19/9/2024

Corporate Finance.

Ques No.1. Discuss the meaning, scope,

significance (importance) of Corporate Finance.

Ans. The meaning, scope, and significance of Corporate

Finance is described below:
(I) Meaning of Corporate Finance-
Corporate finance is the area of finance dealing with the
sources of funding and the capital structure of corporations
and the actions that managers take to increase the value of
the firm to the shareholders, as well as the tools and analysis
used to allocate financial resources.
Corporate finance is one of the most important subjects in
the financial domain. It is deep rooted in our daily lives. All of
us work in a big or small corporations. These corporations
raise capital and then deploy this capital for production
purposes. The financial calculations that go behind raising
and successfully deploying capital form the basis of corporate
finance.
(II) Scope of Corporate finance.
Corporate finance is a broad area that includes many
activities that help a company to manage its finances to
achieve its goals. Some of the areas that fall within the scope
of corporate finance include:
(1) Financial planning-
This includes setting financial goals, predicting future
performance, and determining what resources are
needed to achieve those goals.
(2) Investment-
Corporate finance professionals find and evaluate
investment opportunities that can help a business
grow and create value.
(3) Financing-
Corporate finance specialists help a business get the
capital it needs to fund its operations and
investments.
(4) Risk management-
Financial risk management is a key part of corporate
finance.
(5) Financial analysis and decision making-
Corporate finance professionals use financial analysis,
and modelling to make informed financial decisions.
(6) Corporate governance-
Corporate finance professionals help to ensure that a
business follows ethical corporate governance
principles.
(7) Capital budgeting-
This is the process of identifying capital expenditures,
estimating future cash flows, and comparing planned
investments with potential proceeds.
 (8) Mergers and Acquisitions-
Corporate finance professionals evaluate potential
targets, negotiate deals, and assess financial implications.

(III) Importance /Significance of Corporate Finance:

The importance of corporate finance can be classified as
follows-
(1) Decision making.
There are several decisions that have to be done on the
basis of available capital and limited resources. If an
organisation has to start a new project, then it has to
consider whether it would be financially viable, and if it
would yield profits. Thus, while investing in the new
project, a company has to consider several things like
finance, time taken for completion of this new project.
(2) Research and development--
To survive in the market, company makes survey,
research and develop new products to appeal the
customers. To upgrade its product, a company
employs the surveyors and prepare questionnaire
for consumers to do market analysis.

(3) Fulfilling long term and short-term goals—

Every organisation has several long -term goals in
order to survive in the market. The short -term
goals may include like paying of salaries to the
employee, managing the short term assets,
 acquiring corporate finances like bank drafts,
purchase of raw materials for production, trade
credit from suppliers etc. some long term goals
would include acquiring bank loans and paying
them off, increasing customer base for the
company etc.

(4) Depreciation of assets.

A provision is also made for the depreciation of
assets so that in future the assets can be replaced
by new one. In fast changing time if it is not done,
the company might end up losing business because
of non-availability of finance.

(5) Minimizing the cost of production-

The cost of production is required to be kept as low.
It helps the company to prevent spending lot of
finance and to bring it within the limit. With the
rising cost of raw materials and labour, the
management has to come up with innovative
measures to minimize the cost production.
(6) Raising capital-
When an organisation has to invest in a new
venture, it is important that it has to raise capital.
This can be done by selling bonds and debentures,
stocks of the company, taking loans from the banks
etc. All this can be done only managing corporate
finances in proper manner.
(7) Optimum utilisation of Resources-
 The resources available to organisation may be
limited, but if they are used properly and efficiently,
they can yield good results.
It means the available working capital, working
strength and available raw material are to be
utilised fully in proper way without loss of time.
(8) Efficient functioning-
Efficient functioning means every work is to be
done systematically. The salaries to employees
would be paid on time. Repayment of loans would
be cleared on due dates. Purchase of raw material
can be done when required. The sale and
promoting for finished goods and new products
should be on scheduled periods.
(9) Expansion and diversification-
To expand business, the company has to consider
the availability of capital, risk involved, purchase of
new equipment etc. and new area where raw
materials and labour could be made available and
procured at the cheap rates. The demand of the
new products in the area is properly surveyed by
the experts which would be beneficial to the
organisation.
(10) Meeting Contingencies-
To meet with the contingencies and risks involved,
the insurance policies are needed to be taken to
cover the losses. A separate provision is also made
to meet such contingencies.
 Role of Corporate Finance.
Corporate Finance plays a very important role in
the overall functioning, growth and development of
a business. In India, finance advisors help
entrepreneurs and businesses by providing them
with vital information through market research and
analysis.

