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    Welingkar finance notes

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    Welingkar finance notes

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    Welingkar finance notes

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    Sources or LEINANCE —> LiFe Buovp oF aus. BASE FoR gueRy Qusimes: Aurwirs = soessumaraea'y ‘Aad Ractah” rove bes a Ste aonb a es Share: — - a j A Shest iso. hace Sy tn Shane Capital y ME = Compo htt Inchaeles St9de except Whim a Aislin At Antlineen Stock chase Io expecta |_et_fenpiiad": —w Shane Capital =H Fae fae — @) lisse vatnn - 0 | raat pala Ses — 19 _[astat Vertue a a © Peienmedive numbers — | —jn} |_A.Shase is © pont ot a Umit (x the tote shove Cepdal_ o.| p Whe Semablact, ba shaee, copa cad daa 24 Shaant esrveee zen jBetg Shane hee 6 Valine Ate en Ent Vedi Pesce esterase nr aes Fred hehe Fee ex? Ral fol, PF, fa 50 Re two We 10 es ‘Abie is Mie Velo ob etic, Mie Sheen one | tecwed A pullin = She Sthest Gabe issmed be Oba public rage 2 Abele Oe Fase Veloe* Sp aretemnin [is em oo Mead AT OAR: Der aig cepa 2 sidan —— 9 | Sa baat ca Cocpovy the Shessbaldis so — Vite fem of BR Cape. sey _ | Righes-__ — 4 _Shese Compose Canthrsin Big hts on ibs Molde | Atich cs agit to vel at a mating eight Ia — —Heatee el 4 wna ager celta ind 1 6 A stare is he sales nto sae capa atures of Shares [shows the ownership of» sharhole. ach stare has isn umber, which is noted in sar eit, Shar is & movable propery of member ‘A saris not any visible hing tis shown by sae cee cin the fm the “dea” sae och share has vale expresiedin terms of money. Tee ay be 7 Fac aut: Ti ae switche Memes oF Associtien, 1) Issue value: ie the price at which lla ts ees, For expe, sue at par " onpiny sls its has For cramp, oc a premium o discount ©) Market valu This aloe of sae i tenn by demas sly free in the shire tke. ‘A Sbarcholer is eatited to get share in the nt pit of te company is eld “vient A company can ise tivo pet of shares — 2) Equity shares 0) Preference shues Inds of shares ‘Thee may be diferet types of shares depending wpon right to contol, iacame, andi. The owing cha gives he snapshot view of dient kins of she. SHARE ————,, ares Preference sharts Bastyr with ') Cumultive pretrece share oma voing sgt 4 Non Curative preface shares © Bapy stares with |i) Patigting pete shares Seat ight fn) Non Pacing prea shares ¥) Converibe preference share i) Non Convert preference share vi) Redeemable prfece shares vil) Noo Redeemable preference shies Equity Shares Equity shares ae also know as ‘ordinary shares’. For legal razon, company can not exist tout equity stares Companies Act 1956 defines equity shares as “thse shares which ae not preference shares" 3 Te above dfnion reveals he wo importa tas of ity ses The equity shares do ot ejoy preference in geting. vied The equity shares domo have print For payer of capil at etme of winding up of the ‘Thus, qty staboles do at enjoy any speci privilege in eget of payment of dividend a sepusmest of eal at he Hine of waning up of te compar, quty shares ate findimesal and basic soure of Financing activites of bans, Equity sarcboldrs own te company and bea ulimate rik asacied with the oumertip They beat rnscran ik of bis. Af png cis of alate vests te maining fds beng oy sSarholers Thus egy stareolies ae "sia hima’ ait hearts nd income guy shares do pot cary any fed convient charge. They ae pid dividend atte rat recommended by Borst of Diets If hee sno pri, no dividend wil be payable. Simla if ‘hee i Tess profit les dividend wil be pa Ie seta because of tis posto, equity capital is ‘cnn a Rik capital’. The owners of eau share re el ik ber. However, equly sharks pari in be maagenant of the company. They ae invited © fernerlmeeting and a given oral ong nights They et the meets fo he manage ‘ofthe company. Equyshareoldr ar el owners of company, Features of equity shares > GE) on Permanent capital: Equity sare are irredeemable shares. The amo recived frm emuiy shares is not refundable by the company during the ie ime. Equity shares became redeemable cnly in the event of winding up ofthe company Equity shareholders provide Tong ter and ‘exmanent capital to te company Flctuatng dividend :Egity shares do ot havea fixe eof dividend. The rate of dividend epeods upon aout of profit earned by company. If company cams mae prof, dividend is ida higher at. On thy ater hand if ee is insulin profit, Board of Diets may a postpone the payment of divided. The shareholders ean not compe them o declare at pty the dividend, The income of equity dure is img and uncertain. “hey get dvdend wich is alvays Nocti No preferential right: Eitysareboders do ot enjoy preferential iit in espet of payment of vied It means equty shareholder pai vient ny alter dvitend on pterece shares Tas been paid Atte ime of winding up of company ali, the emt shscholess are pai inthe as. They ae the last claimants If no