SOLUTIONS : PRACTICE PAPER 3

Q.  1.  (A)

(1)  Equity share capital is known as venture capital. : True

(2)  Sweat equity shares are offered to Directors or employees of a company. : True

(3)  A private company can collect deposits from public. : False

(4)  Dividend cannot be paid out of capital. : True

(5)  The objectives of SEBI is to protect the interest of the companies. : False

Q.  1.  (B)
(1) (a)  Transfer to Dividend Account.
(c)  Transfer to Unpaid Dividend Account
(b)  Transfer to IEPF.
(2) (b)  Open Demat Account   (c)  Submit DRF   (a)  Gets Statement of Accounts
(3) (c)  Board Meeting   (b)  Allotment of Debentures   (a)  Interest Warrant
(4) (a)  Obtain credit rating.  (c)  Receive application with money
(b)  Entry in register of debenture
(5) (c)  Application form   (b)  Allotment letter   (a)  Share certificate
Q.  1.  (C)
(1) Global Depository Receipt (GDR)
(2) 60 days
(3) 1996
(4) Interest
(5) London
Q.  1.  (D)
(1) The process of converting raw materials into finished products is called
Production Cycle.
(2) Transmission of Share takes place in case of death, insolvency and insanity of
a shareholder.
(3) The tenure of deposit should be minimum 6 months but cannot be more than
36 months.
(4)  A dividend which is paid or proposed to be paid after the conclusion of the
financial year and the presentation of final accounts is called Final Dividend.
(5) New Issue Market refers to a market where newly established companies sell
their shares, debentures, etc. for the first time to raise fresh capital.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 1

Q.  2. (1) Trade Credit : 
(1) Business cannot run on continuous basis, without credit sale. Credit is treated
as soul of business. Trade credit is one of the major sources of short-term finance
to the business enterprises. Trade creditors mean and include manufacturers,
producers, suppliers of goods and materials, wholesalers, etc. Usually, trade
creditors sell tangible goods and materials to other business firms on the basis
of deferred payment i.e. the payment to be made in future. The period of trade
credit is extended by the business firms due to custom i.e. long standing practice,
developed over a long period of time.
(2) Trade credit refers to the facilities by which business firms, who purchase
goods or materials on credit basis, are permitted to delay payment for goods or
materials they have bought. Trade credit does not mean cash loan. It is an
outcome of credit sale of goods or services. In such credit sale, the payment is
postponed to a future date.
(2) Eligible Public Company :
(1) Eligible public company means a company having : (a)  A net worth of not less
than ` 100 crores or, (b)  Turnover of not less than ` 500 crores and which has
obtained prior approval of its shareholders through special resolution for
accepting public deposits. These companies can accept deposits from their
members and also from the public.
(2) Eligible Public Company cannot accept fresh deposits from its members, if the
amount of such deposits together with the previous deposits exceeds 10% of
aggregate of paid-up share capital and free reserves. Eligible Public Company
cannot accept fresh deposits from public, if the amount of such deposits together
with the previous deposits exceeds 25% of aggregate of paid-up share capital
and free reserves.
(3) Capitalisation of Reserves :
(1) Capitalisation of Reserve means the utilisation of profit which was kept as
reserved fund, that can be used to create new shares that a company gives to its
shareholders. It refers to converting a company’s retained earnings to capital,
which represent the profits held in the business over a period of time.
(2) The capitalisation of profits process involves issuing a stock dividend or bonus
shares to existing shareholders. It is also termed as ploughing back of profit.
Company instead of raising capital from market, raise the capital by bringing

back its profit which was kept as reserve fund.

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (4) Rematerialisation :

(1) Rematerialisation refers to a process in which the securities from electronic

form are reconverted into physical form, i.e. in the form (paper) securities

certificate. The client can get his electronic holdings converted into physical

certificates from Depository. For this, the client is required to submit Remat

Request Form (RRF) to the DP. RRF is then forwarded by DP to Issuer and the

Depository. Issuer confirms the acceptance of Remat Request to the depository.

