Based on the New Textbook

NAVNEET
SECRETARIAL
PRACTICE

• Salient features :
1. Prepared in accordance with the latest Syllabus and the New Textbook
2. Chapterwise Syllabus and explanation of important terms and concepts under
Key Terms and Their Meanings at the beginning of each chapter for ready reference
3. Brief Overview of the chapter for quick understanding of the subject
4. Model answers to all textual questions including all types of objective questions
5. Ample number of additional important questions
6. Wherever necessary charts are given for easy understanding
7. Business Letters to different stakeholders drafted in the required format
8. Systematic and logical coverage of topics in lucid language

By
NAVNEET

First Edition : 2020

E0308
Mumbai : Bhavani Shankar Road, Dadar (W), Mumbai – 400 028. (Tel. 6662 6565)
www.navneet.com ● e-mail : publications@navneet.com
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prosecution without further notice.

2001
Published by Navneet Education Limited, Dantali, Gujarat. CTP
Printed by Navneet Education Limited, Dantali, Gujarat. (22-07-2020)

2
 PREFACE

It is with great pleasure that we present this first edition of Navneet Secretarial
Practice Digest to the Standard XII students. This Digest is prepared in accordance with
the New Textbook.
Important features of this Digest :

(1) Chapterwise Syllabus and the meanings of key terms with explanation given at the
beginning of the chapter.
(2) The summary in the form of Brief Overview is also given at the beginning of each
chapter. To derive best results out of this Digest, the students are advised to study the
summary carefully.
(3) Wherever necessary, charts are included in Summary for easy understanding.
The charts will help them to understand the subject-matter easily. It will also help to have
quick revision.
(4) The Questions and Answers cover the entire chapter. Textual questions and
additional questions of all types, viz. long answer type questions, short answer type
questions, explain the terms/concepts, distinguish between, case study/situation to express
opinion, justify the statements, objective type questions, etc. are included along with their
model answers.
(5) Business Letters to different stakeholders of the company such as members,
debentureholders and depositors are drafted in required format.

(6) The book is written in simple and lucid language to help students comprehend
the subject easily.

In short, this Digest is a comprehensive and student-friendly book. A thorough study

of this Digest will enable the students to score high marks in the board examination.

Every care has been taken to make this Digest perfect in all respects. However,
suggestions for its further improvement are most welcome.

- The Publishers

3
 CONTENTS

1. Introduction To Corporate Finance ... 5

2. Sources of Corporate Finance ... 25

3. Issue of Shares ... 58

4. Issue of Debentures ... 89

5. Deposits ... 102

6. Correspondence with Members ... 118

7. Correspondence with Debentureholders ... 131

8. Correspondence with Depositors ... 144

9. Depository System ... 156

10. Dividend and Interest ... 177

11. Financial Market ... 201

12. Stock Exchange ... 223

4
 1 INTRODUCTION TO CORPORATE FINANCE

SYLLABUS
1.1 Meaning
1.2 Importance
1.3 Capital Requirements :
(A) Fixed Capital and (B) Working Capital
1.4 Capital Structure :
1.4.1 Definition
1.4.2 Components

KEY TERMS AND THEIR MEANINGS

• Finance : The provision of money when and where required. Finance may be short-term, medium-
term and long-term. Finance may be required for consumption as well as for investment.
• Borrowed (Debt) capital : Funds which are raised by a company from the external source for a
definite period by the issue of debentures, by accepting deposits from the general public and by
borrowing loans from the banks and other financial institutions.
• Owned capital : The funds which are raised by a company from the internal sources and not refunded
during the lifetime of the company. It is raised by the company by issue of different types of shares
and ploughing back of profit. It is a permanent capital of the company and is usually employed for
buying the fixed assets.
• Share capital : Funds collected by the company by issuing different types of shares. It is a major
source of finance for the company.
• Security : A document issued by a company or government acknowledging that the issuer has
received money or some other valuable consideration and for issuing such document to some
specified person (investor) in return, entitled to certain rights against the issuer.
• Preference shares : A preference share is one which enjoys preferential rights over equity share as
to payment of dividend and repayment of capital at the time of the winding-up of the company.
• Equity shares : An equity share is one which carries ownership right in the company, right of
participation in the management and right to get dividend without any limit.
• Budget : A precise and detailed planning of various business activities with certain objectives to
attain. It is prepared prior to the accounting year to which it is made applicable. It is expressed in
financial and quantitative terms.
• Current assets : Current assets are those assets which change their form and ultimately get converted
into cash. Current assets include cash, investment, stock, amount receivables, prepaid expenses, etc.
• Current liabilities : Current liabilities refer to those obligations which are normally paid within a
period of one year out of the current assets or creating further current liabilities. They include Bank
overdrafts, amount payable, provision for taxes, outstanding (unpaid) expenses, prepaid incomes,
etc.

1. INTRODUCTION TO CORPORATE FINANCE 5

 • Gestation Period : Period or time required for the conversion of raw materials into the finished
product.
• Boom : It refers to a period of prosperity or expansion of business activities. A boom reaches a peak
when the economy has been working at full capacity.
• Recession : A temporary falling off in business activity.
• Bad debts : Debts (i.e., amount due to firm from outsiders) which cannot be recovered from debtors
are called bad debts. When all efforts to recover doubtful debts have failed and the amount is totally
irrecoverable, then it is treated as ‘bad debts’. It is a loss to the business.
• Debt-equity ratio : Debt-equity ratio is one of the important tools of financial analysis for judging
the financial strength of business enterprises. It shows the relationship between the owners’ funds
and borrowed funds.
• Dividend : The part of the earning of a company given to its shareholders, usually expressed as an
amount per share on the par value of the share.
• Ploughing back of profit : Investment of present and past profit into the business itself is called
ploughing back or reploughing of profit.
• Bonds : Fixed interest securities issued by the government, local authorities or companies after
borrowing funds from the public.
• Trade credit : Facilities given by the suppliers or intermediaries to the firms to delay payment for
goods they have bought.
• Plant : Plant is an industrial establishment that is either a factory, a mill or a workshop concerned
with some type of operations. It refers to a place where goods are produced, such as sugar factory,
iron and steel factory, or from where distribution of goods takes place such as a departmental store
or from where services are supplied such as transport depot, etc.
• Debentures : A document containing an acknowledgement of indebtedness issued by a company
under its common seal. It is a most common form of long-term loan borrowed by a company from
the general public by issuing certificates called debentures.
• Capital market : The term used to describe the various sources of long-term capital needed for
the creation of new companies and for the development and expansion of existing ones. The stock
exchange has the status of a capital market.

• Financial institution : Specialised firm, institution or organisation which provides short-term,

medium-term as well as long-term finance to industry, trade and business. Finance Corporation of
India (FCI), Axis Bank, Banks, etc. are the some of the examples of financial institutions functioning
in India.

• Public deposit : Public deposit is one of the important sources of corporate finance. Any amount of
money received by a company by way of deposit or loan from the general public for a definite period
of time is called public deposit.

• Sales promotion : Marketing activity concerned with stimulating sales and distribution effectiveness,
e.g. arranging display exhibition, demonstration, reduction in selling price for a limited period, but
normally excluding advertisement.

6 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 • Promoter : The person responsible for the convening and formation of a company. They are usually
industrial experts who with the help of big team of experts do preliminary work necessary before a
company can be brought into existence.

• Lease : An agreement whereby the legal owner of real property (especially land, building or
machinery) gives another person the possession of that property with freedom to use it as he wishes,
though under certain conditions, it may imply in return for regular specified payment as rent.

• Overheads : Indirect cost or expenses needed to operate a business. It includes advertising,

insurance, accounting fees, interest, legal fees, rent, taxes, travel expenditure, repairs, etc.

• Merchandise firm : Those firms which are concerned with purchasing and selling of goods and
services without altering the physical form of goods are called merchandise firm or trading concerns.

BRIEF OVERVIEW

Corporate Finance : raised by the company or business firm. It relates

to the selection of assets in which available funds
1.1 Meaning :
are to be invested. The firm has to take into account
Corporate finance deals with acquisition and the cost of capital while investing so that returns on
systematic use of finance (capital) by the business such investments exceed the cost of capital. It is
corporation. It is mainly concerned with financing also called capital budgeting.
the activities of the corporation, capital structuring
1.2 Importance of Corporate Finance :
and making investment decisions. According
Henry Hoagland ‘‘Corporate finance deals Importance of Corporate Finance
primarily with the acquisition and use of capital
1. Helps in decision making
by business corporation.’’ Corporate finance also
comprises of financial planning, study of share 2. Helps in raising capital for a project
market, capital market, money market, capital
formation and foreign capital. The banks and 3. Helps in Research and Development
other financial institutions also play major role in
4. Helps in smooth running of business firm
corporate finance.
The following two decisions provide basis to 5. Brings co-ordination between various activities
corporate finance :
6. Promotes expansion and diversification
(1) Financing decision : The decision of finance
manager which ensures that business firm is well 7. Managing risks
capitalised i.e. it has right amount of capital and
that the business firm has right combination of debt 8. Replace old assets
and equity. From the multiple choices of sources of
9. Payment of dividend and interest
finance available from capital market, the business
firm can choose source of equity capital or debt 10. Payment of taxes and fees
capital for combination of both. It can even raise
(1) Helps in decision making : Availability of
finance through bank loan, debentures, public
funds or finance provides valid base for taking
deposits, etc.
decisions in different areas of business. Most of
(2) Investment decision : Investment decision
the business decisions are taken by considering
refers to decision regarding utilisation of funds

1. INTRODUCTION TO CORPORATE FINANCE 7

profit earning ability. Business enterprises (8) Replace old assets : Corporate finance is
undertake only those projects which are financially required to replace old and outdated fixed assets
viable. In this way corporate finance helps in such as plant, machineries, furniture, vehicles,
decision making process. equipment, etc.
(2) Helps in raising capital for a project : The (9) Payment of dividend and interest :
funds needs to finance the projects or business Corporate finance is required to pay dividend to
ventures can be raised by the business firms from shareholders and to pay interest to debenture-
different sources such as issue of different types holders, creditors and banks.
of shares, debentures, bonds, accepting public
(10) Payment of taxes and fees : Corporate
deposits, borrowing loans from banks and other
finance is also required to pay income tax, Goods
financial institutions.
and Service Tax (GST), etc. to the Government
(3) Helps in Research and Development : and fees to the Registrar of Companies on different
Business organisations need to provide financial occasions.
support to research and development work
1.3 Capital Requirements :
undertaken for growth and development of
business. To attract more customers it is necessary After having set up the business enterprise and
to upgrade old products and develop the new satisfied with the feasibility of the projects, the
products which require further financial support. entrepreneur takes decision on the amount of

(4) Helps in smooth running of business capital requirement to start and run the business.

firm : In every business organisation, smooth flow For this, business enterprise has to draft financial

of corporate finance is required to pay salaries to plan by considering present and future
the staff in scheduled time, to repay interest and requirements of the business. While estimating
loans to creditors on time, to purchase raw the volume of the total capital requirements,
materials, to finance sales promotion of existing entrepreneur has to take into account fixed capital
products, to launch new products in the market, requirement and working capital requirement.
etc. (A) Fixed Capital :
(5) Bring co-ordination between various Fixed Capital is that portion of total capital
activities : Corporate finance is necessary to which is invested in the fixed assets like land,
control and co-ordinate all the activities of different building, plant, machinery, equipment, furnitures,
departments of the business organisation. etc. These assets are used in the business but not
Efficiency of every department in the organisation purchased or kept for resale. Fixed capital stays
depends directly on the effective financial
or remains in the business for a long period i.e.
management.
almost permanently. Fixed capital is required
(6) Promotes expansion and diversification : initially at the time of establishment of a business
Corporate finance is required to purchase and firm or a company. It is also required by well
install modern machinery and techniques which established firms for modernisation, further
required to promote expansion and diversification development, replacement of fixed assets and
of business. diversification. An owner can procure funds for
(7) Managing risks : Corporate finance is purchase of fixed assets from the capital market
necessary to manage different business risks such through issue of shares, debentures, long-term
as sudden fall in sales, loss due to occurrence of borrowings from the banks and other financial
natural calamities, loss due to strikes, etc. institutions.

8 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 • Factors affecting fixed capital requirement : entrepreneurs at concessional rate, then in such
Nature of business case fixed capital requirement would reduce to
Size of business certain extent.
Scope of business (8) International conditions : The large scale
Extent of lease or rent business enterprises carrying business on
Factors Arrangement of sub-contract international level need to expand their production.
affecting Acquisition of old assets They need large amount to expand fixed assets to
Fixed Acquisition of assets on produce more so that there would not be any
Capital concessional rate shortage of goods and services.
requirement International conditions (9) Trade in economy : If entrepreneur or
Trend in economy management predicts that the future of company
Population trend to be bright, then it undertakes expansion of
Consumer preference activities in all areas of business. Such expansion
Competitive factor activity need large investment in fixed assets to
(1) Nature of business : The big manufacturing acquire benefits in the future.
industries and public utility concerns need huge (10) Population trend : When population in
amount to purchase and install fixed assets certain ares increases at high rate, some
whereas trading organisations require relatively manufacturers get opportunities to expand their
less investment in fixed assets. business which increases the requirement of fixed
(2) Size of business : The business enterprises assets, e.g. readymade garments, automobile
which carry on large scale operations mostly use industry, etc.
automatic machines and equipment. So, they need (11) Consumer preference : Business firms
huge amount of fixed capital. producing or providing goods and services which
(3) Scope of business : The business are in great demand, need to produce more.
enterprises which are established to undertake Hence, they needs more fund to invest in fixed
production or distribution on a large scale need assets, e.g. mobile phone, laptop manufacturer.
huge amount of fixed capital. (12) Competitive factor : If one of the
(4) Extent of lease or rent : If industrialist or competitors moves towards automation, the other
owner of business enterprises acquires fixed business firms in same line of products also
assets on lease or rental basis, he needs less follow. This increases the requirement of fixed
amount of funds to invest in fixed assets. capital of all the firms going for automation.
(5) Arrangement of sub-contract : If (B) Working Capital :

entrepreneur outsources on sub-contract some of Working Capital is that portion of total capital
which is invested in short-term assets such as
the processes of production to experts to complete,
cash, account receivable, inventories, etc. It is
then fixed capital requirement in such case would
used to carry out day-to-day business activities.
be less.
Gerstenbergh, defines working capital as, ‘‘The
(6) Acquisition of old assets : If entrepreneur
excess of current assets over current liabilities.’’
acquires old plant, equipment, machinery which
It is referred to Net Working Capital. It is also
are in working condition at low prices, then fixed
called ‘Circulating Capital’.
capital requirement would be less.
J. S. Mill, defines working capital as, “The sum
(7) Acquisition of assets on concessional
of current assets is working capital.” It is referred
rate : When Government wants to promote the
as ‘Gross Working Capital’. Business firms require
industrial growth and development at regional
working capital to store sufficient quantity of raw
level, then government provide fixed assets to

1. INTRODUCTION TO CORPORATE FINANCE 9

material in stock, to maintain adequate stock of
finished goods, to arrange for funds till the amount
is collected from the debtors and to meet
unexpected expenses.
• Factors affecting requirement of Working
Capital :
Nature of business
Size of business
Volume of sales
Factors
Production cycle
affecting
Business cycle
requirement
Terms of purchase and sale
of Working
Credit control
Capital
Growth and expansion
Management ability
External factors
(1) Nature of business : The manufacturing
firms producing products of daily consumption
and public utility concerns providing services need
less working capital as these firms get continuous,
sufficient and constant cash inflow from their
customers. However, business firms dealing in
luxurious products and trading in goods and
services need large amount of working capital.
(2) Size of business : A business enterprise
with large scale operation needs large amount of
working capital whereas the need of working
capital of business firms operated on small scale
and at local level is very less.
(3) Volume of sales : The requirement of working
capital directly varies with volume of sales. If the
volume of sales increases, there is an increase in
the requirement of working capital and vice versa.
(4) Production cycle : If the production cycle
period is longer, the firm requires more amount
of working capital and vice versa.
(5) Business cycle : During boom (i.e.
prosperity) period, demand and sales for goods
and services increase which in turn increase the
requirement of working capital. Conversely, during
recession, the requirement of working capitals
is less.
(6) Terms of purchases and sale : If business
firm does not get proper credit from suppliers
and adopts liberal credit policy for sales, then
10 SECRETARIAL PRACTICE DIGEST : STANDARD XII
requirement of working capital is more. Conversely.
if a business firm gets more period of time for
making payment to suppliers and adopts less
liberal credit polity for sales, then it need less
amount of working capital.
(7) Credit control : If credit control policy is
sound, its cash inflow increases and need of
working capital reduces. If credit control policy is
liberal, there is risk of bad debts and need of
working capital increases. The business firm
selling goods on cash basis needs less amount of
working capital and vice versa.
(8) Growth and expansion : The need of
working capital increases with growth and
expansion of business enterprises.
(9) Management ability : Proper co-ordination
between production department and sales
department reduces the requirements of working
capital. The business firm that needs to keep large
stock of inventories requires more amount of
working capital.
(10) External factors : If the banks and other
financial institutions supply funds to the business
firms at the time of need then requirement of
working capital will be less and vice versa.
1.4 Capital Structure :
Capital structure refers to the relative proportion
of different types of financing used by the
organisation to make up the long-term financing
of a business. A combination of different sources
such as owned capital which consists of equity
share capital, preference share capital, reserves
and surplus and borrowed capital which consists
of bank loans and long-term loans provided by
the financial institutions, debentures, bonds, etc.
are used in capital structure. In other words, it
implies mix-up of various sources of funds in
desired proportion. It is nothing but ‘Composition
of Capital’ or ‘Security Mix’.
1.4.1 Definition : According to John Hampton,
‘‘A firm’s capital structure is the relation between
the debt and equity securities that makes up the
firm’s financing of its assets.’’
 1.4.2 Component of Capital Structure : for short-term as well as for long-term. On this
borrowings, company has to pay interest at an
Components
agreed rate.
of capital
Structure To understand the above concept, the following
Balance sheet is prepared :
Liabilities Amt. ` Assets Amt. `
Equity Preference
Retained Borrowed Fixed assets
Share Share Share Capital :
Earnings Capital Land and Buildings 2,50,000
Capital Capital 15,000 Equity Shares 1,50,000
Plant and Machinery 1,90,000
of ` 10 each fully paid
Furniture and Fixtures 85,000
5,000 Preference 5,00,000
(a) Debentures (b) Term loan Shares of ` 100 each Current Assets
fully paid Inventories 78,000
(1) Equity share capital : It is primary and
Reserves and Surplus 60,000 Sundry Debtors 52,000
basic source of financing the activities of business. Bills Receivable 40,000
Equity shares are those shares on which dividend Liabilities Cash at Bank 1,20,000
Cash in Hand 90,000
is paid after it is paid on preference shares and
1,000 12% Debentures 1,00,000
in the event of liquidation capital is repaid only of ` 100 each fully