suis agent i vale ae paying debs ae pefeeace shares, cy Seok will ot gt anyting, Ths, ey arco sin send incase of ting ‘ividend on their shares as wel gong back i capital athe tire of iui of company. Rights: Equity shareholders enjoy certain righ, These inode — 2) Right to sharin prof, when dibte a vides, ithe most important ight of equity sharsboldr If company is nice and makes handcme pf, they have advange of Tare dividend 1) ight to vot isthe basic ight of guy sharhokes by which they let dirctors, amend “Memoranda, Articles ee. ©) Right to inspect books of acoustof thei company of which they ae owas. 8) Right to transfer shares is one ofthe mos important ight of sro. Control ; Te contol of company is vested inequity sharchaldes They ae often dsrbed as real masters ofthe company. 18 bce they exoy excsive voting ight The voting rights of ‘equity sharholder are protected ae fra posble Equity shacboes may exercise tir voting Fights by proxies, without atening meting in penon. The Act provides the right to cst ot in ‘proportion to number of sharbolings. Egy sarcholiesparipte inthe management of he compar. They cet tir epresetives called Directors on the Board fer the managanent of compen. [Risk : Equity shareholders tear maximum rst in the company. They are described s ‘shoe avorber? when compar has Goan isi I he income of conpeny fl he ate of dividend ‘so comes down. Due to thi, uke value of equity stares goes down resting into capital Toss. Ths, equiy shareholders are main sk takes. ‘Residual claimants: Eqity drcoldes are owners wd hey we rsdn oll eaing ier expenses, tines, ele. have been pad ‘Although equity shareholders we last cleimants they ave avenge of receiving entire eaings that is let ove Face vale : The face valve of equity shares is low, in. compeison to preference shares. It generally 10/- per share or even €Il- pet she, 7 Cin Re DAP ty Re FW me feleD 4 Market Value : Thre is mere cation inthe market vale 0” equity shar in camarion to ‘ber securities, Therefore, epy sare ae more appesing othe specu, ©. Bonus and Right Issue : Bors shares ao issued a gif ety shareholies. They are issued "foe of cost them, They shares ae issued out of scrum pois, These shares a sued tw exstig equity shareholder in certain rato or proportion of tenting shareholdings ~ ao Fey shires gt the beet of igh sue, When a company ses father capil by iswe of ‘tues he exig shakes agen rn get newly ofeed shes Ts led ht sue. Ths equity shrehaldes get he advantage of bona an ight M1 No charge on ass: The ety shes donot cet sy cage on ase of the company. Types of equity shares soe itn 86 of Companies Act 1956, as amenied by te Compass (Amendment) ‘Act 2000, the equity share capil canbe of two pes - with normal voting right © with eel ight "© Baty dar wih oral voi eng igh of cheat hole tl bein poprin 1o is share of pid up equity capital, pty ts wih ent ih Rig of ach ety deel be sw iden ating or ‘otberwise in accordance wih Companies Rule 2001, Dos th proven fx ising sch dares, company can ne shes wt nied ong sighs voting is. They maybe eid to ext te of dvieod iy, 1. Equity Shares 10 Pity shares ate also known as ordinary shares. Every company has to issue equity shares, Fyuity capital is also known as ‘Owned Capitat or Risk Capital’ or ‘Venture Capitai’ Indian Companies Act, 1956 defines equity shares as “those shares which are not preference shares." The definition indicates : * The equity shares do not have preference for dividend. * The equity shares do not have preference for repayment of capital at the time of winding-up of the company, Features of Equity Shares Equity shares have distinct features as follows: Fransferabiiy of Shares Shareholders Value 1. Permanent Capital : The equity share capital represents permanent capital of the company. There is no obligation on the part of the company to repay the capital during the life time of thecompany. The equity shares are isredeemable. The shareholders may get their funds back on the winding up of the company. yo. Ris, Risk to Capital : " There is no guarantee of return of capita, in the case of winding up of the company. Equity shareholders have a residual claim (last claim) on the winding up of the company. There are chances, the equity shareholders may not get back their initial capital invested in the company. Therefore, the equity capital is called the risk capital, 3, Fluctuating Dividend: ‘There is no guarantee of minimum dividend. The rate of dividend depends upon the earnings of the company. If the company makes good profit, then the equity shareholders will get good dividend. If the company makes low profits or loss, then the equity shareholders may not get any dividend. 4.” Voting Rights: ‘The equity shareholders enjoy normal voting rights. They can -vote on all resolutions passed at the shareholders’ meetings. They can exercise their rights either in person or by proxy. The, preference shareholders do not have normal voting rights. 