SKY EDUCATION

S.P.
Q.3. Study the following case/situation and express your opinion

(1) A company is planning to enhance its production capacity and is evaluating the possibility of purchasing new
machinery whose cost is Rs. 2 crore or has alternative of machinery available on lease basis.
a. What type of asset is machinery?
b. Capital used for purchase of machinery is fixed capital or working capital?
c. Does the size of a business determine the fixed capital requirement?
Ans:
i. Machinery is fixed asset since it is used in business for longer time period
ii. The capital used for purchase of Machinery is fixed Capital.
iii. Yes, size of business determines the fixed Capital requirement. When business operations are carried out on a large
scale, it will have higher fixed capital requirement aa most of the production processes are based on automatic machines
and equipment.

(2) The Balance-sheet of a Donald Company for the year 2018-19 reveals equity share capital of Rs. 25,00,000 and
retained earnings of Rs. 50,00,000.
a) Is the company financially sound?
b) Can the retained earnings be converted into capital?
c) What type of source retained earnings is?
Ans:
i. Yes, Since the company has sufficient amount of Capital (equity share capital of Rs 25,00,000 and Retained earnings of Rs
50,00,000), it can be called as financially sound.
ii. Yes, the retained earnings be converted into capital. The retained earnings cannot be an initial source of capital but it can
be important source when company runs its business profitably. The management can convert search earnings into
permanent shared Capital by issuing bonus shares .
iii. Retained earnings is an internal source of Finance or a form of owned capital.

(3) TRI Ltd. Company is newly incorporated public company and wants to raise capital by selling Equity shares to the
public. The Board of Directors are considering various options for this. Advise the Board on the following matters:
a) What should the company offer - IPO or FPO?
b) Can the company offer Bonus Shares to raise its capital?
c) Can the company enter into Underwriting Agreement?
Ans:
i. TRI Company Ltd, is a newly incorporated company and issuing shares to the public for the first time. Hence, the company
should offer initial public offer.
ii. Bonus share the fully paid shares issued free of cost to the existing Equity shareholders in proportion to their
shareholdings. So, the company cannot raise Capital by offering bonus shares.
iii. Company can enter into an agreement with under writers by paying them a commission. The underwriters assured the
company to take up the unsold shares (securities) so that the company is able to raise its minimum subscription.

(4) Silver Ltd. Company has recently come out with its public offer through FPO. Their issue was over-subscribed. The
Board of Directors now wants to start the allotment process. Please advise the Board on:
a) Should the company set up allotment committee?
b) How should the company inform the applicants to whom the company is allotting shares?
c) Within what period should the company issue share certificate?
Ans:
i. Yes, the company should set up allotment committee. The allotment committee will decide the basis of allotment and
submit a report to the board.
ii. The company should inform the applications to whom it is allotting shares by issuing letter of allotment or allotment
advice.
iii. The company should issue share certificates within 2 months from the date of allotment of shares.

(5) Violet Ltd. company plans to raise Rs.10 crores by issuing debentures. The Board of Directors has some queries. Please
advise them on the following:
a. Can the company issue unsecured debentures?
b. Can they issue irredeemable debentures?
c. As the company is offering debentures to its members, can such debentures have normal voting rights?
Ans:
i. Yes, Violet Ltd. Company can issue unsecured debentures.
ii. No, a company cannot issue irredeemable debentures. This is because all the debentures are redeemable. i.e. have to be
repaid.
iii. No, a company cannot issue debentures with voting rights. Hence, the debentures offered to members cannot have
Normal voting rights.

(6) ABC Company Ltd. is an eligible Public Company as per the Companies Act, 2013 with reference to accepting Public
Deposits.
a. Can the company accept deposits in joint names?
b. Can the company accept deposits from its members?
c. Can the company issue secured deposits?
Ans:
i. Yes. The company can accept Deposit in joint names of depositors but not more than 3 names.
ii. Yes. ABC Company Ltd.,being an eligible public company, can accept Deposit from its members. It is important to
remember that ABC Company limited cannot accept fresh deposits if the amount of such deposits together with the
previous deposits exceeds 10% of aggregate of paid up share capital and free reserves.
iii. Yes the company can issue secured deposits. ABC Company limited has to create a charge on its tangible assets within 30
days of acceptance of such deposits.

(7) Apple Company Ltd. is an eligible Public Company. It plans to raise secured deposits from the public. Please advise its
Board on the following.
a. Does the company need to get shareholders’ approval for accepting deposits?
b. Does the company have to appoint a Debenture Trustee?
c. Within what period should the company create a charge on its assets?

Ans:
i. Yes, Apple Company limited needs to get the shareholders approval for accepting deposits. The company holds a general
meeting of the shareholders to seek the approval.
ii. No the company did not appoint a debenture trustee. Hollywood event issuing secure Deposit. Eligible companies and
public companies have to appoint one or more deposit trustees. The trustees protect the interest of the depositors.
iii. The company has to create a charge on its tangible assets within 30 days of acceptance of deposit. The charge is created
for an amount not less than the amount of deposit accepted.