after the repayment of capital to the preference paid

Sundry Creditors 50,000
shareholders. The rate of dividend paid on equity Bank Overdraft 30,000
share is fluctuating depending on the volume of Bills Payable 15,000
9,05,000 9,05,000
disposable profit.
(2) Preference share capital : Preference From the given Balance Sheet, we will calculate
shares are those shares which carry preferential the capital structure.
right to get dividend before it is paid to equity Capital Structure  O
 wned Capital  Borrowed
shareholders and in the event of dissolution of a (Debts) Capital.
company preference shareholders get repayment of Owned Capital  E
 quity Share Capital 
capital before it is paid to equity shareholders. The Preference Shares Capital 
dividend at fixed rate is paid on preference shares. Reserves and Surplus.
(3) Retained earnings : The part of the profit Borrowed (Debts) Bank LoanLong-term
retained by the company for meeting future financial Capital loan provided by financial
requirements is known as retained earnings. It is institutionsDebentures
nothing but ploughing back of profit. It is internal bonds, etc.
With reference to the given Balance Sheet :
source available to the company to raise finance.
Owned Capital  
15,000 Equity Shares of
(4) Borrowed capital : The borrowed capital
` 10 each  5,000 pref.
refers to the capital raised by issuing debt securities.
shares of ` 100 each
Borrowed capital includes the following :
reserves and surplus.
(a) Debentures : Debentures are the  1,50,000  5,00,000
acknowledgement of debt issued by the company  60,000  7,10,000.
under its seals after borrowing funds (money) from  Borrowed Capital  1
 ,000 12% Debentures
the general public. The company is required to pay of ` 100 each  1,00,000
interest at predetermined agreed rate to debenture-
 Capital Structure  Owned Capital 
holders.
Borrowed Capital
(b) Term loan : The company also borrows  7,10,000 1,00,000
loans from bank and other financial institutions    ` 8,10,000.

1. INTRODUCTION TO CORPORATE FINANCE 11

 EXERCISE
Ans.
1  Select the correct answer from the
(1) Finance is related to money and money
options given below and rewrite the
management.
statements : (1 mark each)
(2) 
Finance is the management of monetary
* [1]
affairs of the company.
(1)  is related to money and money (3) Corporation finance deals with the acquisition
management.
and use of capital by business corporation.
(a) Production (b) Marketing (c) Finance (4) Company has to pay taxes to government.
(2) 
Finance is the management of (5) Fixed Capital refers to any kind of fixed
affairs of the company. assets.
(a) monetary (b) marketing (6) Working Capital refers to the excess of current
(c) production assets over current liabilities.
(3) Corporation finance deals with the acquisition (7) Manufacturing industries have to invest huge
and use of by business corporation. amount of funds to acquire fixed assets.
(a) goods   (b) capital   (c) land (8) 
When the population is increasing at high
(4) Company has to pay to government. rate, certain manufacturers find this as an

(a) taxes (b) dividend (c) interest opportunity to expand business.

(9) The sum of all current assets is gross working
(5) refers to any kind of fixed assets.
capital.
(a) Authorised Capital (b) Issued Capital
(c) Fixed Capital (10) Capital Structure means mix-up of various

(6)  refers to the excess of current sources of funds in desired proportion.

assets over current liabilities. Note : While answering this question, students should
(a) Working Capital (b) Paid-up Capital write the full statement and underline the answer
word or figure as shown. However, from [2] onwards,
(c) Subscribed Capital
we have given only the answer word or figure.
(7) 
Manufacturing industries have to invest
[2]
amount of funds to acquire fixed
(1) 
The investors who are ready to take risk
assets.
prefer shares for investment.
(a) huge (b) less (c) minimal
(a) preference (b) equity (c) bonus
(8) 
When the population is increasing at high
(2) 
If share market is depressed a company
rate, certain manufacturers find this as an
should issue capital.
opportunity to business.
(a) debt (b) owned (c) mix
(a) close (b) expand (c) contract
(3) 
Big retail stores require large amount of
(9) 
The sum of all is gross working
capital.
capital.
(a) fixed   (b) working   (c) loan
(a) expenses (b) current assets
(4) The capital stay in business almost
(c) current liabilities
permanently.
(10)  means mix-up of various sources
(a) fixed   (b) working   (c) debt
of funds in desired proportion.
(5) 
The difference between current assets and
(a) Capital Budgeting (b) Capital Structure
current liabilities is capital.
(c) Capital Goods (a) debt   (b) fixed   (c) working

12 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 (6) 
A firm selling on credit terms requires
(4) Management of
working capital.
corporate funds
(a) more (b) medium (c) less
(5) Ratio of buying and
(7) A firm making cash sales requires
selling of goods and
working capital.
services
(a) less (b) more (c) no
(6) Ratio of different
(8) If volume of sales increases, there is
securities in capital
in amount of working capital.
(7) Finding investments
(a) an increase (b) a decrease
and deploying them
(c) no change
successfully
Ans. (1) equity (2) debt (3) working (4) fixed
(8) Use of borrowed fund
(5) working (6) more (7) less (8) an increase.
for financing business
2  Match the pairs : (1 mark each) (9) Market for long-term
debt instrument and
equity shares
* (1) Group ‘A’    
Group ‘B’
(10) Finding access to
(a) Capital budgeting (1) Sum of current assets
capital market to fulfil
(b) Fixed capital (2) Deals with acquisition
financial needs
(c) Working capital and use of capital
(d) Capital structure (3) Fixed liabilities Ans. (a – 6); (b – 9); (c – 7); (d – 1); (e – 2).
(e) Corporate finance (4) 
Sum of current
3  Write a word or a term or a phrase which
liabilities
can substitute each of the following :
(5) Fixed assets
 (1 mark each)
(6) Investment decision
(7) Financing decision *[1]
(8) Deals with acquisition (1) A key determinant of success of any business
and use of assets function.
(9) 
Mix up of various (2) 
The decision of finance manager which
sources of funds
ensures that firm is well capitalised.
(10) Product mix
(3) 
The decision of finance manager to deploy
Ans. (a) Capital budgeting – Investment
the funds in systematic manner.
decision (b) Fixed capital – Fixed assets
(c) Working capital – Sum of current assets (4) Capital needed to acquire fixed assets which
(d) Capital structure – Mix up of various sources are used for longer period of time.
of funds (e) Corporate finance – Deals with (5) The sum of current assets.
acquisition and use of capital. (6) 
The excess of current assets over current
liabilities.
(2) Group ‘A’    
Group ‘B’
(7) The process of converting raw material into
(a) Capital structure (1) Capital that is used to finished goods.
(b) Capita market purchase fixed assets (8) The boom and recession cycle in the economy.
(c) Investment (2) Capital that is used to (9) The ratio of different sources of funds in the
decision carry out day-to-day
total capital.
(d) Fixed capital business activities
(10) The internal source of financing.
(e) Working capital (3) Market for short-term
Ans. (1) Finance (2) Financing decision
debt instruments
(3) Investment decision (4) Fixed capital

1. INTRODUCTION TO CORPORATE FINANCE 13

(5) Working capital (6) Working capital (7) 
The business dealing in luxurious products
(7) Production cycle (8) Business cycle (9) Capital will require huge amount of working capital.
structure (10) Retained earnings. (8) A firm with large scale operations, will require
[2] more working capital.
(1) The portion of total capital which is invested (9) Liberal credit policy creates a problem of bad
in fixed assets. debts.
(10) Financial institutions and banks cater to the
(2) 
The difference between current assets and
working capital requirement of business.
current liabilities.
Ans. (1) True (2) True (3) True (4) False
(3) 
Finding investment and deploying funds in
(5) False (6) False (7) True (8) True (9) True
systematic manner in a business.
(10) True.
(4) The portion of total capital which is used to
carry out day-to-day business activities. 5  Find the odd one : (1 mark each)
(5) Indirect cost or expenses required to run a
business. * (1) 
Land and Building, Plant and Machinery,
Cash.
(6) The funds invested in the current assets of a
* (2) 
Debenture Capital, Equity Share Capital,
business.
Preference Share Capital.
(7) Shares which get dividend and repayment of
* (3) 
Fixed Capital, Capital Structure, Working
capital after it is paid to preference shares.
Capital.
(8) 
Shares which carry preferential right as to
(4) 
Financing decision, production decision,
payment of dividend.
investment decision.
(9) 
Acknowledgement of loans raised by the (5) 
Investment, Receivables, Transportation,
company. cash.
(10) Process of assessment of financial requirement (6) Debentures, Loans, Retained earnings.
and arranging sources of capital. Ans. (1) Cash (2) Debenture capital (3) Capital
Ans. (1) Fixed capital (2) Net working capital Structure (4) Production decision
(3) Investment decision (4) Working capital (5) Transportation (6) Retained earnings.
(5) Overheads (6) Working capital (7) Equity
shares (8) Preference shares (9) Debentures 6  Complete the sentences : (1 mark each)
(10) Financial planning.
* (1) 
Initial planning of capital requirement is
* 4  State whether the following statements
made by .......................... .
are True or False : (1 mark each) * (2) When there is boom in economy, sales will
(1) 
Finance is related to money and money .......................... .
management. * (3) The process of converting raw material into
(2) Business firm gives green signal to the project finished goods is called .......................... .
only when it is profitable. * (4) 
During recession period sales will
(3) 
Corporate finance brings co-ordination .......................... .
between various business activities. (5) Every business corporation must use right
(4) 
Fixed capital is also referred as circulating source of funds that have ..........................
capital. cost.
(5) Working capital stays in the business almost (6) 
.......................... refers to assessment of
permanently. financial requirement and arranging sources
(6) 
The business will require huge funds, if of capital.
assets are acquired on lease basis. (7) Fixed assets are not meant for .................... .

14 SECRETARIAL PRACTICE DIGEST : STANDARD XII

(8) A capital structure of business organisation is (3) Define Working Capital.
composed of owned funds and ..................... . Ans. The portion of a total capital which is
Ans. (1) Company’s promoters (2) increase invested in the current assets such as cash,
(3) Production Cycle (4) decrease (5) minimum inventories, account receivables, etc. is called
(6) Financial planning (7) resale (8) borrowed working capital.
funds.
(4) What is Production Cycle ?
Ans. The process of converting raw materials
* 7 Select the correct option from the bracket :
into finished products is called production cycle.
 (1 mark each)
(5) Define Capital Structure.
Group ‘A’ Group ‘B’ Ans. Capital structure refers to the proportion
(a) Financing decision ................................. of different sources of funds raised in desired
(b) .................................. Longer period of proportion by a firm for long-term finance.
time
(c) Investment decision ................................. 9  Correct the underlined word/s and
(d) .................................. Circulating capital rewrite the following sentences :
(e) Combination of .................................  (1 mark each)
various sources of
* (1) 
Finance is needed to pay dividend to
funds
debentureholders.
(To have right amount of capital, Deploy funds
* (2) 
When there is recession in economy sales
in systematic manner, Fixed capital, Working
will increase.
capital, Capital structure)
* (3) Share is an acknowledgement of loan raised
Ans.
by company.
Group ‘A’ Group ‘B’ * (4) Equity shares carry dividend at fixed rate.
(a) Financing decision To have right
(5) Cost of capital is maximum return expected
amount of capital
by its investors.
(b) Fixed capital Longer period of
(6) 
Fixed capital refers to capital invested for
time
acquiring current assets.
(c) Investment decision Deploy funds in
(7) Initial planning of fixed capital requirement
systematic manner
is made by company’s secretary.
(d) Working capital Circulating capital
(8) 
An entrepreneur obtains funds for the
(e) Combination of Capital structure
purchase of fixed assets from money market.
various sources of
funds Ans.
(1) Finance is needed to pay interest to debenture-
Answer in one sentence : (1 mark each)
* 8   holders.
(2) 
When there is boom in economy sales will
(1) Define Corporate Finance. increase.
Ans. Corporate finance implies raising finance, (3) Debenture is an acknowledgement of loan
financing the activities of the corporation, capital raised by company.
structuring and making investment decisions. (4) Preference shares carry dividend at fixed rate.
(2) What is Fixed Capital ? (5) Cost of capital is minimum return expected by
Ans. The portion of a total capital which is its investors.
invested in fixed assets such as land. building (6) 
Fixed capital refers to capital invested for
equipment, etc. is called fixed capital. acquiring fixed assets.

1. INTRODUCTION TO CORPORATE FINANCE 15

(7) Initial planning of fixed capital requirement is
made by company’s promoters.
(8) An entrepreneur obtains funds for the purchase
of fixed assets from capital market.
* 10 Explain the following terms/concepts :
 (2 marks each)
(1) Financing decision :
Ans. For the answer, refer to Q. 13 (3) (B) (1)
Answer in brief.
(2) Investment decision :
Ans. For the answer, refer to Q. 13 (3) (B) (2)
Answer in brief.
(3) Fixed capital :
Ans. (1) That portion of a total capital which is
invested in the fixed assets is called fixed capital.
In other words, capital needed to acquire fixed
assets which are used for a longer period of time
is called fixed capital. Fixed assets are purchased
for use and not for resale. They remains in the
business for a long period of time i.e. almost
permanently. Fixed assets may be defined as “the
stock of tangible, durable fixed assets owned or
used by the business enterprises for long period.”
(2) Fixed assets include buildings, vehicles,
plant, machinery, equipment, furnitures and
fixtures, etc. An owner can obtain funds to acquire
fixed assets from capital market. Funding can be
raised by selling shares, issuing debentures, bonds
or even by taking long-term loans. Fixed capital is
needed mostly at the time of establishment of a
new company. Some existing company may also
require fixed capital for its expansion,
modernisation and development, replacement of
machinery, plant, equipment, etc. Company’s
promoters prepare initial planning of fixed capital
requirements. In recent times, estimating fixed
capital requirements gained vital important
because of modern industrial processes need
increasing use of heavy and automated machineries.
(4) Working capital :
Ans. (1) Working capital refers to business
firm’s investment in short-term assets such as
cash, account receivable, inventories, etc. Various
16 SECRETARIAL PRACTICE DIGEST : STANDARD XII
financial experts have defined the term working
capital in different ways. According to
Gerstenbergh, ‘‘the excess of current assets over
current liabilities is termed as working capital.’’
This approach is called net working capital
approach. He prefers to call it as ‘circulating
capital’. In this respect, J. S. Mill, says “the sum
of current assets is working capital of a business.”
This is broader approach which takes into account
all current assets of the company. It is also called
as ‘Gross Working Capital’.
(2) Working capital is used in the business firm
to arrange and carry out day-to-day business
activities. The business organisations or companies
need working capital for smooth functioning of
business activities, to maintain sufficient stock of
raw materials, to maintain adequate stock of
finished goods, to arrange for the funds till the
amount of credit sale collected from the debtors,
to pay overheads, to meet unexpected expenses,
etc. It is the prime responsibility of the finance
manager to estimate the amount of working capital
requirement of the business enterprise or company.
* 11  Study the following case / situation and
express your opinion : (3 marks each)
(1) The management of ‘Maharashtra State
Road Transport Corporation’, wants to determine
the size of working capital.
(a) Being a public utility service provider,
will it need less working capital or more ?
(b) Being a public utility service provider,
will it need more fixed capital ?
(c) Give one example of public utility service
that you come across on day-to-day basis.
Ans. (a) Maharashtra State Road Transport
Corporation, being a public utility service provider
needs less amount of working capital because of
continuous flow of cash from their customers.
(b) Maharashtra State Road Transport
Corporation being a public utility service provider
needs more amount of fixed capital to acquire
fixed assets.
 (c) The Bombay Electricity Supply and (c) Does the size of a business determine the
Transport (BEST) providing electricity and public fixed capital requirement ?
transport services in the Brihan Mumbai is one of Ans. (a) Machinery is a fixed asset to be used
the public utility service providers from whom we in the company.
get electricity and transport services.
(b) Capital used for purchase of machinery is
(2) A company is planning to enhance its fixed capital.
production capacity and is evaluating the
(c) The size of a business determines the
possibility of purchasing new machinery whose
requirement of fixed capital. If the business
cost is ` 2 crore or has alternative of machinery
enterprise is established to undertake and carry
available on lease basis.
on large scale operations, its fixed capital
(a) What type of asset is machinery ? requirement is larger then the business firm which
(b) Capital used for purchase of machinery is carries on small scale business operations.
fixed capital or working capital ?