5. Capital Appreciation : Equity shares are subject to capital appreciation ordepreciation. Share capital appreciation takes place when the market value of the shares increases on the stock exchange due to excellent performance of the company. However, Share capital depreciation may take place when the market value of the shares declines on the stock exchange due to poor performance of the company. 6. Benefit of Bonus Share Issue of bonus shares is also called as Capitalisation of Reserves. Companies with good amount of free reserves issue bonus shares, Bonus shares are issued to existing equity shareholders {fiee of cost. The bonus shares are issued in certain proportion to the shares held prior to the issue of bonus shares. The bonus shares can be issued only out of ree reserves built out of profits or share premium collected in cash yy ~\ x (A. Transferability of Shares: aa, Benefit of Rights Issue: |! When an existing company raises further capital by way ofshares and/or debentures, then first priority is given to existing shareholders I the existing shareholders donoacceptsuch right iswue, the shares are issued to the public. The right issue ofshares are issued by the company either at face value or fora premium However, the market value of such shares may be higher “The shares ofa public limited company are frely transferable If the shareholder wants to sell or tranafer the sharés, he ca easily do so, However, in case of certain preferential allot Such as preferential allotment to employees, there is @ lock in period, say three years or so. After.the expiry of the lock in Period, the shareholders can sell or transfer such shares. Controlling Power: “The equity shareholders enjoy control over the management of the company, They control by eesting the Board of Disecors Howey, the control over management is ‘manipulated by @ fart churchalders who hold substantial namber of shares This ree ie the voting rights are in proportion fo the number of equity shares held by each shareholder. ‘Types: Equity sare capital sof two types. As per inion Companies Canendement) Act 2000, the equity share captal can be a) With voting rights, or by With differentia ightsasto dividend, subject to rules and conditions voting or otherwise, | 11, No Charge Over Assets: te any charge over the assets of ‘The equity capital does not crea the firm. | 12, Face Value: Equity shares can be iss ich can peof®1/- toeven® 100/-. Non pe tof the public limited companies: [2 ‘ued of different face value, whi mally, the face value is &10/-of eel 13, Increases Shareholders Wealth: 13 Equity shares increases shareholders wealth, ‘This is due 'o regular dividend and issue of bonus shares. During stock market boom, the share price of reputed companies increases considerably. ‘Types of Equity Shares As per Section 86 Companies Act, 1956 as amended by the Companies (Amendment) Act, 2000, the equity share capital gan be of two types: © With Voting Rights © With Differential Rights +o With Voting Rights: Section 87 of the Act states: ie (@) Every member of a company limited by shares and holding any equity share capital shall have a #ighit to vote on every resolution placed before the compaiy at any general meeting; and (©) Voting right on a poll shall be in proportion to his share of the 8: Propo! paid-up equity capital of the company. With Differential Rights: As per Companies Amendment Act 2000, a company limited by shares can issue equity shares with differential rights. The differential rights are in respect of dividend, voting or otherwise in accordance with the Companies Rules, 2001. The Central Government has prescribed the Companies Rules, 2001 relating to issue of share capital with Differential Rights. The rules state thata company limited by shares may issue equity shares with differential rights with respect to dividend or voting under the following conditions: * Such shares can be issued upto 25% of the issued share capital. _—————eeEe*e’°> > ——s— The company should have distributable profits for three financial years prior to the issue of such shares. The company has not defaulted in repayment of deposits or debentures on the maturity. The company has not defaulted in filing annual returns during the three preceding years. ‘The company has not defaulted in addressing investors grievances. i ‘The company has not been conviced of any offence under = Securities and Exchange Board of India (SEBI) Act, 1992. Securities Contracts (Regulations) Act 1956, + Foreign Exchange Management Act (FEMA) 1999. The Articles of Assogiation of thé company must permit the issue of such shares. Prior approval must be obtained for issuing such shares from ‘the existing shareholders by passing an ordinary resolution at ‘a general meeting. The ordinary resolution stated above should clearly state the degree of voting rights, and the rate of additional dividend. The company is not allowed to convert equity