Issuer then prints the certificate and sends them to the client.

(2) After the completion of process, the Depository will debit the demat account

with the value of securities rematerialised through DP. In the process of

dematerialisation and rematerialisation, depository plays an important role

and allows both physical to electronic and electronic to physical conversion on

the request of client.

(5) IEPF :

(1) IEPF is an abbreviated form of Investors Education and Protection Fund. IEPF

has been established by Central Government since 2001 for the promotion of

investors’ awareness and protection of the interests of investors. If any amount

remains unpaid in the Unpaid Dividend Account of company for 7 years from

the date of transfer of the amount, it is required to be transferred by a company

to IEPF.

(2) Any claimant or the person entitled to any amount transferred to IEPF is

required to make application for refund to the authority or committee appointed

by the Central Government. On verifying the evidences or documents, if the

authority or committee is satisfied that such person is really entitled to receive

refund, it makes an order for payment of such amount due.

(6) Stock Exchange :

(1) Stock exchange is the main segment of the financial market where corporate

securities such as equity shares, preference shares, debentures, government

securities, bonds, units of mutual funds, etc. are traded. It is well managed and

systematically organised capital market where previously issued securities are

traded repeatedly for investment and speculation purposes. Only listed securities

are bought and sold on stock exchange. Stock exchange is also named as

secondary market, stock market, share market or share bazar.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 3

 (2) Stock exchange acts as an intermediary between the borrowers and investors.
To protect the interest of investors, Stock exchanges in India are well regulated
by Securities Exchange Board of India (SEBI). The Bombay Stock Exchange
(BSE) which was established in 1875 is the oldest stock exchange in India. The
Securities Contracts (Regulation) Act 1956, defined stock exchange as,
“An association, organisation or body of individuals, whether incorporated or
not, established for the purpose of assisting, regulating and controlling of business
in buying, selling and dealing in securities.”

Q.  3. (1) (a) A Donald Company is financially sound. This is because retained earnings
are double of equity share capital.
(b) The retained earnings can be converted into share capital by issuing bonus
shares to equity shareholders in specific proportion of their holdings.
(c) Retained earnings is an internal source of raising long-term finance.
(2) (a)  Debentures can be issued for maximum tenure of 10 years.
(b) No. The proposed issue is not empowered by Articles of Association, as it
permits only up to ` 5 crores.
(c) Company should issue debenture certificate within 6 months of allotment
of debentures.
(3) (a) Diamond Co, Ltd. should transfer funds to a separate bank account called
‘Dividend Account’ within 5 days of its declaration.
(b) Diamond Co. Ltd. should pay interim dividend to its shareholders within
30 days of its declaration.
(c) Diamond Co. Ltd. should transfer the unpaid amount of interim dividend
to the Unpaid Dividend Account within 7 days of the expiry of 30 days of

date of declaration, i.e. within 37 days of declaration of dividend.

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q.  4.

(1) Fixed Capital Working Capital

1.  Meaning

Fixed capital refers to that portion of Working capital refers to the firm’s
total capital which is invested in fixed investments in short-term assets viz.
assets such as land, building, equipment, cash, short-term securities, account
etc. receivable and inventories, etc.

2.  Nature

Fixed capital remains in the business for Working capital remains in the business
a long period of time i.e. for more than for a short period of time and circulates
one year. into the business.

3.  Purpose

Amount of fixed capital is employed into Amount of working capital is employed

the fixed assets such as land, building, into the short-term assets such as
machinery, equipment, etc. It is not used inventories, cash, account receivables,
to produce goods and services. etc. It is used to produce goods and
services.

4.  Sources

Fixed capital is funded through Working capital is funded from different

different sources such as issue of shares, sources such as borrowing short-term
debentures, bonds and borrowing long- loans, accepting public deposits, trade
term loans from financial institutions. credit, etc.

5.  Objectives

Investors invest the funds in fixed capital Investors invest their funds in working
to earn future profits. capital to get immediate returns.

