Chapter 1.

INTRODUCTION

A company is a voluntary and autonomous association of certain persons with capital

divided into numerous transferable shares formed to carry out a particular purpose in
common. It is an artificial person created by law to achieve the object for which it is
formed. Section 2(20) of the Companies Act, 2013 defines a company as “Company
formed and registered under this Act or an existing company.” An existing company
means a company formed and registered under any of the former Companies Acts. Thus
it is an abstract person, invisible, intangible and existing only in contemplation of law. It
can hold, purchase or sell both movable and immovable property, incur and pay debts,
open a bank account in its own name and sue and be sued in the same manner as an
individual. Law creates it and law only can dissolve it. Its existence is altogether
independent of the life of its members. Members may come and go but the company
would go on forever. Transferability of shares has given perpetual succession to a
company. Death, insanity or insolvency of a member or any member will not affect the
existence of the company at all. A company is a legal entity quite distinct and separate
from the persons who are its members. A company cannot ordinarily buy its own shares.
A shareholder is not the agent of the company. He cannot incur any debt so as to bind the
company. They cannot bind the company by their acts. The same person can be a
shareholder and a creditor of the company. The ownership is divorced from management
because a joint stock company is’ managed by a Board of Directors elected by the
shareholders (i.e. owners).

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 Company

The word ‗Company‘ has no strictly technical or legal meaning Stanley, Re. It may be
described to imply an association of persons for some common object or objects. The
purposes for which people may associate themselves are multifarious and include
economic as well as non-economic objectives. But, in common parlance, the word
company is normally reserved for those associated for economic purposes i.e. to carry on
a business for gain.

Used in the aforesaid sense, the word ‗company‘, in simple terms, may be described to
mean a voluntary associations of persons who have come together for carrying on some
business and sharing the profits there from.

Indian Law provides two main types of organizations for such associations: partnership
and company. Although the word company is colloquially applied to both, the Statute
regards companies and company law as distinct from partnerships and partnership law.
Partnership law in India is codified in the Partnership Act, 1932 and is based on the law
of agency, each partner becoming an agent of the others and it, therefore, affords a
suitable framework for an association of a small body of persons having trust and
confidence in each other. A more complicated form of association, with a large and
fluctuating membership, requires a more elaborate organization which ideally should
confer corporate personality on the association, that is, should recognize that it constitutes
a distinct legal person, subject to legal duties and entitled to legal rights separate from
those of its members. This can be obtained easily and cheaply by registering an
association as a company under the Companies Act, 2013.

Definition of a Company

Section 2(20) of the 2013 Act defines the term “company” to mean “a company incorporated
under the Companies Act 2013 or any previous company law.” Accordingly, a company, which is
incorporated under the relevant legislation of a foreign country, will not qualify as a “company”
under the 2013 Act The proviso to section 2(71) states that “a company which is a subsidiary of
a company, not being a private company, shall be deemed to be public company for the
purposes of this Act.”

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This definition does not clearly point out the meaning of a company. In order to
understand the meaning of a company, let us see the definition as given by different
authorities. Some of the definitions are:-

Lord Justice Lindley- ―A Company is an association of many persons who contribute

money or monies worth to a common stock and employed in some trade or business and
who share the profit and loss arising there from. The common stock so contributed is
denoted in money and is the capital of the company. The persons who contribute to it or
to whom it pertains are members. The proportion of capital to which each member is
entitled is his share. The shares are always transferable although the right to transfer is
often more or less restricted.

Chief Justice Marshall- ―a Corporation is an artificial being, invisible, intangible,

existing only in contemplation of the law. Being a mere creation of law, it possesses only
the properties which the Charter of its creation confers upon it, either expressly or as
incidental to its very existence.

Prof. Haney-―a company is an artificial person created by law, having separate entity,
with a perpetual succession and common seal.

The above definitions clearly bring out the meaning of a company in terms of its features.
A company to which the Companies Act applies comes into existence only when it is
registered under the Act. On registration, a company becomes a body corporate i.e. it
acquires a legal personality of its own, separate and distinct from its members. A
registered company is there created by law and law alone can regulate, modify or
dissolve it.

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Characteristics of a Company

The most important characteristic features of a company are separate legal entity of the
company and in most cases limited liability of its members. These and other
characteristic feature of a company is discussed below:-

Legal entity distinct from its members

Unlike partnership, the company is distinct from the persons who constitute it. Hence, it
is capable of enjoying rights and of being subjected to duties which are not the same as
those enjoyed or borne by its members. As Lord McNaughton puts it, ―the company is
at law a different person altogether from the subscribers......; and though it may be that
after incorporation the business is precisely the same as it was before and the same
persons are managers and the same hands receive the proceeds, the company is not in
law, the agent of the subscribers or trustee for them. Nor are the subscribers as members
liable, in any shape or form, except to the extent and in the manner provided by the Act.‖
i.e., Solomon‘s case.

The first case on the subject even before the famous Solomon‘s case was that of Kondoli
Tea Co. Ltd.,5 In this case certain persons transferred a tea estate to a company and
claimed exemption from ad valorem duty on the ground that they themselves were the
shareholders in the company and, therefore, it was nothing but a transfer from them in
one to themselves under another name.

Rejecting this, the Calcutta High Court observed- ―The Company was a separate person,
a separate body altogether from the shareholders and the transfer was as much
conveyance, a transfer of the property, as if the shareholders had been totally different
persons.

Even where a single shareholder virtually holds the entire share capital, a company is to
be differentiated from such a shareholder. In the well known case of Solomon v. Solomon
& Co. Ltd Solomon was a prosperous leather merchant. He converted his business into a
limited Company- Solomon & Co. Ltd. The Company so formed consisted of Solomon,
his wife and five of his children as members. The company purchased the business of

4
Solomon for £ 39,000 for purchase consideration was paid in terms of £10,000
debentures conferring a charge over the company‘s assets, £20,000 in fully paid £1 share
each and the balance in cash. The company in less than one year ran into difficulties and
liquidation proceedings commenced. The assets of the company were not even sufficient
to discharge the debentures held entirely by Solomon himself. And nothing was left for
the unsecured creditors. The House of Lords unanimously held that the company had
been validly constituted, since the Act only required seven members holding at least one
share each. It said nothing about their independent or that there should be anything like a
balance of power in the Constitution of the company. Hence, the business belonged to the
company and not to Solomon. Solomon was its agent. The company was not the agent of
the Solomon.

Likewise, in the case of Lee V. Lee‘s Air Farming Ltd L formed a company with a share
capital of three thousand pounds, of which 2999 pounds were held by L. He was also the
sole governing director. In his capacity as the controlling shareholder, L exercised full
and unrestricted control over the affairs

of the company. L was a qualified pilot also and was appointed as the chief pilot of the
company under the articles and drew a salary for the same. While piloting the company‘s
plane he was killed in an accident. As the workers of the company were insured, workers
were entitled for compensation on death or injury. The question was while holding the
position of sole governing director could L also being an employee/ worker of the
company. Held that the mere fact that someone was the director of the company was no
impediment to his entering into a contract to serve the company. If the company has a
legal entity, there was no reason to change the validity of any contractual obligations
which were created between the company and the deceased. The contract could not be
avoided merely because L was the agent of the company in its negotiations. Accordingly
L was an employee of the company and, therefore, entitled to compensation claim.

So much so that even if a shareholder acquires all shares of a company, business of the
company does not become his business unless the company is treated as his agent. –
Gramophone & Typewriters Ltd. V. Stanley.

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Even where a decree has been issued by the Court in respect of sums due against a
company, the same cannot be enforced against its managing director. In H. S. Sidhana V.
Rajesh Enterprises,10 it was held that the liability to discharge the decretal amount was
that of the company and not of its managing director. The executing court could proceed
against the managing director only if it came to the conclusion that the managing director
was personally liable to discharge the decretal amount.

Again, in Chamundeeswari V. CTO, Vellore Rural11 it was held that a company being a
legal entity by itself, any dues from company have to be recovered only from company
and not from its directors.

Artificial person

The company, though a juristic person, does not possess the body of natural being. It
exists only in contemplation of law. Being an artificial person, it has to depend upon
natural persons, namely, the directors, officers, shareholders, etc., for getting its various
works done. However, these individuals only represent the company and accordingly
whatever they do within the scope of the authority conferred upon them and in the name
and on behalf of the company, they bind the company and not themselves.

Limited Liability

One of the principal advantages of trading through the medium of a limited company is
that the members of the company are only liable to contribute towards payment of its
debt to a limited extent. If the company is limited by shares, the shareholder‘s liability to
contribute is measured by the nominal value of the shares he holds, so that once he or
someone who held the shares previously has paid the nominal value plus any premium
agreed on when the shares were issued, he is no longer liable to contribute anything
further. However, companies may be formed and unlimited liability of members or
members may guarantee a particular amount. In such cases, liability of the members shall
not be limited to the nominal or face value of their shares and the premium, if any, unpaid
thereon. In the case of unlimited liability companies, member shall continue to be liable
till each paisa has been paid off. In case of companies limited by guarantee, the liability
of each member shall be determined by the guarantee amount, i.e., he shall be liable to

6
contribute up to the amount guaranteed by him. If the guarantee company also has share
capital, the liability of each member shall be determined in terms of not only the amount
guaranteed but also the amount remaining unpaid on the shares held by a member.

Separate Property

Shareholders are not, in the eyes of the law, part owners of the undertaking. In India, this
principle of separate property was best laid down by the Supreme Court in Bacha F.
Guzdar V. CIT. The Supreme Court held that a shareholder is not the part owner of the
company or its property, he is only given certain rights by law, for example, to vote or
attend meetings, or to receive dividends.

Transferability of Shares

One particular reason for the popularity of joint stock companies has been that their
shares are capable of being easily transferred. The Companies Act, 1956 in Section 82
echoes this feature by declaring ―the shares, debentures or other interest of any member
in a company shall be movable property, transferable in the manner provided by the
articles of the company‖. However, in case of private companies certain restrictions are
placed on right of the member to transfer his shares.

Perpetual Succession

Company being an artificial person cannot be incapable by illness and it does not have an
allotted span of life. Being distinct from the members, the death, insolvency or retirement
of its members leaves the company unaffected. Members may come and go but the
company can go for ever. It continues even if all its human members are dead. Even
where during the war all the members of a private company, while in general meeting
were killed by a bomb, the company survived.

