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Dumdum, Mobile : 9932926701
1 PREF SHARES P.P
Preference Shares jk jkj

Q) Share:Share is a unit for reckoning investor’s interest in the contributed capital of a company. The total
capital of a company is divided into uniform units of small denominations and each such standard is called a
share.
Equity share:-These are the ordinary shares of a company that do not carry any preferential right, either in
respect of payment of dividend or repayment of capital. Equity shares are paid back only if the company goes
into liquidation.
Preference share:-As per sec. 85(1) of the company Act, 1956 preference shares are those which enjoy the
following two preferential rights over equity shares –
1. Preference as to payment of dividend at a specific rate; and
2. Preference as to the return of capital in the event of the company being wound up.

Q) Advantages of Preference Shares

The advantages of preference shares are as follows:
(A) Advantages from Company point of view: The company has the following advantages by issue of
preference shares.
I. Fixed Return: The dividend payable on preference shares is fixed that is usually lower than that payable on
equity shares. Thus they help the company in maximizing the profits available for dividend to equity
shareholders.
II. No Voting Right: Preference shareholders have no voting right on matters not directly affecting their right
hence promoters or management can retain control over the affairs of the company.
III. Flexibility in Capital Structure: The company can maintain flexibility in its capital structure by issuing
redeemable preference shares as they can be redeemed under terms of issue.
IV. No Burden on Finance: Issue of preference shares does not prove a burden on the finance of the company
because dividends are paid only if profits are available otherwise no dividend.
(B) Advantages from Investors Point of View:
Investors in preference shares have the following advantages:
I. Regular Fixed Income: Investors in cumulative preference shares get a fixed rate of dividend on preference
share regularly even if there is no profit. Arrears of dividend, if any, is paid in the year’s of profits.
II. Preferential Rights: Preference shares carry preferential right as regard to payment of dividend and
preferential as regards repayment of capital in case of winding up of company. Thus they enjoy the minimum
risk.
III. Voting Right for Safety of Interest: Preference shareholders are given voting rights in matters directly
affecting their interest. It means, their interest is safeguarded.
IV. Lesser Capital Losses: As the preference shareholders enjoy the preferential right of repayment of their
capital in case of winding up of company, it saves them from capital losses.

Q) Whether preference share have any voting right ?

The preference shares do not have the right to vote except in the following cases –
i) when dividend has not been paid for more than two years in the case of cumulative preference share; and
ii) when dividend has not been paid for three years in the case of non-cumulative preference shares.
Preference shares may be of the following forms : i) Cumulative ii) Non-cumulative iii) Participating
iv) Non-participating v) Convertible vi) Non-convertible vii) Redeemable viii) Irredimable

Q) Right Issue:-Where at any time, a company having a share capital proposes to increase its subscribed
capital by the issue of further shares, right shares shall be offered to persons who, at the date of the offer, are
holders of equity shares of the company in proportion, as nearly as circumstances admit, to the paid-up share
capital on those shares by sending a letter of offer . The offer shall be made by notice specifying the number of
shares offered and limiting a time not being less than fifteen days and not exceeding thirty days from the date
of the offer within which the offer, if not accepted, shall be deemed to have been declined;
Q) Cumulative preference shares: A preference share is said to be cumulative when the arrears of
dividend are cumulative and such arrears are paid before paying any dividend to equity shareholders. Suppose
a company has 10,000 8% preference shares of Rs. 100 each. The dividends for 1987 and 1988 have not
been paid so far. The directors before they can pay the dividend to equity shareholders for the year 1989, must
pay the pref dividends of Rs. 2, 40,000 i.e. for the year 1987, 1988 and 1989 before making any payment of
dividend to equity shareholders for the year 1989.

Non-cumulative preference shares: In the case of non-cumulative preference shares, the dividend is only
payable out of the net profits of each year. If there are no profits in any year, the arrears of dividend cannot be
claimed in the subsequent years. If the dividend on the preference shares is not paid by the company during a
particular year, it lapses. Preference shares are presumed to be cumulative unless expressly described as
non-cumulative.