6.  Risks involved

Investments made in fixed capital is more Investments made in working capital is

risky. comparatively less risky.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 5

 (2) Equity Shares Preference Shares

1.  Meaning

An equity share is the one which has A preference share is the one which
no priority claim either for payment of enjoys preferential rights over equity
dividend or for repayment of capital at the shares as to payment of dividend and
time of the winding-up of the company. repayment of capital at the time of the
winding-up of the company.
2.  Rate of dividend 

The rate of dividend fluctuates, depending The rate of dividend remains fixed since
upon the availability of adequate profits it is predetermined at the time of issue. It
and the decision of the directors. does not depend on the profits.
3.  Voting rights

Equity shareholders enjoy normal voting Preference shareholders have restricted

rights. Through the voting rights they voting rights. They have voting rights
participate in the management of the only on those matters which may affect
company. their interests directly.

4.  Nature of capital

Equity share capital is called risk capital Preference share capital is called safe
because of uncertainty of dividend. It is a capital as it carries dividend at a fixed
permanent capital. rate every year. It is a rentier capital.

5.  Nature of investor

The investors who are willing to take The investors who are conservative and
risk prefer to invest in equity shares. cautious of their investment, prefer to
invest in preference shares.

6.  Face value

The face value of equity shares is The face value of preference shares is
relatively lower than that of preference relatively higher than the face value of
shares, e.g. ` 10 per share or ` 1 per share. equity shares, e.g. ` 100 per share and
so on.

6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

(3) Rights Shares Bonus Shares

1.  Meaning

Rights issue refers to offering the shares The shares which are issued to the
to the existing equity shareholders to buy existing equity shareholders free of cost,
the shares of the company before they are out of reserve funds or accumulated
offered to the public. profits of the company is called Bonus
Shares.
2.  Payment

Equity shareholders have to pay for the Equity shareholders are not required to
rights shares. Only right to buy these pay for bonus shares. They are issued
shares is given to the shareholders by the by the company free of cost to the equity
company. shareholders.
3.  Partly / Fully Paid-up Shares

Shareholders are required to pay for Bonus shares are issued as fully paid-up
these shares as application money, shares. Hence no money is required to be
allotment, call money, etc. till the full paid by the shareholders to the company.
money on shares is paid-up.

4.  Minimum Subscription

Company has to collect minimum There is no question of minimum

subscription. If the company fails to subscription to be collected because
collect minimum subscription within a bonus shares are issued free of cost by
specified time it has to refund the entire the company.
application money so received.

5.  Right to Renounce

The rights shares can be given up by the The Bonus shares cannot be given up by
equity shareholders. the equity shareholders.

6.  Purpose of issue

When a company desires to raise When company desires to reward its

additional funds and also wants to give existing equity shareholders, company
opportunity to their existing members to issues bonus shares from the accumulated
increase their shareholding the company huge profits and reserves.
issues rights shares.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 7

 (4) Bull Bear

1.  Meaning

A speculator who purchases the A speculator who sells the securities

securities with the intention to sell them when the prices of securities start falling
at a higher price later is called the Bull. is called the Bear.
2.  Dealings

Bull buys securities at lesser price and Bear buys securities at a lesser price and
sells them at a maximum higher price to sells them at a little higher price to make
make maximum possible profit. desirable profit and to avoid selling at
still lower price in the future.
3.  Anticipation

Bull always anticipates that the prices of Bear always anticipates that the prices
securities will rise further in the future. of securities will fall further in the
future.

4.  Other name

Bull is also called Tejiwala. This is Bear is also called Mandiwala. This is
because he always anticipates the price because he always expects the price to
to rise. fall.

5.  Views

Bull takes an optimistic view of the Bear takes a pessimistic view of the
future. future.