shares with normal voting rights into equity shares with differential rights, and vice-versa, ‘The shareholders of such shares are entitled to bonus shares and rights issue of the same class of shares. + Dueto the provision for issuing shares with differential voting rights, ‘companies can issue shares with limited voting rights or no voting tights. They may be entitled to extra rate of dividend. Such shareholders shall enjoy all other rights (other than voting) to which the normal equity shareholder is entitled. iy 2 Pe Il, Preference Shares Preference shares are those shares which enjoy preference over equity share capital. The two main preferences are © Fixed annual dividends, + Return of capital in the event of winding upof the company, Although, the preference sharcholders enjoy the above preferences, they do not enjoy normal voting rights. They are entifled to vote only on those matters that affect their interests. The maximum rate of dividend permissible is 14 per cent per year. Features ‘The following are the features of preference shares : 1. Preference for Dividend : The preference ihareholders get a Preference for dividend. They enjoy a preference for payment of dividend over the equity shareholders, 2. Preference for Repayment of Capital : The preference shareholders get preference in repayment of capital over the equity shareholders atthe time of winding up of the company. 3. Redeemability of Shares: As per the Companies (Amendment) Act, 1988, a company cannot issue irradeomable preference shares. In other words, preference shares are to be redeemed (paid back) after certain period of time. 4. Fixed Dividend Rate: The preference shareholders gota regular dividend. The dividend rate is fixed. The rate of dividend varies from one company to that of ariother. 5, Nature of Capital : The preference shares are 10 be redeemed after a certain period of time. Therefore, unlike equity shares, they do not provide permanent share capital 6 Capital Appreciation : The capital appreciation is low as compared to equity shares of profitable companies. 7. Risk Factor: There is less risk for preference shareholders. This is because, they have preference for dividend and return of capital over the equity shareholders. Is .d for a face Face Value: Preference Shares a7 normally issue value of € 100/- ‘arenot entitled for the Bonus Shares : Preference Shareholders fi he ° reap onus share They are ako notte fox RBS of Shares’ ing Ri | voting rights @! 10. Voting Rights : They do not enjoy normal f company meetings. They have vating rights in respect of only those matters which affects theirinterests. cautious investors who do not Ji.» Nature of Investors: Normally, preference shares, like to take large risks prefer to opt for 412, ‘Typed ! There are several types of preference shares such as cumulative, non-cumulative, redeemable, etc f (Noté: For more points refer distinguish between preference n/s equity shares.) “Types of Preference Shares The preference shares can be broadly divided into four groups as shown below"! 8 0 vy PREFERENCE SHARES Participating ——Cumulitve ‘Redeemable Converib ‘and ‘and and and Non-Particlpating Non-Cumulative Irredeemable _Now-Convertible ‘A. Participating and Non-Participating Preference Shares : 1. Participating preference shareholders have the right to ‘participate in the surplus profits of the company, whereas, non- participating do not have such right. 2. Thenon-participating shareholders are entitled to a fixed rate of dividend. Therefore, the participating preference shares are more preferable to non- participating preference shares. 16 3 B. Cumulative and Non-Cumulative Preference Shares : Cumulative preference shares accumulate unpaid dividend on shares. This means; ifthe dividend is not paid in one of more years due to poor performance of the company, then such unpaid dividend gets accumulated. The accumulated dividend ts paid, when the company performs well. The accumulated dividend is to be paid before making any payment of dividend to equity shareholders. Non-cumulative preference shares do not accumulate the unpaid dividend, Ifthe dividend id not paid ini one year due to poor performance, the non-cumulative shareholders forfeit the right to get such unpaid dividend in the subsequent years. Redeemable and Irredeemable Preference Shares : Redeemable preference shares are repaid after a certain period. ‘These shares carry leds risk as compared to irredeemable preference shares. ‘The irredeemable preference shares are re-payable only on the winding up of the capital. Iredeemable shares carry more risk, because there are chances they may not get their capital back on the winding up of the company. ‘As per the amendment made un 15th June, 1988, in the Indian Companies Act, the issue of redeemable preference shares has been abolished, fany irredeemable preference shares are issued prior to this amendment, then such shares haveto be