Participating preference shares: Participating preference shares are those shares which are entitled in
addition to preference dividend at a fixed rate, to participate in the balance of profits with equity shareholders
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2 PREF SHARES P.P
after they get a fixed rate of dividend on their shares. The participating preference shares may also havejkthe
jkj
right to share in the surplus assets of the company on its winding up. Such a right may be expressly provided
in the memorandum or articles of association of the company.

Non-participating preference shares: Non- participating preference shares are entitled only to a fixed rate
of dividend and do not share in the surplus profits. The preference shares are presumed to be non-
participating, unless expressly provided in the memorandum or the articles or the terms of issue. (v)
Convertible preference shares: Convertible preference shares are those shares which can be converted into
equity shares within a certain period.

Non-Convertible preference shares: These are those shares which do not carry the right of conversion into
equity shares.
Q) Redeemable vs. Irredemable Preference share
Redeemable and Irredemable Preference shares are the outcomes of the classification of preference
shares on the basis of redemption or refund of capital. The differences between this two are –
Redeemable Preference share Irredemable Preference share
1. Preference shares which are redeemed at the 1. These are those preference shares which are not
expiry of the contractual period for which such shares repaid within the life time of the company.
are issued are known as redeemable preference
shares.
2. In India as per the provisions of the Companies 2. At present in India a company can issue
(Amendment) Act, 1988 a company can issue irredeemable preference shares (as per provisions of
redeemable preference shares having redemption companies (Amendment) Act, 1988)
period of 10 years or less.

Q) Issue and Redemption of Preference Shares [Section 55]

(1) No company limited by shares shall, after the commencement of this Act, issue any preference shares
which are irredeemable.
(2) A company limited by shares may, if so authorised by its articles, issue preference shares which are liable
to be redeemed within a period not exceeding twenty years from the date of their issue subject to such
conditions as may be prescribed. Provided further that -
(a) Out of the profits of the company or out of the proceeds of a fresh issue of shares made for the purposes of
such redemption;
(b) Redeemed of fully paid share only;
For preference share capital due at premium : Pref. share capital a/c …… Dr.
Premium on redemption of pref. share …… Dr.
(if remain in liabilities side of balance sheet)
Share premium / P/L Appropriation A/c …… Dr.
To Pref. share holder
For payment : Pref. share holder …… Dr.
To Bank A/c
(if any pref. share holder are not traceable then
the amount due for them should be shown in liabilities
side as ‘amount due to pref. share holder’ as current
liabilities.
(c) If redeemed out of the profits of the company, then a sum equal to the nominal amount of the shares to
be redeemed, transfer to the Capital Redemption Reserve Account;
Deficiency = Cash / Bank outflow for pref. capital – cash / Bank inflow from new share capital.
For such deficiency – Revenue reserve / general reserve / P/L appropriation A/c …… Dr.
To capital redemption reserve
(this reserve can be used for issuing fully paid bonus share)

(d) The capital redemption reserve account may be applied by the company for issue of fully paid bonus
shares to be issued to members of the company.