Q.  5. (1) [A] Meaning : Corporation Finance refers to management of corporate funds.

It deals with acquisition and use of capital. It is concerned with the raising
finance and its efficient and effective utilisation in the business, by a
corporation. It is mainly dealt with financing different activities and
projects of the corporation, capital structuring and taking investment
decisions. The term corporation finance also contains financial planning,
study of capital market, money market and share market. Its scope extends
to capital formation and foreign capital. Banks and other financial
institutions, play major role in corporate financing.
[B]  Decisions which are basis of corporate finance :

The following two decisions are the basis of corporate finance :
(1) Financing decision : To fulfil the financial needs, the business enterprise has
access to the capital market. Financing decision refers to taking decision in

8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 respect to selection of right sources of finance from available multiple options
of financing. The business enterprise raises the needed finance either by issue
of equity shares or by issue of debt securities. Even business enterprise can
raise finance by issuing debentures, borrowing term loans from the bank,
accepting public deposits, etc. In this respect, finance manager confirms that
company or business enterprise is well capitalised i.e. they have sufficient
amount of capital and the company has right combination of debt and equity.
In brief the decision of finance manager which ensures that business enterprise
is well capitalised is called financing decision.
(2)  Investment decision : When the different sources of raising the finance from
capital market are made available to the company, the finance manager is
required to decide about the systematic use and judicious investment of such
funds to earn maximum returns for its owners. Accordingly, investment decision
refers to the decision taken by the finance manager in respect to utilisation of
funds raised by the business enterprise in systematic manner so that such use
of funds or investment of funds yield maximum returns for its owners. It relates
to the selection of assets in which funds are to be invested. The business
enterprise has to take into account the cost of capital. Once the cost of capital
is calculated and ascertained, the business enterprise can allocate or use the
available funds in such a manner that returns on such investment or use of
funds exceed the cost of capital. Thus, searching investment opportunities and
deploying the funds successfully in the business, is popularly known as
investment decision. It is also called ‘capital budgeting’.
(2) Companies which issue secured debentures are required to appoint Debenture
Trustees. Debenture Trustees are institutions which safeguard the interest of
the debentureholders.
Following are the important points about Debenture Trustees :
(1) The company creates a charge on its movable or immovable assets or assets of
its subsidiary company or holding company. Charge is created in favour of the
Debenture Trustees.
(2) They become the custodian of the assets on which charge has been created.
Debenture Trustees are appointed by the company, before prospectus or letter
of offer/offer letter is issued or within 60 days from the date of the allotment of
debentures.
(3) The Trustees must give a written consent to act as Debenture Trustees.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 9

 (4) The prospectus or letter of offer / offer letter must mention the names of

Debenture Trustees.

(5) Debenture Trustees have to redress the complaints of debentureholders, if the

company defaults in making payment of debentures.

(6) Trustees can approach the NCLT (National Company Law Tribunal) who can

order a defaulting company to repay the principal amount or interest.

(3) The benefits/advantages of Depository to the companies are shown in the

following chart :

Benefits of Depository to the companies

Better investor –
Up-to-date
company
information
relationship

Reduction in costs International

and efforts investment

The advantages of depository system are as follows :

(1) Up-to-date information : The details and up-to-date information of the investors

are provided by the depository to the company at regular interval.

(2)  Reduction in costs and efforts : The depository system enables the company to

save costs, efforts and time involved in printing and distribution of certificates in

cases of new issues, issue of bonus shares, transfer of securities, etc.

(3)  Better investor – company relationship : The complaints of shareholders

in respect to loss of certificates, signature differences, longer time taken in

executing requests, etc. are substantially minimised. As a result, there is better

communication with the investors and enhancement in the reputation and

goodwill of the company.

(4)  International investment : On account of electronic and automatic clearing

and settlement of the transactions, better and quicker services under depository

system, more and more foreign investors get attracted to invest their funds in

Indian capital markets. As a result, the inflow of the foreign capital is increased

considerably.