Ques No.2. What are the objectives of

Corporation finance profit
maximization and wealth maximization?
Ans.
Objectives of Financial Management.
The firm’s investment and financing decisions are
unavoidable and continuous. In order to make them
rational, the firm must have a goal. Two financial
objectives predominate amongst many objectives.
They are:
(1) Profit Maximization;
(2) Shareholder’s Wealth Maximization (SWM).
*****
(1) The profit maximization refers to the rupee
income while wealth maximization refers to
the maximization of the market value of the
firm’s shares.
Although, profit maximization has been
traditionally considered as the main objective of
the firm, it has faced criticism. Wealth maximization
is regarded as operationally and managerially the
better objective. Both profit maximization and
wealth maximization are considered to be primary
objectives of the financial management.

Arguments in favour of profit maximization

objectives of financial management.
(i) When profit earning is the aim of business,
then profit maximization should be obvious
objective.
(ii) Profit is the barometer for measuring
efficiency and economic prosperity of a
business.
(iii) In adverse situation such as recession,
depression etc. a business can survive only
when if it has past reserves to rely upon.
Therefore, every business should try to earn
more and more profit when situation is
favourable.
(iv) The profits are the main source of finance
for growth of a business. So, a business
should aim at maximization of profits for
earning its growth and development.
(v) Profitability is essential for fulfilling social
goals also. A firm by pursuing the objective
of profit maximization also maximises socio-
economic welfare.

(2) Wealth maximization as primary objective of

financial management.
 The primary objective of financial management is
wealth maximization. The concept of wealth in the context of
wealth maximization objective refers to the shareholder’s
wealth as reflected by the price of their shares in the share
market. Therefore, wealth maximization means maximization
of the market price of the equity shares of the company.
However, this maximization of the price of company’s equity
shares should be in the long run by making efficient -
decisions which are valued positively by the investors at large
and not by manipulating the share prices in the short run.
The long run implies a period which is long enough to reflect
the normal market price of the shares irrespective of short-
term fluctuations.
The long run price of an equity share is a function of two
basic factors:
(I) The likely rate of earnings or earnings as per share
(EPS) of the company; and
(II) The capitalization rate reflecting the liking of the
investors of a company.
The financial manager must identify those avenues of
investment, mode of financing, ways of handling various
components of working capital which ultimately will lead
to an increase in the price of equity share. If the
shareholders are gaining, it implies that all other claimants
are also gaining because the equity shareholders are paid
only after the claims of all other claimants (such as
creditors, employees, and lenders) have been duly paid.
Arguments are advanced in favour of wealth maximization as
the goal of financial management:
a) It serves the interests of owners, (shareholders) as well
as other stakeholders in the firm i.e. suppliers of loaned-
Capital, employees, creditors and society.
b) It is consistent with the objective of owner’s economic
welfare.
c) The objective of wealth maximization implies long-run
survival and growth of the firm.
d) It takes into consideration the risk factor and the time
value of money as the current present value of any
particular course of action is measured.
e) The effect of dividend policy on market price of the
shares is also considered as the decisions are taken to
increase the market value of the shares.
f) The goal of wealth maximization leads towards
maximizing stockholder’s utility or value maximization of
equity shareholders through increase in stock price per
share.
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Ques No.3. Evaluate the provisions of prospective
(Prospectus) information, issue and
allotment in relation to equity finance. [IMP]

Ans. “Prospectus”- Information Disclosure.

A prospectus is a disclosure document that

describes a financial security for potential buyers. It
commonly provides investors with material
information about mutual funds, stocks, bonds and
other investments, such as a description of the
company’s business, financial statements,
biographies of officers and directors, detailed
information about their compensation, any
litigation that is taking place, a list of material
properties and any other information.