Amalgamations
AS -14: Accounting for Amalgamations
• Accounting Standard – 14 as prescribed by the Institute of Chartered Accountants of India deals with
accounting for amalgamation and treatment for resulting goodwill or reserves.
• AS-14 classifies amalgamation into two type’s viz.: Amalgamation in nature of merger; and Amalgamation in
nature of purchase.
Methods of Accounting: As per AS-14, there are two recognised methods of accounting for amalgamations, namely:
1. Pooling of Interest Method (applicable in case of Amalgamation in nature of merger);
2. Purchase Method (applicable in case of Amalgamation in nature of purchase)
*Pooling of Interest Method (Amalgamation in the nature of merger)
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The assets, liabilities and reserves of the transferor company are to be recorded at their existing carrying amounts and in
jk jkj
the same form as it was appearing in the books of the transfer or transferor company.
The identity of the reserves of the transferor company is to be kept intact in the balance sheet of the transferee company.
Difference between the amounts of share capital issued plus any other additional consideration paid by the transferee
company and the amount of the share capital of the transferor company should be adjusted in Reserves.
*Purchase Method (Amalgamation in nature of purchase)
The assets and the liabilities of the transfer or company are to be recorded at their existing carrying amounts
or, alternatively, the consideration should be allocated to individual assets and liabilities on the basis of air
values at the date of amalgamation while preparing the financial statements of the transferee company.
The identity of the reserves of the transferor company other than the statutory reserves is not
preserved. The identity of the statutory reserves is preserved in the same form and is recorded in the
books of the transferee company by a corresponding debit to the amalgamation adjustment A/c.
Excess or shortfall of consideration over the value of net assets acquired should be credited/ debited as capital
reserve/goodwill, as the case may be.
It is appropriate to amortize goodwill over a period of not exceeding 5 years unless a longer period is justified
*.Meaning of Purchase Consideration:
• Purchase consideration represents consideration paid by the transferee company(s) to shareholders (equity
and preference) in any form viz., cash, shares, debentures etc.
• According to AS-14, it is aggregate of the shares and other securities issued and the payment made in the
form of cash or other assets by the transferee company to the shareholders of the transferor company.
Shareholders means both equity and preference shareholders.
Payment to any other party like Debenture holders, other creditors and any amount of expenses of
dissolution borne by the Transferee company will not come in Purchase Consideration.
Q) Demarger
“Demerger”, in relation to companies, means the transfer, pursuant to a scheme of arrangement under
sections 230 to 232 of the Companies Act, 2013, by a demerged company of its one or more under takings to
any resulting company.“ demerged company ” means the company whose under taking is transferred,
pursuant to a demerger, to a resulting company; ‘resulting company” means one or more companies to
which the under taking of the demerged company is transferred .Here —
(i) all the property of the under taking, being transferred by the demerged company, immediately before the
demerger becomes the property of the resulting company by virtue of the demerger;
(ii) all the liabilities relatable to the under taking, being transferred by the demerged company, immediately
before the demerger becomes the liabilities of the resulting company by –virtue of the demerger;
(iii) The property and the liabilities of the under taking or under takings being transferred by the demerged
company are transferred at values appearing in its books of account immediately before the demerger;
(iv) The resulting company issues, in consideration of the demerger, its shares to the shareholders of the
demerged company on a proportionate basis;
Q) A Reverse merger - at times also referred to as a reverse takeover (RTO) – is a way by which a private
company can become a public company and take advantage of the greater financing options available to
public companies.
The reverse merger is an alternative to the traditional IPO (Initial Public Offering) as a method for going public.
Reverse takeovers have historically been used by businesses that wish to start trading in a very short time. A
reverse merger is a complex method that a private company uses to become a publicly traded corporation.

GOODWILL AND SHARES

Q)Goodwill The good will of a company may be defined as an intangible asset that enables a firm to earn
extra proportion. In other words, it is a qualified value assigned to the reputation of the firm which will be
reflected in its profitability.
Factors affecting Goodwill
a) The personal reputation of owners or managers.
b) Location of the business.
c) The quality of goods & services.
d) Patents and copyrights owned by the firm and
e) special factors relevant to a particular situation (like competition, Govt. Policy and money market condition, etc.)
(f) Nature of the industry, its history and the risks to which it is subject to
(g) Prospects of the industry in the future
(h) Yield on shares of companies engaged in the same industry, which are listed in the Stock Exchanges.
(i) Personal skill in management

Q) Purpose of valuing Goodwill(OBJECTIVES)