10 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q.  6. (1)

(1) Capital structure refers to the relative proportion of different types of financing

used by the company to make up the long-term financing of a business. Capital

structure is the mixture of owned funds and borrowed funds. Owned funds

consist of share capital, free reserves and surplus and borrowed funds consist

of debentures, bank loans and long-term loans borrowed from financial

institutions. The pattern of capital structure of various firms or organisations

varies widely according to the nature and so many other relevant factors.

(2) When new company starts its business, it raises capital through issue of equity

shares. When company grows and develops, it issues debt securities to raise

funds. Large manufacturing firms raise funds by issue of equity shares and

debentures whereas trading concerns raise finance through issue of equity

shares and preference shares.

(3) A developed company with stable earnings can easily keep more proportion of

borrowed funds (debt capital)  whereas company with unstable and unpredictable

cash inflow cannot keep more proportion of debt capital in their capital structure.

If funds are required on regular basis, the company keeps more proportion of

equity shares i.e. owned funds. If funds are required for short period of time,

the company raises funds through issue of debentures i.e. borrowed funds.

(4) If market is in boom, more funds are made available through issue of equity

shares whereas if the market is in declining (recession)  situation more funds

are obtained by issue of debt securities. In order to minimise the cost of capital,

more funds can be obtained through issue of preference shares and debt

securities. If the prevailing rate of interest is higher, then funds are raised by

issue of equity shares, use of free reserves and surplus and vice versa.

(2) A company has to create charge on their tangible assets while issuing secured

deposits and following are the reasons for the same :

(1) Safeguarding the money of the depositors is the utmost priority while issuing

the secured deposits and by creating charge on their tangible assets makes

depositors money safe and secure.

(2) A company accepting secured deposits from public, within 30 days of acceptance

of the secured deposits, has to create a charge on its tangible assets for an

amount not less than the amount of deposits accepted in favour of the Deposit

Trustees.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 11

 (3) This is done to safeguard the interest of the depositors. Company has to create

a charge on its tangible assets, for an amount not less than the amount of deposit

accepted in favour of the Deposit Trustees.

(4) The Deposit Trustee, on its own or on the request of one tenth of depositors, can

call a meeting of all depositors, when a company defaults in repaying deposits.

(3)

(1) A debenture is a document issued by the company under its common seal and

signed by the directors, acknowledging the loan accepted by the company from

a party, under certain terms and conditions stated therein. It is a certificate of

loan issued by the company.

(2) Debentures are issued by the public companies as well as by the private

companies to raise debt capital. Debentures are a good source of supplementary

finance to the company. A company may issue secured debentures as well as

unsecured debentures. For secured debentures, company has to create a charge

on the assets of the company. The issue of unsecured debentures is now

prohibited by the Companies Act, 2013.

(3) The company can issue debentures which can be converted partly or fully into

equity shares as well as non-convertible debentures. To issue convertible

debentures, a special resolution is required to be passed in the General Meeting

of the company. The company can issue redeemable as well as irredeemable

debentures. The debentures are mostly redeemable i.e. payable at the end of

some fixed period. Irredeemable debentures are payable only after the dissolution

of the company or when any contingency arises.

(4) A company cannot issue debentures with voting rights. A company may issue

debentures to its members or make a public offer or offer them through private

placement.

(4)

(1) Individuals, corporates, government, firms, etc. who have surplus (excess)

funds and want to invest that funds are called investors. The businessmen,

corporates, government, individual traders, etc. who need funds to use in their

productive business activities and want to borrow them are called borrowers.

The investors lend money to the borrowers through a market called financial

market.

12 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2) Market where financial assets, i.e. financial instruments are traded is called

financial market. Financial market mobilises scattered savings and transform

such savings into investments. Thus, financial market acts as link (intermediary)

between investors and borrowers. Being an intermediary, financial market

attracts funds from the investors and channellises them to corporations.

(3) Financial market serves as the market that raises finance for long-term through

the capital market and short-term through the money market. Financial market

helps in the transfer of real economic resources from lenders to ultimate users.