Common Seal

A Company being an artificial person is not bestowed with a body of a natural being.
Therefore, it does not have a mind or limbs of human being. It has to work through the
agency of human beings, namely, the directors and other officers and employees of a

7
company. But, it can be held bound by only those documents which bear its signature.
Common seal is the official signature of a company.

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The main characteristics of a company are:

(i) It is a distinct legal person existing independent of its members

(ii) Liability of the members is limited to the extent of the face value of shares held by
them.

(iii) It has a perpetual succession, i.e, the members of the company may keep on
changing from time to time but this does not affect the company’s continuity.

(iv) The shares of a company are freely transferable except in case of a Private limited
Company.

(v) A company being a legal person is capable of owing, enjoying and disposing of the
property in its own name

(vi) A company, being a separate body can sue and be sued in its own name.

(vii) Though a company is an artificial person yet it acts through human beings who are
called directors of the company. There is a divorce between ownership and the
management.

(viii) It is a voluntary association of persons usually for profit.

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Statutory Books

Statutory books are those which a limited company is under statutory obligation to
maintain at its registered office. The main statutory books are:

(i) Register of Investments held and their names

(ii) Register of charges

(iii) Register of Members

(iv) Register of debenture holders

(v) Annual returns

(vi) Minutes books

(vii) Register of contracts

(viii) Register of Directors

(ix) Register of shareholdings of the directors

(x) Register of loans to companies under the same management

(xi) Register of Investment in the shares of other companies.

Books of Account

Every company is required to keep at its registered office books of account.

These books are to be maintained in such a way so as to disclose

(a) The sums of money received and expended by the company and the matter in respect
of which the receipt and expenditure has taken place.

(b) All sales and purchases of goods of the company.

(c) All assets and liabilities of the company.

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Types Of Companies
There are different types of company, which can be classified on the basis of formation,
liability, ownership, domicile and control.

1. Types Of Companies On The Basis Of Formation Or Incorporation

a. Chartered Companies
Companies which are incorporated under special charter or proclamation issued by the
head of state, are known as chartered companies. The Bank Of England, The East India
Company, Chartered Bank etc. are the examples of chartered companies.

b. Statutory Companies
Companies which are formed or incorporated by a special act of parliament, are known as
statutory companies. The activities of such companies are governed by their respective
acts and are not required to have any Memorandum or Articles Of Association.

c. Registered Companies
Registered companies are those companies which are formed by registration under the
Company Act. Registered companies may be divided into two categories.

* Private Company
A company is said to be a private company which by its Memorandum of Association
restricts the right of its members to transfer shares, limits the number of its members and
does not invite the public to subscribe its shares or debentures.

* Public Company
A company, which is not private, is known as public company. It needs minimum seven
persons for its registration and maximum to the limit of its registered capital. There is no
restriction on issue or transfer of its shares and this type of company can invite the public
to purchase its shares and debentures.

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2. Types Of Companies On The Basis Of Liability
Registered companies are divided into two types, namely, companies having limited
liability and companies having unlimited liability.

a. Companies Having Limited Liability

This liability can be limited in two ways:

* Liability Limited By Shares

These are those companies in which the capital is divided into shares and liability of
members (share holders) is limited to the extent of face value of shares held by them.
This is the most popular class of company.

* Liability Limited By Guarantee

These are such companies where shareholders promise to pay a fixed amount to meet the
liabilities of the company in the case of liquidation.

b. Companies Having Unlimited Liability

A company not having any limit on the liability of its members as in the case of a
partnership or sole trading concern is an unlimited company. If such a company goes into
liquidation, the members can be called upon to pay an unlimited amount even from their
private properties to meet the claim of the creditors of the company.

3. Types Of Companies On The Basis Of Ownership

a. Government Companies
A government company is a company in which at least 51% of the paid up capital has
been subscribed by the government.

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b. Non-government Companies
If the government does not subscribe a minimum 51% of the paid up capital, the
company will be a non-government company.

4. Types Of Companies On The Basis Of Domicile

a. National Companies
A company, which is registered in a country by restricting its area of operations within
the national boundary of such country is known as a national company.

b. Foreign Companies
A foreign company is a company having business in a country, but not registered in that
country.

c. Multinational Companies
Multinational companies have their presence and business in two or more countries. In
other words, a company, which carries on business activities in more than one country, is
known as multinational company.

5. Types Of Companies On The Basis Of Control

a. Holding Companies
A holding company is a company, which holds all, or majority of the share capital in one
or more companies so as to have a controlling interest in such companies.

b. Subsidiary Company
A company, which operates its business under the control of another company (i.e
holding company), is known as a subsidiary company.

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History of Company Legislation in India

As noted in the initial paragraphs, the Company Legislation in India has closely followed
the Company Legislation in England. The first legislative enactment for registration of
Joint Stock Companies was passed in the year 1850 which was based on the English
Companies Act, 1844. This Act recognised companies as distinct legal entities but did not
introduce the concept of limited liability. The concept of limited liability, in India, was
recognised for the first time by the Companies Act, 1857 closely following the English
Companies Act, 1856 in this regard. The Act of 1857, however, kept the liability of the
members of banking companies unlimited. It was only in 1858 that the limited liability
concept was extended to banking companies also. Thereafter in 1866, the Companies
Act, 1866 was passed for consolidating and amending the law relating to incorporation,
regulation and winding-up of trading companies and other associations. This Act was
based on the English Companies Act, 1862. The Act of 1866 was recast in 1882 to bring
the Indian Company Law in conformity with the various amendments made to the
English Companies Act of 1862. This Act continued till 1913 when it was replaced by the
Companies Act, 1913. The Act of 1913 had been passed following the English
Companies Consolidation Act, 1908. It may be noted that since the Indian Companies
Acts closely followed the English Acts, the decisions of the English Courts under the
English Company Law were also closely followed by the Indian Courts. Till 1956, the
business companies in India were regulated by this Act of 1913. Certain amendments
were, however, made in the years 1914, 1915, 1920, 1926, 1930 and 1932. The Act was
extensively amended in 1936 on the lines of the English Companies Act, 1929. Minor
amendments were made a number of times thereafter.

At the end of 1950, the Government of independent India appointed a Committee under
the Chairmanship of H.C. Bhaba to go into the entire question of the revision of the
Indian Companies Act, with particular reference to its bearing on the development of
Indian trade and industry. This Committee examined a large number of witnesses in
different part of the country and submitted its report in March 1952. Based largely on the
recommendations of the Company Law Committee, a Bill to enact the present legislation,
namely, the Companies Act, 1956 was introduced in Parliament. This Act, once again

14
largely followed the English Companies Act, 1948. The major changes that the Indian
Companies Act, 1956 introduced over and above the Act of 1913 related to: (a) the
promotion and formation of companies;(b) capital structure of companies;(c) company
meetings and procedures; (d) the presentation of company accounts, their audit, and the
powers and duties of auditors; (e) the inspection and investigation of the affairs of the
company; (f) the constitution of Board of Directors and the powers and duties of
Directors, Managing Directors and Managers, and (h) the administration of Company
Law.

The Companies Act, 1956 has been amended several times since then. The major
amendments were introduced in the years 1960, 1962, 1963, 1964, 1965, 1966, 1967,
1969, 1974, 1977, 1985, 1988 and 1991.

In the wake of economic reforms processes initiated from July, 1991 onwards, the
Government recognized the many provisions of the Companies Act had become
anachronistic and were not conducive to the growth of the Indian corporate sector in the
changing environment. Consequently, an attempt was made to recast the Act, which was
reflected in the Companies Bill, 1993. The said Bill, however, was subsequently
withdrawn. As part of continuing reforms process and in the wake of enactment of the
Depositories Act, 1996, certain amendments were, however, incorporated by the
Companies (Amendment ) Act, 1996.

In the year 1996, a Working Group was constituted to rewrite the Companies Act,
following an announcement made by then Union Minister for Finance in his Budget
Speech to this effect. The main objective of the Group was to re-write the Act of facilitate
healthy growth of Indian corporate sector under a liberalized, fast changing and highly
competitive business environment. Based on the report prepared by the Working Group
and taking into account the developments that had taken place in structure, administration
and the regulatory framework the world over, the Companies Bill, 1997 was introduced
in Rajya Sabha on August 14, 1997 to replace by repealing the Companies Act, 1956. In
the meantime, as part of the reforms process and in view of the urgency felt by the
Government, the President of India promulgated the Companies (Amendment)
Ordinance, 1998 on October 31, 1998 which was later replaced by the Companies

15
(Amendment) Act, 1999 to surge the capital market by boosting morale of national
business houses besides encouraging FIIs as well as FDI in the country. The amendments
brought about number of important changes in the Companies Act. These were in
consonance with the then prevailing economic environment and to further Government
policy of deregulation and globalisation of the economy. The corporate sector was given
the facility to buy-back company‘s own shares, provisions relating to the investments and
loans were rationalized and liberalized besides the requirements of prior approval of the
Central Government on investment decisions was dispensed with, and companies were
allowed to issue ― sweat equity‖ in lieu of intellectual property. In order to make
accounts of Indian Companies compatible with international practices, the compliance of
Indian Accounting Standards was made mandatory and provisions for setting up of
National Committee on Accounting Standards was incorporated in the Act. For the
benefit of investors, provisions were made for setting up of ―Investor Education and
Protection Fund‖ besides introduction of facility of nomination to shareholders debenture
holders etc.

The First Amendment of 2002 provides for producer companies. The Second
Amendment of 2002 replaces the Company Law Board with National Company Law
Tribunal and also creates an Appellate Tribunal. Apart from taking over the jurisdiction
of the Company Law Board, the National Company Law Tribunal has been vested with
the jurisdiction of the High Courts under the Companies Act. The result is that the
jurisdiction of the High Courts has also become reduced to a very few points. Since this
amendments has not been enforced, the original Act holds good.

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 Chapter 2.Research Methodology

This study referred to several books, journals, committee reports, Ministry websites,
judicial decisions etc. Further a comparative, historical, critical and analytical mode of
exploration has been adopted.

Aims and objective of study

 To study different types of Companies.

 To study of role of Debentures in Companies.
 To study of role of Shares in Companies.
 To see the behavior of Investors and their views for Debentures & Shares
 To find out reason why Shares is better than Debentures or vice versa.
 To understand the customer behaviour about Shares & Debentures
 To enforce stricter action against fraud and gross non-compliance with company
law provisions
 To promote the development of the economy by encouraging entrepreneurship
and enterprise efficiency and creating flexibility and simplicity in the formation
and maintenance of companies.
 To encourage transparency, accountability and high standards of corporate
governance.

