit is a good source of short term financing
6. Bond holder is creditor of the company.
Justification:
a) A bond is a debt security. It is a loan.
A bond is a formal contract to repay the borrowed money with interest.
b)
It is an interest bearing certificate issued by the government, semi-government,
or business firms to raise capital.
c)
The person holding such an instrument is known as a bond holder. He becomes the
creditor of the company.
d)
As a bond holder is the creditor of the company, he does not enjoy any voting
rights and cannot participate in the management of the company.
e) Thus, it is rightly justified that, the bond holder is a creditor of the company
7. Trade credit is not cash loan.
Justification:
a) Trade Credit refers to the facilities or
credit extended by the manufacturer, wholesalers, and suppliers of goods to the
purchaser but receives payment after the credit period from the date of
purchase.
b)
Manufacturer, wholesalers, and suppliers of goods or materials are called "Trade Creditors'
c)
Tradecredit is not a cash loan. It results from a credit sale of goods/services, which has to be paid at a future date after the sales take place.
d)
This practice is done by a business concern with an intention to increase its sales or turnover, generate additional business and maintain a good relationship with the purchasers.
e) Thus, it is rightly justified that,
trade credit is not a cash loan.
8. Different investors have different preferences.
Justification:
a) The investors are the persons who invest
the capital in the company. They can invest in equity share capital or
preference share capital.
b)
The investors who can take the risk, invest in equity shares. They are known as the
ultimate risk bearer.
c)
The investors who are cautious, conservative, interested in the safety of capital,
generally invest in preference shares.
d) Thus, it is rightly justified that, different investors have different preferences.
9. Equity share capital is risk capital.
Justification:
a) The person holding equity share capital
is known as 'Equity Shareholder'.
b) The dividend received by equity shareholders is fluctuating. Also, if a company
does not earn profit in a particular year then equity shareholders will not get
any dividend.
c) Hence, Equity shareholders bear the maximum risk in the company. They are described as
'Shock absorbers' when a company has a financial crisis.
d) Thus, it is rightly justified that, equity share capital is risk capital.
Q.7 Answer the following questions.
1. What is share and state it's features ?
Ans: The term share is defined by Section 2 (84) of the Companies Act 2013, ‘Share means a share in the share capital of a company and includes stock’.
Features of Shares : 1. Meaning : Share is a smallest unit in the total share capital of a company. 2. Ownership : The owner of share is called as shareholder. It shows the ownership of a shareholder in the company.
3. Distinctive Number : Unless dematerialised, each share has distinct number for identification. It is mentioned in the Share Certificate.
4. Evidence of title : A share certificate is issued by a company under it’s common seal. It is a document of title of ownership of shares. A share is not any visible thing. It is shown by share certificate or in the form of Demat share.
5. Value of a Share : Each share has a value expressed in terms of money. There may be : (a) Face value : This value is written on the share certificate and mentioned in the Memorandum of Association. (b) Issue price : It is the price at which company sells it’s shares.
(c) Market Value : This value of share is determined by demand and supply forces in the share market.
6. Rights : A share confers certain rights on its holder such as right to receive dividend, right to inspect statutory books, right to attend shareholders’ meetings and right to vote at such meetings, etc.
7. Income : A shareholder is entitled to get a share in the net profit of the company. It is called dividend. 8. Transferability : The shares of public limited company are freely transferable in the manner provided in the Articles of Association.
9. Property of Shareholder : Share is a movable property of a shareholder.
10. Kinds of Shares : A company can issue two kinds of shares : (a) Equity shares. (b) Preference shares.
2. What is an equity share ? Explain it’s features.
Ans: Equity Shares : Equity shares are also known as ordinary shares.
Features of Equity Shares :
1. Permanent Capital : Equity shares are irredeemable shares. The amount received from equity shares is not refundable by the company during its life time. Equity shares become refundable only in the event of winding up of the company or company decides to buyback shares. Thus equity share capital is long term and permanent capital of the company.
2. Fluctuating Dividend : Equity shares do not have a fixed rate of dividend. The rate of dividend depends upon amount of profit earned by company. If company earns more profit, dividend is paid at higher rate. On the other hand if there is insufficient profit or loss, Board of Directors may postpone the payment of dividend.
3. Rights : Equity Shareholders enjoy certain rights :
a) Right to vote : It is the basic right of equity shareholders through which they elect directors, alter Memorandum and Articles of Association, etc.
b) Right to share in profit : It is an important right of equity shareholders. They have right to share in profit, when distributed as dividend. If the company is successful and makes handsome profit, they have advantage of getting large dividend.
c) Right to inspect books : Equity shareholders have right to inspect statutory books of their company.
d) Right to transfer shares : The equity shareholders enjoy the right to transfer shares as per the procedure laid down in the Articles of Association.
4. No preferential right : Equity shareholders do not enjoy preferential right in respect of payment of dividend. They are paid dividend only after dividend on preference shares has been paid.