Financial market facilitates productive use of the funds. Financial market

transfers the excess and idle funds lying with the investors to the industrial

borrowers, corporation, entrepreneurs, businessmen, etc. for the use of funds

for productive purposes.

(4) Financial market links the investors that have savings with corporates that

require investment. Financial market contributes lot to the development of

entrepreneurial class and corporate sector by providing them the necessary

financial resources. It obtains funds from various units such as individuals,

households, private and public sector units, Central Government, etc. and

supply these funds to those business units who need it for productive purpose.

It helps investors to invest their savings according to their choices and risk

assessment. In brief, financial market acts as an intermediary between investors

and borrowers, provides platform where both have easy access to deal with

each other.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 13

Q.  7. (1) A reply letter resolving the query of the member on Low Rate of Dividend :

SENA HOSPITALS LIMITED

Registered Office : 5/54, Trident Tower,
Bandra (East), Mumbai  –  400 050.
CIN : L59439 MH 2002 PLC535522

Phone : 022-38653322 Website : www.senahospitals.com

Fax : 022-38654433 E-mail : senahospitals@gmail.com
Ref. No. V/RQ/435/22-23 Date : 9th May, 2022

Mr. Kishan More

A/5, Star Apt.,
Malad (W),
Mumbai  –  400 103.

Sub. : Resolving query on Low Rate of Dividend made by the Company

Dear Sir,
With reference to your letter dated 6th May, 2022, I am hereby directed to resolve your
query regarding the low rate of dividend paid by the company to their members. The
reasons for low rate of dividend are stated as follows  :
(1) In the last year, due to the lockdown, company’s factory located at Vadodara was
not in a condition to operate in a full-fledged manner.
(2) On account of such unavoidable circumstances, company went through huge
financial losses due to non availability of raw material, labour and finished products
during lockdown.
(3) Because of such circumstances, the Board of Directors has decided to
transfer ` 10 crores to General Reserves which is 30% more than the amount
transferred to reserves last year.
Hope the reasons and the information specified above by the company will be
up to your satisfaction.
We assure you, that company will surely come over from such unavoidable
circumstances and will definitely pay higher dividend in the coming years.
Thanking you,
Yours faithfully,
For Sena Hospitals Ltd.
Sign
(Mr. Deepak Jain)
Company Secretary

14 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2) A letter to debentureholder informing him/her about redemption of debentures :

TECO PIPES LIMITED

Registered Office : 24, Bawa Towers,
Manu Bhavan, GIDC Makarpura,
Baroda  –  390 016.
CIN : L24357GJ 2009PLC6785336
Phone : 076-75475686 Website : www.tecopipes.com
Fax : 764-523543666 E-mail : tecopipes@gmail.com
Ref. TA/PP/44/21-22 Date : 26th March, 2022

Mr. Jaimin Shah,

Amar Mahal, K. P. Road,
Chembur,
Mumbai  –  400 072.
Sub.: Redemption of Debentures
Dear Sir,
In the financial year 2015-16, on 7th April, 2015, our company had issued to the
public 50,000 12% Redeemable debentures of ` 100 each (Total value ` 50,00,000)
for the period of 7 years. As per the terms of issue, the period of the above stated
debentures expires on 6th April 2022. The Board of Directors in their Board Meeting
held on 25th March 2022 has passed a resolution for redemption of debentures. The
entire amount of debentures shall be paid from ‘Debenture Redemption Reserve
Fund’ of the company. You are holding 500 12% Redeemable debentures of ` 100
each, issued by our company and maturing on 6th April 2022.
You are requested to fill in the enclosed debenture redemption form and
submit the same along with the original debenture certificate to the company’s
office on or before 4th April, 2022.
On receiving the duly filled in redemption form along with original debenture
certificate, the amount of redemption will be credited to your bank account.
Please submit your Bank account details.