a) In case of partnership firm : if
(i) profit sharing ratio is changed,
(ii) a new partner is taken,
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(iii) an existing partner retires or dies, jk jkj
(iv) the firm amalgamates with other firm, or
(v) the firm is sold out.
b) For consolidating the assets & liabilities of Holding and Subsdiary Co.
c) When shares have to be valued for estate duty or wealth tax purpose.
Q) FEATURES OF GOODWILL
It is relevant to state the special features of goodwill, which are as under:
1) Goodwill is an unidentifiable intangible asset.
2) Goodwill of a business cannot be sold in a part or isolation. It is always sold with the business except
admission and retirement of a partner.
3) Individual intangible factors which may contribute to goodwill cannot be valued.
4) The value of goodwill may fluctuate widely according to internal and external factors over relatively short
periods of time.
5) The valuation of goodwill is subjective and not objective, because its valuation will differ from estimator to
estimator.
6) The value of goodwill has no reliable or predictable relationship to any costs which may have been
increased.
Q.) Positive and Negative goodwill
Ans.) Goodwill is the difference between the value of a business as a whole and the fair value of its net assets.
Goodwill may be both positive and negative. Positive goodwill arises when the value of the business as a whole
is greater than the fair value of the net assets. More rarely, the aggregate of the fair values may exceed the total
price paid for the business. The excess is accounted for as ‘negative goodwill’. Theoretically speaking, negative
goodwill can not exist in a going concern because the existence of the negative goodwill indicates that the value
of the business as a whole is less than the sum total of the[values of its individual assets less liabilities.]
Q.) Purchased and self generated goodwill ?
Ans.) If a business purchased another running business and the aggregate of the net assets may below the
total price paid for the business.. Then payment of excess amount is purchased goodwill.
Non-purchased (self generated) goodwill refers to the internal hidden capacity of the business to earn more
than normal rate of return. Factors like superior management, sales policies, good public image etc. contribute
towards the development of this type of goodwill. Valuation of non-purchased goodwill in highly subjective
and depends on judgment of individual valuer. No formula can be laid down for the accurate measurement of
the value of goodwill. In many cases, purely arbitrary methods, depending on the custom of trade, are adopted.
In the case of sale of a business the value of goodwill will depend upon mutual agreement between the vendor
and the buyer.

Q)Amortization of Goodwill
No firms records goodwill in the books of accounts unless situation claims it. Even if goodwill is
recorded in the books of any specific purpose, after the necessity is over the firm intends to write off the same
at an early date. Such writing off goodwill is known as its amortization.
The logic behind such amortization of goodwill is that it is a potential profit earning strength which most
of the firms try to keep secret for enjoying the edge over their competitors.

Q) Methods of valuation of Goodwill:-There are mainly following five methods –

A) Average profit basis method
B) Year’s purchase of super profit method
C) Capitalization of future profit method
D) Annuity method
E) Turnover method
A) Average profit basis method :- Under this, the profits of the recent past are averaged out. This average is
then adjusted for any chance expected to occur in the near future, exceptional income, abnormal loss, taxation
etc. to obtain average maintainable profit. The average maintainable profit is then multiplied by a certain
number of years of purchase of goodwill, i.e.,
Goodwill = Average maintainable profit x No. of years purchase
B) Year’s purchase of super profit method :- Super Profit :- This refer to excess of future maintainable
proportion over normal profit earned by similar type of firms facing a like degree of business risk, i.e.,
Super profit = Future Maintainable Profit – Normal Return on Capital Employed
Super profit method
a) Average trading capital employed
Market value of fixed assets xxxx
(if goodwill remain at cost then it to be taken but
if remain only goodwill then it should not be taken)
Market value of trading investment xxxx
(if nothing is mentioned then it is considered as non-trading)
Market value of current assets xxxx
Less : External liabilities xxxx
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Trading Capital Employed xxxx jk jkj
Less : ½ of current years profit excluding non-trading income after tax (Note 3) x x x x
Average Trading Capital Employed xxxx
b) Average trading profit after tax
Average profit xxxx
Less : Non-trading income (interest on non-trading investment) xxxx
Less : Tax xxxx
Average trading profit after tax (Note 4) xxxx
c) Calculation of super profit
Average trading profit after tax xxxx
Less : x% normal return on average trading capital employed xxxx
Super profit xxxx
Goodwill = Super profit x n year purchase
C) Capitalization of future profit method :- Under this, the value of the business is ascertained first on the
basis of its expected normal profit. This value is also called capitalized value of profit. The amount that remains
after deducting the value of net tangible assets of the firm from the capitalized value of profit is taken as the
value of goodwill, i.e.,
Goodwill = Capitalised value of profit – Value of Net Tangible assets
Average Expected Profit
where, Capitalised value of profit = x 100
Normal Rate of Return
D) Annuity method :- Here the basis of valuation of goodwill is super profit. The value of goodwill is the
present value of an annuity of the annual super profit payable over an expected. No. of years at the current
rate of interest. It is calculated as –
a
V= [1 – (1 + i)-n] Where, V = value of Goodwill
i
a = super profit
i = rate of interest per rupee per year
n = No. of years the annuity would be enjoyed.
E) Turnover method : - Here the valuation of goodwill is made not on the basis of profit but on the basis of
sales. It is assumed under this that the increased profit earned by the firm due to the existence of goodwill is
reflected through capital turnover ratio. Goodwill is calculated as –
 Average Expected Profit Capital Employed 
Goodwill =  -
 Normal Rate of Return Actual Sales 
This method is particularly useful in case of person or firm engaged in professional work (like Doctors,
Law years, Chartered Accountants, etc.)