(8) SUN Pvt. Ltd. company wants to raise funds through deposits.
a. Can the company accept deposits from the public?
b. Which document should the company issue to invite deposits?
c. What is the maximum period for which they can accept deposits?
Ans:
i. No, Sun Pvt. Ltd, being a private company, cannot raise capital from the public, a private company can accept deposit
from its member or directors or relatives of directors.
ii. The company should issue a circular to invite deposits.
iii. The company can accept deposits for a maximum period of 36 months.

(9) Mr. Z holds 100 shares of Peculiar Co. Ltd. in Physical mode and wishes to convert the same in electronic mode:
a) Mr. Z holds a Saving Bank Account with CFDH Bank Ltd. Can he deposit his shares in this account for demat?
b) What type of account is needed for the same?
c) Is it the RBI which will be the custodian of shares of Mr. Z after demating?
Ans:
i. No Mr Z, cannot deposit his shares in his bank account for demat.
ii. A demat account is required for converting physical shares into electronic holding.
iii. No RBI will not be the custodian of shares of Mr Z the depository. i.e.NSDL or CDSL will be the custodian of shares of Mr
Z after demating.

(10) Mrs. Z wishes to open a Demat account in her name:

a) Can she open the account going to Mumbai office of NSDL?
b) Is she required to pay for opening of account and its maintenance?
c) Does she have to send the shares to respective company for demating?
Ans:
i. No, Mrs, Z cannot open a demat account by going to Mumbai Office of NSDL. NSDL is a depository which is like a central
bank. She has to open a demat account with a Depository Participant (DP).
ii. Yes, Mrs, Z has to pay for opening of account and its maintenance for availing services of DP.
iii. No, she doesn’t have to send the shares to respective company for demating. She has to send the physical share
certificates and demat requisition form (DRF) in triplicate to the DP.

(11) Mr. S holds 50 shares of Peculiar Co. Ltd. in demat form. The company has declared a dividend of Rs. 5/- per share
and Bonus of 1:1 to its shareholders.
a) How will Mr. S get his dividend?
b) Will he get Bonus share in Physical or demat?
c) Who is entitled to dividend and Bonus: Mr. S or the depository? (NSDL in this case)
Ans:
i. Under the depository system the account of the invest that is automatically credited in case of corporate action. So, Mr. S
will get his divided through the depository in his bank account which is linked with the depository.
ii. Since Mr s holds the shares and demat form the bonus shares also will be received in demat form and will be directly
credited to his demat account.
iii. Mr s is the beneficial owner and hence he is entitled to the dividend and bonus.

(12) ABC Co. Ltd. decides to pay Interim Dividend

a) Can it be paid out of free reserves?
b) Is the Board right in declaring the same at the Board Meeting?
c) Can the company distribute the same within 30 days of its declaration?
Ans:
i. No, interim dividend cannot be paid out of free reserves. Interim dividend is declared out of profits of the current
accounting year.
ii. Yes, the board of directors has the power to decide and declare the same at the board meeting.
iii. Yes the company should distribute the interim dividend within 30 days of its declaration.

(13) DIAMOND Co. Ltd. is considering to declare Interim Dividend.

a) In how many days of declaration it should transfer the funds to Dividend Account?
b) In how many days it must pay it to shareholders?
c) In how many days of declaration it must transfer the funds to the Unpaid Dividend A/c?
Ans:
i. The funds should be transferred to Dividend account within 5 days from the date of declaration of interim dividend.
ii. The interim dividend must be paid to the shareholders within 30 days from its declaration.
iii. The unpaid dividend must be transferred to unpaid dividend account within 37 days from its declaration.

(14) Joy ltd. Company is a newly incorporated company. It wants to raise capital for the first time by issuing equity
shares.
a. Should it go to primary market or secondary market to issue its shares?
b. Should it offer its shares through public offer or rights issue?
c. What will be the issue of Equity shares by Joy Ltd. Co. called as, IPO or FPO?
Ans:
i. In primary markets the companies can raise capital for the first time from Public. So joy limited company should go two
primary Market to issue with share since it is a newly incorporated company.
ii. Joy limited wants to raise capital for the first time by issuing Equity shares. Initial public offer (IPO) but refers to the
process of offering shares of a company to the public for the first time. Therefore Joy limited should offer it’s shares
through public offer.
iii. The issue of Equity shares by joy limited company will be called as IPO which means initial public offer.

(15) Mr. P has a recently got his B.Sc. degree. He has enrolled for a course in securities market. As a new student of this
subject, he has few queries as follows:
a) Does a Company need to be listed on a stock exchange to sell its securities through the stock exchange.
b) What is the term used for referring to a stock exchange’s ability to reflect the economic condition of a country?
c) What is the term which refers to the functions of stock exchange as a provider of ready market for sale and purchase of
security?
Ans:
i. Yes, a company needs to be listed on a stock exchange to sell it securities through Stock Exchange.
ii. Economic mirror is a term used for referring to a stock exchange's ability to reflect the economic conditions of a country.
iii. Liquidity is a term which refers to the functions of Stock Exchange as a provider of ready market for sale and purchase of
Security.