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Significance of Study

 To get a clear view of the Companies with Shares & Debentures.

 To highlight the importance & Limitations of Share & Debentures of the
Company.
 To find out Amendments in Acts & Rules of the company.
 To see the effects of Shares & Debentures in the Company’s performance.
 To see the Source of Funds And their Applications.

Contribution of study to the knowledge

Research work will be useful for legal fraternity as such and academicians, law students,
legal practitioners and judiciary.

Sources of Data Collection

This is an explanatory research to find out the details about the Companies with Shares &
Debentures.
Information is obtained by primary as well as secondary sources.
Primary data is collection by taking interview of Individuals and Investors.
Secondary data is gathered from books, websites.

Scope and Limitations of Study

Less time is given to complete the project study.

Limited information is available in the market.
Biasness of the respondent
The information and solution which are available is not applicable to all Companies
Lack of resources may also affects the my projects study.

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Chapter 3. Literature Survey/ Review

International Journal of Management and Commerce Innovations, Vol. 2, Issue 2,

pp: (399-402), Month: October 2014 - March 2015, Though the new Act seems to be
enthusiastic in spelling out accountability and reporting by the directors, it also
encourages and provides necessary freedom and enough room for self-regulation. These
are adequately reflected at several places in the form of removing bureaucratic approval
process by the Central Government for various corporate actions, e.g., related party
transactions, increase in number of directors, managerial remuneration, loans to directors,
etc.

(Singh. 2010) The researcher has found out that there are sufficient rules and regulations
in the law but there is a problem of implementation of those rules and regulations,
Researcher has also suggested that there should be a continuous review of an independent
regulator, He has also noticed that the auditor and audit committee should work hand
on hand to enhance the consistency factor of accounting documents. He has also
examined that the Satyam was just a loophole rather than the rule.

(Chandrani.Chattopadhyay 2011) The researcher has investigated the problems faced

by the PSUs in India. As the ownership is with the government and the they used the tax
payer’s money for their operations. He has tried to find out the failure to sustain
Corporate governance.
He has found out some issues which includes contradictory objectives, extreme
government interfering, lack of commercial and managerial self-sufficiency and
absenteeism of self- governing directors. The PSU has its own features but it should
concentrate on the impairments of corporate Governance and bring out the transparency
and accountability.

Almeida H Campello and M. & M. Weisbach 14 have observed that the availability of
internal liquidity is a key parameter of firms‟ ability to invest and accomplish the desired
expansion plans. Companies need not to seek the assistance of external financing source
as it always has a higher cot to the capital, thereby adversely affecting the profit and
profitability of the firm.

In continuance and contrary to the above literature, Jenson has rightly pointed out that
external debt can be considered as an effective way to reduce the agency cost problems
that may lead to the under-performance of firms. So, confusions emerge in between
internal and external source of financing to reach at a judicious managerial decision.

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In the views of Flkender and Petesen the dependence of investment on cash or debt
largely depends on whether the firm is facing an income shortage or, conversely, a high
income state.

The authors highlight that there is interplay between firms‟ cash and debt policies as cash
holdings have a significant effect on financing capacity and investment spending in low
cash-flow states, while debt reductions are a particularly effective way of boosting
investment in high cash-flow states.

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Chapter 4.ACCOUNTING OF SHARES AND DEBENTURES

Meaning And Types Of Share Capital

Meaning Of Share Capital

A joint stock company should have capital in order to finance its activities. It raises its
capital by issue of shares. The Memorandum of Association must state the amount of
capital with which the company is desired to be registered and the number of shares into
which it is to be divided. When total capital of a company is divided into shares, then it is
called share capital. It constitutes the basis of the capital structure of a company. In other
words, the capital collected by a joint stock company for its business operation is known
as share capital. Share capital is the total amount of capital collected from its
shareholders for achieving the common goal of the company as stated in Memorandum of
Association.

Types Of Share Capital

Share capital of a company can be divided into the following different categories:

1. Authorized, registered, maximum or normal capital

The maximum amount of capital, which a company is authorized to raise from the public
by the issue of shares, is known as authorized capital. It is a capital with which a
company is registered, therefore it is also known as registered capital.

2.Issued Capital
Generally, a company does not issue its authorized capital to the public for subscription,
but issues a part of it. So, issued capital is a part of authorized capital, which is offered to
the public for subscription, including shares offered to the vendor for consideration other
than cash. The part of authorized capital not offered for subscription to the public is
known as 'un-issued capital'. Such capital can be offered to the public at a later date.

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3.Subscribed Capital
It can not be said that the entire issued capital will be taken up or subscribed by the
public. It may be subscribed in full or in part. The part of issued capital, which is
subscribed by the public, is known as subscribed ccapital

4.Called Up Capital
It is that part of subscribed capital, which is called by the company to pay on shares
allotted. It is not necessary for the company to call for the entire amount on shares
subscribed for by shareholders. The amount, which is not called on subscribed shares, is
called uncalled capital.

5. Paid-up Capital
It is that part of called up capital, which actually paid by the shareholders. Therefore it is
known as real capital of the company. Whenever a particular amount is called and a
shareholder fails to pay the amount fully or partially, it is known an unpaid calls or calls
in arrears.
Paid-up Capital = Called up capital - calls in arrears

6. Reserve Capital
It is that part of uncalled capital which has been reserved by the company by passing a
special resolution to be called only in the event of its liquidation. This capital can not be
called up during the existence of the company.It would be available only in the event of
liquidation as an additional security to the creditors of the company

Concept Of Stock Splits And Its Value To Shareholders

A stock split is similar to a stock dividend in economic sense. When a company
announces stock splits, it results into an increase in number of outstanding shares with a
proportionate decrease in par value and market price of the stocks. Therefore, firms with
exceptionally high market prices split their stocks in order to bring the market price
within reasonable limits. As a result, small investors can purchase the company's share.
22
With a stock split, total value of the shares of common stock outstanding remains
unchanged along with no change in paid-in capital and retained earnings.

Example,

Suppose, a firm has the following total shareholder's equity account before stock split:

A. Common stock ( 4000 shares @ Rs.10)...................=Rs.40,000

B. Additional paid-in capital........................................= Rs. 20,000

C. Retained earnings ....................................................= Rs. 90,000

Total shareholder's equity (A+B+C)...........................= Rs. 150,000

If the firm announces 2-for-1 stock splits, it results into an increase in outstanding shares
from 4,000 shares to 8,000 shares (i.e 4,000 shares x2) and reduction in the par value
from Rs. 10 per share to Rs. 5 per share (i.e. Rs.10 x 1/2). This keeps the value of
common stock constant at Rs. 40,000 (i.e 8,000 shares x Rs. 5). Total shareholder's
equity accounts of the firm after 2-for-1 stock splits announcement appears as:

A. Common stocks ( 8,000 shares @ Rs. 5 each)....................= Rs. 40,000

B. Additional paid in capital.....................................................= Rs. 20,000

C. Retained earnings................................................................= Rs. 90,000

Total shareholder's equity (A+B+C)......................................= Rs. 150.000

Unlike in stock dividend, stock split does not involve transfer of funds from retained
earnings to paid-in capital and common stock accounts.

23
Stock splits do not change the proportionate ownership of the company. Therefore, stock
splits has no economic value to the investors or shareholders. When the number of shares
held by shareholders increases, because of stock splits, the market price of the stock
should decrease proportionately to remain the total value of common stock unchanged.

Distinction Between Equity Shares And Preference Shares

The main differences between equity shares and preference shares are as follows:

1. Rate Of Dividend
The rate of dividend on equity shares may vary from year to year depending upon the
availability of profit. Preference share holders are paid dividend at a fixed rate.

2. Arrears Of Dividend
Equity shareholders can not get the arrears of past dividend. Cumulative preference share
holders can get the arrears of past dividend.

3. Redemption
Equity shares can not be redeemed except, under a scheme involving reduction of capital.
Preference shares can be redeemed as provided by the articles and terms of issue.

4. Voting
Equity shareholders enjoy voting rights. Preference shareholders do not have the right to
participate in the management of the company.

5. Payment Of Dividend
Payment of dividend to equity share is made only after paying to preference shares.
Preference shares have a preferential right to receive dividend before equity shares.

ISSUE OF SHARE

24
SHARE CAPITAL
No trading concern can run without capital. The divisions of share capital are:

(i) Nominal or Authorized Capital. The amount of capital with which the company
intends to be registered is called registered capital. It is the maximum amount which the
company is authorized to raise by way of public subscription. There is no legal limit on
the extent of the amount of authorized capital.

(ii) Issued Capital. That part of the authorized capital which is offered to the public for
subscription is called issued capital.

(iii) Subscribed Capital. That part of the issued capital for which applications are received
from the public is called the subscribed capital.

(iv) Called up Capital. The amount on the shares which is actually demanded by the
company to be paid is known as called up capital.

(v) Paid up Capital. The part of the called up capital which is offered and is actually paid
by the members is known as paid up capital. The sum which is still to be paid is known as
calls in arrears.

EQUITY SHARES
Equity shares, commonly referred to as ordinary share also represents the form of
fractional ownership in which a shareholder, as a fractional owner, undertakes the
maximum entrepreneurial risk associated with a business venture. The holder of such
shares is the member of the company and has voting rights. According to explanation
(i) to Section 43 of Companies Act, 2013 ‘‘equity share capital’’, with reference to any
company limited by shares, means all share capital which is not preference share capital.
Section 43 further provides for equity share capital
(i) with voting rights, or

25
(ii) with differential rights as to dividend, voting or otherwise in accordance with such
rules as may be prescribed.

Equity capital and further issues of equity capital by a company are generally based on
the condition that they will rank paripassu along with the earlier issued share capital in all
respects. However, as regards dividend declared by the company such additional capital
shall be entitled to dividend ratably for the period commencing from the date of issue to
the last day of the accounting year, unless otherwise specified in the articles or in the
terms of the issue.

Important characteristics of equity shares are given below :

Equity shares, have voting rights at all general meetings of the company. These votes
have the affect of the controlling the management of the company.
Equity shares have the right to share the profits of the company in the form of dividend
(cash) and bonus shares.
However even equity shareholders cannot demand declaration of dividend by the
company which is left to the discretion of the Board of Directors.