Thanking you,

Yours faithfully,
For Teco Pipes Limited,

Sign
(Mr. Ravi Ved)
Company Secretary

Encl. : Debenture Redemption Form

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 15

 (3) A letter to depositor informing him/her about payment of interest electronically :

CAST ROLLS LIMITED

Registered Office : Plot No. S/91, Thala Bhavan,
D.D. Road, Chennai  –  600 038.
CIN : L359643 TN 2000 PLC054332
Phone : 022-60603021 Website : www.castrolls.com
Fax : 020-96864636 Email : castrolls@gmail.com
Ref. No. NC/DEP/544/22-23 Date : 7th April, 2022

Miss. Kirti Bohra,

7 Juhu Road,
Vile Parle (West),
Mumbai  –  400 056.

Sub. : Payment of Interest on Fixed Deposit Electronically

through ECS or NEFT
Dear Madam,
I am directed by the Board of Directors to inform you that the Board of directors
in its Board meeting held on 4th April, 2022 has passed a resolution to pay interest
@ 12% p.a. on the deposits for the year ending 31st March, 2022 electronically
through ECS or NEFT.
Your company has completed all the legal formalities relating to payment of
interest on deposits.
The details of interest payable on your deposit is shown in the following
schedule :

1 2 3 4 5 6
Fixed Deposit Rate of Gross TDS @ Net Amount of
Deposit Amount (`) Interest Amount of (10%) Interest
Receipt. No. (%) Interest (`) payable (`)
W1444 ` 25,000 12% ` 3,000 NIL ` 3,000

In due course the amount of interest as stated above will be credited to your
bank account (ECS/NEFT) by electronic transfer as per details submitted by you
to the company.

Thanking you,

Yours faithfully,
For Cast Rolls Ltd.

Sign
(Miss. Parag Datta)
Company Secretary

16 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

Q.  8. (1) [A] Meaning : The Preference Shares are those shares which carry certain

preferential rights distinct from the rights of equity shareholders with

regard to (i)  receive dividend at a fixed rate during the life-time of the

company and (ii)  a preferential right as to receive the entire amount of

capital at the time of winding-up (closure) of the company. It means

preference shareholders are paid dividend before it is paid to the equity

shareholders. Similarly, in the case of the winding-up of the company,

preference share capital is refunded first.

[B] Features : The features of Preference Shares are shown in the following

chart :

Features of Preference Shares

  1.  Preference for dividend
  2.  Preference for repayment of capital
  3.  Fixed return
  4.  Nature of capital
  5.  Market value
  6.  Voting rights
  7.  Risk
  8.  Face value
  9.  Right or bonus shares
10  Nature of investors

The features of preference shares are explained as follows :

  (1) Preference for dividend : Preference shares rank before the equity shares

for payment of dividend. They have the first charge on divisible amount of net

profit of the current year. The dividend is paid first to the preference

shareholders before it is paid to any other type of shareholders.

  (2) Preference for repayment of capital : In the event of winding-up of the

company, preference shareholders have a right to receive their capital before

such capital is paid to equity shareholders. Thus, preferential treatment in

respect of repayment of capital saves the preference shareholders from capital

losses.

  (3)  Fixed return : The preference shareholders get dividend at predetermined

fixed rate. The dividend paid every year is in the form of fixed sum calculated

at fixed rate. The dividend is paid to preference shareholders only out of profits.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 17

