SKY EDUCATION

Q.6 Justify the following statements.

1. Fixed capital stays in the business almost permanently
Ans:
i. Fixed capital refers to capital invested for acquiring fixed assets.
ii. These assets are not meant for resale.
iii. Fixed capital is capital used for purchasing land and building, furniture, plant, and machinery, etc.
iv. Such cap al is usually required at the time of the establishment of a new company.
v. Existing companies may also need such capital for their expansion and development, replacement of
equipment, etc.
vi. Modern industrial processes require the increased use of heavy automated machinery. Thus, it is rightly said
that fixed capital stays in the business almost permanently.

2. Equity shareholders are real owners and controllers of company

Ans:
i. Equity shareholders participate in the general meetings and management of their company.
ii. They are allowed to vote on all matters discussed at the general meeting.
iii. They elect their representatives to manage the company.
iv. The equity shares do not enjoy preference for dividend. Also, they do not have priority for repayment of capital at
the time of winding up of the company.
v. Equity shareholders own the company and bear ultimate risk associated with the ownership.
vi. If the company is successful, they enjoy great financial rewards while if the company fails, the risk falls mainly on
them. Hence, equity shareholders are real owners and controllers of company.

3. Bond holder is creditor of the company.

Ans:
i. A bond is a debt security which the company borrows for long-term finance and issues certificates under its seal as
acknowledgment.
ii. The owners get interested as a return on their investment which is decided and fixed at the time of issue.
iii. The interest payable to bondholders is a fixed charge and a direct expenditure.
iv. It has to be paid whether the company makes a profit or not.
v. As the bondholders are creditors they do not have the right to attend meetings or participate in management.
vi. Thus, it is rightly said, that the bondholder is a creditor of the company.

4. Equity share capital is risk capital.

Ans:
i. Equity shareholders have a claim over residual proceeds of the company.
ii. In the event of winding up, they are the last to be paid off after setting the claims of creditors and external liabilities.
iii. They have fluctuating returns and risk of fluctuating market value.
iv. Equity capital is permanent capital and not refunded during the lifetime of the company.
v. Not having any assurance as regards dividend, repayment of capital Equity Capital becomes risk capital.
vi. Thus, it is rightly said, that equity capital is risk capital.

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5. The Board of Directors can refuse transfer of shares.
Ans:
i. Board of Directors can refuse transfer of shares as they have authority to refuse registration of transfer of shares.
ii. A notice of refusal of transfer is to be sent by the board to a member within 30 days from the date on which the
instrument of transfer is received by the company.
iii. The board may refuse to register the transfer under following conditions.
iv. When the provisions for transfer of shares as given in the Articles of Association are not fulfilled by the member.
v. When the instrument of transfer is not as per the rules prescribed under the Companies Act.
vi. When the instrument is not accompanied by the share certificate.
vii. When the company has a lien on the shares to be transferred.

6. A company has to create charge on its assets for issuing secured debentures.
Ans:
i. A debenture is a debt instrument, which helps the company to raise long-term loans.
ii. A secured debenture is a debenture against which a charge has been created.
iii. In case, if the company has failed to make redemption of debenture or interest, in that case by the order of NCLT,
the charged asset can be realized by the company and dues can be settled.
iv. Thus, it is rightly said that a company has to create a charge on its asset for issuing secured debenture.

7. All companies cannot accept deposits from public.

Ans:
i. Accepting deposits from the public is an important source of raising funds for a company.
ii. The company needs to follow certain terms and conditions while collecting deposits from the public.
iii. Similarly, on the other side, provisions issued by the Central Government, Companies Rules 2014, and directives
issued by the Reserve Bank of India do not allow companies to accept deposits.
iv. Banking companies, Non-Banking Finance Companies, Housing Finance companies are not allowed to accept
deposits.
v. Thus, it is rightly said, that all companies cannot accept deposits from the public.

8. There is a limit or restriction on the amount that a company can collect as Deposits.
Ans:
i. A private company can accept deposits from its members or directors or relatives of directors not more than 100%
of its aggregate of paid-up share capital and free reserves.
ii. Public company (other than eligible company) cannot accept fresh deposit from members if the amount of such
deposits together with the previous deposits exceeds 25% of the aggregate of the paid-up share capital and free
reserves of the company.
iii. Government company can accept deposits from public not exceeding 35% of the paid-up share capital and free
reserves of the company.
iv. A public company cannot accept fresh deposits from its members if the amount of such deposits together with the
previous deposits exceeds 10% of aggregate of paid-up share capital and free reserves and 25% of aggregate of
paid-up share capital and free reserves in case of deposits from public.
v. Hence, there is a limit or restriction on the amount that a company can collect as Deposits.

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9. Depository system results in reduced time, cost and efforts.
Ans:
i. Under depository system, securities are held in electronic form.
ii. The transfer and settlement of securities are done electronically. iii. The efforts that were required in filling
transfer forms and lodging the documents are eliminated in depository system.
iii. Processing time in transfer of securities is reduced and neither the security is nor the cash is tied / held up for
unnecessarily long time.
iv. Further stamp Duty levied on transfer of physical shares is also not applicable. So the cost involved is also
eliminated.
v. Even at the company end, costs, efforts and time involved in printing and distribution of certificates in cases of new
issues, bonus, transfers, etc. is saved.
vi. Hence, the depository system results in reduced time, cost and efforts.