Q) When valuation of shares is required?

Valuation of shares is required when :

 One of the important reason is when you are about to sell your business and you wanted to know your
business value
 When you approach your bank for a loan based on shares as a security
 Merger, acquisition, reconstruction, amalgamation etc – valuation of shares is very important
 When your company shares are to be converted i.e. from preference to equity
 Valuation is required when implementing an employee stock ownership plan (ESOP)
 For tax assessments under the wealth tax or gift tax acts
 In case of litigation, where share valuation is legally required
 Shares held by an Investment company
 Compensating the shareholders, the company is nationalized

Q) Factors of valuation of shares

The value of share of a company depends on so many factors such as:

1. Nature of business.

2. Economic policies of the government.

3. Demand and supply of shares.

4. Rate of dividend paid.

5. Yield of other related shares in the stock exchange, etc.

6. Net worth of the company.

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7. Earning capacity. jk jkj

8. Quoted price of the shares in the stock market.

9. Profits made over a number of years.

10. Dividend paid on the shares over a number of years.

11. Prospects of growth, enhanced earning per share, etc.

Method Of Valuation Of Shares

1) Asset Backing OR Intrinsic Value Method
Calculation of Net Asset
Goodwill (if goodwill given in balance sheet then it not to be taken xxxx
but new goodwill should be taken)
Market value of fixed assets xxxx
Market value of trading and non-trading investment xxxx
(if nothing is mentioned then it is considered as non-trading)
Market value of current assets xxxx
Less : External short term and long term liabilities xxxx
Net Assets (Note 1) xxxx
Less : Claims of Preference Shareholder :-
Pref. Share capital
Arrear Pref. dividend
Premium on redemption of pref. share xxxx
Net Assets to equity shares xxxx
Value of equity share = Net assets to equity shares / No. of equity share
Value of pref. share = Claims of Preference Share / No. of preference share

2) Yield OR Earning capacity Method

A) On the basis of average profit method
Average profit xxx
Less Tax xxx
Less transfer to reserve xxx
Less Pref Dividend of current year xxx
Profit to equity share xxx
profit to eq share x 100
Capitalised Value of equity shares=
X% normal return on eq share
Capitalised value to eq share
Value of equity shares=
no of eq share

profit to Perf share x 100

Capitalised Value of perf shares=
X% normal return on pref share
Capitalised value to pref share
Value of Pref shares=
no of pref share

3) Fair value method

Asset backing value + Yield value
Fair value =
2

Alteration of Share Capital & Internal Reconstruction( CAPITAL REDUCTION)

Q) Meaning of Alteration of Share Capital:

According to Section 94 of the Companies Act, a limited company can, if authorised by its articles of
association, alter the capital clause of its memorandum of association in any of the following ways
(a) Increase its share capital by such amount as it thinks expedient by issue of new shares. Accounting entries
are the same as are done for issue of new shares.
(b) Consolidate all or part of its existing shares of smaller denomination into shares of higher denomination.

Q) INTERNAL RECONSTRUCTION OR CAPITAL REDUCTION

Internal reconstruction means the reduction of capital to cancel any paid up share capital which is lost or
unrepresented by available assets. This is generally resorted to write off the past accumulated losses of the
company. Thus internal reconstruction and reduction of capital mean the same. Reduction of capital is unlawful
except when sanctioned by the court because conservation of capital is one of the main principles of the
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company law. capital which is lost or unrepresented by available assets. This is generally resorted to writejk off
jkj
the past accumulated losses of the company. Thus internal reconstruction and reduction of capital mean the
same. Reduction of capital is unlawful except when sanctioned by the court because conservation of capital is
one of the main principles of the company law.
Q) PROCEDURE FOR REDUCING SHARE CAPITAL OR Regulation of company Act for capital reduction
(i) A company cannot reduce its share capital unless it is authorised by its articles. However, if the articles do
not permit capital reduction, they may be altered by special resolution to enable the company to reduce its
share capital.
(ii) The company must pass a special resolution for reduction of capital.