* 12  Distinguish between the following : (4 marks)

Fixed Capital and Working Capital :

Ans.

Fixed Capital Working Capital

1. Meaning
Fixed capital refers to that portion of total capital Working capital refers to the firm’s investments in
which is invested in fixed assets such as land, short-term assets viz. cash, short-term securities,
building, equipment, etc. account receivable and inventories, etc.
2. Nature
Fixed capital remains in the business for a long Working capital remains in the business for a short
period of time i.e. for more than one year. period of time and circulates into the business.
3. Purpose
Amount of fixed capital is employed into the fixed Amount of working capital is employed into the
assets such as land, building, machinery, equipment, short-term assets such as inventories, cash, account
etc. It is not used to produce goods and services. receivables, etc. It is used to produce goods and
services.
4. Sources
Fixed capital is funded through different sources Working capital is funded from different sources
such as issue of shares, debentures, bonds and such as borrowing short-term loans, accepting
borrowing long-term loans from financial public deposits, trade credit, etc.
institutions.
5. Objectives
Investors invest the funds in fixed capital to earn Investors invest their funds in working capital to
future profits. get immediate returns.
6. Risks involved
Investments made in fixed capital is more risky. Investments made in working capital is comparatively
less risky.

1. INTRODUCTION TO CORPORATE FINANCE 17


* 13 Answer in brief : (4 marks each)
(1) Define Capital Structure and state its
components.
Ans. [A] Definition : A company or a business
enterprise collects its capital from different sources
such as owned capital or borrowed capital or
both. Capital structure refers to the relative
proportion of different sources used by the
business enterprise to make up the long-term
financing of a business. In other words, capital
structure implies ‘mix-up of various sources of
funds in desired proportion.’
According to John Hampton, “A firm’s capital
structure is the relation between the debt and
equity securities that makes up the firm’s
financing of its assets”. In brief, capital structure
refers to the proportion of different securities
raised by a firm or a company for long-term
finance.
[B] Components : The different components of
capital structure are :
(1) Equity share capital : The capital raised by
the company by issuing equity shares is called
equity share capital. It is primary and basic source
of financing the activities of business. On equity
shares dividend payment and repayment of capital
are made after the payment is made on preference
shares. The equity shareholders own the company.
They bear the ultimate risk of ownership. They get
dividend at fluctuating rate depending upon the
availability of profit.
(2) Preference share capital : The capital
raised by the company by issuing preference
shares is called preference share capital. On
preference shares dividend at fixed rate is paid
before payment of dividend on equity shares.
Repayment of capital is made to preference
shareholders before equity shareholders at the
time of liquidation of a company.
(3) Retained earnings : The part of the profit
retained by the company for meeting future
financial needs and for expansion and betterment
of the company is known as retained earnings. It
18 SECRETARIAL PRACTICE DIGEST : STANDARD XII
is an internal source of finance. It is also called
ploughing back of profit. This source of financing
is available to well established and highly profitable
company.
(4) Borrowed capital : The borrowed capital
refers to the capital raised by the company by
issue of (a) debentures and (b) term loan.
(a) Debentures : Debentures are the
acknowledgement of debt issued by the company
under its seal after borrowing money from the
general public. The company is required to pay
interest at fixed and agreed rate.
(b) Term loan : The bank and other financial
institutions provide term loans at fixed and agreed
rate of interest.
(2) State any four factors affecting fixed
capital requirement.
Ans. For the answer, refer to Q) 15 (3) Long
Answer Questions.
(Write any 4 or 5 points with brief explanation.)
(3) What is corporate finance and state two
decisions which are basis of corporate finance.
Ans. [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 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 in 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’. In
brief the decision of finance manager to deploy the
funds in systematic manner is called investment
decision.
* 14 Justify the following statements :
 (4 marks each)
(1) The firm has multiple choices of sources
of financing.
Ans. (1) The business enterprises require
finance for various purposes, at different stages
and for different period. The business firm has
1. INTRODUCTION TO CORPORATE FINANCE
the following multiple choices of sources of
financing. When new company starts its business,
it raises capital through issue of equity shares. It
is a basic source of financing activities of the
business. The company also issues preference
shares to get the funds only for specific period of
time to the investors who are cautious of their
investment.
(2) When company grows, it issues debts
securities such as debentures and bonds, accepts
public deposits, borrows loans from banks and
other financial institutions. 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) The developed company or business
organisation with stable earnings can easily raise
funds by issue of debt securities and also use of
retained earnings to balance their projects. If
company needs funds on regular basis, it can
raise funds by issue of equity shares to larger
proportion. If funds are required for short period,
the company raises funds through issue of
preference shares and debentures.
(4) Retained earnings is one of the important
sources of internal financing. It is nothing but
ploughing back of profit. The company also
borrows loans from bank and other financial
institutions for short-term as well as long-term.
Trade credit is the cheapest and easiest method of
raising short-term finance. It is free of cost source
of financing. Selling bills of exchange to the bank
for certain amount slightly lesser than its face
value is called discounting bills of exchange. These
bills are retained by the bank as security and
grant short-term loans to the business enterprises.
(2) There are various factors affecting the
requirement of fixed capital.
Ans. For the answer, refer to Q. 15 (3) Answer
in Brief.
(3) Fixed capital stays in the business almost
permanently.
Ans. (1) Fixed capital refers to that part of the
total capital which is invested or used for
19
purchasing fixed assets such as land and building,
plant and machinery, furniture and fixtures, motor
vehicle, etc. These fixed assets are used in the
company for a longer period of time. These assets
are not meant for resale. In other words, fixed
capital implies capital invested for acquiring fixed
assets.
(2) Fixed capital remains in the business for a
long period of time i.e. almost permanently. It
refers to the stock of tangible and durable fixed
assets owned or used. Fixed capital is needed at
the time of establishment of new company. Fixed
capital is also required for expansion
development of business and for purchasing
equipment which are used in the business for a
long period of time.
(3) The big business enterprises such
railways, road transport and other utility services
invest huge sum in fixed assets. The general rule
states that bigger the size of business, higher the
need of fixed capital. Newly established organisation
needs more investments in fixed assets than that
required by the established business firm.
(4) Capital structure is composed of owned
funds and borrowed funds.
Ans. (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 debts
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.
20 SECRETARIAL PRACTICE DIGEST : STANDARD XII
(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 where 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
and 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
as 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.
(5) There are various factors affecting the
requirement of working capital.
Ans. (1) The nature and size of business have
great impact on the working capital. Industrial
and manufacturing firms and big retail enterprises
need large amount of capital, whereas small
concerns need small amount of working capital. If
the volume of sale increases, there will be increase
in working capital and vice versa. If the production
cycle period is longer, the company needs more
working capital and vice versa.
(2) If credit terms of purchases are more liberal
and terms of credit sales are less favourable then
less amount of working capital is required.
Conversely, if the firm does not get proper credit
facility from suppliers and offers credit facility to
its customers, then more amount of working
capital will be required. If credit control policy of
the firm is sound, then cash inflow will improve
which in turn will reduce the requirement of
working capital.
(3) Along with expansion and growth of the firm
or company in terms of sales and fixed assets, the
requirement of working capital increases. If there
is proper co-ordination, communication, and
co-operation between production department and
sales department, then the requirement of working
capital will be less. If the requirement of funds are
procured by the firm from the banks and other
financial institutions easily, then requirement of
working capital is less. If requirement of cash is
higher, then more amount of working capital is
required.
(4) The firms or companies producing or selling
seasonal products such as umbrella, rain coats,
woollen clothes, crackers, etc., need more working
capital during their respective seasons. Similarly,
during boom period, sales increase and need of
working capital also increases to produce more of
goods. Conversely, during recession period, sales
decline and consequently need of working capital
declines.
* 15 Answer the following question :
 (8 marks each)
(1) Discuss the importance of corporate
finance.
Ans. The importance of corporate finance is
explained as follows :
For the chart showing the importance of
corporate finance, refer to Brief Overview point
no. 1.2.
(1) Helps in decision making : In all business
organisations the decisions in the different areas
of the business are taken by considering the
availability of finance or funds. Without adequate
finance business organisation cannot independently
perform any function of the business. Most of the
business decisions are taken by considering their
impact on the profit earning ability. From the
available alternatives management needs to select
the best alternative that will increase profitability
of the business organisation. Business organisation
will undertake those project which are financially
viable. In this way, corporate finance plays key
role in decision making process.
1. INTRODUCTION TO CORPORATE FINANCE
(2) Helps in raising capital for a project : Every
business organisation is required finance if it
wants to start a new business venture. The needed
finance can be raised by the business organisation
from the different sources such issue of different
type of shares, debentures, bonds and by
borrowing loans from the banks and other financial
institutions.
(3) Helps in Research and Development :
Business organisations must undertake research
and development for its growth and expansion.
Even for the execution of projects detailed technical
work is necessary. Financial support is required
continuously throughout the process of research
work. In order to attract more customers, it is
necessary to upgrade the old products and develop
the new products which requires more financial
support.
(4) Helps in smooth running of business
firm : In every business organisation, continuous
and smooth flow of corporate finance is necessary
to pay salaries to the employees in scheduled
time, to repay the loans to creditors on time, to
purchase sufficient quantity of raw materials at
the time of their requirements, to finance sales
promotion of existing products, to launch new
products in the market more effectively, etc.
(5) Brings co-ordination between various
activities : Corporate finance is necessary to
contract and co-ordinate all the activities of
different departments of the business organisation,
e.g. finance department has to provide adequate
finance to the production department to purchase
raw materials and to meet daily financial needs
for smooth running of production units. In the
absence of regular supply of finance, the production
will be adversely affected which in turn will have
its effects on sales and ultimately on income flow
and profitability of the organisation. In this
manner, efficiency of every department in the
organisation depends directly on the effective
financial management.
(6) Promotes expansion and diversification :
Expansion and diversification in business
21
organisation are possible through the use of
modern machinery and techniques. Corporate
finance is necessary to buy and install modern
machines and techniques. Hence, corporate
finance plays significant role for expansion and
diversification of a business organisation.
(7) Managing risks : Several risks such as
sudden fall in sales, loss due to occurrence of
natural calamities, loss due to strikes, etc. are
inevitable in every business organisation. Corporate
finance is essential to manage all such risks.
(8) Replace old assets : Fixed assets such as
plant and machinery, furniture and fixtures,
vehicles, etc. are depreciated every year. They
become old and outdated after certain years.
These assets are required to be replaced by
installing new assets. For purchase and installation
of new asset corporate finance is mandatory.
(9) Payment of dividend and interest :
Corporate finance is necessary to pay dividend to
shareholders and to pay interest to debenture-
holders, creditors, banks, etc. on the finance
provided by them in the form of loans.
(10) Payment of taxes/fees : Corporate finance
is required by every business organisation to pay
various taxes to the Government such as income
tax, Goods and Service Tax (GST) and fees to the
Registrar of Companies on different occasions.
(2) Discuss the factors determining working
capital requirement.
Ans. The factors determining working capital
requirement are explained below :
For the factor determining working capital
requirement, refer to Brief Overview point
no. 1.3 (B).
(1) Nature of business : The nature of business
have great impact on the requirement of working
capital. Manufacturing and industrial enterprises
engaged in manufacturing essential products of
day-to-day consumption would require relatively
less amount of working capital. This is because
there is continuous and adequate cash inflow in
the enterprises to take care of liabilities. Similarly
public utility concerns providing services such as
22 SECRETARIAL PRACTICE DIGEST : STANDARD XII
transport, gas, electricity, etc. need less working
capital due to continuous inflow of cash from their
customers. Business enterprises engaged in selling
and distribution of luxurious products need huge
amount of working capital. This is due to lack of
regular and continuous sale. The trading or
merchandising firm engaged in the distribution of
goods need huge amount of working capital
because they need to keep big inventories (stock
in trade) to fulfill customers’ demand.
(2) Size of business : A business enterprises
with large scale operation will need large amount
of working capital. However, the need of working
capital of business operated on small scale and at
local level is comparatively very less.
(3) Volume of sales : The requirement of
working capital directly varies with the volume of
sales. If the volume of sales increases there is
corresponding increase in the requirement of
working capital and vice versa.
(4) Production cycle : Production cycle (i.e.
gestation period) refers to the process of conversion
of raw materials into finished products. If the
production cycle period is longer, the firm requires
more working capital. Conversely, if the production
cycle period is short, the firm needs less working
capital.
(5) Business cycle : During boom (i.e.
prosperity), demand and sales for goods and
services will increase which in turn will increase
the requirement of working capital. Conversely,
during recession period, the demand and sales for
goods and services will decline and consequently
the requirement of working capital will also
decrease.
(6) Terms of purchases and sales : If business
enterprise does not get proper credit from the
suppliers and adopts liberal credit policy for sales,
then requirement of cash will be more which in
turn will increase the need of working capital.
Conversely, if a business enterprise gets adequate
or more period of time for making payment to
suppliers and adopts less liberal credit policy for
sale, then requirement of cash will be less which
in turn will reduce the need of working capital.
 (7) Credit control : Volume of credit sales, the
terms of credit sales, the collection policy, etc. are
the important components of credit control. Sound
credit control policy improves cash flow while
liberal credit control policy increases the risks of
bad debts. The business enterprises selling goods
on cash basis need less working capital whereas
the business enterprises selling goods on credit
terms need more working capital.
(8) Growth and expansion : The growth and
expansion of business enterprise increase the
requirement of working capital. Growing
enterprises need more funds constantly to finance
large scale operations.
(9) Management ability : Proper co-ordination
between production department and sales
department reduces the requirements of working
capital. Lack of proper communication and
co-ordination among the different departments
may lead to excess production and heavy inventory
of finished and semi-finished goods. Ultimately,
requirement of working capital increases.
(10) External factors : If the banks and other
financial institutions supply funds to the business
organisations at the time of need, then requirement
of working capital will be less and vice versa.
(3) Explain the factors affecting fixed capital
requirement.
Ans. For the chart showing the different
factors affecting fixed capital requirement, refer
to Brief Overview point no. 1.3 (A).
The factors affecting fixed capital requirement
are explained as follows :
(1) Nature of business : The big business
enterprises, manufacturing industries and public
utilities need large fixed investment to acquire
fixed assets whereas trading organisations need
comparatively very less investments in fixed assets.
(2) Size of business : The general rule states
that bigger the size of business, higher the need of
fixed capital. The business enterprise that is
established to undertake large scale business
operations its fixed capital needs is usually higher.
This is because its production processes are
1. INTRODUCTION TO CORPORATE FINANCE
carried out through the use of automatic machines
and equipment.
(3) Scope of business : The business
enterprises which are established to undertake
large scale production or distribution of goods
and services would need large amount of fixed
capital.
(4) Extent of lease or rent : If the entrepreneur
acquires most of the fixed assets on lease or on
rental basis, his requirement of fixed capital funds
will be very less. He needs to pay rent regularly to
the fixed assets owners.
(5) Arrangement of sub-contract : If the
entrepreneurs outsourced or sub-contract some
of his processes of production to expert persons
for certain consideration in monetary terms, his
fixed capital requirement would be very less or
minimum.
(6) Acquisition of old assets : If entrepreneur
acquires old plant or machinery and equipment at
low prices, his fixed capital requirement would be
minimum or less.
(7) Acquisition of assets on concessional
rate : When Government wants to promote the
industrial growth and development of regional
level, the industrialists or entrepreneurs get land
and building, material at concessional rates as
well as on instalment basis from the Government.
In such cases, requirement of fixed capital would
reduce to considerable extent.
(8) International conditions : This factor is
very important especially in large business
enterprises managing business on international
level, e.g. if war is expected in near future, then
companies produce goods and services on large
scale to avoid shortage. In such cases, requirement
of fixed capital would be large.
(9) Trend in economy : If the management of
the company predicts that there will be lot of
opportunities in the near future to develop and
grow its business, then it undertakes expansion
activities in all areas of the business. To carry out
expansion, it need amount to invest in fixed assets
so that it will reap benefits in future.
23
 (10) Population trend : When population in preferences of the consumers, they need large
certain areas is growing rapidly, then some amount to invest in fixed assets. For instance,
industrialists or manufacturers get opportunities mobile phone, computers and laptop manufacturers
to expand their business. For expansion of mobile services providers, etc.
business, they require huge amount of fixed (12) Competitive factor : While taking decision
capital. For instance, electronic goods in respect to requirement of fixed capital,
manufacturing industry, readymade garment management is required to consider competitive
industry, automobile industry, leather industry, element. If one of the competitors moves towards
etc. need large amount of fixed capital to expand automation, then other competitors in the same
their business. line of products have to follow that competitor.
(11) Consumer preference : Industrialists or Hence need arises to have more amount of fixed
manufacturers producing goods and services capital.
which are in great demand and according to the

  

24 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 2 SOURCES OF CORPORATE FINANCE

SYLLABUS
2.1 Sources of Owned Capital :
2.1.1 Shares
2.1.2 Retained earnings
2.2 Sources of Borrowed Capital :
2.2.1 Debentures 2.2.5 Commercial Banks
2.2.2 Acceptance of deposits 2.2.6 Financial Institutions
2.2.3 Bonds 2.2.7 Trade Credit
2.2.4 ADR / GDR

KEY TERMS AND THEIR MEANINGS

• Memorandum of Association : The basic, fundamental and principal document of a company with
which the company is registered. It serves as the constitution or charter of the company and defines
the essential information, objectives and scope of its activities.
• Articles of Association : The document of the company consisting of its by-laws, the rules and
regulations relating to the internal management of the company.
• Director : A person elected by the members (shareholders) to control for them the day-to-day
management of the business and to decide its general policy.
• Transfer of shares : The passing of ownership and possession of the shares by one shareholder to
another as a result of voluntary sale or gift of shares.
• Stock Exchange : A specific place where trading of the listed and second hand securities such as
shares, debentures, government bonds, etc. is done in an organised method.
• Speculators : The persons or group of persons who buy and sell securities such as shares, bonds,
debentures, etc. with the object of making quick profit from the variations in the prices of these
securities.
• Bonus shares : The shares which are issued by the company free of charge of its existing equity
shareholders out of its reserve or accumulated profits.
• Rights issue : An offer of new shares to existing shareholders only. A company will offer the ‘rights’
in a certain proportion to the existing holdings, depending upon the amount of new equity capital it
wishes to raise.
• Winding-up/Liquidation of company : The legal process whereby the life of a company is brought
to an end. It means the winding-up of the affairs of a company when it ceases business.
• Common seal : A company having a legal personality cannot sign any document. Therefore, law has
provided for the use of common seal with the name of the company engraved on it, as a substitute
for its signature.