10. Electronic holding of securities is safer than physical holding.

Ans:
i. Electronic holding of securities means holding the securities in dematerialized form.
ii. Conversion of physical certificates into electronic form is known as 'Dematerialization'.
iii. Holding securities in electronic form eliminates a huge volume of paperwork.
iv. The use of technology facilitates paperless trading which eliminates storage and handling of
certificates. It also helps in reducing costs and efforts.
v. There is no risk of getting lost, damaged, torn, stolen, misplaced during transit, etc.
vi. Delay in transfer and allotment of securities is also avoided.
vii. Thus, it is rightly justified that, electronic holding of securities is safer than physical holding.

11. Dividend is paid out of profits of the company.

Ans:
i. The dividend is the portion of profits of the company paid to its shareholders.
ii. It is payable out of profits of the company.
iii. Dividend can be paid out of capital profits on fulfilling these conditions.
iv. Capital Profits are realized in cash.
v. Articles of Association of the company permit such a distribution.
vi. It remains as profits after revaluation of all assets and liabilities.
vii. Thus, it is rightly justified that dividend is paid out of profits of the company.

12. Interim dividend cannot be paid out of free reserves.

Ans:
i. Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
ii. The interim dividend shall not be declared out of free reserves.
iii. In the event of a loss or inadequacy of profits during a financial year, no interim dividend shall be declared.
iv. The declaration of an interim dividend does not create a debt against a company.
v. The board of directors can cancel an interim dividend after declaring it.
vi. Thus, it is rightly justified that Interim dividends cannot be paid out of reserves.

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13. Approval of members is not needed for Interim Dividend.
Ans:
i. Dividend declared by the Board of Directors between two Annual General Meetings is called Interim Dividend.
ii. It is paid in the middle of the accounting year.
iii. It is declared out of profits of the current account year.
iv. It is declared before the preparation of final accounts of the company.
v. The Board of Directors has the power to declare Interim Dividend.
vi. Articles of Association' of the Company must authorize the Board of Directors to declare an interim dividend.
vii. The Board Meeting has to pass a resolution for declaring the Interim dividend.
viii. Thus, it is rightly said that approval of members is not needed for Interim dividends.

14. Financial markets acts as link between investor and borrower.

Ans:
i. The financial market is the market that brings together borrowers and lenders.
ii. The financial market attracts fund from investors by offering them a variety of schemes and
then collected fund is diverted into the business organizations.
iii. People having surplus cash invested into financial market securities, the financial market
provides finance than to businesses.
iv. Similarly, when the financial market generates income from investments in business, it shares
with the investor.
v. Thus, it is a valuable link between borrower and lender.

15. Capital market is useful for corporate sector.

Ans:
i. Capital Market is the market that provides loans for long-term periods. It is controlled by SEBI.
ii. It uses shares, debenture bonds, Mutual funds.
iii. The corporate sector issues these securities in the market and attracts saving from investors by offering them a
variety of schemes. These savings become capital and get invested in the business.
iv. It is helpful to develop the corporate and industrial sectors.
v. Thus, the capital market is useful for the corporate sector.

16. The Securities and Exchange Board of India (SEBI) is the regulator for the securities market in India.
Ans:
i. The Securities and Exchange Board of India was set up on 12th April 1988.
ii. The main purpose of setting up SEBI was to develop and regulate stock exchanges in India.
iii. The objectives of SEBI are to protect the interest of the investors and regulate the securities market in India.
iv. To bring professionalism in the working of intermediaries in the capital markets, i.e., brokers, mutual funds, stock
exchanges, Demat- depositories, etc. is also a feature of SEBI.
v. The role of SEBI also includes creating a good financial climate, so that companies can raise long-term funds through
the issue of securities - shares and debentures.
vi. The main function of SEBI is to register and regulate the working of stockbrokers, sub-brokers, share transfer agents,
bankers to an issue, trustee of trust deeds, registrars to an issue, merchant bankers, underwriters, and such other
intermediaries who may be associated with securities market.
vii. Thus, it is rightly said that SEBI is the regulator of the securities market in India

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17. Stock exchanges work for the growth of the Indian economy.
Ans:
i. The stock exchange is a specific place where the trading of securities is arranged in an organized method.
ii. The stock exchanges help in the process of rapid economic development by speeding up the process of capital
formation as well as resource mobilization in India.
iii. It helps in raising medium-term capital as well as long-term capital for the development and expansion of the
companies in the Indian economy.
iv. New industries and commercial enterprises can easily acquire capital funds for economic growth.
v. It reflects a healthy financial and investment conducive atmosphere in the economy. It stimulates investment in the
productive sector which accelerates the process of economic development of the nation.
vi. Thus, it is rightly said that the stock exchanges work for the growth of the Indian economy.

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