redeemed. Convertible and Non-Convertible Preference Shares : Convertible preference shares can be converted into equity shares, The market value of convertible preference shares appreciates, especially those issued by profitable ims ‘Non-convertible preference shares cannot be converted into cquity shares. In this respect, convertible prefers shares are caice preferable, especialy, of highly profitable comPanisS y/ 2 Preference shares ste mame wats, hese hares ve erin pile and preferential hts tet fom hose machine Wo uty shes Tre shares whch ary flowing ret igh ae termed as pee hares (0) Aeon as oe payment of die ing he Me ine of be company 0) Aree night a the ren of capil in the eve of wading up of he company older of these shares have» pce night wo ree the fixed rate of dividend before any dividend spo uty sues The eof vided pried in he se oxrally referaeshars ayn vy power They hve voting ih ely oo hoe mate vk et hes ite ich a eng of wna caning is of pefeece bor, Tre peerce schol we co-ome fhe cmpy ba ct conte These tres ae pts by cana invests wo cave wy of ppl ao eid wih ow bt define fal ear icome Preference hres apy aa bawer’ poston athe ape ca rteence shares Freer vend Te dvds pay wpe fre ayn ee ‘Pid equity thes. The company mat as thi prefcetal ight a opment of died ring the ie f the company. aa 2. elor repayment of capital: efeece shure have x peeeace over ety shaban, ‘in respect of ret of capt whe te company it Renes —- company is quid. eaves preface shareholder a3 aed return : These shares cay vide! a fed ate. The ne of divided it pretend, Manay bein te form of ie sum or may be called at a ied rt. (ne pia mut be made clea The pefereace sacle went o divide! which an tbe pid only outof profi. Although the rate of dividend ified, the directo, in financial prodence, decide tl o dividend be pid as tee ae 20 profits, the preference sarcholers Ive no cis for dividend Nature of eaplal : Preference shares do not provide permanent sare capita They we rooered the erin period of tine. Ax per Companies (Amendment) Act 1988,» company fan not se redeemable preface shares, Market vale : The make value of preference sae dos aot change a the rate of divider ble ote i fed. The capil ppesiato is comin be low a compre with ceuty sures, Vein ight : Te pene she o ove tonal ong rh. They Rave vag ri TEs tose amen which ac tir ita The pee ares dont exo ht feo on the ais ofthe company nk : The investors who ae cautious, generally purchase yefieace sare, Safety of capi) vecced ran on veel ae adits sacl 1 rence de, They atret odert ‘pe efor Tie ares ar bom fx shaolin ere pio wi interest le icon fing. Face Value: Fece vee of preece shar is wiv higher than at of euy stars. They sue noma issued at a face vale of 100 Rightor onus ioe: Prefceatl ssl et ee right or bone se a "reference sharcholes are te ownen by oot coabalea™ i Do you age with ths sateen Discs, l ate Sa Kinds of preterence shares” preference shares: fay aay Roto aes eh sso wich died pon azcuatng wt ti a et a the ids pd man myers be nee peach psi died ges accumulated The acute nde pod a compauy Treen The area of divided ae pi bet mang pemeat Oy becca ree thar a avay civ aes dhewie isdn he Nike ee reas tat if iin isnt pid in any yao flat af rsd ee unpaid Sevownt is cared forvard to net year and wo xual area bave bern pt 2 erumulave preference shares: Dividend on ts shes ds not cate. This aa Sn arden om tes can be pid oly cut of poi ft yar The ni clare fens 5 Paampatingprfrcce shares; The biden of tee sas a itl pact ins Profit bess preferential dividend. The sup po which mau arte then ha to ‘aid to equity shareoldes upto cern lit, isd to peerence shacks mpariating pcerece shares: The pefseace has ae dened be mopaticptig et 0 sles provision in Arles of Asciton. The shrhldes ae ete ely fixed rate of dividend prescribed i the ase, SComvertbie preference shares: Thee sharehodes hve igh to conver ts peecace shares ino equity shares The conversion takes pice win « ceria fed ped 6 Non-convertible preference shares: These shares can nt be convened ito equity shares. 7. Redeemable preference shares : Sb which can be rete afer a cern fed ped Are cal redecmable preference ses. A. company inte by sates, if ashrzed by Ace of Assocation sss redeemable pefience shares. Such shes mst be fly pa, Thse share ‘ae redeemed out of dvsible profit ony or out of fesh ine of tres made for this pups Irvedeemable preference shares : Shares which are wot rleemable ie. payable oaly oa te winding up of the company are called imedeemable preference tates. As pe Conpaics Act (Amendment mace in 1988) the company cannot issue ineceemble preference shares =| Paoe(eauly Stara gy Pate aps No, ee ss | Meng [iy Sas ve no py it | Peace hares cary feel ile ecg dividend and yet it inept of dividend of apa at the time of wig up| payer a epyet of exit of company. in wid up of company. Pat of | Bity she ben ae gen Sviend Preference dare oles gt divideat | factating ate