The company willing to apply for reduction of share capital should follow the below steps-
Step 1. File an application to the Tribunal in Form No. RSC-1 along with the fees of INR 5,000.
Step2. Following documents are to be filed along with the application-
a. The list of creditors (duly certified by the Managing Director/ two directors). The list should contain a name,
address and amounts owed by the creditors. Notably, such a list of the creditors should have been prepared
not earlier than 15 days from the date of filing of an application.
b. A certificate from the auditor certifying the correctness of the list of creditors.
c. A certificate from the auditor and declaration from the director stating that the company is not in arrears in
the repayment of the deposits/ interest; and
d. A certificate from the auditor certifying that the accounting treatment as proposed by the company, for
reduction of the share capital, is in conformity with the accounting standards as specified in section 133.
Step3. On receiving the application in Form No. RSC-1 from the company for reduction of share capital, the
tribunal will take the following actions-
a) As and when the Tribunal receives the application for reduction of share capital, firstly it will give notice to
the following persons/ authorities for seeking their representation/ objections-
The Central Government (in Form No. RSC-2);
Registrar;
The Securities and Exchange Board (only in case the application is received from a listed company) (in Form
No. RSC-2);
and The creditors of the company (in Form No. RSC-3).
b) The notice should be published in the following newspaper, in the State in which the registered office of the
company is situated- Leading English newspaper; and Leading vernacular language newspaper. The notice
should be published within a period of seven days from the date on which the direction is given.
c) The Tribunal may pass the order confirming the reduction of share capital only after satisfying the following-

claim of each and every creditor has been discharged; or

claim of each and every creditor has been secured; or
The consent of the creditor has been obtained.
Step 4)
Once the company receives the order confirming the reduction of share capital from the Tribunal, the company
is required to take the following steps-
Publish the confirmation order in the manner as directed by the Tribunal.
Submission of the following documents with the Registrar within 30 days of the receipt of the order-
Certified copy of the Tribunal’s order confirming the reduction of share capital;
Minutes reflecting the following- The amount of the share capital; The number of shares in which it is to be
divided; The amount of each shares;
Step5) the registrar, After receipt of the above document, will issue a certificate in Form No. RSC-7.
Procedure of reduction of capital is not called for:
(a) Provisions of reduction of share capital under section 66 will not apply to the buy-back of own securities by the
company.
b)Where redeemable preference shares are redeemed in accordance with the provisions of Section 80 of the
Companies Act, 1956.
(c) Where any shares are forfeited for non-payment of calls.
(d) Where there is surrender of shares or a gift is made to a company of its own shares.
(e) Where the nominal share capital of a company is reduced by cancelling any shares which have not been
taken or agreed to be taken by any person.

Q) Internal vs. External Reconstruction: Internal reconstruction means that the scheme will be carried out by
liquidating the existing company and incorporating immediately another company (with the name only slightly
changed such as AB Ltd., to take over the business of the outgoing company. There are advantages in both,
but generally internal reconstruction is preferred. The advantages in its favour are:-
(a) Creditors, specially bank over draft and debenture holders, may continue where as they may not if the
company is formally liquidated which will involve payment of claims to out siders, If they do not continue, the
company may suffer from want of financial assistance.
(b) The company will be able to set off its past losses against future profits for income-tax purposes.his will
materially reduce the income-tax liability depending on the losses suffered during the preceding eight years.
Losses can be carried forward for eight years provided the business is carried on.
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The arguments in favour of external reconstruction are as under:- jk jkj
(a) External reconstruction may be the only way to bring about speedy reconstruction because sometimes a
few people hold up the scheme by delaying tactics by means of legal objections.
(b) It may help in raising more finance by issuing to the existing shareholders partly paid shares in the new
company. It should be remembered that in internal reconstruction fully paid up shares unless every share
holder gives his assent in writing.