There are two types of prospectuses for stocks

and bonds: Preliminary and Final.
(i) The preliminary prospectus is the first
offering document provided by a securities
issuer and includes most of the details of
business and transaction in question. In the
first front cover some lettering (words) is
printed in red, which is used by nickname as
“red herring” for this document.
(ii) The final prospectus is printed after the deal
has been made effective and can be offered
for sale, and supersedes the preliminary
prospectus. It contains finalised background
information including such details as the
exact number of shares/ certificates issued
and precise offering price. A final prospectus
contains details on its objectives,
investment strategies, risk, performance,
distribution policy, fees and expenses, and
fund management.
(A) Information to be stated in the prospectus:
(Contents of prospectus, S.26 of the Company
Act).
(1) Regarding name and addresses etc.
(a) The name, address and contact details of
the corporate office of the issuer
company, merchant bankers, co-
managers to issue, registrar to the issue,
stock broker to issue and any other
names and addresses as specified in the
Securities and Exchange Board in its
regulations.
(b) A declaration is to be made that the
allotments letters shall be issued or
application money shall be refunded
within 15 days from the closure of the
issue, failing which interest at the rate of
15% would be paid annually to the
applicants.
(c) A statement given by the Board that all
monies received out of the issue shall be
transferred in a separate account in
scheduled bank.
(d) The details of monies received in previous
issue by way of public offer utilised and
un-utilised shall be disclosed in the
balance sheet.
 (e) The names, addresses, telephone
numbers, fax numbers and email
addresses of the underwriters and
amount underwritten by them shall be
disclosed.
(f) The consent of trustee, solicitors or
advocates, merchant bankers to the issue,
registrar to the issue, lenders and experts
shall be obtained.
[underwriter means a person or company
that evaluates and assess the risk
associated with insuring person or asset
and then offer to assume those risks in
exchange for fee.]
(2) Capital structure of the Company:
It shall be presented in the following manner
—
(i) The authorised, issued, subscribed and
paid- up capital;
(ii) Size of present issue;
(iii) The paid- up capital;
(iv) The share premium account before and
after issue;
(v) Details of existing share capital of the
issuer company;
(3) The prospectus to be issued shall contain the
following particulars, namely-
(i) The object of issue;
 (ii) The purpose for which there is
requirements of funds;
(iii) The summary of the project appraisal
report (if any);
(4) The details of litigation or legal action pending
or taken by the Govt.
(5) The details of directors their appointments,
remunerations etc.
(a) The name, designation, director
identification number, age, period of
tenure and address and experience.
(b) Remuneration payable to the director by
the issuer company etc.
(6) The sources of promoter’s contribution, if any-
(i) The total shareholding of the
promoters clearly stating the name of
the promoter, nature of issue, date of
allotments, number of shares, face
value, issues price, sources of funds
contributed, date when the shares
were made fully paid.
(7) Name of auditors their qualifications, report of
last 5 financial years immediately preceding
year.
(8) Details of any inquiry, inspections or
investigations initiated or conducted under the
company Act.

(B) Allotment of Shares:

 Meaning-
Allotment of shares means the act of appropriation of issue
of proceeds by the Board of Directors of the company. An
allotment is the acceptance of an offer to take shares by an
applicant, and such acceptance must be communicated to
the allottees.
General principles regarding allotment of shares:
(i) The allotment should be made by the Board of
Directors of the Company.
(ii) The allotment of shares must be made within a
reasonable time.
(iii) The allotment should be absolute and
unconditional to all the allottees.
(iv) The allotment must be communicated to all the
allottees.
(v) The allotment should be not be in contravention of
any law.
Case law Judgements:
 Allotment of shares made by an irregularly constituted
Board shall be treated as invalid.
 It is necessary that the Board should be duly constituted
and should pass a valid resolution for allotment of
shares at a valid Board meeting.
 An allotment by a Board irregularly constituted may be
subsequently ratified by a regular board.
 The interval of about 6 months between application and
allotment was held to be unreasonable.
(C ) Allotment of securities by the company (S.39 of the
Company Act):
(1) No allotment of any securities of a company offered to
the public for subscription shall be made unless the
amount is stated in the prospectus.
(2) The amount payable on application on every security
shall not be less than 5 % of the nominal amount of the
security or such other amount as specified by the SEBI.
(3) If minimum amount as stated has not been subscribed
and sum payable not received within a period of 30
days of date of issue or date specified by SEBI, the
amount shall be returned to the applicants.
(4) Whenever, the company having share capital makes
any allotment of securities, it shall file with the
Registrar of companies, a return of allotment in such a
manner as prescribed.
(5) In case of default, the company and its officers shall be
liable to a penalty of Rs.1000/- for each day during such
default continues or Rs. One lakh whichever is less.

Ques No 3. Define Share.

Discuss the provisions related to issue and
allotment of shares.

Ans. (A) Define Share.