depnting up tbe | vided at Ged rate pris we song. ‘ng it |Buy schol exoy nomad [Prefer archos do ti sosing sight Tey parc ne | paral agit Thy can vee eb | cf tai on nates afting he [Rare of Eniy sar apt is pemanet_—[Prefcee stare capital is agin capil is known a Risk capa’ ale capita” with stable ret Ss [Naue |The vest who ae realy [Te investors who ar cations € ho tke invet in equty bey ftir vest, tovescr (shares, inven in pelea tres. © [Face "The fice va of equity pe fc vale of preference vite shares generly © Uo ses sete higher 2104 is elt low. i. 10 and 50 on. 7 [es Tigiy stares ae cased ino —|Prfereace sues wre classified |=) egy shares wi 2) Cumuatve prefeence shares oma ving it 'b)Noncumsive pefecace str ext tars wih <)Conerilepeferece sires, el ving et 3) Nencamerble petecoe sh 6) Reeemable preference share. [)Iieemblepeference shares. [Pacing pefereace shares h) Nooparipating evcerce hares ‘8 | Benefit of right | qty shareholder i ented Preference shareholders are not aaa ant to et right shares and bonus bars. |i right shares and bons us shares stares. 7 [capa (asker va of eniy stares Mat a of preference ferrin |inrenes wi the omperiy of [ses oes mot tate ompiay I least increase in be /So te is possibility of rae of shares opal gprecation. 70. | Rsk Egy tes we objeto ‘(Preference sares ae bjt 10 ibe ik Tati exase [less I i because of fix te fof fuating rate of cvidend of cvidend and pefeenial ight nd co guarantee of rfid of as repat dviend and repayment ul = Jogcapad _______ S IIL. Deferred Shares or The deferred shares are Founders! Shares or "Mana, + The deferred shares can be issued only by an independent Private company. The private company issuing deferred shares ™ust not be a subsidiary of a public limited company The deferred shares are to be purchased by promoters of a Private company in order to become directors of thetcompany. * Normally, the deferred shareholders have residual claim of the capital in the event of winding-up of the company." © The deferred sharchol dividend to othér types * A public limited company cannot issue defetred shares as per Indian Companies Act, 1956, also known as Promoters’ Shares or igement Shares". The main features are Iders get dividend after payment of of sharehdlders. Equity Shares v/s Preference Shares EQUITY (ORDINARY) PREFERENCE SHARES SHARES 1. Meaning: Equity shares provide permanent | Preference shares enjoy certain * | capital to the company. The preferences, as to payment of shareholders enjoy rewards as welll dividend, and repayment of capital, as bear risks of the company ‘over the equity shareholders 2 Preferences: | They do not enjoy preference _| They enjoy preference over equity jover preference shareholders in | shareholders in terms of payment terms of receiving dividend and _ | of dividend, and repayment of | repayment of capital capital at the time of winding-up. 3. Dividend Rate: The dividend rate is not fixed The rate depends upon the profits of the company in each year. The rate of dividend is fixed. The rate of dividend differs from one ‘company to that of another. Nature of Capi They provide permanent capital to the company, ‘They may provide temporary capital as there are redeemable preference shares, 5. Voting Rights : ‘The equity shareholders enjoy normal voting rights, ‘They do not enjoy normal voting, rights, except on those matters which affects their interest. 6. Nature of Investors : at the time of winding-up. ‘Those investors who are ready to | Cautious investors may prefer to take highersskinvestineqity | goforpreferencecaptal~ capi 7. Types: ‘There are two classes of equity _| There areseveral classes, such as, shares equity shares with voting_| cumulative/nor-cumilative, Tights and equity shares with | convertible/nonconvertible, etc. differential voting rights, 8. Capital Appreciation: ‘There is considerable capital _ | Thereis less capital appreciation. appreciation, in the case of But, the value of convertible | profitable companies. preference shares appreciates. 9, Face Value: Normally, equity shares are Normally, preference shares are issued for a face value of €10.__| issued fora face value of €100. 10. Risk Factor: Equity Shares are subject to higher | Preference Shares are subject to risks. less risks 11. Differential Right: A company can issue'equity shares| A company cannot issue preference ‘with differential rights to voting | shares with differential rights ordividend. 