2. SOURCES OF CORPORATE FINANCE 25

 • Trust deed : When a company borrows money for the period of more than 18 months, especially
from debentureholders, it has to make an agreement with the trustees of debentureholders in respect
to terms and conditions of mortgage or charge created against the properties of the company, such an
agreement is called trust deed.

• Fixed charge : A term used to describe a mortgage of distinct assets against which a loan is taken.
The charge applies to assets specifically identified. These terms usually arise in connection with an
issue by a company of debentures, which may be described as fixed or floating debentures.

• Floating charge : A legal charge, as security for a loan on the assets generally of a business. It is an
alternative to a charge on an identified major asset.

• Collateral security : Security that is additional to the main security for a debt (or an advantage to the
mortgage that is additional security to the payment of interest). For example, a lender may require
as collateral the assignment of a insurance policy in addition to the principal security of mortgage on
the borrower’s home.

• Paid-up capital : The part of the called-up capital which is actually paid by the shareholders. The
actual amount of capital that shareholders have subscribed or paid.

• Globalisation : Increasing internationalisation of the production, distribution and marketing of

goods and services through linking national economy to the world economy.

• Depository : An organisation or an institution which holds and transfers the ownership of the securi-
ties such as shares, bonds, debentures, etc. in electronic form on behalf of its investors. It acts as a
custodian of securities.

• Charge on assets : When a company borrows from a bank it may offer as security for a loan that is
known as a charge on its assets including stock of finished goods. It may be either a fixed charge or
floating charge.

• Underwriting of shares : A new issue of shares in a company may be underwritten. In such case, the
underwriter for certain consideration agrees to take up any shares which are not applied for by the
public and thus guarantee the success of the issue.

• Inflation : A general and persistent increase in prices in an economy and consequent fall in the
purchasing value of money. It also refers to as a sustained rise in the general price level.

• Commercial Paper : The debt instrument which is issued by the corporate house for raising short-
term financial resources from the money market. It is unsecured debt instruments issued in the form
of promissory note.

BRIEF OVERVIEW

Introduction : 2.1 Sources of Owned Capital :

The funds required by the business enterprises
to carry out regular activities and activities of pro-
motion, organisation and development are called
capital. A company, being large scale undertaking
needs huge amount of capital funds for doing its
business more efficiently.
A process of raising capital funds from different
sources as per the financial plan of a company is
called Capital Formation. The different sources of
finance available to the company is shown in the
following chart :

26 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 Sources of Finance based on types of Capital
Owned Capital
Shares Retained Earning
Equity Shares Preference Shares
Thus, the sources of finance may be categorised
as (1) External Source i.e. the sources outside
the business firm through which funds for initial
capital are collected and (2) Internal source i.e.
the sources within the organisation through which
funds are made available to business organisation.
The capital funds provided by the owners of the
company i.e. shareholders are called owned capital.
It is also called ownership capital. Retained earnings
also called ploughing back of profit is considered
as another form of owned capital. Ploughing back
of profit is nothing but reinvestment of profit in
the business by the company itself. It is an internal
source of finance and considered as a permanent
capital. It provides initial source of capital for a new
company. Retained earnings although it is a form of
owned capital, it is available to the company at a
later stage when the company starts earning profit
at high rate.
2.1.1 Shares :
(i) Meaning : The total capital of a company
when divided into large number of small parts of
equal face value, each such part is called a share.
According to the Section 1(84) of the Companies
Act 2013, “Shares means a share in the share
capital of a company and includes stock.”
(ii) Features :
(1) Meaning : A share is the smallest indivisible
unit of the total capital of a company.
(2) Ownership : A person who purchases
and owns the shares is called shareholder. The
ownership of the shareholder in a company
reflected in the share.
2. SOURCES OF CORPORATE FINANCE
Borrowed Capital
Debentures, Public
Deposits, Bonds,
ADR / GDR,
Banks, Financial
Institutions, Trade
Credit
(3) Distinctive number : If the shares are not
dematerialised, each share bears a distinctive
number for identification of its holder. It is specified
on the share certificate.
(4) Evidence of title : A share is not anything
capable of being perceived by the eye or by the
hand. Share is either shown by share certificate or
they remain in the form of demat share.
(5) Value of a share : The value of a share is
expressed in term of money. It may be expressed in
three ways, viz. –
(a) Face value : The face value of share is
mentioned in the Memorandum of Association and
on the share itself.
(b) Issue price : Issue price is the price at which
company sells or issues its shares.
(c) Market value : It is the value of share which
is determined by demand and supply forces in the
share market. At this value shares are sold in the
stock exchange.
(6) Rights : Share enables its shareholders to
have certain rights such as right to receive divi-
dend, right to attend shareholders’ meetings and to
vote at such meetings, to inspect statutory books,
etc.
(7) Income : Shareholder is given a share in the
net profit earned by the company which is called
dividend.
(8) Transferability : The shares issued by the
public company are freely transferable as per the
provisions made in the Articles of Association of
the company.
27
 (9) Property of shareholder : Shares are
treated as movable property of the shareholder.
(iii) Kinds of Shares : The different kinds of shares are shown in the following chart :
Shares
(A) Equity Shares
(1) Equity Shares with normal voting right.
(2) Equity Shares with differential voting right.
(A) Equity Shares :
(i) Meaning : The equity shares are those shares
which do not have preference to receive dividend
and have no priority for repayment of capital
at the time of liquidation of the company. The
equity shares are also called ordinary shares. The
Companies Act, 2013 defines equity shares as,
“those shares which are not preference shares.”
The equity shareholders are the owners of the
company and bear ultimate risk connected with the
ownership. So, equity share capital is also known
as Venture Capital or Risk Capital. The owners of
equity shares are real risk bearers.
(ii) Features of Equity Shares :
(1) Permanent capital : The equity share
capital is permanent and long-term capital of the
company. The equity shares are not redeemable i.e.
non-refundable during the life time of the company.
The amount of these shares are repaid only in the
event of dissolution of the company or if company
decides to buyback its shares.
(2) Fluctuating dividend : The rate of dividend
payable to equity shareholders is uncertain and
fluctuating. It depends upon the quantum or size of
profit company earns. If company earns high profit
it pays dividend at high rate. If there is insufficient
profit or no profit, dividend may be paid at lesser
rate or may not be paid.
28 SECRETARIAL PRACTICE DIGEST : STANDARD XII
(10) Kinds of shares : A company can issue two
types of shares viz. equity shares and preference
shares.
(B) Preference Shares
(1) Cumulative Preference Shares.
(2) Non-cumulative Preference Shares.
(3) Participating Preference Shares.
(4) Non-participating Preference Shares.
(5) Convertible Preference Shares.
(6) Non-convertible Preference Shares.
(7) Redeemable Preference Shares.
(8) Irredeemable Preference Shares.
(3) Rights :
(i) Right to vote is the basic right of the equity
shareholders through which they elect directors,
amend Memorandum of Association and Articles
of Association.
(ii) Equity shareholders have right to share profit
whenever it is distributed in the form of dividend.
(iii) They have right to inspect all statutory books
of the company.
(iv) They have right to transfer its shares to
another person by following the procedures laid
down in the Articles of Association of the company.
(4) No preferential right : Equity shareholders
do not have preferential right to receive dividend
and have no priority in receipt of capital amount
in the event of winding up of the company. Their
claims are entertained only after settlement of
claims of preference shareholders.
(5) Controlling power : Equity shareholders
are the owners of and the real masters of company
and hence controlling power of the company is
vested in them. They elect the Board of Directors
to look after the management of the company. They
have right to vote on all the matters discussed in
the meeting.
(6) Risk : Equity shareholders bear the
maximum risk associated with the company. If
company’s earnings fall, equity shareholders get
dividend at very low rate which in turn declines the
market value of shares. This results into capital loss
to equity shareholders. Thus, equity shareholders
are real risk takers of the company.
(7) Residual claimant : A residual claim implies
the last claim on the earnings of the company which
is left over after the payment of taxes, expenses,
interest, dividend, etc. The equity shareholders
have benefits of receiving entire earnings that is left
after paying all dues and expenses.
(8) No charge on assets : Unlike secured
debentures, equity shares have no charge on the
assets of this company.
(9) Bonus issue : Bonus shares are issued free
of cost i.e. gift to the existing shareholders by the
company out of retained or accumulated profits.
Bonus shares are issued in specific proportion of
the shares held by them.
(10) Right issue : Whenever a company makes
fresh issue of shares to raise additional funds to
finance expansion or modernisation of business,
the existing equity shareholders are given ‘right’ i.e.
first to buy those shares in proportion to shares
held by them. This is called ‘Right issue’.
(11) Face value : The face value of equity shares
is very low. Usually it is ` 10/- per share or even
` 1/- per share.
(12) Market value : The market value of equity
shares always fluctuates in the stock exchange.
When company earns huge profit, the market value
of equity shares increases. Conversely, if company
incurs loss, the market value of shares declines.
Due to fluctuating market value, equity shares are
traded on stock exchange and are more appealing
to the speculators.
(13) Capital appreciation : Prosperity and high
profit earning capacity of the company increase
reputation of the company in the share capital
which in turn appreciate market value of the
shares. Increase in the value of equity shares result
into capital appreciation.
• Types of Equity Shares : The equity shares
are broadly classified into two categories viz.,
(1) Equity shares with normal voting right :
This is the type of equity shares in which their
2. SOURCES OF CORPORATE FINANCE
holders have right to vote in the meeting on any
issue in proportion to their shareholdings.
(2) Equity shares with differential voting
right : This is the type of equity shares in which their
holders have varying (differential) rights in respect
to dividend, voting or otherwise in accordance
with Rule 4 of the companies (Share Capital and
Debentures) Rules 2014. The company may either
issue such type of shares with limited voting rights
or no voting rights. The holders of such equity
shares may receive extra rate of dividend, if any.
(B) Preference Shares :
(i) Meaning : The type of shares which carry
certain preferential rights distinct from the rights of
equity shareholders with regard to (i) a preferential
right to receive dividend at fixed rate during the
lifetime of the company and (ii) a preferential right
as to receive the entire amount of capital at the time
of liquidation of the company.
(ii) Features :
(1) Preference for dividend : Out of the
available divisible profit, the dividend is paid first
to preference shareholders before it is paid to any
other type of shareholders.
(2) Preference for repayment of capital : In
the event of liquidation of the company, preference
shareholders have right to receive capital amount
before it is paid to equity shareholders. This right
saves preference shareholders from capital loss.
(3) Fixed return : The preference shareholders
get dividend at predetermined fixed rate only out of
profit. If company unable to earn sufficient profit,
the preference shareholders except cumulative
preference shares, looses the claim for dividend.
(4) Nature of capital : The preference shares
provide capital for fixed period of time and not
for life time of the company. Preference shares are
redeemed after fixed (determined) period is over.
Preference shares capital is considered as safe
capital and reinter capital.
(5) Market value : The market value of
preference shares do not change because the rate
of dividend payable on them is always fixed.
(6) Voting rights : The preference shareholders
do not enjoy normal voting rights. They have voting
29
rights only on those matters which directly affect
their interests.
(7) Risk : The cautious investors usually invest
their holdings in preference shares because these
shares provided safety to capital and steady and
regular income flow to them. During the period
of depression, these shares become a boon for
shareholders.
(8) Face value : The face value of preference
share is very high in comparison to equity shares
i.e. ` 100/- per share.
(9) Right or bonus issue : Unlike the equity
shareholders, preference shareholders are not
entitled to get right shares or bonus shares, if they
are issued by the company.
(10) Nature of investors : The moderate type
of investors who are cautious and conservative
usually make investment in preference shares.
(iii) Types of Preference Shares : The different
types of preference shares are shown in the
following chart :
Cumulative and
Non-cumulative
Preference Shares
(2) Non-cumulative Preference Shares : The
type of preference shares in which shareholders get
dividend only when company earns profit is called
non-cumulative preference shares. If company
incurs loss, the right of these shareholders to claim
dividend lapses.
(3) Participating Preference Shares : The
preference shares in which shareholders have right
to receive regular fixed dividend and also have right
to participate in the surplus profit left after paying
dividend to equity shareholders up to certain limit,
are called participating preference shares.
(4) Non-participating Preference Shares : The
type of preference shares in which shareholders
have a right to receive only dividend at fixed rate
are called non-participating preference shares.
(5) Convertible Preference Shares : Conver-
tible preference shares are those in which holders
are given right to convert their holdings into equity
shares within a certain fixed period.
(6) Non-convertible preference shares : The
preference shares which cannot be converted into
equity shares are called non-convertible preference
shares.

Participating and (7) Redeemable Preference Shares : The

Non-participating preference shares which are redeemed i.e. paid
Types of Preference Shares back after specific period of time are called
Preference redeemable preference shares.
Shares Convertible and
(8) Irredeemable Preference Shares : The
Non-convertible
preference shares which cannot be paid back during
Preference Shares
the life time of the company are called irredeemable
Redeemable and preference shares. However, provisions made under
Irredeemable section 55(1) of the Companies Act, 2013, do not
Preference Shares allow company to issue irredeemable preference
shares.
(1) Cumulative Preference Shares : The
type of preference shares in which right to claim 2.1.2 Retained earnings :
dividend of current year (if not paid) out of future (i) Meaning : In many companies, during
profit are called cumulative preference shares. The the period of high profit, management does not
dividend in such case goes on accumulating till distribute the entire profit in the form of dividend
it is not fully paid. Preference shares are always among its shareholders. A part of the net profit
cumulative unless otherwise stated in the Articles which is retained in the company in the form of
of Association of the company. different types of Reserve Funds is called retained

30 SECRETARIAL PRACTICE DIGEST : STANDARD XII

profits or retained earnings. By issuing bonus shares
to the existing equity shareholders in proportion
of their shareholdings free of charge, a company
can convert retained earnings into capital. This is
called Ploughing Back of Profit or Capitalization
of Profit. In short, ‘the process of accumulating
corporate profits and their utilisation in business
is called retained earnings.
(ii) Determinants of retained earnings :
(1) Total earnings of company : If there is large
profit, company can save and retain more amount
of such profit. It is also subject to attitude of the
top management to determine the size of retained
profits.
(2) Taxation policy : If the taxes are levied
at high rate by the government, there will be less
savings and resultant size of retained profits will be
low and vice versa.
(3) Dividend policy : If the company follows
conservative dividend policy, more amount of profit
can be saved and retained. But this may create
dissatisfaction among the shareholders.
(4) Government control : The company is
required to formulate its dividend policy in tune with
the rules and regulations framed and prescribed by
the Government. This has great impact on the size
of retained earnings.
2.2 Sources of Borrowed Capital :
To supplement its owned capital, a company
is required to borrow funds from the available
sources. A company can raise borrowed capital if
it is authorised by Memorandum of Association.
Articles of Association of the company makes
provisions as to how and by whom such power of
borrowings should be exercised. A private company
exercises this power immediately after receiving
Certificate of Incorporation. However, a public
company exercises this power only after obtaining
Certificate of Commencement of Business. The
borrowed capital is raised to fulfil short, medium
or long-term financial needs of the company at
later stage of company’s business. Interest at fixed
rate is paid on borrowed capital. Borrowed capital
2. SOURCES OF CORPORATE FINANCE
is repaid after fixed period of time. The different
sources of borrowed capital are as follows :
Issue of debentures
Accepting deposits
Borrowed
Capital
Sources Issue of Bonds
Borrowing loans from
banks and other financial
institutions
2.2.1 Debentures :
(i) Meaning :
The word ‘debenture’ is derived from Latin
word ‘debere’ which means to ‘owe’. Accordingly
debenture is a loan borrowed by a company by
issuing a debenture certificate under its common
seal. According to Palmer, “A debenture as an
instrument under seal evidencing debt, the
essence of it being admission of indebtedness.”
(ii) Features :
(1) Promise : The debenture is a written
promise given by the borrowing company that it
owes certain specified sum of money.
(2) Face Value : The face value of debenture
is usually of high denomination, e.g. ` 100 or
multiples of ` 100.
(3) Time of repayment : Usually repayment
date is specified on the debenture certificate. The
principal amount of debenture is refunded on due
date.
(4) Priority of repayment : The capital of
debenture is repaid before making payment of
dues to other claimants.
(5) Assurance of repayment : The debentures
are long-term debts which carry assurance of
repayment on the maturity date.
(6) Interest : The debentureholders are entitled
to receive interest at agreed rate at fixed intervals.
It is a fixed liability of the company to pay interest
whether it makes profit or not.
31
 (7) Parties to debentures : There are three
parties to debentures viz. (i) The company, an
entity borrowing loan.
(ii) The Debenture Trustee appointed by the
company if it offers debentures to more than 500
people.
(iii) Debentureholders, the investors
provide loan to the company.
(8) Authority to issue debentures : In the case
of company, the Board of Directors is the right
authority to issue debentures (Section 179 of the
Companies Act, 2013).
(9) Status of debentureholder : As debenture
holder provides loan to the company, he is called
creditor of the company.
(10) No voting right : A debentureholder being
a creditor of a company, does not have any voting
right at the general meeting of the company. (Section
71 (2) of the Companies Act, 2013,)
(11) Security : The debentures are usually
secured by a fixed or floating charge on the property
who of the company.
(12) Issuers : The public company as well as
private company can issue debentures to the public
at large.
(13) Listing : The debentures must be listed on
at least one recognised stock exchange.
(14) Transferability : The debentures are freely
transferable documents.

