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CHAPTER 2 Flashcards

1
Q

Sources of Owned Capital are:

A

Shares
Retained Earnings

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2
Q

What is Authorised Capital

A

Promoters determine the share capital required for a company, which is known as authorized capital. This amount is specified in the Capital clause of the company’s Memorandum of Association.

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3
Q

Define Shares:

A

The term share is defined by the Companies Act 2013 ‘Share means a share, in the share capital of a company and includes stock’.

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4
Q

Meaning of Shares

A

A share is a unit of a company’s capital. The total capital is divided into small parts called shares, each with a face value. Shares allow the public to subscribe to the capital in smaller amounts. Anyone can buy any number of shares and becomes a shareholder or member of the company.

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5
Q

Features of Shares:

A

Meaning
Ownership
Distinctive Number
Evidence of Title
Value of a Share
Income
Transferability
Property of Shareholders
Kinds of shares

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6
Q

Define Equity Shares

A

Companies Act 2013 defines equity shares as ‘ those shares which are not preference shares’.
This definition reveals that:
a) Equity shares do not enjoy preference for dividend
b) Equity shares do not get priority for repayment of Capital during the winding up of the company.

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7
Q

Notes on Equity Shares.

A

Ownership and Risk: Equity shareholders own the company and bear the ultimate risk associated with ownership.

Residual Claimants: After paying all other investors, remaining funds belong to equity shareholders, making them residual claimants of income and assets.

Dividend Variability: Equity shareholders do not have a fixed dividend commitment; dividends depend on the company’s profits.

Management Participation: Equity shareholders participate in company management by voting in general meetings and electing representatives.

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8
Q

Features of Equity Shares

A
  1. Permanent Capital
  2. Fluctuating Dividend
  3. Rights (Vote, Share in Profit, Inspect Books, Transfer Shares)
  4. No Preferential Rights
  5. Controlling Power
  6. Risk
  7. Residual Claimants
  8. No charge on assets
  9. Bonus Issue
  10. Rights Issue
  11. Face Value
  12. Market Value
  13. Capital Appreciation
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9
Q

Equity shares with normal voting rights:

A

in proportion to his share holdings

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10
Q

Equity Shares with Differential Voting Right:

A

Varying rights regarding dividend, voting or otherwise in accordance with Rule 4 of Companies (Share Capital and Debentures) Rules 2014.

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11
Q

Meaning of Preference Shares:

A

As the name suggests, these shares have preferential rights distinct from equity shares.The shares which carry the following preferential rights are termed as preference shares:
a) A preferential right to payment of dividend during the life time of the company.
b) A preferential right as to the return of capital in the event of winding up of company.

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12
Q

Features of Preference shares:

A
  1. Preference for Dividend
  2. Preference for repayment of capital
  3. Fixed Return
  4. Nature of Capital
  5. Market Value
  6. Voting Rights
  7. Risk
  8. Face Value
  9. Rights or Bonus Issue
  10. Nature of Investor
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13
Q

Cumulative Preference Shares

A

Cumulative Preference Shares are shares on which dividends accumulate until fully paid. If dividends are not paid in one or more years due to inadequate profits, the unpaid dividend accrues. When the company performs well, the accumulated dividend is paid, and arrears are settled before making payments to equity shareholders. Usually, preference shares are cumulative unless otherwise stated in the Articles of Association.

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14
Q

Non-cumulative Preference Shares:

A

Dividend on these shares does not get accumulated. This means that dividend on shares can only be paid out of profits of that year. The right to claim dividend lapses if company does not make profit that particular year. If dividend is not paid in a year, it is lost forever.

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15
Q

Participating Preference Shares

A

The holders of these shares are entitled to participate in surplus profit besides preferential dividend. The surplus profit which remains after the dividend is paid to equity shareholders, up to a certain limit is distributed to preference shareholders.

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16
Q

Non-participating Preference Shares:

A

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 dividend, prescribed at the time of issue.

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17
Q

Convertible Preference Shares:

A

The holders of these shares have a right to convert their preference shares to equity shares. The conversion takes place within a certain fixed period.

18
Q

Non-convertible Preference Shares:

A

These shares cannot be converted into equity shares.

19
Q

Redeemable Preference Shares:

A

Shares which can be redeemed after a certain fixed time period 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.

20
Q

Irredeemable Preference Shares:

A

Preference shares that are not redeemable, i.e. payable only at the time of winding up of the company are Irredeemable preference shares. As per Section 55(1) of the Companies Act, 2013, a company cannot issue such shares.

21
Q

Definition of Retained Earnings

A

The process of accumulating corporate profits and their utilisation in business is called retained earnings.