 A share signifies a unit of equity ownership in a company.
Shareholders receive a portion of the company’s profit as
dividends and bear any losses the company incurs/ sustains.
Essentially, owing shares means holding a percentage of the
company in proportion to the shares purchased, which can be
easily managed via a share market app.
What are Shares?
Shares are essentially units of the ownership in a company.
When individuals or institutional investors buy shares, they
acquire a portion of a company, and become shareholders.
The total number of shares, a company issues, is known as its
“Capital Stock” or “Equity”. Shareholders have right to vote
on certain company matters, such as the election of the
Board of Directors and major corporate decisions.
Additionally, they may receive dividends -payments from the
company’s profits- and enjoy the potential for capital
appreciation as the company grows.
(B ) Issue of Shares.
The issue of shares is the procedure in which enterprises
allocate new shares to the shareholders. Shareholders can
be either corporates or individuals. The enterprises follow the
rules stipulated by the Companies Act, 2013 while calculating
the shares. The Issue of Prospectus, Receiving Applications,
Allocation of Shares are THREE key fundamental steps of the
process of issuing the shares.
A noticeable feature of the company’s is that the amount
on its shares can be progressively collected in simple
instalments that are spread over a time frame relying upon its
enhancing financial obligation.
 The 1st instalment is collected with the application, and
is hence, called as ‘Application money;’

 The 2nd instalment is on allocation (termed as allocation

or ‘Allotment money’; and the
 The 3rd instalment of money is known as 1st call, 2nd call
and so one. The word ‘final’ is suffixed to the final
allotment. The procedure, in no way, prevents an
enterprise from calling the entire amount on shares
during the period of application.
The significant steps in the process of issue of shares are
given below:
 Issue of Prospectus:
The enterprise initially issues the prospectus to the
public generally. The prospectus is an appeal to the
public that a new enterprise has come into the presence
and it would require funds for operating the trading
concern. It comprises of complete data regarding the
enterprise and the way in which the money is to be
collected from the prospective investors.

 Receipt of Application:
When the prospectus is circulated to the public, the
prospective investors contemplating to sign up and
subscribe the share capital of the enterprise would
make an application along with the application money
 and deposit it with a scheduled bank as mentioned in
the prospectus.

 Allocation of Shares:
Once the minimum subscription has been received, the
shares can be allocated. Normally, there is always
oversubscription of the shares, so the allocation is done
on pro-rata basis. Letters of allotment are sent out to
those people (applicants) who have been allocated their
part of shares, this results in an authentic contract
between the enterprise and the claimant, who will now
be a part-owner of the enterprise.

(C ) Provisions regarding allotment of shares.

In case of public company is issuing shares through public
allotment, then it must issue a ‘prospectus’ before registering
it with the Registrar of Companies.
After prospectus is released, the interested public then apply
for the shares. The company can set its terms of money, such
as asking for full money at the time application, or can later
ask it in instalments. However, the application money should
be more than 5% of the nominal value in order to proceed
with the application process.
The minimum subscription that is there in the prospectus
should be received if the company wants to move further
with the application.
All the money should be deposited in a separate bank which
should not be used for any other purpose other than that for
shares.
If the company has not received 90% of the issued amount
within 60 days, then the company has to refund all of the
money back to the applicants. There is 18 days relaxing
period. If company delays it for 78 days, then it has to pay an
interest of 6% per annum.
As far as the calls are concerned, no calls should be made
beyond 25% of the total value. There should be a minimum
gap of ONE month between two calls.
Calls should be made in the same manner for everyone, and
no preferential treatment should be given to any shareholder
of the same class.
Certain principles have to be observed during allotment
of Shares.
 The allotment of shares must be communicated within
stipulated period.
 Allotment of shares must be done with the
requirements such as minimum subscription, board
resolution etc.
 As per the law, the reasonable time is 6 months which
means there should not be more than a duration of 6
months between application and allotment of shares.
 The allotment of shares should not contain any
condition precedent to it. It should be absolute and
unconditional.
  The bank account used for application money should
not be used for any other purpose.

Ques. No.4. Discuss the various rights available to the

shareholders through which law gives
protection. [Imp.]

Ans.
A shareholder, commonly referred to as stockholder, in
any person, company, or institution that owns at least
one share of the company’s stock. Because shareholders
are a company’s owners, they reap the benefits of the
company’s successes in the form of increased stock
valuation. Shareholders play an important role in the
framing and profits of the company. They are the main
stakeholders in the company.

Shareholder’s Rights.
There are various rights available to a shareholder.
Different types of rights have been discussed below:

(1) Appointment of directors-

Shareholders play an important role in the
appointment of directors. An ordinary resolution is
required to be passed by the shareholders for the
appointment. Apart from this, shareholders can
also appoint various types of directors.
 They are:
 An additional director who will hold office till next
general body meeting;
 An alternative director for 3 months;
 A nominee director;
 A Director appointed for casual vacancy in the office of
any director appointed in a general body meeting.
Apart from this, shareholders also can challenge any
resolution passed for the appointment of a director in the
general meeting.
(2) Legal action against directors:
Shareholders also initiate legal action against director by the
rules laid down in the Companies Act,2013, if any director
acts:
(i) Against the affairs of the company; or
(ii) Commits frauds;
(iii) Transfer of any assets at under-valued rates or acts
against the law or the Constitution;
(iv) When there is a diversion of funds; and
(v) Any act done in mala fide manner.