Equity share holders enjoy different rights as members under the

Companies Act, 2013 such as:

(a) The right to vote on every resolution placed before the company – (Section 47)
(b) The rights to subscribe to shares at the time of further issue of capital by the company
(Preemptive Right) – (Section 62)
(c) Right to appoint proxy to attend and vote at the meeting on his behalf – (Section 105)
(d) Right to receive copy of annual accounts of the company – (Section 136)
(e) Right to receive notice of the meeting of members – (Section 101)
(f) Right to inspection of various statutory registers maintained by the company –
(Section 94)
(g) Right to requisition extraordinary general meeting of the company – (Section 100)

26
SHARES WITH DIFFERENTIAL VOTING RIGHTS

Section 43(a)(ii) of the Companies Act, 2013, authorized equity share capital with
differential rights as to dividend, voting or otherwise in accordance with rule 4 of
Companies (Share Capital and Debentures) Rules, 2014 which prescribes the following
conditions for issue of DVRs :

(a) The articles of association of the company authorizes the issue of shares with
differential rights;

(b) The issue of shares is authorized by ordinary resolution passed at a general meeting of
the shareholders. Where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through postal
ballot at a general meeting;

(c) The shares with differential rights shall not exceed twenty-six percent of the total
post-issue paid up equity share capital including equity shares with differential rights
issued at any point of time;

(d) The company having consistent track record of distributable profit for the last three
years;

(e) The company has not defaulted in filing financial statements and annual returns for
three financial years immediately preceding the financial year in which it is decided to
issue such shares;

(f) The company has no subsisting default in the payment of a declared dividend to its
shareholders or repayment of its matured deposits or redemption of its preference shares
or debentures that have become due for redemption or payment of interest on such
deposits or debentures or payment of dividend; 22 EP-CM&SL

27
(g) The company has not defaulted in payment of the dividend on preference shares or
repayment of any term loan from a public financial institution or state level financial
institution or scheduled bank that has become repayable or interest payable thereon or
dues with respect to statutory payments relating to its employees to any authority or
default in crediting the amount in Investor Education and Protection Fundto the Central
Governement. However, a company may issue equity shares with differential rights upon
expiry of five years from the end of the financial year in which such default was made
good.

(h) The company has not been penalized by Court or Tribunal during the last three years
of any offence under the Reserve Bank of India Act, 1934, Securities and Exchange
Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, the Foreign
Exchange Management Act, 1999 or any other special Act under which such companies
being regulated by sectoral regulators.

(i) The explanatory statement to be annexed to the notice of the general meeting should
contain the disclosures as mentioned in the rules

(j) The Board of Directors shall disclose in the Board’s Report for the financial year in
which the issue of equity shares with differential rights was completed, the details as
mentioned in the rules The holders of the equity shares with differential rights shall enjoy
all other rights such as bonus shares, rights shares etc., which the holders of equity shares
are entitled to, subject to the differential rights with which such shares have been issued.

(k) The company shall not convert its existing share capital with voting rights into equity
share capital carrying differential voting rights and vice-versa.

(l) The register of members maintained under section 88 of the Companies Act, 2013,
shall contain all the relevant particulars of the shares so issued along with details of the
shareholders.

28
PREFERENCE SHARES

According to explanation (ii) to Section 43 of Companies Act, 2013 ‘‘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 –
(a) payment of dividend, either as a fixed amount or an amount calculated at a fixed rate,
which may either be free of or subject to income-tax; and
(b) repayment, in the case of a winding up or repayment of capital, of the amount of the
share capital paid-up or deemed to have been paid-up, whether or not, there is a
preferential right to the payment of any fixed premium or premium on any fixed scale,
specified in the memorandum or articles of the company;

Capital shall be deemed to be preference capital, notwithstanding that

it is entitled to either or both of the following rights, namely:–

(a) That in respect of dividends, in addition to the preferential rights to the amounts
specified in sub-clause (a) of clause (ii), it has a right to participate, whether fully or to a
limited extent, with capital not entitled to the preferential right aforesaid;

(b) That in respect of capital, in addition to the preferential right to the repayment, on a
winding up, of the amounts specified in sub-clause (b) of clause (ii), it has a right to
participate, whether fully or to a limited extent, with capital not entitled to that
preferential right in any surplus which may remain after the entire capital has been
repaid.
In simple terms, the preference shares are those shares which have rights of preference
over equity shares in Lesson 2 Capital Market Instruments 23 the case of distribution of
dividend and distribution of surplus in the case of winding up. They generally carry a
fixed rate of dividend and redeemable after specific period of time. According to Section
55 of the Companies Act, 2013, a Company cannot issues preference shares which are
irredeemable.

29
The following kinds of preference shares are issued by the companies:
• Cumulative preference shares
• Non-cumulative preference shares
• Convertible preference shares
• Redeemable preference shares
• Participating preference share
• Non participating preference shares

CUMULATIVE PREFERENCE SHARES

Cumulative preference shares where the preference dividend gets accumulated for being
paid subsequently if the company does not have adequate profits. Such arrears of
dividend need to be paid in subsequent years before payment of equity dividends.

NON-CUMULATIVE PREFERENCE SHARES

In the case of these preference shares, dividend does not accumulate. If there are no
profits or the profits are inadequate in any year, the shares are not entitled to any dividend
for that year. Unless there is a specific provision in the Articles of Association of the
company, the preference shareholders have no right to participate in the surplus profits or
in the surplus assets in a winding up. RBI also allowed Indian banks to issue these types
of preference shares as capital under Basel III capital regulations.

CONVERTIBLE PREFERENCE SHARES

If the terms of issue of preference shares includes a right for converting them into equity
shares at the end of a specified period they are called convertible preference shares. In the
absence of such condition or right, the preference shares are not converted into equity
shares to become eligible for various rights such as voting, higher dividend, bonus issue
etc. as in the case of equity shares. These shares are some times referred to as quasi
equity shares in common parlance.

REDEEMABLE PREFERENCE SHARES

30
These are such preference shares in which are redeemed after specific period and money
is returned to shareholders. According to Section 55 of the Companies Act, 2013, a
Company cannot issue preference shares which are irredeemable. If Article of association
permits, the Company can issue preference shares which are redeemable not later than 20
years. Companies engaged in infrastructure projects can issue shares redeemable
exceeding 20 years subject to condition mentioned in rule 9 and 10 of the Companies
(Share Capital and Debenture) Rules, 2014.

PARTICIPATING PREFERENCE SHARES

Preference shareholders are not entitled to dividend more than what has been indicated as
part of the terms of issue, even in a year in which the company has made huge profits.
Subject to provision in the terms of issue these shares can be entitled to participate in the
surplus profits left, after payment of dividend to the preference and the equity
shareholders to the extent provided therein. Subject to provisions in the terms of issue
such preference shares can be entitled even to bonus shares.

NON PARTICIPATING PREFERENCE SHARES

Unless the terms of issue indicate specifically otherwise, all preference shares are to be
regarded as nonparticipating preference shares.

FULLY CONVERTIBLE CUMULATIVE PREFERENCE SHARE

(EQUIPREF)
This instrument is in two parts A & B. Part A is convertible into equity shares
automatically and compulsorily on the date of allotment without any application by the
allottee, and Part B is redeemed at par/ converted into equity after a lock in period at the
option of the investor, at a price 30% lower than the average market price. The dividend
is given only for part B shares.

Conditions to be fulfilled for Buy-Back of Equity Shares

31
Conditions to be fulfilled by a Joint Stock Company to buy-back its equity shares as per
Companies Act, 2013.

Section 68 to 70 of the Companies Act, 2013 lays down the provisions for a company to
buy-back its own equity shares. The key provisions in this regard are as under:

(a) A company may purchase its own shares or other specified securities out of:
(i) Its free reserves;
(ii) The securities premium account;
(iii) The proceeds of the issue of any shares or other specified securities (not being
the proceeds of an earlier issue of the same kind of shares or other specified
securities).

(b) The buy-back is authorized by its articles.

(c) A special resolution has been passed in general meeting of the company authorizing
the buy-back (except where the buy back is of less than 10% of the paid up equity capital
and free reserves of the company and the buy back is authorized by the Board by means
of a resolution passed at a duly convened Board Meeting)

(d) The buy-back does not exceed 25% of the total paid up capital and free reserves of the
company. Provided that in case of buy back of equity shares in any financial year, the
25% of paid up capital shall be construed as 25% of the total paid up equity capital in that
financial year.

(e) The ratio of the secured and unsecured debt owed by the company after the buy back
is not more than twice the paid up capital and its free reserves
.
(f) All the shares and other securities for buy-back are fully paid up.

32
(g) The buy-back is completed within 12 months of the passing of the special resolution
or a resolution passed by the Board.

(h) The buy-back of the shares listed on any recognized stock exchange is in accordance
with the regulations made by the SEBI in this behalf.

(i) Before making such buy-back, a listed company has to file with the Registrar and the
SEBI a declaration of solvency in the prescribed form.

(i) the buy back may be from;

(i) the existing shareholders or security holders on proportionate basis;
(ii) the open market;
(iii) the shares or securities issued to the employees of the company pursuant to a
scheme of Stock Option or Sweat Equity.

(j) Where a company purchases its own shares out of its free reserves or securities
premium account it shall transfer an amount equal to the nominal value of such
shares to Capital Redemption Reserve Account and details of such transfers should be
given in the Balance Sheet.

SWEAT EQUITY SHARES

Section 2 (88) of the Companies Act, 2013 defines “sweat equity shares” means such
equity shares as are issued by a company to its directors or employees at a discount or for
consideration, other than cash, for providing their know-how or making available rights
in the nature of intellectual property rights or value additions, by whatever name called.

According to Section 54 of the Companies Act, 2013 a company may issue sweat equity
shares of a class of shares already issued, if the following conditions are fulfilled:

33
(a) The issue is authorized by a special resolution passed by the company in the general
meeting.
(b) The resolution specifies the number of shares, current market price, consideration if
any and the class or classes of directors or employees to whom such equity shares are to
be issued.
(c) Not less than one year has elapsed at the date of the issue, since the date on which the
company was entitled to commence business.
(d) The sweat equity shares of a company whose equity shares are listed on a recognised
stock exchange are issued in accordance with the regulations made by SEBI in this regard
and if they are not listed the sweat equity shares are to be issued in accordance with the
rule 8 of Companies (Share Capital and Debenture) Rules, 2014.