5. Controlling power : The control of company is vested with the equity shareholders. They are often described as ‘real masters’ of the company. It is because they enjoy exclusive voting rights. The Act provides the right to cast vote in proportion to share holding. They can exercise their voting right by proxies, without even attending meeting in person.
6. Risk : Equity shareholders bear maximum risk in the company. They are described as ‘shock absorbers’ when company has financial crisis.Due to this, market value of equity shares comes down resulting into capital loss. Thus equity shareholders are main risk takers.
7. Residual claimant : Equity shareholders as owners are residual claimants to all earnings after expenses, taxes, etc. are paid. A residual claim means the last claim on the earnings of company. Although equity shareholders come last, they have advantage of receiving entire earnings that is left over.
8. No charge on assets : The equity shares do not create any charge over assets of the company.
10. Right Issue : When a company needs more funds for expansion purpose and raises further capital by issue of shares, the existing equity shareholders may be given priority to get newly offered shares. This is called ‘Right Issue’. The shares are offered to equity shareholder first, in proportion to their existing shareholding.
11. Face Value : The face value of equity shares is low. It can be generally ` 10 per share or even ` 1 per share.
12. Market Value : Market value of equity shares fluctuates according to the demand and supply of these shares. The demand and supply of equity shares depend on profits earned and dividend declared. When a company earns huge profit, market value of its shares increases
3. Define preference shares. What are the different types of preference shares.
Ans: As the name indicates, these shares have certain preferential rights distinct from those attached to equity shares.
The shares which carry following preferential rights are termed as preference shares: a) A preferential right as to payment of dividend during the life time of company. b) A preferential right as to the return of capital in the event of winding up of company
1. Cumulative Preference Shares : Cumulative Preference Shares are those shares on which dividend goes on accumulating until it is fully paid. This means, if the dividend is not paid in one or more years due to inadequate profits, then this unpaid dividend gets accumulated. This accumulated dividend is paid when company performs well. The arrears of dividend are paid before making payment to equity shareholders. The preference shares are always cumulative unless otherwise stated in the Articles of Association. It means that if dividend is not paid any year, the unpaid amount is carried forward to the next year and so on, until all arrears have been paid.
2. Non-cumulative Preference Shares : Dividend on these shares does not get accumulated. This means, the dividend on shares can be paid only out of profits of that year. The right to claim dividend will lapse, if company does not make profit in that particular year. If dividend is not paid in any year, it is lost forever.
3. Participating Preference Shares : The holders of these shares are entitled to participate in surplus profit besides preferential dividend. The surplus profit which remains after the dividend has been paid to equity shareholders, up to certain limit, is distributed to preference shareholders.
4. Non-participating Preference Shares : The preference shares are deemed to be non-participating, if there is no clear provision in the Articles of Association. These shareholders are entitled to fixed rate of divided, prescribed at the time of issue.
5. Convertible Preference Shares : The holders of these shares have a right to convert their preference shares into equity shares. The conversion takes place within a certain fixed period.
6. Non-convertible Preference Shares : These shares cannot be converted into equity shares.
7. Redeemable Preference Shares : Shares which can be redeemed after certain fixed period of time are called redeemable preference shares. A company limited by shares, if authorised by Articles of Association, issues redeemable preference shares. Such shares must be fully paid. These shares are redeemed out of divisible profit only or out of fresh issue of shares made for this purpose.
8. Irredeemable Preference Shares : Shares which are not redeemable i.e. payable only on winding up of the company are called irredeemable preference shares. As per Section 55(1) of the Companies Act 2013, a company cannot issue irredeemable preference shares.
4. What are preference shares? State it’s features.
Ans: As the name indicates, these shares have certain preferential rights distinct from those attached to equity shares. The shares which carry following preferential rights are termed as preference shares: a) A preferential right as to payment of dividend during the life time of company. b) A preferential right as to the return of capital in the event of winding up of company
Features of Preference Shares :
1. Preference for dividend : Preference shares have the first charge on the distributable amount of annual net profit. The dividend is payable to preference shareholders before it is paid to equity shareholders.
2. Preference for repayment of capital : Preference shareholders have a preference over equity shareholders in respect of return of capital when the company is liquidated. It saves preference shareholders from capital losses.
3. Fixed Return : These shares carry dividend at fixed rate. The rate of dividend is pre-determined at the time of issue. It may be in the form of fixed sum or may be calculated at fixed rate. The preference shareholders are entitled to dividend which can be paid only out of profits. If the directors, in financial crisis, decide not to pay dividend, the preference shareholders have no claim for dividend.
4. Nature of Capital :Preference capital is generally raised at a later stage, when the company gets established. These shares are issued to satisfy the need for additional capital of the company. Preference share capital is safe capital as the rate of dividend and market value does not fluctuate.
5. Market Value : The market value of preference share does not change as the rate of dividend payable to them is fixed. The capital appreciation is considered to be low as compared with equity shares.
6. Voting rights : The preference shares do not have normal voting rights. They do not enjoy right of control on the affairs of the company. They have voting rights on any resolution of the company directly affecting their rights e.g. : Change in terms of repayment of capital, dividend payable to them are in arrears for last two consecutive years, etc.