(iii) Types of Debentures : The different types of debentures are shown in the following chart :

Debentures

On the Basis On the Basis On the Basis On the Basis

of Security of Transfer of Repayment Conversion

(1) Secured and (3) Registered and (5) Redeemable and (7) Convertible and
(2) Unsecured (4) Bearer (6) Irredeemable (8) Non-convertible
Debentures Debentures Debentures Debentures

The different types of debentures are explained
as follows :
(1) Secured debentures : The debentures
which are secured by creating fixed or floating
charge on the property of the company are called
secured debentures.
(2) Unsecured debentures : These debentures
are not covered by any charge on any assets of
the company. The Companies Act, 2013 is now
prohibited the companies from issuing unsecured
debentures.
(4) Bearer debentures : The debentures on
which the name of the holders are not recorded
are called bearer debentures. The company does
not keep record of bearer debentures. These
debentures are transferable by mere delivery.
(5) Redeemable debentures : The debentures
which are refundable after the specific period of
time is over are called redeemable debentures.
The amount of debentures is paid on maturity
date either in lumpsum or in instalment which is
mentioned in Trust Deed.

(3) Registered debentures : The debentures
on which the name of the holders are recorded
and the same are recorded in the register of
debentureholders are called registered debentures.
These debentures are transferred through transfer
deed.
(6) Irredeemable debentures : The debentures
which are not repayable during the lifetime of the
company are called irredeemable debentures.
These debentures are redeemed after the winding
up of the company or when there is breach of any
condition or due to some other contingencies.

32 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 (7) Convertible debentures : The debentures
which give rights to their holders to convert their
debentures into equity shares at a particular rate of
exchange after a specific period of time are called
convertible debentures.
(8) Non-convertible debentures : The deben-
tures which cannot be converted into equity shares
are called non-convertible debentures.
2.2.2 Acceptance of Deposit :
• Introduction : Public deposit is one of the
important sources of short-term finance required
by the company. Any amount in the form of fixed
deposit received by the company from the general
public for the period ranging from 6 months to
36 months (i.e. 3 years) is called public deposit.
Whenever company needs short-term finance, it
invites public to deposit their savings or surplus
idle money with the company for varied period. The
company issues Deposit Receipt and pays interest
at fixed rate on such deposits. The deposits may
be either secured or unsecured loan given to the
company.
• Meaning : According to Section 2(31) of the
Companies Act, 2013, “Deposit’ includes any
receipt of money by way of deposit or loan or in
any other form by a company, but does not include
such categories of amount as may be prescribed
in consultation with the Reserve Bank of India.”
However according Rule 2(1) (c) of Companies
(Acceptance of Deposit) Rules 2014, deposit
does not include any amount received : (i) from
the Central Government or a State Government
(ii) as loan from any banking company (iii) from
foreign government or international banks (iv) by
a company from any other company (v) by issuing
commercial paper (vi) by issue of bonds (vii) in
trust and (viii) by way of subscriptions to any
shares or debentures.
2.2.3 Bond :
(i) Meaning : A bond is a debt security issued by
the government or business firm, to acknowledge
the debt borrowed by them from the public. It is
2/Secretarial Practice Digest : Std. XII E0308
2. SOURCES OF CORPORATE FINANCE
type of formal contract between issuer company
and bond holder to repay borrowed money along
with interest to the bond holder by a company.
As bond holder provides loan, he is therefore a
lender or creditor of the company. Every bond has
maturity date. Interest is payable on bond either at
fixed interval or on maturity date.
According to Webster’s Dictionary, “A bond
is an interest bearing certificate issued by the
government or business firm, promising to pay
the holder a specific sum at a specified date.”
(ii) Features :
(1) Nature of finance : Bond provides long-
term debt finance. The bonds are issued for longer
period say for 5 years, 10 years, 25 years, 50 years,
etc.
(2) Status of bondholder : The bondholders
are the lenders or loan creditors of the company.
They are not the owners of the company and hence
cannot vote in the meeting and participate in the
management of the company.
(3) Return on bonds : The bondholders are
entitled to get interest at fixed rate either at regular
interval or on maturity date.
(4) Repayment : Every bond has specific
maturity date. On the maturity date, principal
amount of bond is paid along with interest (if not
paid periodically).
2.2.4 American Depository Receipt (ADR)
and Global Depository Receipt (GDR) :
Due to adoption of free economic policy and
globalisation, the shares of an Indian company can
be listed and traded on foreign stock exchanges
like NYSE or NASDAQ. For this, a company is
required to comply with complicated, rigid and
lengthy procedure and policies. By avoiding such
complicated policies, an Indian company can get
their shares listed on foreign stock exchanges
indirectly using Global Depository Receipt
(GDR) and American Depository Receipt (ADR).
Both GDR and ADR are Dollar/Euro dominated
instruments traded on foreign stock exchanges.
Both are depository receipts and each receipt
contains fixed number of shares.
33
 Depository Receipts which are traded in USA
are called ADRs and Depository receipts which
are traded in all foreign countries except USA are
called GDRs. The Depository Banks issue GDRs
and ADRs to investors against Indian companies
shares. By using regular equity trading account,
Non-Resident Indians (NRI) and foreign nations can
invest their money in Indian companies by buying
ADRs and GDRs. Indian company pay dividend
after its declaration to Depository bank in home
currency and then Depository banks pay such
dividend to investors in their currency. GDRs are
traded on London Stock Exchange, Luxembourg
Stock Exchange, NASDAQ Dubai, Singapore Stock
Exchange and Hongkong Stock Exchange.
2.2.5 Commercial Bank :
(i) Meaning : The commercial banks by
introducing different types of deposit schemes
provide finance to fulfil financial needs of individual
depositors, mobilise savings of the community and
channelise these funds to meet varied financial
needs of corporate enterprises. Commercial banks
help corporate enterprises (i) by giving term loans
to companies, (ii) by purchasing their shares and
debentures and (iii) by underwriting the issue
of securities of the company. Commercial banks
provide short-term finance in the form of bank
credit and trade credit to fulfil the need of working
capital of the business.
(ii) Innovative schemes for disbursement of
credit :
(1) Overdraft : Overdraft is an arrangement by
which a company having current account is allowed
to overdraw (withdraw more) up to a certain limit
sanctioned by the bank. Within this predetermined
limit, any number of withdrawals are permitted.
Repayment may be made by depositing cash into
•The classification of financial institutions is as follow :
Financial Institutions in India
(1) Development (2) Financial
Banks Institutions
RCTC TDICI TFCI
IDBI IFCI ICICI SIDBI IRBI
34 SECRETARIAL PRACTICE DIGEST : STANDARD XII
this account. This is a temporary loan on which
bank charges interest on the actual amount over-
drawn.
(2) Cash credit : Cash credit is similar to
overdraft. The borrower is allowed to withdraw
required amount from this account (specially
opened and certain amount is credited to this
account by the bank) up to the limit sanctioned by
the bank. The cash credit limit is determined on
the basis of security offered. Bank charges interest
on the amount actually withdrawn.
(3) Cash loan : It is arrangement by which the
bank advances certain amount against securities
pledged. Under this arrangement, the loan amount
is directly credited to a separate loan account of the
borrower. It is granted for a fixed period. Interest
is charged by the bank on the actual outstanding
balance.
(4) Discounting bills of exchange : The bills
of exchange is also called trade bills. The bank
advances cash against bills of exchange. If drawer
(i.e. creditor) needs funds before due date, he can
discount the bill with the bank. Discounting of
bill means selling the bill to the bank for certain
amount slightly less than its face value. Thus, bank
provides finance against the security of bill.
2.2.6 Financial Institutions :
• Meaning : Immediately after independence,
i.e. in 1948, the Government of India had declared
first industrial policy to bring about rapid industri-
al development in the country. To provide medium
term and long-term finance to industry, the Gov-
ernment of India had established special financial
institutions in the country. The financial assistance
provided by these institutions helps new compa-
nies and on going concerns to considerable extent.
(3) Investment (4) State Level
Institutions Institutions
LIC UTI GIC SFC SIDC
 (1) Development Banks :
(1) Industrial Development Bank of India (IDBI)
(2) Industrial Finance Corporation of India Ltd.
(IFCI)
(3) Industrial Credit and Investment Corporation
of India (ICICI)
(4) Small Industries Development Bank of India
(SIDBI)
(5) Industrial Reconstruction Bank of India
(IRBI)
(2) Financial Institutions :
(1) Risk Capital and Technology Finance
Corporation Ltd. (RCTC)
(2) Technology Development and Information
Company of India Ltd. (TDICI)
(3) Tourism Finance Corporation of India Ltd.
(TFCI)
(3) Investment Institutions :
(1) Life Insurance Corporation of India (LIC)
(2) Unit Trust of India (UTI)
(3) General Insurance Corporation of India
(GIC)
(4) State Level Institutions :
(1) State Finance Corporations (SFC)
(2) State Industrial Development Corporation
(SIDC)
All these financial institutions provide finance in
the form of term loans. They :
ii(i) Purchase shares and debentures of the
company.
EXERCISE
1  Select the correct answer from options
given below and rewrite the statement :
 (1 mark each)
* [1]
(1)  is a smallest unit in the total share
capital of the company.
(a) Debenture (b) Bonds (c) Share
(2) The benefit of Depository Receipt is ability to
raise capital in market.
(a) national (b) local (c) international
(3)  are residual claimants against the
income or assets of the company.
2. SOURCES OF CORPORATE FINANCE
i(ii) Underwrite (giving guarantee to sell) the
issue of securities issued by the company.
(iii) Lend money whenever required.
(iv) Give guarantee for the term loans borrowed
by the company.
2.2.7 Trade Credit :
(i) Meaning : Trade credit is one of the
major sources of short-term finance to the
business organisations. Trade creditors include
manufacturers, producers, suppliers of goods and
materials, wholesalers, etc. Usually trade creditors
sell goods and materials to other business
organisations on the basis of deferred payment i.e.
the payment to be made in future. Credit period is
granted or extended by trade creditors to expand
their sales. The credit period is also extended
because of custom.
Trade credit means the facilities in which the
business firm who purchases goods on credit
is permitted to delay the payment. It does not
mean cash loan. Trade credit is more important
in distributive trade. The small retailers mostly
get trade credit from suppliers or manufacturers.
This is easy type of credit which may be obtained
without preparing and signing any debt instrument.
It is easily made available and is cheap method
of financing. In trade credit, usually grace period
of 30 days or more is allowed to make payment
of credit sale. If the bill is paid within very short
period i.e. 10 days or 15 days, trade creditors give
some discount. The terms of credit are easier and
soft.
(a) Bondholders (b) Equity Shareholders
(c) Debentureholders
(4)  participate in the management of their
company.
(a) Preference Shareholders (b) Depositors
(c) Equity Shareholders
(5)  shares are issued free of cost to
existing equity shareholders.
(a) Bonus (b) Right (c) Equity
(6) The holder of preference shares has right to
receive rate of dividend.
(a) fixed   (b) fluctuating   (c) lower
35
 (7) 
Accumulated dividend is paid to (10) A shareholder is entitled to receive as
preference shares. return on investment.
(a) redeemable (b) cumulative (a) dividend (b) interest (c) discount
(c) convertible Ans. (1) interest (2) equity shares (3) internal
(8) The holder of preference shares have (4) creditor (5) six (6) 36 (7) U.S.A. (8) equity
right to convert their shares into equity shares. (9) fluctuating (10) dividend.
(a) cumulative   (b) convertible [3]
(c) redeemable (1) A company must issue shares.

(9) Debentureholders are of the company. (a) preference (b) bonus (c) equity

(a) creditors (b) owners (c) suppliers (2) 

A Depositor’s receipt traded in all the
countries is called .
(10) is paid on borrowed capital.
(a) Global Depository Receipt (GDR)
(a) Interest  (b) Discount  (c) Dividend
(b) American Depository Receipt (ADR)
Ans. (1) Share (2) international (3) Equity
Shareholders (4) Equity Shareholders (5) Bonus (c) Fixed Deposit Receipt (FDR)
(6) fixed (7) cumulative (8) convertible (3) Debentures are issued to raise capital.
(9) creditors (10) Interest. (a) borrowed (b) owned (c) internal
[2] (4) A person who purchases share of company is
* (1) Debentureholders get fixed rate of as known as of the company.
return on their investment. (a) shareholder (b) bond holder
(a) interest (b) dividend (c) discount (c) creditor
(5) Debentures are secured through .
* (2) 
Convertible debentures are converted into
(a) Agreement (b) Contract (c) Trust Deed
after a specific period.
(6)  is an instrument issued in the
(a) equity shares (b) deposits (c) bonds
Government or business firm as an evidence
* (3) 
Retained earnings are source of of debt.
financing. (a) Debenture (b) Bond (c) Trade credit
(a) internal (b) external (c) additional Ans. (1) equity (2) Global Depository Receipt
* (4) The holder of bond is of the company. (GDR) (3) borrowed (4) shareholder (5) Trust
(a) secretary (b) owner (c) creditor Deed (6) Bond.
* (5) Company can accept deposits from public,
minimum for months. 2  Match the pairs : (1 mark each)
(a) six (b) nine (c) twelve
* (1) Group ‘A’    Group ‘B’
* (6) Company can accept deposits from public,
maximum for months. (a) Equity share (1) Agreement
capital (2) Capitalisation of Profit
(a) 12   (b) 24   (c) 36
(b) Debenture (3) Bold Investor
* (7) 
A depository receipt traded in is
Trustees
called American Depository Receipt. (4) Venture Capital
(c) Preference
(a) London (b) Japan (c) U.S.A. (5) Document of Ownership
Shareholders
  (8) The shares bear ultimate risk (d) Debenture (6) Capitalisation of Loan
associated with the ownership. Certificate (7) Safe Capital
(a) equity (b) preference (c) deferred (e) Bonus Shares (8) Instrument of Debt
(9) 
Equity shares are paid dividend at (9) Trust Deed
rate. (10) Cautious Investor
(a) fluctuating (b) fixed (c) high Ans. (a – 4); (b – 9); (c – 10); (d – 8); (e – 2).

36 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 Ans. (1) Equity shareholders (2) Share
(2) Group ‘A’    Group ‘B’
Certificate (3) Participating preference shares
(a) Right issue (1) Owned capital
(4) Debenture trustees (5) Equity shareholders
(b) Equity (2) Conversion in ordinary
(6) Face value (7) Market value (8) Retained
shares shares
earning (9) Deposit receipt (10) American
(c) Preference (3) Company does not maintain
Depository Receipt (A.D.R).
shares record.
(d) Share (4) Dividend at fixed rate [2]
capital (5) Partly paid-up shares * (1) 
The Depository Receipt traded in country
(e) Bearer (6) Company maintains detailed other than USA.
debentures records of debentures
* (2) Money raised by company from public for
(7) Offered to equity
minimum 6 months to maximum 36 months.
shareholders
* (3) 
Credit extended by the suppliers with an
(8) Capitalization of retained
intention to increase their sales.
earnings
(9) Dividend at fluctuating rate * (4) 
The credit facility provided to a company
(10) Offered to preference having current account with bank.
shareholders   (5) The type of debentures which are secured by
some charge over the assets of the company.
Ans. (a – 7); (b – 9); (c – 4); (d – 1); (e – 3).
  (6) The preference shares which do not get any
3  Write a word or a term or a phrase which arrears of dividend.
can substitute each of the following   (7) A definite promise in writing from buyer for
statement : (1 mark each) paying the amount on a specific date.

* [1] Ans. (1) Global Depository Receipt (G.D.R)

(1) The ‘real masters’ of the company. (2) Public deposits (3) Trade credit (4) Overdraft
(5) Secured debentures (6) Non-cumulative
(2) A document of title of ownership of shares.
preference shares (7) Bills of exchange.
(3) 
The holders of these shares are entitled to
participate in the surplus profit. [3]
(4) 
A party through whom the company deals (1) A document issued by a company, under its
with debentureholders. common seal, which creates or acknowledges
(5) Name the shareholders who participate in the a debt.
management. (2) 
The type of shares on which the rate of
(6) 
The value of share which is written on the dividend varies according to the amount of
share certificate. net profits.
(7) 
The value of share which is determined (3) 
A debenture which is transferable by mere
by demand and supply forces in the share delivery.
market. (4) 
Name the shareholders who are ‘residual
claimants’ against the assets and income.
(8) 
The policy of using undistributed profit for
the business. (5) A formal contract to repay borrowed money
with interest.
(9) 
It is an acknowledgment of loan issued by
(6) An interest bearing certificate issued by the
company to depositor.
government promising to pay the holder a
(10) A Dollar denominated instrument traded in
specific sum at a specified date.
USA.