SECURED PREMIUM NOTES

These instruments are issued with detachable warrants and are redeemable after a notified
period say 4 to 7 years. The warrants enable the holder to get equity shares allotted
provided the secured premium notes are fully paid. It combines the feature of both debt
and equity. During the lock in period no interest is paid. The holder has an option to sell
back the SPN to the company at par value after the lock in period. If the holder exercises
this option, no interest/premium is paid on redemption. In case the holder keeps it further,
he is repaid the principal amount along with the additional interest/premium on
redemption in installments as per the terms of issue.

EQUITY SHARES WITH DETACHABLE WARRANTS

The holder of the warrant is eligible to apply for the specified number of shares on the
appointed date at the predetermined price. These warrants are separately registered with
the stock exchanges and traded separately. The practice of issuing non convertible
debentures with detachable warrants also exists in the Indian market.

34
DUAL OPTION WARRANTS
Dual option warrants are designed to provide the buyer with good potential of capital
appreciation and limited downside risk. Dual option warrants may be used to sell equity
shares in different markets. For example, equity shares or debentures may be issued with
two warrants - one warrant giving right to the purchaser to be allotted one equity share at
the end of a certain period and another warrant with a debt or preference share option.

DEBT INSTRUMENTS WITH DEBT WARRANTS

Debt instruments may be issued with debt warrants which give the holder the option to
invest in additional debt on the same terms within the period specified in the warrant.
This instrument is beneficial to the investors in periods of falling interest rates when the
holder can exercise the debt warrant option and hold additional debt at, interest rates
above market rates.

Need For Valuation Of Shares

The following are the circumstances where need for the valuation of
shares arises:

1. Where companies amalgamate or are similarly reconstructed, it may be necessary to

arrive at the value of shares hold by the members of the company being absorbed or taken
over.

2. Where shares are hold jointly by the partners in a company and partnership firm
dissolved, it becomes necessary to value of shares.

3. Where a portion of the shares is to be given by a member of proprietary company to

another member as the member cannot sell it in the open market, it becomes necessary to
certify the fair price of these shares by an auditor.

35
4. When a loan advanced on the security of shares, it becomes necessary to know the
value of shares on the basis of which loan has been advanced.

5. When shares are given in a company as gift it may be necessary for the purpose of
assessing gift tax, to place a value on the shares.

6. When preference shares or debentures are converted into equity share it becomes
necessary to value the equity shares for ascertaining the number of equity shares required
to be issued for debentures or preference shares which are to be converted.

7. When equity shareholders are to be compensated on the acquisition of their shares by

the government under a scheme of nationalization then it is necessary to value the equity
shares.

Methods Of Valuation Of Shares

The methods of valuation depends on the purpose for which valuation is required.
Generally, there are three methods of valuation of shares:

1. Net Assets Method Of Valuation Of Shares

Under this method, the net value of assets of the company are divided by the number of
shares to arrive at the value of each share. For the determination of net value of assets, it
is necessary to estimate the worth of the assets and liabilities. The goodwill as well as
non-trading assets should also be included in total assets. The following points should be
considered while valuing of shares according to this method:

* Goodwill must be properly valued

36
* The fictitious assets such as preliminary expenses, discount on issue of shares and
debentures, accumulated losses etc. should be eliminated.

* The fixed assets should be taken at their realizable value.

* Provision for bad debts, depreciation etc. must be considered.

* All unrecorded assets and liabilities ( if any) should be considered.

* Floating assets should be taken at market value.

* The external liabilities such as sundry creditors, bills payable, loan, debentures etc.
should be deducted from the value of assets for the determination of net value.

The net value of assets, determined so has to be divided by number of equity shares for
finding out the value of share. Thus the value per share can be determined by using the
following

formula:

Value Per Share=(Net Assets-Preference Share Capital)/Number Of Equity Shares

2. Yield Or Market Value Method Of Valuation Of Shares

The expected rate of return in investment is denoted by yield. The term "rate of return"
refers to the return which a shareholder earns on his investment. Further it can be
classified as (a) Rate of earning and (b) Rate of dividend. In other words, yield may be
earning yield and dividend yield.

a. Earning Yield

37
Under this method, shares are valued on the basis of expected earning and normal rate of
return. The value per share is calculated by applying following formula:

Value Per Share = (Expected rate of earning/Normal rate of return) X Paid up value
of equity share

Expected rate of earning = (Profit after tax/paid up value of equity share) X 100

b. Dividend Yield
Under this method, shares are valued on the basis of expected dividend and normal rate
of return. The value per share is calculated by applying following formula:
Expected rate of dividend = (profit available for dividend/paid up equity share
capital) X 100
Value per share = (Expected rate of dividend/normal rate of return) X 100

3. Earning Capacity Method Of Valuation Of Shares

Under this method, the value per share is calculated on the basis of disposable profit of
the company. The disposable profit is found out by deducting reserves and taxes from net
profit. The following steps are applied for the determination of value per share under
earning capacity:

Step 1: To find out the profit available for dividend

Step 2: To find out the capitalized value
Capitalized Value =( Profit available for equity dividend/Normal rate of return) X 100
Step 3: To find out value per share
Value per share = Capitalized Value/Number of Shares

38
DEBENTURES

Section 2(30) of the Companies Act, 2013 defines debentures. “Debenture” includes
debenture stock, bonds or any other instrument of a company evidencing a debt, whether
constituting a charge on the assets of the company or not;
Debenture is a document evidencing a debt or acknowledging it and any document which
fulfills either of these conditions is a debenture.

Meaning And Concept Of Debentures

The total capital of joint stock companies can be divided into owner's capital and
borrowed capital. Share capital is owner's capital whereas debenture is considered as
borrowed capital. The buyers of shares i.e. shareholders possess the voting right through
which they own control power of the company. Debenture is a long-term loan.
Companies can raise additional capital by the issue of debentures. Debenture-holders
receive fixed income in the form of interest during the loan period, however, they do not
possess the voting right.

Debenture is a written promise for a debt by a company under its seal which contains the
terms and conditions regarding the amount of loan or principal, the rate of interest,
maturity date, maturity value etc. In other words, debenture is a certification of
acknowledgment issued with the seal of company in favor of lender as an evidence of
debt. This written document grants the holder the right to receive interest and return of
principal as per the terms under which debentures are issued.

Thus, debenture is a part of total capital of a company and debenture-holders are the
creditors. Debenture-holders are entitled the right to receive interest on their fund
invested in debenture. The rate of interest is predetermined and stated in the bond

39
certificate. The interest is payable whether there is profit or loss. The amount of
debenture is returned to the holders at the end of predetermined maturity period.

The important features of a debenture are:

1. It is issued by a company as a certificate of indebtedness.

2. It usually indicates the date of redemption and also provides for the repayment of
principal and payment of interest at specified date or dates.

3. It usually creates a charge on the undertaking or the assets of the company. In such a
case the lenders of money to the company enjoy better protection as secured creditors, i.e.
if the company does not pay interest or repay principal amount, the lenders may either
directly or through the debenture trustees bring action against the company to realise their
dues by sale of the assets/undertaking earmarked as security for the debt.

4. Debentures holders does not have any voting rights.

5. Compulsory payment of interest. The interest on debenture is payable irrespective of

whether there are profits made or not.

Characteristics Of Debentures

Debentures are ranked as creditors of the company. Debenture is long-term debt and
issued under the common seal of the company. In brief, a debenture possesses the
following characteristics.

1. Debenture is an instrument of loan.

40
2. Interest is paid at fixed rate every year and debentures is known as"fixed cost bearing
capital".

3.Debenture has common seal of the company.

4. Debenture is redeemable at a fixed and specified time.

5. Debenture-holders are the creditors of company not owners.

6. Debenture is a form of long-term borrowed capital.

7. Debenture-holders have no right to cast vote in company's general meting.

8. At the time of liquidation, first priority is given to debenture-holders at the time of

repayment.

9. Debentures can be issued to fulfill the requirement of huge capital. Small firms most
often find it more expensive source of financing.

41
Modes Of Issue Of Debentures

The procedure and accounting entries for issue of debentures are very much similar to
that of share. A prospectus is issued to the public for inviting applications. The money on
debentures may be payable in full at a time along with application or by installments on
application, allotment and various calls.
There is no legal restriction on the price for which debentures are issued. Thus, a
debenture may be issued at par, at premium or at discount. They can be issued at cash, for
consideration other than cash and as collateral security as well as issue of debentures with
redeemable conditions.

Issue Of Debentures At Par

When a debenture is issued at its face value, it is called issue of debenture at par. If a
debenture of Rs.100 is issued at Rs. 100, it is called the issue of debenture at par.

Issue Of Debentures At Premium

A debenture is said to be issued at premium when the issue price exceeds the par value. If
a debenture of Rs.100 is issued at Rs.110, then it is called issue of debenture at premium.
The excess amount Rs.10 (Rs.110-Rs.100) is debenture premium.

Issue Of Debentures At Discount

When a debenture is issued at an amount less than its face value, it is said to be issued at
discount. If a debenture of Rs.100 is issued at Rs.95, it is said to have been issued at a
discount of Rs.5.

42
TYPES OF DEBENTURES

Naked or unsecured Debentures Debentures of this kind do not carry any

charge on the assets of the debentures
company.

Secured debentures Debentures that are secured by a mortgage

of the whole or part of the assets of the
company are called mortgage debentures or
secured debentures.

Redeemable debentures Debentures that are redeemable on expiry

of certain period are called redeemable
debentures.

Perpetual debentures If the debentures are issued subject to

redemption on the happening of specified
events which may not happen for an
indefinite period, e.g. winding up, they are
called perpetual debentures.

Bearer debentures Such debentures are payable to bearer and

are transferable by mere delivery.

Registered debentures Such debentures are payable to the

registered holders whose name appears on
the debenture certificate/ letter of allotment
and is registered on the companies register
of debenture holders maintained as per
Section 88(1)(b) of the Companies Act,
2013.

43
CATEGORIES OF DEBENTURES

Based on convertibility, debentures can be classified under three categories:

1. Fully Convertible Debentures (FCDs)
2. Non Convertible Debentures (NCDs)
3. Partly Convertible Debentures (PCDs)

FULLY CONVERTIBLE DEBENTURES (FCDs)

These debentures carry the option of fully conversion into equity shares.
The convertible Debenturs is to be converted into equity shares at the expiry of specified
period.