7. Risk : The investors who are cautious, generally purchase preference shares. Safety of capital and steady return on investment are advantages attached with preference shares. These shares are boon for shareholders during depression period when interest rate is continuously falling.
8. Face Value : Face value of preference shares is relatively higher than equity shares. They are normally issued at a face value of Rs. 100/-.
9. Rights or Bonus Issue : Preference shareholders are not entitled for Rights or Bonus issues.
10. Nature of Investor : Preference shares attract moderate type of investors. Investors who are conservative, cautious, interested in safety of capital and who want steady return on investment generally purchase preference shares.
5. What is Debenture ? Discuss the different types of debentures.
Ans: The term debenture has come from the latin word ‘debere’ which means to ‘owe’.
Palmer defines : “A debenture as an instrument under seal evidencing debt, the essence of it being admission of indebtedness.”
1. Secured debentures : The debentures can be secured. The property of company may be charged as security for loan. The security may be for some particular asset (fixed charge) or it may be the asset in general (floating charge). The debentures are secured through ‘Trust Deed’. 2. Unsecured debentures : These are the debentures that have no security. The issue of unsecured debentures is permitted by the Companies Act, 2013.
3. Registered Debentures : Registered debentures are those debentures on which the name of holders are recorded. A company maintains ‘Register of Debentureholders’ in which the name, address and particulars of holdings of debentureholders are entered. The transfer of registered debentures requires the execution of regular transfer deed.
4. Bearer Debentures : Name of holders are not recorded on the bearer debentures. Their names do not appear on the ‘Register of Debentureholders’. Such debentures are transferable by mere delivery. Payment of interest is made by means of coupons attached to debenture certificate.
5. Redeemable Debentures : Debentures are mostly redeemable i.e. Payable at the end of some fixed period, as mentioned on the debenture certificate. Repayment can be made at fixed date at the end of specific period or by instalment during the life time of the company. The provision of repayment is normally made in ‘Trust Deed’.
6. Irredeemable Debentures : These kind of debentures are not repayable during life time of the company. They are repayable only after the liquidation of the company, or when there is breach of any condition or when some contingency arises.
7. Convertible Debentures : Convertible debentures give right to holder to convert them into equity shares after a specific period of time. Such right is mentioned in the debenture certificate. The issue of convertible debenture must be approved by special resolution in general meeting before they are issued to public. These debentures are advantageous for the holder. Because of this conversion right, convertible debentureholder is entitled to equity shares at a rate lower than market value.
8. Non-convertible Debentures : Non-convertible debentures are not convertible into equity shares on maturity. These debentures are redeemed on maturity date. These debentures suffer from the disadvantage that there is no appreciation in value.
6. Define Debenture and explain the features of debentures.
Ans: The term debenture has come from the latin word ‘debere’ which means to ‘owe’.
Palmer defines : “A debenture as an instrument under seal evidencing debt, the essence of it being admission of indebtedness.”
Features
1. Promise : Debenture is a promise by company that it owes specified sum of money to holder of the debenture.
2. Face Value : The face value of debenture normally carries high denomination. It is ` 100 or in multiples of ` 100.
3. Time of Repayment : Debentures are issued with the due date stated in the debenture certificate. The principal amount of debenture is repaid on maturity date.
4. Priority of Repayment : Debentureholders have a priority in repayment of debenture capital over the other claimants of company.
5. Assurance of Repayment : Debenture constitutes a long term debt. They carry an assurance of repayment on due date.
6. Interest : A fixed rate of interest is agreed upon and is paid periodically in case of debentures. Payment of interest is a fixed liability of the company. It must be paid by company irrespective of the fact, whether the company makes profit or not.
7. Parties to Debentures : a) Company : This is the entity which borrows money. b) Trustees : A company has to appoint Debenture Trustee if it is offering Debentures to more than 500 people. This is a party through whom the company deals with debentureholders. The company makes an agreement with trustees, it is known as Trust Deed. It contains the obligations of company, rights of debentureholders, powers of Trustee, etc. c) Debentureholders : These are the parties who provide loan and receive, ‘Debenture Certificate’ as an evidence.
8. Authority to issue debentures : According to the Companies Act 2013, Section 179 (3), the Board of Directors has the power to issue debentures.
9. Status of Debentureholder : Debentureholder is a creditor of the company. Since debenture is a loan taken by company, interest is payable on it at fixed rate, at fixed interval until the debenture is redeemed.
10. No Voting Right : According to Section 71 (2) of the Companies Act 2013, no company shall issue any debentures carrying any voting right. Debentureholders have no right to vote at general meeting of the company.
11. Security : Debentures are generally secured by fixed or floating charge on assets of the company. If a company is not in a position to make payment of interest or repayment of capital, the debentureholder can sell off charged property of the company and recover their money.
12. Issuers : Debentures can be issued by both private company and public limited company.
13. Listing : Debentures must be listed with at least one recognised stock exchange.
14. Transferability : Debentures can be easily transferred, through the instrument of transfer .
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