2. SOURCES OF CORPORATE FINANCE 37

 (7) 
The debentures which are not repayable (6) 
The equity shares create charge over some
during lifetime of the company. assets of the company.
(8) The process of accumulating corporate profits (7) 
Preferences are boon for the shareholders
and their utilization in the business. during depression period when interest rate
Ans. (1) Debenture certificate (2) Equity shares is continuously falling.
(3) Bearer debenture (4) Equity shareholders
Ans. (1) True (2) False (3) False (4) True
(5) Bond (6) Bond (7) Irredeemable debentures
(5) False (6) False (7) True.
(8) Retained earnings.
Find the odd one :
5   (1 mark each)
4  State whether the following statements are
* (1) 
Debenture, Public deposit, Retained
true of false : (1 mark each)
earnings.
* [1] * (2) Face value, Market value, Redemption value.
(1) 
Equity share capital is known as venture * (3) 
Share Certificate, Debenture Certificate,
capital.
ADR.
(2) 
Equity shareholders enjoy fixed rate of
* (4) Trade Credit, Overdraft, Cash Credit.
dividend.
  (5) BSE, NSE, NYSE
(3) 
Equity shareholders are described as ‘shock
  (6) ICICI, RBI, SIDBI
absorber’ when company has financial crisis.
(4) 
Debentureholders have right to vote at the   (7) LIC, UTI, SFC
general meeting of the company.   (8) 
Equity shares, Debentures, Preference
(5) Bond holders are owners of the company. shares
(6) Depository bank stores the shares on behalf of Ans. (1) Retained earnings (2) Redemption
GDR holder. value (3) ADR (4) Trade Credit (5) NYSE (6) RBI
(7) Financial institutions underwrite the issue of (7) SFC (8) Debentures.
securities.
(8) Cash credit is given against hypothecation of Complete the sentences : (1 mark each)
6  
goods or any security.
* [1]
(9) 
Trade credit is major source of long-term
(1) The finance needed by business organization
finance.
is termed as ……… .
Ans. (1) True (2) False (3) True (4) False
(5) False (6) True (7) True (8) True (9) False. (2) The convertible preference shareholders have
a right to convert their shares into ……… .
[2]
(3) 
Equity shareholders elect their representa-
(1) Debenture can be secured with some property
tives called ……… .
of the company.
(4) Bonus shares are issued as gift to ……… .
(2) 
Retained earnings is difficult and costly
method of raising capital. (5) The bond holders are ……… of the company.

(3) 
Public deposit is good source for long-term (6) Depository receipt traded in a country other
financing. than USA is called ……… .
(4) Providing loan to business is primary function (7) 
First Industrial policy was declared in the
of banks. year ……… .
(5) 
The face value of share is determined by (8) 
When goods are delivered by supplier to
demand and supply forces in the share customer on the basis of deferred payment, it
market. is called ……… .

38 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 Ans. (1) Capital (2) Equity shares (3) Directors (c) Debentures Interest at fixed rate
(4) equity shareholders (5) creditors (6) Global (d) Retained Accumulated corporate
Depository Receipt (7) 1948 (8) Trade Credit. earnings profit

[2] (e) Public deposit (5) Short-term loan

(1) 
……… value of equity shares fluctuates
* 8  Answer in one sentence : (1 mark each)
according to the demand and supply of these
shares. (1) What is a Share?
(2) The investors who are cautious, usually buy Ans. The total capital of a company when
……… . divided into large number of small parts of equal
face value, each such part is called a share.
(3) The process of accumulating corporate profits
(2) What are Equity Shares?
and their proper utilisation in the business is
Ans. The equity shares are those shares which
called ……… .
have no special preferential rights as to payment
(4) 
……… is nothing but selling the bill to the
of dividend or repayment of capital in the event of
bank.
liquidation of the company.
(5) ……… is the soul of business.
(3) What are Preference Shares?
(6) Manufacturers, wholesalers and suppliers of
Ans. Preference shares are those shares which
goods or materials are called ……… . carry preferential right as to payment of dividend
Ans. (1) Market (2) preference shares during the lifetime of company and preferential
(3) retained earnings (4) Discounting of bills of right as to the return of capital in the event of
exchange (5) Credit (6) Trade creditors. winding up of the company.
(4) What are Retained Earnings?
7  Select the correct option from the bracket : Ans. The process of accumulating corporate
 (1 mark each) profit and their utilisation in the business is called
retained earnings.
Group ‘A’ Group ‘B’
(5) What is Debenture ?
(a) Equity shares (1) ………
Ans. Debentures mean and include debenture
(b) ……… (2) Dividend at fixed rate stock, bonds and any other instrument of the
(c) Debentures (3) ……… company evidencing a debt, whether constituting a
(d) ……… (4) Accumulated corporate charge on the assets of the company on not.
profit (6) What is a Bond?
(e) Public deposit (5) ……… Ans. A bond is an interest bearing instrument
issued by the government, semi-government
(Fluctuating rate of dividend, Preference institution or the public corporations to
shares, Interest at fixed rate, Retained earnings, acknowledge the debts borrowed and promising
Short-term loan) thereby to pay the holder a specific amount at a
Ans. specified date.

Group ‘A’ Group ‘B’ (7) In which country can ADR be issued?
(a) Equity shares Fluctuating rate of Ans. American Depository Receipts (ADR) can
dividend be issued in the United States of America (USA).
(b) Preference Dividend at fixed rate (8) In which countries can GDR be issued?
shares Ans. Global Depository Receipts (GDR) can be
issued in all the countries other than USA.

2. SOURCES OF CORPORATE FINANCE 39

 (9) What are Convertible Debentures?
10  Explain the following terms/concepts :
Ans. The convertible debentures are those in
 (2 marks each)
which the company gives right to the debenture-
holders to convert their debentures into equity * (1) Borrowed Capital :
shares after a specific period of time. Ans. (1) Various sources of finance can be
(10) What are Cumulative Preference shares ? divided as owned capital and borrowed capital.
Ans. The type of preference shares on which Only owned capital is not adequate to manage all
dividend if not paid goes on accumulating until it the activities of the company and hence a company
is fully paid is called cumulative preference shares. is required to borrow funds from the available
sources to supplement its owned capital. The
9  Correct the underlined word/s and rewrite funds collected by the company through issue of
the following sentences : (1 mark each) debentures, accepting deposits from public, issue
of bonds, borrowing loans from commercial banks
* (1) Owned capital is temporary capital.
and financial institutions, etc. are called borrowed
* (2) Equity shares get dividend at fixed rate.
capital. A company can raise borrowed capital if
* (3) Preference shares get dividend at fluctuating
it is anthorised by Memorandum of Association.
rate.
Articles of Association of the company makes
* (4) 
Retained earnings is an external source of
provisions as to how and by whom such power
finance.
of borrowing shall be exercised. Usually, Board of
* (5) Debentureholder is owner of the company.
Directors exercises the powers of borrowings. A
* (6) Bond is a source of short-term finance.
private company can exercise its borrowing power
* (7) 
Depository Receipt traded in USA is called
on getting certificate of incorporation whereas
Global Depository Receipt.
public company can exercise its borrowing powers
(8) Face value of share is determined by demand
only after getting Certificate of Commencement of
and supply forces in the share market.
Business.
(9) 
The shares of Private limited company are
freely transferable in the manner provided in (2) The company may borrow the funds to fulfill

the Articles of Association. short-term, medium term and long-term needs of the
company. Usually company raises borrowed capital
Ans. (1) Owned capital is Permanent capital.
at a later stage when it needs additional funds for
(2) Equity shares get dividend at fluctuating rate.
expansion, modernisation or diversification of its
(3) Preference shares get dividend at fixed rate.
activities. The company is required to pay interest
(4) 
Retained earnings is an Internal source of
on borrowed capital at fixed and predetermined
finance.
rate and after specific period of time.
(5) Debentureholder is creditor of the company.
* (2) Owned Capital :
(6) Bond is a source of long-term finance.
Ans. (1) The funds required by the business
(7) 
Depository Receipt traded in USA is called
firms to carry out their activities are called capital.
American Depository Receipt (ADR).
A company can raise its capital from different
(8) Market value of share is determined by demand
sources such as owned capital, borrowed capital or
and supply forces in the share market.
both. The finance or funds collected or raised by the
(9) 
The shares of Public limited company are
company from its owners i.e. shareholders is called
freely transferable in the manner provided in
owned capital. It is also referred to as ownership
the Articles of Association.
capital. In other words, capital provided by the

40 SECRETARIAL PRACTICE DIGEST : STANDARD XII

shareholders in a company is called owned capital.
The owned capital consists of equity share capital,
preference share capital, reserves and surplus.
Retained earnings is an important form of owned
capital. Retained earnings refer to reinvestment of
profit in the business by the company itself. It is
also called ploughing back of profit.
(2) Owned capital is considered as permanent
capital because, it is refunded only at the time of
liquidation of the company. Owned capital supplies
initial source of capital for newly established
company. Owned capital can be raised later on by
the new company after its establishment to fulfill
additional capital needs. Retained earnings though
it is a form of owned capital made available to the
company when it runs its business profitably in
later years during its existence.
* (3) Ploughing Back of Profit :
Ans. (1) In many companies, during the period
of high profit, management does not distribute
the entire profit in the form of dividend among
its shareholders. Prudent (sensible) management
retain part of the profit every year to be used in
the future for meeting the financial needs and to
overcome the downswing in the business cycle.
A part of the net profit which is not distributed
as dividend to shareholders and retained by the
company in the form of different types of reserve
funds is called retained profits on retained earnings.
(2) A company can make use of retained profits
subject to certain rules. The practice of using such
retained profit in the business is called ‘ploughting
back of profit’ or ‘self financing’. By issuing
bonus shares to the existing equity shareholders
in proportion of their shareholdings free of cost,
a company can convert the retained profit into
a capital. This is called ploughing back of profit
or capitalisation of profit. It is a simple and the
cheapest method of raising finance. It is one of
the important sources of internal financing. It is,
however, used by developed and well established
company.
2. SOURCES OF CORPORATE FINANCE
* (4) Overdraft :
Ans. Overdraft is an arrangement by which
a company is allowed to overdraw i.e. withdraw
money in excess of available balance, up to a certain
credit limit sanctioned by the bank. Within this
predetermined limit, any number of withdrawals
are allowed. Repayment may be made as and when
cash is deposited during the time period. Overdraft
facility is given by the bank to the company having
current account. This is a kind of temporary
loan on which the bank charges interest on the
actual amount overdrawn. The overdraft facility is
extended on the basis of collateral security of goods
or sometimes even on the personal security of the
customer.
* (5) Trade Credit :
Ans. (1) For survival and growth of business
enterprise, credit sale of goods is must. 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.
Thus, credit period is granted or extended by the
trade creditors with the main objective to expand
sales. The period of trade credit also extended by
the business firms due to custom i.e. long standing
practice developed over 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 has been postponed to future date or
delay the payment.
41
 (6) Bond :
Ans. (1) Bond is a debt security issued by the
government or business enterprise, to acknowledge
the money borrowed by them from the public. It is
a type of formal contract between the bondholder
and the issuer company to repay borrowed money
along with interest to bond holder by the company
after predetermine period is over. The Bondholder
is a loan provider and he is therefore, called lender
or creditor of the company. He is entitled to receive
interest as returns on his investment in bond.
(2) Every bond has maturity date and entire
amount of bond is paid on maturity along with
interest, if it is not paid periodically. The bond-
holders provides long term finance say for 5 years,
10 years, 25 years, 50 years, etc. They get interest
of fixed rate. It is payable either at regular interval
or on maturity. According to Webster Dictionary,
“A bond is an interest bearing certificate issued
by the government or business firm, promising to
pay the holder a specific sum at a specified date.”
* 11  Study the following/situation and express
your opinion : (3 marks each)
(1) The Balance Sheet of A Donald Company
for the year 2018-19 reveals equity share capital
of ` 25,00,000 and retained earnings of
` 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. (a) A Donald Company is financially
sound. This is because retained earnings is 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.
42 SECRETARIAL PRACTICE DIGEST : STANDARD XII
(2) Mr. Satish is a speculator. He desires to
take advantage of growing market for company’s
product and earn handsomely.
(a) According to you which type of share
Mr. Satish will choose to invest?
(b) What does he receive as return on
investment?
(c) State any one right which he will enjoy as
a shareholder.
Ans. (a) In my opinion, Mr. Satish should choose
to invest in equity shares issued by the company.
(b) He receives dividend as return on the
investment in shares.
(c) As a shareholder, he has right to cast vote
in proportion to his shareholdings. By exercising
voting right he can participate in the management
and affairs of the company. He is allowed to vote
on all matters discussed at the general meeting. He
enjoys control over the company.
(3) Mr. Rohit, an individual investor, invests
his own funds in the securities. He depends on
investment income and does not want to take
any risk. He is interested in definite rate of
income and safety of principal.
(a) Name the type of security that Mr. Rohit
will opt for.
(b) What does he receive as return on his
investment?
(c) The return on investment which he
receives is fixed or fluctuating?
Ans. (a) Mr. Rohit should opt for preference
shares issued by the company.
(b) Mr. Rohit would receive dividend as return
on his investment.
(c) The return on investment which Mr. Rohit
receives is fixed.
12  Distinguish between the following : (4 marks each)
* (1) Equity Shares and Preference Shares :
Ans.

Equity Shares Preference Shares

1. Meaning
An equity share is the one which has no priority claim A preference share is the one which enjoys
either for payment of dividend or for repayment of preferential rights over equity shares as to payment
capital at the time of the winding-up of the company. of dividend and repayment of capital at the time of
the winding-up of the company.
2. Rate of dividend
The rate of dividend fluctuates, depending upon the The rate of dividend remains fixed since it is
availability of adequate profits and the decision of predetermined at the time of issue. It does not
the directors. depend on the profits.
3. Voting rights
Equity shareholders enjoy normal voting rights. Preference shareholders have restricted voting
Through the voting rights they participate in the rights. They have voting rights only on those matters
management of the company. which may affect their interests directly.
4. Nature of capital
Equity share capital is called risk capital because of Preference share capital is called safe capital as it
uncertainty of dividend. It is a permanent capital. carries dividend at a fixed rate every year. It is a
reinter capital.
5. Nature of investor
The investors who are willing to take risk prefer to The investors who are conservative and cautious
invest in equity shares. of their investment, prefer to invest in preference
shares.
6. Face value
The face value of equity shares is relatively lower The face value of preference shares is relatively
than that of preference shares, e.g. `10 per share or higher than the face value of equity shares, e.g.
` 1 per share. ` 100 per share and so on.

* (2) Shares and Debentures :

Ans.

Shares Debentures
1. Meaning
The smallest part or unit of the owned as well as A specific or smallest part or unit of the debt capital
rentier capital subscribed by the public usually for borrowed from the public for a specific period is
a longer period is called share. called debenture.
2. Nature
Capital raised by issue of shares is a permanent Funds raised by issue of debentures is a temporary
capital. It is not refunded during the lifetime of the capital. It is repaid after a specific period of time.
company.

2. SOURCES OF CORPORATE FINANCE 43

 3. Status
A share is an ownership security. A shareholder A debenture is a creditorship security. A debenture-
is the owner of the company. The share capital is holder is a creditor of the company. The capital
owned capital. raised by issue of debenture is called loan capital or
borrowed capital.
4. Voting Rights
Equity shareholders have a right to receive notices Debentureholders, being the creditors, have no
of general meetings, to vote in such meetings and to right to receive notices of general meetings, no right
participate in the management of the company. to vote in such meetings nor to participate in the
management.
5. Return on investment
The income or monetary return on shares is called The income or monetary return on debentures
dividend. The rate of dividend is fluctuating except is called interest. The rate of interest is fixed
in the case of preference shares. irrespective of profit or loss made by the company.
6. Security
Shares are not secured against any asset of the Debentures are usually secured by creating fixed or
company. Share capital is unsecured capital. floating charge against the assets.

* (3) Owned Capital and Borrowed Capital :

Ans.
Owned Capital Borrowed Capital
1. Meaning
The funds collected by a company through issue The funds collected by a company through the issue
of ownership securities such as equity shares and of loan securities such as debentures, accepting
preference shares and ploughing back of profit are public deposits and borrowing from the banks and
called owned capital. other financial institutions are called borrowed
capital.
2. Return on investment
The contributors to the owned capital get dividend The contributors to the borrowed capital get
as the return on their investment. Except preference interest as the return on their investment. The rate
shares rate of dividend is fluctuating. of interest is fixed.
3. Status of supplier
The contributors to the owned capital are the co- The contributors to the borrowed capital are the
owners or the joint owners of the company. creditors of the company.
4. Voting Rights
The contributor to the owned capital has a right to The contributor to the borrowed capital has neither
vote at the general meetings on all the matters also any right to vote at the general meeting nor any
has right to participate in the management of the privilege to participate in the management of the
company. company.
5. Repayment of capital
Repayment or redemption of the owned capital Repayment or redemption of the borrowed capital
is made only at the time of the winding-up of the is made on the maturity or redemption date.
company.

44 SECRETARIAL PRACTICE DIGEST : STANDARD XII

 6. Charge on assets
The owned capital is raised without offering any The borrowed capital usually raised against security
security. The shareholders do not have any charge offered by the company. The secured debentures
on the assets of the company. have charge on the assets of the company.

(4) Shareholders and Debentureholders :

Ans.