22
Q

Retained Earnings Meaning:

A

Retained earnings refer to the portion of net profit that a company keeps aside instead of distributing it as dividends to shareholders. These earnings are accumulated over time and reinvested in the business, forming a reserve fund. Companies can convert these reserves into permanent share capital by issuing bonus shares, which are given free of cost to existing shareholders. This method, known as ploughing back of profit, is a simple and cost-effective way for established companies to raise long-term capital internally.

23
Q

Determinants of Retained Earnings:

A
  1. Total Profits of the Company
  2. Taxation Policy
  3. Dividend Policy
  4. Government Policy
24
Q

Definition of Debenture by Topham:

A

A Debenture is a document given by a company as evidence of debt, to the holder, usually arising out of loan and most commonly secured by a charge.

25
Q

Who has the Authority to issue debentures?

A

According to the Companies Act 2013, Section 179 (3), the board of directors have the power to issue Debentures.

26
Q

Features of Debentures:

A
  1. Promise
  2. Face Value
  3. Time of Repayment
  4. Priority of Repayment
  5. Assurance of Repayment
  6. Interest
  7. Parties to Debentures
  8. Authority to Issue debentures
  9. Status of Debenture holder
  10. No voting right
  11. Security
  12. Issuers
  13. Listing
  14. Transferability
27
Q

Secured Debentures:

A

Debentures can be secured by creating a charge on the company’s assets. 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.

28
Q

Unsecured Debentures:

A

These are the debentures that have no security. The issue of unsecured debentures is permitted by the Companies Act 2013.

29
Q

Registered Debenture:

A

Registered Debentures are those Debentures on which the name of the holders are recorded. A company maintains ‘Register of Debenture holders’ in which the name, address and particulars of holdings of debenture holders are entered. The transfer of a registered debenture requires the execution of a regular transfer deed.

30
Q

Bearer debentures:

A

Name of holders are not recorded on the bearer debentures. Their names do not appear on the Register of debenture holders. Such debentures are transferable by mere delivery. Payment of interest is made by means of coupons attached to debenture certificate.

31
Q

Redeemable Debentures:

A

Debentures are mostly repayable i.e. they are 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.

31
Q

Irredeemable Debentures:

A

These kinds of debentures are not repayable during the lifetime of the company. They are only repayable at the liquidation of the company, or incase of breach of contract or arising of a contingency.

32
Q

Convertible Debentures:

A

These allow holders to convert their debentures into equity shares after a specified time period, as stated in the Debenture Certificate. Issuance requires special resolution approval in a general meeting. Holders benefit from obtaining equity shares at a rate lower than market value.

33
Q

Non - Convertible Debentures:

A

Non - Convertible Debentures are not convertible into equity shares on maturity. These debentures suffer from the disadvantage that there is no appreciation in value.

34
Q

Public Deposits:(Points)

A
  1. Public Deposits finance a company’s short-term needs, ranging from 6 to 36 months.
  2. Companies invite general public to deposit their savings, offering interest on investment in return.
  3. A deposit receipt is issued to the depositor detailing terms and acknowledgement of debt/loan to the company.
  4. Deposits can be either secured or unsecured loans to the company.
35
Q

Public Deposits: (Meaning)

A

As per Section 2 (31) of Companies Act 2013, ‘Deposit’ includes any receipt of money by way of deposit or loan in any other form by way of deposit or loan in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

36
Q

Public Deposits (Companies Rule 2014)

A

According to Rule 2(1)(c) of Companies (Acceptance of Deposits) Rule 2014,’deposit’ means any receipt in the form of deposit or loan by a company. However, ‘Deposit’ does not include the following:
1. Any amount received from Central Government or a State Government.
2. Any amount received as loan from any banking company.
3. Any amount received from foreign government or international banks.
4. Any amount received by a company from any other company.
5. Any amount raised by issuing commercial paper.
6. Any amount raised by issue of bonds.
7. Any amount received in trust.
8. Any amount received by way of subscription to any shares or debentures.

37
Q

Definition of Bond by Webster Dictionary:

A

‘A Bond is an interest-bearing certificate issued by the Government or business firm, promising to pay the holder a specified sum at a specified date.’

38
Q

Bonds: (Points)

A
  1. A bond is a debt security, a formal contract to repay borrowed money with interest.
  2. The bondholder is a lender to the institution and a creditor of the company, receiving a fixed interest rate.
  3. Bonds have a maturity date, with repayment in cash on a specified future date.
  4. Companies issue bonds as evidence of debt, with interest payable at fixed intervals or on maturity.
39
Q

Features of Bonds:

A
  1. Nature of Finance
  2. Status of Bondholders
  3. Return on bonds
  4. Repayment

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