NON CONVERTIBLE DEBENTURES (NCDs)

These debentures do not carry the option of conversion into equity shares and are
therefore redeemed on the expiry of the specified period or periods.

PARTLY CONVERTIBLE DEBENTURES (PCDs)

These may consist of two kinds namely -convertible and non-convertible. The convertible
portion is to be converted into equity shares at the expiry of specified period. However,
the non convertible portion is redeemed at the expiry of the stipulated period. If the
conversion takes place at or after 18 months, the conversion is optional at the discretion
of the debenture holder.

FULLY CONVERTIBLE DEBENTURES WITH INTEREST

(OPTIONAL)
In this case there is no interest payment involved say for the first 6 months. Then the
holder can exercise option and apply for securities at a premium without paying
additional amount. However interest will be payable at a determined rate from the date of
first conversion to second/final conversion and in lieu thereof equity shares are issued.

44
Upon conversion of each part, the face value stands reduced proportionately on the date
of conversion.
BASIC FEATURES OF CONVERTIBLE DEBENTURES

• Debentures are issued for cash at par.

• They are converted into specified or unspecified number of equity shares at the end of
the specified period. The ratio at which the convertible debentures are exchanged for
equity shares is known as conversion price or conversion ratio which is worked out by
dividing the face value of a convertible debenture by its conversion price. For instance if
the face value of a convertible debenture is ` 100 and it is convertible into two equity
shares, the conversion price is ` 50 and the conversion ratio is 2. The difference between
the conversion price and the face value of the equity share is called conversion premium.

• Convertible debentures may be fully or partly convertible. In case it is fully convertible

the entire face value is converted into equity shares on expiry of the stipulated period. If
partly convertible, the convertible portion is converted into equity shares on expiry of the
specified period and the non convertible portion is redeemed at the expiry of certain
period.

• Conversion into equity shares may take place in one or more stages at the end of
specified period or periods in the case of fully or partly convertible debentures.

• If one or more parts of the debentures are convertible after 18 months, a company
should get a creditrating done by a credit rating agency approved by SEBI. Fresh rating is
required if debentures are rolled over.

• Convertible debentures of public companies are listed on the stock exchanges to assure
liquidity to the holders. However, even today debt instruments are not actively traded in
Indian stock exchanges.

45
ADVANTAGES OF CONVERTIBLE DEBENTURES

The advantages of convertible debentures to the company are –

1. Capitalisation of interest cost till the date of commissioning of the project is allowed in
accordance with accounting principle. If the conversion of the debentures is duly linked
with the commissioning of the project the entire interest cost can be capitalised, without
charging the interest to profit & loss account and pulling down the profits of the
company.

2. Convertible debentures carry lower interest as compared to the rate charged by the
Banks and Financial Institutions.

3. From the point of view of the debt equity ratio the convertible part of the debentures is
treated as equity by financial institutions. The company is thus enabled to have a high
degree of flexibility in financing its future projects.

4. Equity capital gets increased after each conversion, facilitating easier servicing of
equity by payment of dividend.

5. Tax benefits are higher as interest on debentures is allowed as a deduction in

computation of taxable income of the company. Additionally a company having a proven
track record and future earning potential will be able to charge reasonable premium at the
time of conversion.

6. In the case of term loans from FIs and Banks they usually impose many conditions on
management including placing their representative on the board. In the case of
convertible debentures there is thus a greater degree of autonomy for the companies.

46
The advantages of the convertible debentures to the investors are –

1. The investor is assured of a fixed return by way of interest on the debentures till
conversion. On conversion into equity the investor becomes entitled to receive dividend
declared on equity shares. The advantage to the investor is that he receives a fixed return
on his investment by way of interest even during the gestation period and project
implementation period.

2. As price of equity shares tends to rise on completion of the project of the company, the
investor gets value appreciation on his investment, if converted into equity.

3. In most cases, debentures carry security with a charge on all or a part of

movable/immovable properties of the company. This assures prompt payment of
principal and interest by invoking the assistance of a debenture trustee. However in terms
of SEBI Regulations where the debentures have a maturity period of 18 months or less it
is mandatory for the company to create security on the debentures.

4. A fair amount of liquidity is enjoyed by convertible debentures listed on the stock

exchanges depending on the track record of the companies. Even if debentures are not
traded as actively as equity shares, convertible debentures of good companies command
reasonable liquidity. Where a debenture has several parts, each part of the convertible
debentures can be traded separately or in full on the stock exchanges.

5. The following options are available to the investor who has bought convertible
debentures issued in several parts:
(a) To sell all the parts immediately on allotment;
(b) To sell one or more parts and retain other or others till conversion and to obtain equity
shares for retention or sale.

47
DISTINCTION BETWEEN FULLY CONVERTIBLE AND PARTLY
CONVERTIBLE DEBENTURES

Characteristics Partly convertible Fully convertible debentures

debentures

Suitability Better suited for companies Better suited for companies

with established track record without established track
record

Capital base Relatively lower equity Higher equity capital on

capital onconversion of conversion ofdebentures
debentures

Flexibility in financing Favourable debt equity ratio Highly favourable debt equity
ratio

Classification for debt- Convertible portion classified Classified as equity for debt-
equity ratio computation as ‘equity’and non- equitycomputation
convertible portion as ‘debt’

Popularity Not so popular with investors Highly popular with investors

Servicing of equity Relatively lesser burden of Higher burden of servicing of

equityservicing equity

In the case of partly convertible debentures, debenture redemption reserve has to be

created for 50% of the face value of the non-convertible portion. The facility of buy-back
is also permissible in respect of non-convertible portion of debentures.

In contrast no reserve for debenture redemption is required for fully convertible

debentures nor are buy-back arrangements permissible.

48
 Sometimes companies issue zero interest fully convertible debentures. In this case,
investors are not paid any interest till the date of conversion or upto the notified date,
after which they are converted into shares. For the investor the investment amount is
lower and cost of conversion also is less. Further this helps them as a means of tax
planning since interest which is otherwise taxable is not paid. The capital appreciation at
the time of conversion is treated as capital gains where tax rate is less. Companies also
prefer this instrument because they are able to avoid payment of interest.

Issue and Redemption of Debenture:

When a company desires to borrow a considerable sum of money for its expansion, it
invites the general public to subscribe to its debentures. Debenture is a certificate issued
by the company acknowledging the debt due by it to its holders and is issued by means of
a prospectus in the same manner as shares.

Section 2 (12) of the Companies Act states that “a debenture includes debenture stock,
bonds and any other securities of a company, whether constituting a charge on the assets
of the company or not”.

Difference between shares and debentures:

 Ownership:

A shareholder is considered to be the owner of a company whereas a debenture holder is

known to be a creditor. A share is a part of equity capital whereas a debenture is a part of
a loan capital (borrowed capital).

 Return:

Returns on shares are known as dividends whereas that on debenture is called interest.

49
 Appropriation:

Dividend is an appropriation of profits whereas interest is a charge against profits.

 Voting rights:

Shareholders hold voting rights whereas debenture holders enjoy no such right.

 Charge:

Shares do not create any charge on the assets of the company, whereas debentures do.

 Redemption:

The share capital is not to be returned during the lifetime of the company, whereas
amount of debentures has to be returned after a given period of time.

 Purchase:

A company cannot purchase its own shares, but can purchase its own debentures from
the open market.

 Convertibility:

Shares cannot be converted into debentures. Debentures, on the contrary, can be

converted into shares according to the conditions of issue of debentures.

Types of Debentures:
Convertibility Point of View

1. Convertible debentures:

50
 These can be converted into equity shares of the issuing company after a predetermined
period of time. These may be Partly Convertible (part of these instruments are converted
into Equity shares in the future at notice of the issuer) or Fully convertible Debentures
(fully convertible into Equity shares at the issuer’s notice).

2. Non-convertible Debentures:
These are regular debentures which cannot be converted into equity shares. These are
debentures without the convertibility feature; these usually carry higher interest rates than
their convertible counterparts.

Security Point of View

1. Secured Debentures:

These instruments are secured by a charge on the fixed assets of the issuer company. So
if issuer fails to pay the principal or interest amount, assets can be sold to repay the
liability towards debenture holders.

2. Unsecured Debentures:

These instruments are unsecured, meaning, that if the issuer defaults on payment of the
interest or principal amount, the investor is treated like other unsecured creditors of the
company.

Redemption Point of View

1. Redeemable Debentures:

Redeemable debentures are those which are redeemed or paid off after the termination of
fixed term. The amount paid off includes the principal amount and the current year’s
interest. The company can choose between the options of redeeming a specific number of
debentures each year or redeeming all the debentures at a specified date.

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2. Irredeemable or Perpetual Debentures:

Irredeemable debentures are those debentures which do not have any particular date of
redemption. They are redeemed either in the event of winding up or at a very remote
period of time.

Issue of Debentures:
The process followed for issue of debentures involves the investors applying for
debentures basis the prospectus issued by thr company. Either the entire amount is paid
on application or it is paid in instalments. Debentures can be issued at par, discount or
premium. They can also be issued for a consideration other than cash.

1. Issue of Debentures at Par

Debentures are known to be issued at par when the issue price is equivalent to the face
value.

Bank A/c Dr.

On receipt of application money To Debenture Application
and Allotment A/c

Debenture Application and Allotment A/c Dr.

On acceptance of application To Y% Debentures A/c
money
To Bank A/c

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2. Issue of Debentures at Discount
Debentures, when issued at a price below their nominal value, are said to be issued at a
discount. Discount on issue of these debentures is a capital loss and is accounted for on
the asset side of the balance sheet, under the head of Miscellaneous Expenditure, till it is
written off (Either by debiting it to profit and loss account or out of the capital profits,
during the debentures’ life time).

Bank A/c Dr.

On receipt of application money To Debenture Application
A/c

On transfer of application Debenture Application A/c Dr.

money To Y% Debentures A/c

Y% Debenture Allotment A/c Dr.

On Allotment money being due
Discount on Issue of Debetures A/c Dr.

To Y% Debentures A/c

Bank A/c Dr.

On receipt of allotment money
TO Y% Debenture Allotment A/c

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3. Issue of Debentures at a Premium
When debentures are priced at a value higher than the nominal value, they are issued at a
premium. The amount of premium is credited to the Securities Premium Account and is
shown on the liabilities side of the balance sheet, under the head of Reserves and Surplus.

Bank A/c Dr.

On receipt of application money To Debenture Application
A/c

Debenture Application A/c Dr.