Shareholders Debentureholders
1. Meaning
The persons who buy and possess shares of a The persons who buy and possess debentures of a
company are called shareholders. company are called debentureholders.
2. Status
Shareholders are the joint owners of the company. Debentureholders are the loan creditors of the
company.
3. Income
Shareholders get dividend as the return on their Debenture holders get interest as the return on their
investments in shares. investments in debentures.
4. Nature of Return
Shareholders get dividend at fluctuating rate. Debentureholders get interest at a fixed rate
The rate of dividend depends upon availability of (predetermined at the time of issue of debentures).
disposable profit. The payment of interest does not depend on the
profit.
5. Rights
Equity shareholders have right to vote at the general Debentureholders being creditors of the company
meetings and also have right to participate in the are the preferential claimants over the equity
management of the company. shareholders and unsecured creditors for refund of
capital at the time of winding-up of the company.
6. Repayment (Refund)
Shareholders being owners of the company are the Debentureholders being creditors of the company
last claimants for the return of capital at the time of have the preferential right over the shareholders
winding-up of the company. and unsecured creditors for refund of capital at the
time of winding-up of the company.

money with company for varied period. On such

13  Answer in brief : (4 marks each)
* (1) What is Public Deposit?
Ans. (1) Public Deposit is one of the key
sources of raising short-term finance to fulfill the
financial needs of the company. Any amount for the
period ranging from 6 months to 36 months (i.e.
3 years) received from the public by the company
are called Public Deposit. The term public include
the customers, employees, general public and
shareholders. When the company needs short-term
finance, it invites public to deposit their surplus idle
deposits, the borrowing company pays interest at
regular interval or at maturity.
(2) On receiving deposit amount, the company
issues ‘Deposit Receipt’. It is an acknowledgement
of debts borrowed by the company. The terms and
conditions of deposit are printed on the deposit
receipt.
(3) The public deposits are either secured
or uncured loans offered to the company.
The definition of public deposit is given in
Section 2(31) of the Companies Act, 2013 as,