12. Participation in Surplus : ‘The equity shareholders can ‘The preference shares (except participate in the surplus profits of | partcipating) do not have right in the firm and in the surplus assets | partcipation of surplus profits and in the surplus assets atthe time of winding-up. / (B) Retained Earnings ve ————__—— Retained earnings is also called as Ploughing back of profits. Itis an important source of financing working capital needs as well as fixed capital needs of an organisation, Instead of distributing all the profits to the shareholders by way of dividends, the firm retains a part of the profit for self-financing. Companies adopt ploughing of profits cover a period of time, in order to generate enough reserves mainly for long-term financing. Importance of Retained Earnings: > 1. No Dilution of Control: Retained earnings do not dilute the control over the working ofthe firm, The control remains with the existing shareholders, Raising of more equity capital from the market dilutes owners’ control. 2. -Buy-back of Shares: ‘The retained earings (free reserves) can be used for buy back of shares. The buy back is allowed under Indian Companies ‘Act, in order to reduce the chances of hostile take-over. ‘3. Increases Net Worth : Relained earnings increaze net worth of a company. Net worth the greater is the credit worthiness of a company. 4. Issue of Bonus Shares: Accumulated reserves can be tised to issues bonus shares. The issue of bonus shares results in capitalisation of reserves. Thus, retained earnirigs help to increase shareholders’ value. Less Dependence on External Sources: Retained earnings reduce the dependence on external sources for financial requirements. Therefore, a company does not face the problem of uncertainty of funds. However, there is ‘uncertainty of raising funds from external sources, especially, . when there is poor financial climate or situation. ‘means equity capital + free reserves. The higher the net worth,” one = 6. Investors’ Confidence: Retained earnings indicate a healthy practice company. Therefore, investors develop con! companies. 7. Flexibility for Utilising Funds: ‘There slot of flexibility for utilizing the funds. The management can utilize the funds either for working capital or for fixed capital. on the part of the fidence in such 8. Improvement of Overall Performance: The retained earnings can be utilized for expansion and modernization, which in turn cart improve the overall performance of the organisation. 9. No cost of Raising Funds: The company can save costs and expenses connected with raising of funds such as brokerage or commission to agents, brokers, ete, This is because retained earnings does not require external support for raising funds. 10. Reputation: ; Retained earnings improves image of the company. It improves credit worthiness of a company. Due to retained earnings, a company can easily obtain additional funds for expansion and modernisation. Disadvantages of Retained Earnings: 1. Lower Returns to Shareholders: The shareholders get lower dividend due to retained earnings. However, in the long run, the shareholders may be benefited as the funds are utilized for expansion and modernization which can generate higher returns. Therefore, shareholders do not object to retained earnings. 2, Misallocation of Funds: Due toeasy availability of funds, the management may allocate the funds to sub-marginal projects, which may not bring returns to the organisation. In other words, there may be unproductive use of the funds, 2S f és 3 & | | b Determinants of Retained Earnings: Retained earnings depend on certain factors: 1. Profits: Retained earnings depend on the net profits of the compary. Generally, higher the profits, higher would be the amount of retained earnings. ‘Tax Rate: ‘The net profits ofa company depend on the taxrate. Generally, higher the tax rate, lower will be the profits, and as such lower will be the amount of retained earnings. Dividend Policy: ‘The retained earnings depend on the dividend policy of the dividend policy of the company. If the company decides to pay ‘out large share of net profits as dividend, lower will be the amount transferred to retained earnings. Provisions of Indian Companies Act, 1956: Section 205 @A) of Companies Act, 1956 provides, that no dividend shall be declared ot paid by a company out ofits profit for the current year without transferring to the reserves such percentage of profits, not exceeding 10 per cent. However, the Companies (Transfer of Profits to Reserves) Rules, 1975 prescribe as follows: agen Rate of Dividend Proposed Minimum % of Profits to be (Percent) ‘Transferred to Reserves Below 10 Nil 10 to 125 25 125to 15 50 15 to 2 75 20+ 10 ‘Accompany may transfer a higher percentage of profits (more than 10%) ifitso decides. However, no transfer to reserves shall be required if the dividend proposed is less than 10%. Under Companies Act 2013, Companies are free to transfer any ‘amount or no amount of profits to reserves [Section 123 (1)] 26 (8), Retained profis 2 Business organizations are subjet to variation in eamings. I wou bea wise decision onthe spt of managment keep aie apr of eaming ring peri of iy profit I lps a comgany to overcome the dvswing inthe bans eee, Retained pris reaming ofthe conpary which arene in te buses. tis as tal of nse pris, scumulatd ver yas and vedi the buses rater an dtd as dividend “The process of scuuting coor profs sd hi