On transfer of application money
To Y% Debentures A/c

Y% Debenture Allotment A/c Dr.

On Allotment money being due,

To Y% Debentures A/c
including premium

To Securities Premium A/c

Bank A/c Dr.

On receipt of allotment money
TO Y% Debenture Allotment A/c

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Issue of Debentures for Consideration Other Than Cash:
In some cases, when companies purchase assets from vendors, instead of making the
payment in cash, chooses to issue debentures for a consideration thereof. In this case too,
they can be issued at par, discount or for a premium.

Sundry Assets A/c Dr.

On purchase of assets
To Vendor A/c

Vendor A/c Dr.

On issue of debentures at par
To Debentures A/c

Vendor A/c Dr.

On issue of debentures at To Debentures A/c

premium
To Securities premium A/c

Vendor A/c Dr.

On issue of debentures at Discount on issue of debentures A/c Dr.

discount
To Debentures A/c

Issue of Debentures as Collateral Security:

When debentures are issued as security in addition to any other security against a loan or
bank overdraft, such an issue of debentures is known as issue of debentures as collateral

55
 security. The underlying idea of such an issue is that if the company does not repay the
loan and the interest and the principal security is not sufficient, the bank becomes entitled
to sell the debentures in the market or choose to keep the debentures with it. If the
company repays the loan, the bank shall return the debentures issued as collateral security
to the company.

In the accounting books of the company issue of debentures as collateral

security can be credited in two way :

1. First method :

No Journal entry to be made in the books of accounts of the company for debentures
issued as collateral security. A note of this fact is given in this case.

2. Second method :

Entry to be made in the books of accounts of the company.

Journal Entry:

Debenture Suspense A/c Dr.

To Y % Debentures A/c

(Being the issue of Debentures of Rs…. each issued as collateral security)

Interest on Debentures:
Interest on Debentures is calculated at a fixed rate on its face value and is usually payable
half yearly & is paid even company is suffering from loss because it is charge on profit.

56
1. When Interest is due

Debentures Interest A/c Dr.

To Debentures holder A/c

To Income Tax Payable A/c

When Interest is paid

2.

Debentures Holder A/c Dr.

To Bank A/c

3. On payment of Income Tax to Government

Income Tax Payable A/c Dr.

To Bank A/c

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 4. On Transfer of Interest on Debenture to statement of profit and Loss
A/c

Statement of Profit and Loss Dr.

To Debenture Interest A/c

Redemption of Debentures:

Redemption of debentures means repayment of the due amount of debentures holders for
the purpose of discharging the company’s liabilities. It may be at par or at premium.

Time of Redemption

1. At maturity :

When repayment is made at the date of maturity of debentures which is determined at the
time of issue of debentures.

2. Before maturity :

If articles of association and terms of issue mentioned in prospectus allows, then a

company can redeem its debentures before maturity date.
Redemption Methods

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1. Redemption in Lump-sum :

When redemption is made at the expiry of a specific period, as per the terms of issue.
The time of repayment is known in advance.

 (If redeemed at par)

Y% Debentures A/c Dr.

To Debenture holders A/c

Debenture holders A/c Dr.

To Bank A/c

 (If redeemed at premium)

Y% Debentures A/c Dr.

Premium of Redemption of Debentures A/c Dr.

To Debenture holders A/c

Debenture holders A/c Dr.

To Bank A/c

2. Redemption by payment in installments :

In this method a certain proportion of debentures are redeemed each, year, the debenture
for which repayment is to be made is selected by draw of lots.
59
 (If redeemed out of profits)
Profit and Loss Appropriation A/c Dr.

To DRR A/c

Y% Debentures A/c Dr.

To Debenture holders A/c

Debenture holders A/c Dr.

To Bank A/c

 (If redeemed out of capital)

Y% Debentures A/c Dr.

To Debenture holders A/c

Debenture holders A/c Dr.

To Bank A/c

3. Redemption by purchases in open market :

If articles of association of a company authorize, it may purchases its own debentures

from open market i.e. stock exchange; for the purpose of cancellation.

 (Purchase for immediate cancellation)

Debentures A/c Dr.

60
 To Bank A/c

To Profit on Redemption of Debentures A/c

 (On transfer of profit)

Profit on Redemption of Debentures A/c Dr.

To Capital Reserve A/c

4. Redemption by conversion into Shares:

A company may choose to redeem its debentures by converting them into shares; which
may be issued at par, discount or a premium. No DRR A/c is required in case of
convertible debentures as no funds are required for redemption.

Differences Between Shares And Debentures

Following are the main differences between shares and debentures:

1. Ownership
The share of a company provides ownership to the shareholders. Debenture-holders are
creditors of a company who provide loan to the company.

2. Identity
Person holding share is known as shareholder. person holding debenture is known as
debenture-holder.

3.Certainty Of Return
No certainty of return in case of loss for the shareholder. Debenture-holder receives the

61
interest even if there is no profit.

4. Convertibility
Shares can not be converted into debentures. Debentures can be converted into shares.

5. Control
Shareholders have the right to participate and vote in company's meeting. Debenture
holders do not possess any voting right and can not participate in meeting.

62
Chapter 5. Data analysis and Interpretation
Question
On 1st April, 2014, A Ltd. issued 45,000 shares of Rs.100 each payable as follows:
Rs. 30 on application;
Rs. 20 on allotment;
Rs. 25 on 1st October, 2014; and
Rs. 25 on 1st February, 2015.
By 20th May, 2014 40,000 shares were applied for and all applications were accepted.
Allotment was made on 1st June. All sums due on allotment were received on 15th July;
those on 1st call were received on 20th October. Journalise the transactions when
accounts were closed on 31st March, 2015.
Answer

Case of under subscription

Shares issued by the company 45000
Shares applied by the public 40000
A Ltd. Journal

Date Particular Amount Amount

(Dr.) (Cr.)

May 20 Bank A/c (40000 x Rs. 30) Dr. 12,00,000

To Share Application A/c 12,00,000

(Application money received on

40,000 shares at Rs. 30 per share.)

June 1 Share Application A/c Dr. 12,00,000

To Share Capital A/c 12,00,000

(Application money transferred to

Share capital)

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 Note : Share Application A/c will be
transferred

to share capital A/c on the date of

Allotment.

June 1 Share Allotment A/c Dr. 8,00,000

(40000 x Rs. 20) 8,00,000

To Share Capital A/c

(Amount due on allotment on 40000

shares @ Rs. 20 per share)

July 15 Bank A/c Dr. 8,00,000

To Share Allotment A/c 8,00,000

(The amount due on allotment

received)

Oct. 1 Share First Call A/c Dr. 10,00,000

(40000 x Rs. 25) 10,00,000

To Share Capital A/c

(Amount due on First call on 40000

shares @ Rs. 25 per Share)

Oct. 20 Bank A/c Dr. 10,00,000

To Share First Call Account 10,00,000

(Amount received on First call)

Feb. 1 Share second and final Call A/c Dr. 10,00,000

(40000 x Rs. 25) 10,00,000

64
 To Share Capital A/c

(Amount due on Second and Final call

on 40000 shares @Rs. 25 Per share)

Mar. 31 Bank A/c Dr. 10,00,000

To Share Second & Final Call A/c 10,00,000

(Amount received on Second and

Final call)

Question
X Ltd. Invited applications for 11,000 shares of Rs.10 each, issued at 20% premium
payable
as :
Application Rs. 3 (including Re.1 premium)
Allotment Rs. 4 (including Re.1 premium)
Ist call Rs. 3
IInd call Rs. 2

Applications were received for 24,000 shares

Category I :- One fourth of the shares applied for allotted 2000 shares
Category II :- Two fourth of the shares applied for allotted 9000 share
Category III :- Remaining applications were rejected
Excess amount received is to be adjusted towards allotment and any amount beyond that
shall be refunded.

Mr. Remo, holding 300 shares out of category II failed to pay allotment and two calls and
his shares were forfeited and re-issued @ Rs.11 fully paid up.
Pass journal entries.

65
Answer

Journal of X Ltd.
Particulars Amount Dr. Amount Cr.

Bank A/c Dr. 72,000

To Share Application A/c 72,000

(Application money received on 24,000 shares

@ Rs.3)

Share Application A/c Dr. 72,000

To Share Capital A/c 22,000

To Securities Premium A/c 11,000

To Share Allotment A/c 17,000

To Bank A/c 22,000

(Amount transferred to share capital on 11,000

shares and excess amount adjusted & refunded)

Share Allotment A/c Dr. 44,000

To Share Capital A/c 33,000

To Securities Premium A/c 11,000

(Amount due on allotment on 11,000 shares @

Rs.4 including premium of Rs.1)

Bank A/c Dr. 26,100

To Share Allotment A/c 26,100

(Amount received on allotment)

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Share First Call A/c Dr. 33,000

To Share Capital A/c 33,000

(Amount due on Ist call on 11,000 shares @

Rs.3)

Bank A/c Dr. 2,100

To Share First Call A/c 2,100

(Amount received on Ist call on 10,700 share @

Rs.3)

Share Second Call A/c Dr. 22,000

To Share Capital A/c 22,000

(Amount due on IInd call on 11,000 shares @

Rs.2)

Bank A/c Dr. 21,400

To Share Second Call A/c 21,400

(Amount received on IInd call on 10,700 shares

@ Rs.2)

Share Capital Account A/c Dr. 3000

Securities Premium A/c Dr. 300 900

To Share Forfeiture A/c 900

To Share Allotment A/c 900

To Share First Call A/c 600

To Share Second Call A/c

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(300 Shares of Mr. Ram forfeited, who failed to
pay his dues)

Bank A/c Dr. 3300

To Share Capital A/c 3000

To Securities Premium A/c 300

(Shares reissued @ Rs.11 fully paid up)

Share Forfeiture A/c Dr. 900

To Capital Reserve A/c 900

(Amount transferred to Capital Reserve)

Working notes:

Calculation for adjustment and refund

Catego No. of No. Amount Amount Amount Refun Amount Amount
ry of d
Share received required adjuste due on receive
s Share on d d
on allotme
s
applie applicati applicati on nt on
d allott on on allotme
allotme
e nt
for nt
d

I 6,000 2,000 18,000 6,000 8,000 4,000 8,000 NIL

II 12,00 9,000 36,000 27,000 9,000 NIL 36,000 26,100

0

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III 6,000 NIL 18,000 NIL NIL 18,00 NIL NIL
0