 If the directors decide not to pay dividend due to financial instability, the
preference shareholders (except cumulative preference shareholders) lose the
claim for dividend.
  (4)  Nature of capital : The preference shares provide capital funds only for
specific period of time and not for longer period of time. Preference shares are
redeemed i.e. paid back after predetermined period is over. No company can
issue irredeemable preference shares. Usually preference shares are issued by
the company at later stage when company is well established to fulfill the need
of additional capital. As the rate of dividend is fixed and there is no chance of
capital loss, preference share capital is treated as safe capital.
  (5)  Market value : The market value of preference shares do not change because
the rate of dividend payable on the preference shares is always fixed. Hence
capital appreciation is almost very low in comparison to equity shares.
  (6)  Voting rights : The preference shareholders do not enjoy normal voting rights
and hence they do not have control over the affairs of the company. They have
voting rights only on those matters which directly affect their interests, e.g.
dividend due for payment for last two consecutive years, sudden change in the
terms of repayment of capital, etc.
  (7) Risk : The cautious investors usually invest their holdings in the preference
shares. These shares provide safety of capital and also provide steady and
regular income flow to the investors. During depression period, when interest
rate is continuously falling, these shares become a blessing (boon) for the
preference shareholders.
  (8) Face value : In comparison to the equity share, the face value of the preference
share is high. Usually, its face value is ` 100.
  (9) Right issue or Bonus issue : Unlike the equity shareholders, the preference
shareholders are not entitled to get right shares or bonus shares, if at all they
are issued by the company.
(10)  Nature of investors : The moderate type of investors who are conservative
and cautious, interested in steady return on investment and in safety of
investment, etc. usually are attracted towards preference shares and hence
they prefer to purchase preference shares.
(2) Public Issue or offer means offering the shares to the public. This is the most
common method used by companies. The company invites the public to subscribe
for its shares by issuing prospectus. A company can use two pricing methods to
offer shares to the public.

18 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (a)  Fixed Price Issue Method : Under this method, the issue price of shares is
mentioned in the prospectus and investors have to buy shares at that price only.
Company has to issue a prospectus and it contains the details of price at which
shares are offered and the total number of shares offered by the company. The
exact price of shares is known in advance and it is mentioned in the prospectus.
The subscribers / investors are asked to pay a certain portion of face value of
shares or entire issue price along with the application. Company comes to know
the public demand for its shares only after closure of the issue. Application
money or entire money has to be paid by the investor at the time of submitting
his application for shares. It can be used for any issue i.e. Public Issue, Rights
Issues, ESOS, etc.
(b)  Book Building Method : Under this method, the Board of Directors of the
company decides the number of shares and the price at which its shares will
be issued by bidding process. The company firstly has to issue a Red Herring
Prospectus which contains price range or price band and asks the investors to
bid on it. The company collects bids from the investors at various prices which
are equal to the floor price or even above floor price. The lower price of bid is
known as ‘floor price’ or ‘ask price’. Upper price of bid is known as the ‘cap price’
or ‘bid price’ or the ‘ceiling price’. The final price at which shares are offered to
the investors is called as ‘cut off’ price. Investors can bid any number of shares
that they are willing to buy at any price within the price band. Bidding is kept
open for 5 days.
After the closure of issue, all applications are scrutinised and cut off price (final
price) is decided by the company on the basis of demand and quotes received for
securities. Bids along with the application money is to be submitted to the Lead
Merchant Bankers called ‘Book Runners’ who enters the bids in a book. After
bidding is over, company fixes ‘cut off price’ based on the highest or best price at
which all shares on offer can be sold. Company issues a Prospectus which contains
the final price. Book Building Method is used for public issues i.e. IPO and FPO.
Companies Act prohibits a company to issue its shares at discount. However, it may
be allowed in certain exceptional cases like when shares are issued to its creditors,
when the debts are converted into shares under a restoration or debt restructuring
scheme as per RBI or Banking Regulation Act, 1949.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (S. P.) 19

 A company can make public offer through two methods as follows :

Public Offer of Shares

(ii) Further Public Offer /Follow

(i) Initial Public Offer (IPO)
on Public Offer (FPO)

 (i) Initial Public Offer (IPO) : Initial Public Offer refers to the process of offering
shares of a company to the public for the first time. It is the process by which
a private company can go to public to sale of its stocks to the general public.
Companies can raise equity capital with the help of an IPO by issuing new shares
to the public or the existing shareholders can sell their shares to the public
without raising any fresh capital.
(ii)  Further Public Offer or Follow on Public Offer (FPO) : When a company
issues shares to the public after an IPO, it is called Further (Follow on) Public
Offer. Every issue of shares by a listed company after its IPO is called FPO. FPO
leads to an increase in the subscribed capital of a company.

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20 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)