utilization i business i called retained coming’ In simple wo, part of net rt which not bed to sek a vie, rene ‘by company inthe fem of ‘reserve fund. These reeves ar reed profi of the company. The pricy of wing sch eine prot inthe tines is koown at “lf ning’ ot ‘ploughing back of ‘rofi. The management can conver this resned profit ito permanent capital which x known at ‘capitalisation of pro by ising bons shares, Retin poi isan mgt sauce of steal fasring Ii single ad he cheapest method of mising finance. It is used by esuled companies Determinants of retained profits 1 Total earning of company : 1 tere is ample pot, company can sve and ean sme pst of profit “Larger the eaming,lnger the saving, ithe principle pt forts by exnomist JM, ‘Keynes. It is slso a ebject of atte of top minagerent 0 delemine the art of retained cemings “Taxation polly : The tation poly of govern an por determin of exprte savings. Ibn tas ar levied wt high tes, compasy cast mar uch ofthe promt vo be ‘ain’ by it 3. Dividend pole : 1 is poiey of Board of Directors in reptds dsbution of profit. A conservative dividend poly is ead fer having god curation of poi. This poly ets shareholders as they get dvieod at ow re 5 4. Government contol: A goveneat is replay bady of canon este ofthe county is polices, rules and regulations compel companies to workin tht drecton, A company bas © forint dividend poly in accordance With heres and reguntons famed by govern. (6) 1 Debentures oe Debentures have cipal igi posiin inte financial sce of he companies 1 ne ofthe rain sources of raisin, det capital lo mee ong tem franc reeds, Deberurs peel Iowa capital The debenture holes ae crabs of he company. The eberare ber pets a ie ae of ees at return on hi investment. Board of Dictors ha he power o nue bent, The term “ehesure has come fom Latin word ‘debe’, which means to “we. Palmer define x debenture a6 - an fiasunent under seal evidencing debt, te ewence of it being admis of indeed” Tophan defies - a deere i met ven by cay a ei foe leet aig cut of Youn un tee sec by care ‘he above din wig te clear ening o eat. Fay Kt an irae ed tn te fame "bona cto’ wt he con sl of he company, Big an insane | eae I a eee of ndcdnest. Ts debi older rir of he company ein an iced by cage on ae. Is eld “The tem enue hs ot ben defined clay under Compan a 1956. Sec 22) of compres Ac 196 ely ssi, "te wor debe nies eee ek sooth ud any or ey ofthe company wher consting x cae on ae fe comeany xo” Unter exiting in deters meas eres which eter ae or wows etx Carly dente charge on company, ome pa of prope, bt ee ty bee dena witch cae ee oi wb ce tl pet Cpu (Aen) At 200, copay an mt ise scoured debens Chace of Deets 2 pst vw © Promise © ice valve (ota vey eet pend dono + Pats wo debenture gi of ean oles Teme of ise * Lstg, Ee Charactristisof Debentures Promise: Debecte i aw holder ofthe detente, Face valve: The fice ve iples of & 100, rien promise by company tha tomes specified sum of movey 1 of debenture norally canes high domination. tis € 100. ce ‘Tine of repayment: Debates ae sud with do date sted in the ‘Debate Cerificate’ A detent provides forte repayment of principal amount on matty dae Interest: A fed rte of nee i sped upon an pai pero in cae of eben ‘The rte of intrest tat company ofa depends up the macket conditions and natu of the buses. . Assarance of repiyment : Debeotures constitute leg tenn debt. They cary an assurance of ‘payment on dete. Parties to debentures: Thee are cern peso debts ch as ~ 8) Compan ‘Ths te ety wich temo ey, 0) Trastee¢ ‘This is apr trough whom expan Ss wits detect olden Te compiny males ap greenest with tes and eben bole ska a Tt Dee cots the bliin of ony, hts of dee ole ©) Debenture holders: These ae the pares who provide oan and receive ‘beatae cen as evidence of papain. ‘Rights of Debenture holder: Debeotise holder ave no right to ot at gener meting of he company, ‘Terms of ksue of debestares : 8) Deteatues can be ised tp a premium ad een at sant. 1) Accortng to Companies Ac, company can ot ave deere caning voting igh (2) According to Companies At, Sec 282 (1) the Board of Diets hs the power iste debs Security: Debentures canbe soured with some propecy of the campy, “Listing :Debestues ms be Hse with atleast on eognzed sock exchange sof Debentures ea Debentures aa — F v ont bt one ts On te es on br bs Sess fe oe ‘fesmeoe sad nee com seme | Repent | Rakai Covete Gems | tems | te | emer Ui eae Iesemble Nena sens deemurs tuned ‘Te debentures can be of tferet kinds acorn other ims of sue, conversion, provision of secur, repayment te, Let us discus thm in del. 1. Secured debentures The dane ca bese The propery of cmpany may be eg as security for Josn. The security may be for some particular asset (fixed charge) or it may be thease in gsr loatig che), The deere a seed thigh ‘Trt Ded 2 Unsecured debentures: Ths ete deena tt have ao sci. The we of unsrued

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