2. SOURCES OF CORPORATE FINANCE 45

“deposit includes any receipt of money by way of
deposit or loan or in any other form by a company,
but does not include such categories of amount
as may be prescribed in consultation with the
Reserve Bank of India.”
(4) The definition is further explained in detail
by Rule 2 (1) (c) of the companies (Acceptance
of Deposits) Rules 2014 as ‘deposit’ means any
receipt of money in the form of deposit or loan
accepted by a company.
(5) However, deposit does not include any
amount received from (i) Central Government
or a State Government (ii) as loan from any
banking company (iii) from foreign government or
international banks (iv) from any other company
(v) by issuing commercial paper (vi) by issue of
bonds (vii) in trust and (viii) by way of subscription
to any shares or debentures.
* (2) What is Global Depository Receipt?
Ans. (1) The shares of public company in
India are now listed and traded on different
stock exchanges such as Bombay Stock Exchange
(BSE) and National Stock Exchange (NSE). Due to
globallsation and adoption of free economic policy
by the Government of India, shares of an Indian
company can be listed and traded on various share
markets on foreign stock exchanges like New York
Stock Exchange (NYSE) or National Association of
Securities Dealer Automated Quotation (NASDAQ).
(2) In order to list the shares on foreign
stock exchanges, a company has to comply with
complicated, rigid and lengthy procedure and
policies. By avoiding such complicated policies, an
Indian company can get their shares listed on foreign
stock exchanges indirectly using Global Depository
Receipt (GDR) and American Depository Receipt
(ADR).
(3) GDR and ADR are Dollar/Euro denominated
instruments traded on stock exchanges of foreign
countries. Both GDR and ADR are Depository
Receipts and each depository receipt contains
fixed number of shares. They represent claims of
shares noted thereon. Depository Receipts which
are traded in USA are called ADRs and which
46 SECRETARIAL PRACTICE DIGEST : STANDARD XII
are traded in all foreign countries except USA are
called GDRs.
(4) Intermediary who buys shares of Indian
Companies for trading in foreign countries is called
‘Depository’. The foreign banks such as Bank
of New York. Citi group, etc. act as Depository.
The Depository Banks issue GDRs and ADRs to
investors against Indian companies shares. The
Depository Receipts are then listed on foreign stock
exchanges and are traded like ordinary shares. By
using regular equity trading account, Non-Resident
Indians (NRI) and foreign nationals can invest their
surplus money in India by buying ADR and GDR.
(5) The Indian companies pay dividend after its
declaration to depository bank in home (Indian)
currency and then depository bank converts it into
the currency of the investors and pay such dividend
to them.
The stock exchanges on which GDR is traded
are : (i) London Stock Exchange (ii) Luxembourg
Stock Exchange (iii) NASDAQ Dubai, (iv) Singapore
Stock Exchange and (v) Hongkong Stock Exchange.
* (3) What is Trade Credit?
Ans. (1) For survival and growth of business
enterprise, credit sale of goods is inevitable.
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.
(2) 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. Thus, credit period is granted or extended
by the trade creditors to the borrower with the
main objective to expand sales. The period of trade
credit also extended by the business firms due to
custom i.e. long standing practice developed over
long period of time.
(3) 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 has been postponed to other traders to
delay the payment.
(4) Usually, small retailers rely on getting trade
credit from suppliers to a great extent. Trade credit
is an easiest and cheapest method of credit which
can be raised or obtained without making any
agreement or signing any document. It is considered
as free cost source of finance.
(5) Trade creditors i.e. manufacturers,
wholesalers or suppliers allow 30 days or more to
their customers for making payment of bill amount.
They also offer cash discount if their customers
make payment within a short period say 10 days
or 15 days from the date of delivery of goods.
The terms and conditions of trade credit are very
lenient. It is readily available if goods or services
are purchased on credit in bulk.
* (4) What are the schemes for disbursement
of credit by the bank?
Ans. The different schemes for disbursement of
credit by the bank are explained as follows :
(1) Overdraft : Overdraft facility is given by
the bank to the company having current account.
Overdraft is an arrangement by which a company
is allowed to overdraw i.e. withdraw money
in excess of available balance up to a certain
credit limit sanctioned by the bank. Within this
predetermined limit, any number of withdrawals
are allowed. Repayment may be made as and
when cash deposited during the time period. This
is a kind of temporary loan on which the bank
charges interest on the actual amount overdrawn.
The overdraft facility is extended on the basis of
collateral security of goods or sometimes even on
the personal security of the customer.
(2) Cash Credit : Cash credit is an important
mode of financial help. Cash credit is similar to
overdraft facility and operated in similar way as
overdraft. The borrower is allowed to withdraw
amount from this cash credit account up to
2. SOURCES OF CORPORATE FINANCE
limit sanctioned. The limit of the cash credit is
sanctioned against pledge or hypothecation of goods
or on the basis of alternative securities given. Bank
charges interest on the amount actually withdrawn
or outstanding amount borrowed and not on the
entire credit limit sanctioned.
(3) Cash Loan : Loan is an arrangement by
which the bank advances an amount against
certain securities. Under this arrangement, the
loan amount is directly credited to a separate loan
account in the name of borrower by the bank. It is
granted for a fixed period. Interest is charged by
the bank on the actual balance outstanding.
(4) Discounting Bills of Exchange : The bills of
exchange is also called trade bills. The bank advance
the cash against bills of exchange. The drawer (i.e.
creditor who draws the bills of exchange) receives
the amount of bill from drawee (i.e. a debtor on
whom bill is drawn) on the due date or after the due
date. If drawer needs funds before the due date of
the bill, he can discount the bill with bank and gets
funds immediately to finance business activities.
Discounting a bill of exchange means selling the bill
to the bank before its due date for certain amount
which is slightly lesser than its face value. The
difference between face value of the bill and actual
amount received from bank on discounting bill is
called ‘discount’.
Discount is nothing but the interest charged
by the bank for advancing loans against bill of
exchange.
(5) State the features of bonds.
Ans. The features of bonds are as follows :
(1) Nature of finance : Bond is a debt security.
It is a debt or loan finance. The Bondholders
provide long-term finance to the company. Usually,
company issues bonds for longer periods such as
5 years, 10 years, 25 years, 50 years, etc.
(2) Status of bondholder : The company
borrows money for certain fixed period and issues
bonds as evidence of debt. Bondholder is a lender
of the company. Hence, bondholders are creditors
of the company. The bondholders are not the
owners of the company. So, they cannot attend and
47
participate in the general meetings of the company.
They do not have voting right and hence they cannot
participate in the management of the company.
(3) Return on bonds : The bondholders are
entitled to receive return on their investment in the
form of interest at fixed rate. Interest on the bonds
may be either paid at regular interval or on the
maturity date along with principal amount.
(4) Repayment : A bond is a formal contract
between the company and bondholder to repay the
borrowed money by the company. All bonds have
maturity date. On maturity date the repayment of
principal amount along with interest (if not paid) is
made by the company to the bondholder.
(6) What is Retained Earnings? What are the
determinants of retained earnings.
Ans. [A] Meaning : (1) In many companies
during the period of high profit, management
does not distribute the entire profit in the form
of dividend among its shareholders. Prudent
(cautious) management retain part of the profit
every year to be used in the future for meeting the
financial needs and to overcome the downswing in
the business cycle. A part of the net profit which
is not distributed as dividend to shareholders and
retained by the company in the form of different
types of reserve funds is called retained profits on
retained earnings.
[B] Determinants of retained earnings : The
determinants of retained earnings are as follows :
(1) Total earnings of company : If company
earns large amount of profit, it can save and retain
more amount of profit even after distribution
of sufficient amount towards dividend to
shareholders. The size of the retained profit is also
influenced by the attitude of the top management.
If attitude of management favours the owners, it
will distribute major portion of profit as dividend
to shareholders. In such case, company will be able
to save and retain less amount of profit and vice
versa.
(2) Taxation policy : Taxation policy adopted
by the government also has great impact on the
corporate savings. If the taxes are levied by the
48 SECRETARIAL PRACTICE DIGEST : STANDARD XII
Government at higher rate, there will be less
savings and consequently amount of retained profit
will be low.
(3) Dividend policy : If the Board of Directors
pay dividend at a lower rate by following conservative
dividend policy and by transferring very large
portion of profits to reserve, then size of the
retained profit will be larger and vice versa. Paying
dividend at lower rate, may lead to dissatisfaction
among shareholders.
(4) Government control : A government
regulates and controls the economic system of the
country. While framing the dividend policy, every
firm or company has to follow policies, rules and
regulations framed by the government. Thus,
government’s control has great impact on the
retained earnings.
* 14  Justify the following statements :
 (4 marks each)
(1) Equity shareholders are real owners and
controllers of company.
Ans. (1) Equity shareholders are the joint
owners of the company. They have ownership rights
in the company. They have the right to participate
in the management of the company. Similarly, they
have the right to vote on every resolution placed
before any general body meeting of the company.
(2) Equity shareholders do not have special
preferential rights either as to dividend and return
of capital in the event of winding-up of the company.
Equity shareholders run the risk of receiving
nothing or have the chances of earning attractive
dividend at an increasing rate.
(3) As equity shareholders accept the business
risks in real sense, they are the real owners of the
company. The control of the company is vested
in equity shareholders. This is because they have
exclusive voting rights.
(4) By exercising voting rights, equity
shareholders elect their representatives called
Directors for management of the company,
amend Memorandum of Association and Articles
of Association, etc. Similarly, they can remove
directors from their posts on genuine grounds by
exercising voting power.
(2) Preference shares do not carry any voting
right.
Ans. (1) Preference shares are those which
enjoy priority or preference over equity shares for
the payment of dividend and repayment of capital.
Preference shares carry a fixed rate of dividend.
(2) Because of these special rights, the preference
shareholders, unlike equity shareholders, do not
undertake much risk. Therefore, they cannot
participate in the general body meetings of the
company.
(3) They do not have normal voting rights like
those of the equity shareholders. They have limited
voting rights in respect of those matters which
affect their interest.
(4) If they have any problem affecting their
interests or if dividend is not paid to them for two
consecutive years, they can ask the company to
convene a meeting of all the preference shareholders
only and pass resolution in that meeting.
(3) The debentures are secured by charge on
the assets of the company.
Ans. (1) A debenture is a document issued under
the common seal of the company duly attested by
the authorised signatories. A debentureholder, i.e.
a person who buys the debentures of a company, is
a creditor of the company. A company may borrow
loan in the form of debentures from the public.
(2) Debentures being a loan, are required to
be secured by charge on the company’s assets. To
protect and safeguard the interest of debenture-
holders, debentures can be secured with some
property of the company. When debentures are
secured with some property of the company,
debentureholders become tension free. On the
other hands, it encourages to invest more in the
company.
(3) The property or assets of the company may
be charged as security for loan borrowed by issuing
debentures. Debentures are usually secured by
some particular fixed asset (fixed charge) or are
2. SOURCES OF CORPORATE FINANCE
3/Secretarial Practice Digest : Std. XII E0308
secured by the assets in general (floating charge).
The debentures are secured through Trust Deed.
(4) Some debentures do not have any charge
on any asset of the company. Such debentures
are called unsecured debentures. According to
provisions made in Companies Act, 2013, now the
issue of unsecured debentures is prohibited by the
Government.
(4) Retained earning is simple and cheapest
method of raising finance.
Ans. (1) In many companies, the management
does not distribute the entire profit earned during
the financial year in the form of dividend to the
shareholders. They retain some part of it to be used
in the future for meeting the financial needs and to
overcome the downswing in the business cycle. The
part of the profit which is set aside for different
purposes is called Retained Earnings.
(2) Retained profits or earnings refers to the
sum total of those profits, accumulated over the
years and reinvested in the business rather than
distributed as dividend. Thus, retained earnings
can be used by the company subject to certain
rules.
(3) Retained profits is kept in the firm in the
form of Reserve Funds. The amount of such reserve
is made available to the business organisation free
of cost for financing different types of projects,
expansion and modernisation programmes.
(4) The management can convert the retained
earnings into permanent capital which is known
as Capitalisation of Retained Earnings by issuing
bonus shares free of charge to the existing
shareholders in the proportion of their holdings.
Thus, retained profits is an important source
of internal financing. It is simple and cheapest
method of raising finance. However this source
of financing is available to a well established and
highly profitable company.
(5) Public deposit is a good source of short-
term financing.
Ans. (1) A company collects the required
amount of capital through different sources such as
issue of shares, borrowing, accepting deposits from
public, etc. Usually small part of debts capital, that
49
too for a short period, is raised through accepting
deposits from general public.
(2) The deposits accepted by the company
from general public are called public deposits.
The depositors provide finance to the company
by keeping their deposits with the company. The
amount raised by accepting deposits is usually
used for meeting short-term financial requirement
of the working capital.
(3) Under this method, general public is invited
to deposit their savings with the company for varied
period. A company may accept the deposits for a
minimum period of 6 months and for a maximum
period of 3 years.
(4) Because of these reasons, the acceptance of
deposits is a source of raising capital for short-term.
But, it cannot be a long-term and permanent source
of raising capital.
(6) Bondholder is creditor of the company.
Ans. (1) Bond is a debt security. When a company
borrows money for long-term finance and issues a
certificate under its seal as acknowledgement, it
is called Bond. Thus, bond is an interest bearing
certificate issued by a government or business firm,
promising to pay to its holder a specified amount
after a specified period.
(2) The bondholder is a creditor of the company.
The bondholders are entitled to get fixed rate of
interest on the amount invested in the company in
the form of bonds. The rate of interest is decided
and fixed at the time of issue of bonds. Interest
is payable either at regular intervals or on the
maturity.
(3) Interest payable to the bondholders is a fixed
charge and an item of direct expenditure of the
company. It is paid compulsorily by the company
even if profit is not earned. As the bondholders
are non-owners of the company, they have no right
to attend general meetings and participate in the
management through voting.
(4) The bondholders are not entitled to get
dividend from the company, because dividend is a
part of distributable profit of the company and it is
paid only to the owners i.e. shareholders. Hence,
bondholders are not the owners of the company.
50 SECRETARIAL PRACTICE DIGEST : STANDARD XII
(7) Trade credit is not cash loan.
Ans. (1) In order to increase turnover, many
manufacturers, wholesalers or suppliers supply or
sell goods, services or raw materials on credit to
their customers and allow certain period of time for
making payment. Credit sales or granting credit to
customers is inevitable in the present competitive
business world. It is considered as short-term
financing of business funds.
(2) Trade credit refers to the facility or credit
extended by one business firm to other business
firm. It may occur through the issue of Bills of
exchange or may arise from delay of receipts and
payments for goods sold or services performed.
Credit is given or extended with an ultimate motive
of increasing turnover or sales.
(3) In trade credit, goods or services are supplied
or sold on the basis of future (deferred) payments.
Trade credit is not a cash loan. It is a facility given
by one trader to other traders to delay the payment.
(4) Trade creditors i.e. manufacturers, whole-
salers or suppliers usually allow 30 days or more
to their customers for making payment of bill
or purchase consideration. They also offer cash
discount if their customers make payment of bill
within a short period say 10 days or 15 days from
the date of delivery of goods. Trade credit can be
obtained without making any agreement or signing
any document. It is readily available if goods or
services are purchased on credit in bulk. It is
considered as cost free source of finance.
(8) Different investors have different
preferences.
Ans. (1) The person who invests money or
capital in an enterprise or in securities with the
expectation of profit or of earning regular income
in the form of interest is called investor. The term
securities include, shares, debentures, bonds,
Fixed Deposit Receipts (FDRs), etc. The different
investors have different preferences liking, etc.
They have different opportunities to invest their
funds in different types of securities.
(2) There is direct relationship between the risk
undertaken and its rewards in the form of profits or
incomes. Higher the risk undertaken, greater will be
the profit or income and vice versa. The investors
who want to undertake risk in the investment prefer
to invest in equity shares. Investment in equity
shares is risky in nature because it does not carry
fixed commitment of dividend. If there is no profit,
no dividend will be payable to these shareholders.
Similarly, if there is less profit, lesser dividend will
be paid. If company is successful they enjoy great
financial rewards and if company fails the risk falls
mainly on equity shareholders.
(3) The investors who are conservative, cautious
and interested in safety of investment and who
want steady returns on investment prefer to invest
in preference shares. These shares carry dividend
at fixed rate which is determined at the time of
issue. These shares are boon for the shareholders
during depression period when interest rate is
continuously falling. The holders of participating
preference shares are entitled to participate in
surplus profit besides preferential dividend. The
holders of convertible preference shares have a
right to convert their preference shares into equity
shares. The holders of redeemable preference
shares get their investment money back after
certain fixed period of time.
(4) Apart from above investment preferences,
investors have options to invest their holdings in
debentures of different types. Interest at fixed rate is
paid on debentures periodically. It must be paid by
the company irrespective of fact whether it makes
profit or incurs loss. They are usually secured by
fixed or floating charge. Investors may also prefer
to invest their fund in term deposits scheme in the
bank to earn fixed regular income. Thus, different
investors have different preferences to invest their
funds.
(9) Equity share capital is risk capital.
Ans. (1) Equity shareholders are the owners
of the company who bear ultimate risk associated
with the ownership. They are also called ‘residual
claimants’ of the income and assets. This is because
as a owner after paying claims of all other investors
and stakeholders the remaining funds and property
belong to equity shareholders. Conversely at the
time of winding-up if no fund is left after paying
2. SOURCES OF CORPORATE FINANCE
claims to other investors, equity shareholders will
not get anything. They have to suffer capital loss.
(2) Equity shareholders do not have guarantee
of getting dividend every year. They get dividend at
the rate recommended by the Board of Directors.
The fortune of equity shareholders fluctuates with
the ups and downs of the company.
(3) If the company earns handsome or huge
amount of profit, equity shareholders enjoy great
financial rewards in the form of higher dividend.
Conversely, if the company suffers heavy loss, the
risk falls mainly on equity shareholders. Because
of these reasons, equity share capital is known as
venture capital or risk capital. Thus, the owners of
equity shares are real risk bearers.
(4) Equity shareholders are described as, ‘shock
absorbers’ when company has financial crisis. If
the company suffers loss or its income falls, the
company forced to reduce the rate of dividend.
Because of this situation, the market value of equity
shares falls down in the share market resulting into
capital loss to its shareholders. Thus investment in
equity shares is risky.
* 15  Answer the following questions :
 (8 marks each)
(1) What is Share and state its features ?
Ans. [A] Meaning : The total capital of a
company when divided into large number of small
parts having equal value, each of such parts is
called a Share. According to the provisions made
in Section 2(84) of the Companies Act, 2013,
‘share means a share in the share capital of a
company and includes stock.’ The monetary value
of each part or unit is called face value of the share.
Share is a small unit or unit of measurement of
capital of a company e.g. a capital of ` 1,00,000
may be divided into 10,000 shares of ` 10 each.
[B] Features :
(1) Meaning : A share is the smallest indivisible
unit of the total share capital of a company.
(2) Ownership : The person who purchases
shares of a company is called shareholder of
that company. The shareholder is called part
owner of the company. The ownership interest
51
of shareholders in a company is reflected in the
instrument called share.
(3) Distinctive number : Unless shares are
dematerialised each share is given distinct number
for identification. This distinctive numbers of
shares are noted in the share certificate.
(4) Evidence of title : A share is not any visible
item or thing. It is always shown or expressed in
the form of a share certificate. Even shares may
also be expressed in dematerialised form. A share
certificate is a registered document of title of
ownership of shares issued by the company under
its common seal.
(5) Value of a share : Every share has specific
money value. The value of share is expressed
in terms of money. The value of shares may be
expressed in three ways viz.
(a) Face value : The value of share which is
mentioned on the share certificate and in the
Memorandum of Association is called face value of
share, e.g. ` 10, ` 100, etc.
(b) Issue price : The price at which company
sells or issues its shares is called issue price of
shares.
(c) Market value : The value of share which is
fixed by demand and supply forces in the share
market is called market value.
(6) Rights : The share grants (gives) certain
rights on its holder such as right to attend
shareholder’s meeting, right to vote in the meetings,
right to inspect statutory books, right to receive
dividend, etc.
(7) Income : Every shareholder is entitled to get
a share in the net profit of the company. This share
of net profit is called dividend.
(8) Transferability : As per the procedure laid
down in the Articles of Association, the shares of a
public limited company are freely transferable.
(9) Property of shareholder : Shares of a
company are treated as movable property of the
shareholder.
(10) Kinds of shares : As per the provisions
made in Section 43 of the Companies Act, 2013,
a company can issue two types of shares viz.
(i) Equity shares and (ii) Preference shares.
52 SECRETARIAL PRACTICE DIGEST : STANDARD XII
(2) What is an Equity Share ? Explain its
features.
Ans. [A] Meaning : An equity share is the one
which has no priority claim either for payment of
dividend or for repayment of capital at the time
of winding-up of the company. Equity shares are
also referred to as ordinary shares. Companies
Act, 2013 defines equity shares as “those shares
which are not preference shares.” The equity
shareholders often described as residual claimants
of all earnings and assets that left after the payment
of claims of all other investors and stakeholders.
Equity shareholders are the owner of the company
and bear ultimate risk associated with the
ownership of the company.
[B] Features :
(1) Permanent capital : The amount received
by the company from the issue of equity shares is
irredeemable in nature, i.e. the amount of equity
shares is not refundable during the lifetime of
the company. It is refunded only at the time of
dissolution of the company or as and when
company decides to buy back its shares. Equity
shareholders provide long-term and permanent
capital to the company.
(2) Fluctuating dividend : The rate of dividend
payable to equity shareholders is not fixed. It
depends upon the quantum of profit earned by the
company. If company earns handsome profit, it
pays dividend at higher rate. If there is inadequate
or no profit, dividend may not be paid or paid at
very low rate. Thus, income of equity shareholders
is uncertain and fluctuating.
(3) Rights : The equity shareholders enjoy the
following rights :
(a) Right to vote : Right to vote is the basic
right of the equity shareholders. Through right to
vote, its shareholders elect directors and amend or
alter the Memorandum of Association and Articles
of Association.
(b) Right to share in profit : Equity
shareholders have right to share profits when
distributed as dividend. If company earns more
profit, equity shareholders entitled to get dividend
at higher rate.
 (c) Right to inspect books : It is another
important right of the equity shareholders. They
have right to inspect all statutory books of their
company.
(d) Right to transfer shares : The equity
shareholders have right to transfer their shares to
another person as per the procedure laid down in
the Articles of Association.
(4) No preferential right : Equity shareholders
do not have special preferential rights as to
payment of dividend. They get dividend only after
the dividend is paid on preference shares. In the
event of winding up of the company, the capital is
refunded to the equity shareholders only after it
is refunded to preference shareholders. If nothing
is left behind after paying other claims, the equity
shareholders may not get anything.
(5) Controlling power : Equity shareholders
are the owners and real masters of the company
and hence control of the company is vested in
them. They can exercise their voting rights by
proxies without attending the meeting in person.
Through their right of voting, equity shareholders
can participate in the management and affairs of
the company. They can elect the Board of Directors
to look after the management of the company. They
have right to vote on all the matters discussed in
the general meeting. Thus, equity shareholders
exercise the control over the company.
(6) Risk : Equity shareholders have to face
maximum risks of the company. They are also
called as “shock absorbers” when company faces
financial crisis. If the earnings of the company fall,
equity shareholders get dividend at very low rate.
This in turn declines the market value of equity
shares resulting into capital loss. Thus, they bear
maximum risk associated with the ownership of
the company.
(7) Residual claimants : A residual claim
implies the last claim on the earning of the company.
The equity shareholders often described as residual
claimants of all earnings that left after payment of
taxes, expenses, interest and dividend to preference
shareholders, etc. The equity shareholders have
2. SOURCES OF CORPORATE FINANCE
benefits of receiving entire earnings whatever is left
over.
(8) No charge on the assets : Unlike secured
debentures, equity shares do not create any charge
on the assets of the company.
(9) Bonus issue : Bonus shares are issued free
of cost as gift to the existing equity shareholders by
the company. The Bonus shares are issued out of
retained or accumulated profits in proportion to
the shares held by equity shareholders.
Thus, there is an increase in the capital
investment of equity shareholders on its own.
These benefits are not available to any other types
of shareholders or investors.
(10) Right issue : Whenever a company makes
fresh issue of shares for the purpose of raising
additional finds for expansion or modernisation of
business, the existing equity shareholders are given
‘rights’ first to buy those newly offered shares in
proportion to their shareholdings. This is called
rights issue.
(11) Face value : The face value of equity shares
is usually very low. Generally, it is ` 10/- per share
or even ` 1/- per share.
(12) Market value : The market value of shares
is determined by forces of demand and supply
in the share market. The market value of equity
shares always fluctuates in the stock exchange.
It depends on quantum of profit earned and rate
of dividend declared. When company earns huge
profit, the market value of shares increases.
Conversely, if loss is incurred by the company, the
market value of shares declines. Equity shares are
traded on stock exchange and are more appearing
to the speculations.
(13) Capital appreciation : Prosperity and high
profit earning capacity of the company increases
reputation of the company in the share market
which in turn appreciates the market value of the
shares. Share capital appreciation takes place
along with appreciation in market value of shares.
(3) Define Preference Shares. What are the
different types of preference shares.
Ans. [A] Definition : The Preference Shares are
those shares which carry certain preferential rights
53
distinct from the rights of equity shareholders with
regard to (i) receive dividend at a fixed rate during
the lifetime 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] Types :
For the different types of preference shares,
refer to Brief Overview point no. 2.1.1 (iii).
(1) Cumulative Preference Shares : Cumula-
tive Preference Shares are those shares which
have the right to claim a fixed dividend of the
current year (if not paid) out of future profits. The
dividend in their case goes on accumulating unless
paid. If the company is unable to earn sufficient
profits in any year, the unpaid dividend shall be
paid from the profit of the subsequent years. The
accumulated arrears of dividend become payable
before anything is paid out of profits to the holders
of any other class of shares. Preference shares are
always cumulative unless otherwise stated in the
Articles of Association.
(2) Non-cumulative Preference Shares : Non-
cumulative preference shares are those shares in
which shareholders get dividend only when the
company earns profit. Dividend if not paid by the
company in any year due to inadequate profit or
loss, it does not accumulate. In such case, right to
claim dividend lapses.
(3) Participating Preference Shares :
Participating preference shareholders have the
normal right to get fixed dividend as well have the
additional right to participate (receive additional
amount) in the surplus profits left after paying
equity shareholders up to a certain limit.
(4) Non-participating Preference Shares :
Non-participating preference shareholders are
entitled to get only dividend at fixed rate prescribed
at the time of issue. If the Articles of Association is
silent about this issue, then it is implied that the
preference shares are non-participating.
54 SECRETARIAL PRACTICE DIGEST : STANDARD XII
(5) Convertible Preference Shares :
Convertible preference shares are those preference
shares in which holders have a right to convert
their preference shares into equity shares. The
conversion may take place within a certain fixed
period.
(6) Non-convertible preference shares :
Preference shares which cannot be converted into
equity shares are called non-convertible preference
shares.
(7) Redeemable Preference Shares :
Preference shares which are redeemed after specific
or certain fixed period of time are called redeemable
preference shares. A company limited by shares, if
authorised by the Articles of Association, can issue
redeemable preference shares. Such shares must
be fully paid either out of distributable (divisible)
profit or out of fresh issue of shares made
specifically for redemption of preference shares.
(8) Irredeemable Preference Shares :
Irredeemable preference shares cannot be paid
back during the existence of the company. They
are paid back only in the event of winding-up of
the company. However, as per Section 55 (1) of the
Companies Act, 2013, the issue of irredeemable
preference shares is not permitted.
(4) What are Preference Shares? State its
features.
Ans. [A] Meaning : For the answer, refer to
Q. 15 (3) (A) Answer in Brief.
[B] Features : 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. 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 three 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 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, it’s face value is ` 100.
(9) Right issue or Bonus issue : Unlike the
equity shareholders, the preference shareholders
2. SOURCES OF CORPORATE FINANCE
are not entitled to get right shares or bonus shares,
if at all they are issued by the company.
(10) Nature of investor : The moderate type
of investors who are conservative and cautious,
interested in steady return on investment and in
safety of investment, etc. usually attracted towards
preference shares and hence they prefer to purchase
preference shares.
(5) What is Debenture? Discuss the different
types of debentures.
Ans. [A] Meaning : The word ‘debenture’ is
derived from the Latin word, “debere” which
means ‘to owe some thing to some one’. According
Topham, “A debenture is a document given by a
company as evidence of debt to the holder, usually
arising out of loan, and most commonly secured
by charge.” Debentures are one of the important
sources of acquiring borrowed capital to meet long-
term and the medium-term requirements of the
finance. In recent years debentures have secured a
key position in the capital structure of the company.
A debenture is a loan accepted by a company
by issuing a debenture certificate. A debenture
certificate 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.
[B] Types of Debentures :
For the chart showing different types of
debentures, refer to Brief Overview point
no. 2.2.1 (iii).
1. On the Basis of Security :
(1) Secured debentures : These debentures
are secured by creating a charge on the property
of the company. The charge may be for particular
property (fixed charge) or it may be for the assets
in general (floating charge). The debentures are
secured by creating trust deed.
(2) Unsecured debentures : These debentures
are not covered by any charge on any assets of the
company. In recent years, the issue of unsecured
debentures is completely prohibited by the
Companies Act, 2013.
55
 2. On the Basis of Transfer :
(1) Registered debentures : These are the
debentures on which the name of the holders
is recorded. The company keeps and maintains
register of debentureholders in which the names
addresses and details of the holdings are recorded.
Registered debentures can be transferred through
execution of regular instrument of transfer.
(2) Bearer debentures : Bearer debentures are
those debentures on which the names of debenture-
holders are not recorded. The company does not
keep any record of the names and addresses of
the holders. Bearer debentures are transferable
by mere delivery. Interest coupons are attached to
these debenture certificates to enable the holders
to encash them on due dates.
3. On the Basis of Repayment :
(1) Redeemable debentures : Usually,
debentures are redeemed i.e. repaid at the end
of specified period as specified on the debenture
certificate. The repayment of debenture amount
is made on maturity date in lump sum or in
installments during the life period of the company.
Trust deed is prepared to record provisions of
repayment.
(2) Irredeemable debentures : The debentures
which are not repayable during lifetime of the
company are called irredeemable debentures.
These debentures are redeemed only after the
liquidation of the company or when there is breach
of any condition or some other contingencies.
4. On the Basis of Conversion :
(1) Convertible debentures : The convertible
debentures are those debentures which give right
to the holders to convert their debentures into
equity shares at a particular rate of exchange after
a specific period of time. The right of conversion is
specified in the debenture certificate. The approved
of the members by special resolution in the general
meeting is necessary before they are issued to
the public. These debentures are beneficial to the
holders because after their conversion they are
entitled to equity shares at a rate lower than the
market value.
56 SECRETARIAL PRACTICE DIGEST : STANDARD XII
(2) Non-convertible debentures : These
debentures are not convertible into equity shares.
These debentures are usually redeemed on their
due date. For this type of debentures there is no
appreciation in value.
(6) Define Debenture and explain the features
of debentures.
Ans [A] Definition : For the answer, refer to
Q. 15 (5) (A) Answer in Brief.
[B] Features :
(1) Promise : The debenture is a written
promise given by the borrowing company that it
owes certain specified sum of money and to pay
that money to the holder of the debenture after
specified period is over.
(2) Face value : Each debenture has a definite
face value which is expressed in terms of money.
The face value of debenture is usually of high
denomination. e.g. ` 100 or multiples of ` 100.
(3) Time of repayment : Usually, repayment
date is specified in the debenture certificate. The
principal amount is refunded on due date.
(4) Priority of repayment : The capital of the
debentureholders is repaid before making payment
of dues to the other claimants of the company.
Thus, Debentureholders have priority in payment
of their capital.
(5) Assurance of repayment : Debentures
are considered as long-term debts. They carry an
assurance of repayment of such debts on maturity
date.
(6) Interest : Debentureholders are paid
interest at the rate agreed upon at fixed intervals.
It is a fixed liability of the company to pay interest
to the debentureholders at regular interval
irrespective of the fact whether the company earns
profits or not.
(7) Parties to debentures : There are 3 parties
to the debentures :
(a) Company : The company is an entity which
borrows the money by issuing debentures.
 (b) Trustees : A company is required
appoint debenture trustee if company offers (or
issues) debentures to more than 500 people.
Through trustee, the company deals with the
debentureholders. An agreement which company
makes with the trustee is called Trust deed. It
includes the rights of debentureholders, powers of
trustees and obligations of company.
(c) Debentureholders : The persons
investors who provide loan and receive
debenture certificates as an evidence are called
debentureholders.
(8) Authority to issue debentures : The provi-
sions made under Section 179 of the Companies
Act, 2013 have empowered the Board of Directors
to issue debentures.
(9) Status of debentureholder : As debenture-
holder provides loan to the company, he is called as
creditor of a company. The company who borrows
the loan is required to pay interest on it at fixed
rate, at regular interval until the debenture is
redeemed by the company.
2. SOURCES OF CORPORATE FINANCE
to (10) No voting right : As per the provisions
made under Section 71 (2) of the Companies Act,
2013, a company cannot issue debentures carrying
voting right. A debentureholder being a creditor,
does not have any voting right in the general
meetings of the company.
(11) Security : The debentures are usually
secured by a fixed or floating charge on the property
or of the company. If company fails to make payment
of interest or repayment of principal amount of
debenture, the debentureholder can sell off the
property so charged to recover his dues.
(12) Issuers : Both the companies viz. public
company and private company can issue debentures
to the public at large.
(13) Listing : The debentures must be listed on
minimum one recognised stock exchange.
(14) Transferability : The debentureholders
can transfer debentures to any other person
through transfer deed or through instrument of
transfer.
  
57