Total 24,00 11,00 72,000 33,000 21,000 22,00 44,000 26,100

0 0 0

Category I
Excess Money Received on (6000-2000)4000 X3= 12000
Allotment due 2000 x 4= 8000
Excess adjusted towards allotment = 8000
Refund = Excess money Received – Excess Adjusted towards allotment
= 12000-8000=4000

Category II
Excess Money Received on (12000-9000) 3000 x 3=9000
Allotment due 9000 x 4= 36000
Excess adjusted towards allotment 9000
Category III
Refund 6000 x 3 = 18000
Mr. Remo
Allotted shares 300
Applied share 400
Excess shares 100
Excess Application money Rs. 300/-
Allotment due
300 shares x Rs. 4 Rs.1,200/-
-excess amount Rs. 300/-
Amount not received Rs. 900/-
First call due
300 shares x Rs. 3 Rs. 900/-

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Second call due
300 shares x Rs. 2 Rs. 600/-

Question
KG Limited furnishes the following summarized Balance Sheet as at 31st March, 2015,
Liabilities (Rs. in lakhs) Assets (Rs. in lakhs)

Equity share capital 1,200 Machinery 1,800

(fully paid up shares of Rs. 10

each)

Securities premium 175 Furniture 226

General reserve 265 Investment 74

Capital redemption reserve 200 Inventory 500

Profit & loss A/c 170 Trade receivables 160

12% Debentures 750 Cash at bank 740

Trade payables 645

Other current liabilities 95

3,500 3,500

Liabilities (Rs. in lakhs) Assets (Rs. in lakhs)

Equity share capital 1,200 Machinery 1,800

(fully paid up shares of Rs. 10

each)

On 1st April, 2015, the company announced the buy back of 25% of its equity shares @
Rs.15 per share. For this purpose, it sold all of its investments for Rs. 72 lakhs.

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On 5th April, 2015, the company achieved the target of buy back. On 30th April, 2015 the
company issued one fully paid up equity share of Rs. 10 by way of bonus for every four
equity shares held by the equity shareholders.

You are required to:

(1) Pass necessary journal entries for the above transactions.

(2) Prepare Balance Sheet of KG Limited after bonus issue of the shares

Answer

In the books of KG Limited

Journal Entries
Date Particulars Dr. Cr.

(in lakhs) (in lakhs)

April 1 Bank A/ c 72
Dr.
2
Loss on sale of Investment A/c Dr.
74
To Investment A/c

(Being investment sold on loss)

April 5 Equity share capital A/c Dr. 300

Premium payable on buy back A/c 150

Dr.

To Equity shares holder A/c

450
(Being the amount due to equity

71
 shareholders on buy back)

Equity shareholder A/c Dr. 450

To Bank A/c 450

(Being the payment made on account

of buy back of

30 Lakh Equity Shares)

April 5 General reserve A/ c Dr. 265

Profit and Loss A/ c Dr. 35

To Capital redemption reserve A/c 300

(Being amount equal to nominal

value of buy back

shares from free reserves transferred

to capital

redemption reserve account as per the

law)

April 30 Capital redemption reserve A/c Dr. 225

To Bonus shares A/c (W.N.1) 225

(Being the utilization of capital

redemption reserve

to issue bonus shares)

Bonus shares A/ c Dr. 225

To Equity share capital A/c 225

(Being issue of one bonus equity

72
 share for every four

equity shares held)

Securities premium A/c Dr. 150

To Premium payable on buy back A/c 150

(Being premium payable on buy back

adjusted from

securities premium account)

Balance Sheet (After buy back and issue of bonus shares)

Particulars Note No Amount

(in Lakhs)

I. Equity and Liabilities

(1) Shareholder's Funds

(a) Share Capital 1 1,125

(b) Reserves and Surplus 2 433

(2) Non-Current Liabilities 750

(a) Long-term borrowings

- 12% Debentures.

(3) Current Liabilities

(a) Trade payables 645

(b) Other current liabilities 95

73
 Total 3,048

II. Assets

(1) Non-current assets 3

(a) Fixed assets 2,026

(i) Tangible assets

(2) Current assets

(a) Current investments

(b) Inventory 500

(c) Trade receivables 160

(d) Cash and cash equivalents 362

(W.N. 2)

Total 3,048

Notes to Accounts

1. Share Capital
Equity share capital (Fully paid up shares of Rs.10 each) 1125

2. Reserves and Surplus

General Reserve 265

Less : Transfer to CRR (265)
Capital Redemption Reserve 200
Add: Transfer due to buy-back of shares from P/L 35

74
Transfer due to buy-back of shares from Gen. res. 265
Less: Utilisation for issue of bonus shares (225) 275
Securities premium 175
Less: Adjustment for premium paid on buy back (150) 25
Profit & Loss A/c 170
less : Loss on sale of investment (2)
Less : Transfer to CRR (35)
133 433

3. Tangible assets
Machinery 1800
Furniture 226
2026

Working Notes:

1. Amount of bonus shares = 25% of (1,200 – 300) lakhs = Rs. 225 lakhs
2. Cash at bank after issue of bonus shares ‘in lakhs’
Cash balance as on 1st April, 2015 740
Add : Sale of investments 72
Less : Payment for buy back of shares (450) 362
Note:
In the given solution, it is possible to adjust transfer to capital redemption reserve account
or capitalization of bonus shares from any other free reserves also.

Interpritation

The above Data analysis provides the result that every allotment of shares or debentures
is done to collect the funds to finance the others such as buy back of shares or redemption
of shares or debentures or repay their loans or advances.

75
The company can adopt any mode to collect the funds from the general public and other
financial institutors.

Companies do the same by issuing different types of shares and debentures to fulfill their
purposes. Here we can see that while applying for shares or debentures the investors
considers various factors before make such investments. They Consider some factors
such as rate of returns, time period, reputation of company in the market, mode of
allocation like whether primary market or secondary market etc.

Questionnaire Method

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Chapter 6

CONCLUSION

In view of changes in the national and international economic environment and expansion
and growth of economy of our country, the central government after due deliberations
decided to repeal the companies act, 1956 and enact a new legislation to provide for new
provisions to meet the changed national and international, economic environment and
further accelerate the expansion and growth of our economy.

The introduction of a new Companies Act, after the old Act has served all for over five
decades, is a welcome and a significant step. The intentions of the Central Government,
particularly the MCA, in drafting this law with several new provisions and concepts and
prescribing extensive Rules to make the law dynamic and responsive to the needs of the
corporate sector are greatly laudable. While the corporate sector would certainly be
expected to conduct its affairs responsibly and transparently, the government would have
to demonstrate that its intentions are to encourage the corporate sector and not to stifle or
strangulate it. If the corporate sector prospers, society and all its stakeholders will
prosper. The Government and the corporate sector must work together to build mutual
confidence and help advance the economic development of India. Each one of us may
have a different perspective with regard to the new company law but let us believe for a
moment that the new law has been introduced by the central government with the best
intentions and that it is now the turn of the corporate sector to demonstrate that it will
play according to the Rules. The government on its part must trust the corporate sector to
function honestly but keep a watch.

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Chapter 7 Bibliography and webliography

Websites:

https://www.ICSI.edu
https://www.ICAI.org
https://en.wikipedia.org/Company Accounts.
https://slideplayer.com

https://www.caclubindia.com

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REFERENCES

[1] For books: Dr. J.P. Sharma, “an easy approach to company and compensation law”,
(2010), at pg 10-14

[2] For books: Anil kumar, “corporate laws -third revised edition based on companies act
2013”, (2014)

[3] The economic times, “No law 'perfect', new Companies Act provides for self-
regulation: Corporate Affairs Ministry”, Dec 28, 2014

[4] Ms. Renuka kumar, “the companies act, 2013 and company secretaries”, September-
2013, chartered secretary (mag.), pg-1022-25

[5] T.N. Pandey, “the concept of CSR under the companies act 2013”, chartered
secretary (mag.), pg-1022-25

[6] The economic times, “New Companies Act to give impetus to growth, says
Sadananda Gowda”, Dec19, 2014

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 APPENDIX

Date of Survey
Respondent's serial no
Name :

Q1. Do you invest in any of the following securities?

[a] Shares
[b] Debentures

Q2. which factors do you consider while opting/looking for investment ? (Give ranks
1,2,3....)
[a] Quick value appreciation _______
[b] Better annual returns _______
[c] Chances of getting bonus / rights _______
[d] Company’s reputation _______
[e] Safety of money _______
[f] Loan facility _______

Q3. (If investing in shares) what type of markets are you more interested in ?
[a] New issues (Primary market)
[b] Buying and selling of shares in the secondary market

Q4. How do you get your information about a new issue or a good scrip in the market ?
[a] Newspaper/Magazines
[b] Radio
[c] TV
[d] Brokers
[e] Friends/Relatives.

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Q5. If you are given an option to invest Rs. 1,00,000/-, in what will you invest this
money?
[a] Fixed deposits
[b] Shares
[c] Debentures
[d] None of the above

Q6. Which investments do you presently own? Please tick one or any of below.
[a]Equity Shares
[b]Debentures

Q7. How profitable are investment in initial public offers. Please tick any one.
[a] Very profitable
[b] Profitable
[c]Not profitable

Q8. What is your experience with the extent of information provided to you by the
company about its fundamentals at the time of a public issue? Please tick any one.
[a] Very Satisfactory
[b] Satisfactory
[c] Not satisfactory
[d] Extremely dissatisfactory
[e] Can't say

Q9. Which of the following policies do you generally adopt? Please tick any.
[a] Sell shares within few days/weeks/one month at the most Yes/No
[b] Hold shares for few months, but less than a year Yes/No
[c] Hold shares for some years. Yes/No

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Q10. Have you invested in an IPO based on its grade? Please tick any one.
[a] Yes
[b] No

Q11. If yes, how helpful have been these grades in making a judgement about the IPO?
Please tick any one.
[a] Very Helpful
[b] Helpful
[c] Not Helpful
[d] Misleading

Q12. Rank the following Companies you think is good in Financial Position & also gives
good dividend to its investors.
[a] Reliance Industries
[b] TATA Consultancy Services
[c] Yes Bank
[d] DHFL

Q13. Do you invest on a regular basis or occasionally?

[a] Regular
[b] Occasionally
[c] Rarely

Q14 . Remarks and suggestions if any

THANK YOU FOR YOUR VALUABLE TIME

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