(3) Appointments of Company Auditors:

Shareholders have a right to appoint auditors. Under
Companies Act,2013, the first auditor is appointed by the
Board of Directors. Further, the shareholders at annual
general body meeting at the recommendation of directors,
appoint the auditors for 5 years by passing a resolution.
 (4) Voting Rights:
Shareholders also have the right to attend at the annual
general body meeting held at the head office or any other
place. At the meeting, there are various mandatory agendas
which are to be discussed.
When a resolution is brought by the members of a company,
then according to the Companies Act,2013, it can be passed
by means of voting by the shareholders.
(5) Right to call for general meeting:
Shareholders have right to call for a general meeting. They
have a right to direct the director of the company to call an
extra-ordinary general meeting. They can approach the
Company Law Board for conducting the general body
meeting, if it is not conducted according to the statutory
requirements.
(6) Right to inspect register and books:
As the shareholders are the main stakeholders in the
company, they have the right to inspect the account register
and also the books of the firm and can ask question if they
feel so.
(7) Right to get copies of financial statements:
Shareholders have right to get the copies of the financial-
statements. It is the duty of the company to send the
financial statements of the company to all its shareholders.
(8) Winding up of the Company:
Before the company is wound up, the company has to inform
all the shareholders about the same and also all the credit
has to be given to all the shareholders.

Other Shareholder’s rights:

 When a company is converted into other company, then
it requires the prior approval of shareholders.
 Right to approach the court in case of insolvency.
 Attend and vote in general meetings.
 Inspect statutory registers and minutes book.

Ques No.5. What is a Debenture?

How many kinds are the debentures?
What are the features of debentures?
What are the remedies/rights of debenture
holders?

Ans. (I) Meaning of debentures.

There is no exact definition of debentures under the
law. A debenture is like a certificate of loan or a loan
bond evidencing the fact that the company is liable to
pay a specified amount with interest, although the
money raised by the debentures becomes a part of the
company’s capital structure, but it does not become the
share capital.
As per S.2(30) of the Companies Act,2013, debenture
includes Debenture stock, bond and any other securities
of a company whether constituting a charge on the
assets of the company or not.

(II) Kinds of debentures.

(i) Non-convertible debenture.
(ii) Partly convertible debenture.
(iii) Fully convertible debenture.
(iv) Optional convertible debenture.
(v) Secured debenture.
(vi) Unsecured debenture.
(vii) Redeemable debenture.
(viii) Irredeemable debenture.
(ix) Registered debt.
(x) Bearer debt.

(III) Features of Debenture.

A debenture has certain specified characteristics which

are as follows:
(1) Debentures are generally issued in series but a
single debenture may be issued in case of a sole-
lender of the company.
(2) Debenture is usually in the form of a certificate
issued under the seal of the company.
(3) Debenture is an acknowledgement of
indebtedness. It usually provides for the payment
of a specified sum at a specified date.
(4) Each debenture is numbered.
(5) Debenture generally creates a charge on the
undertaking of the company or some of its assets.
This is, however, not an essential characteristic and
a debenture creating no charge is also perfectly
legal.
(6) The holder of debentures is the creditor of the
company and not its member (shareholder).
(7) A debenture carries no voting right at any meeting
of the company.

(IV) Remedies/Rights of Debenture holder.

(i) It is duty of debenture trustee to communicate

debenture- holders default, if occurs, with
respect to redemption of debentures or
payment of interest and any other action taken
by the trustee himself. [Rule-18(11) of the
Companies Act,2013.]
(ii) The debenture holder is entitled to interest and
redemption of debentures in accordance with
the conditions of their issue. [S.71(8]
(iii) There is a provision if the company makes a
default either in payment of interest due or in
redemption of debentures of the date of
maturity of debentures, the tribunal may, on
application wither (sad or unhappy) of
debenture trustee or of any or all of the
debentures and, after hearing the parties
involved, direct, through order, the company to
 redeem the debenture with the payment of
principal amount as well as the interest overdue.
[S.71(10)]

(iv) Further, if the companies make a default in

complying the order of tribunal, the tribunal shall
punish the officers in default with an imprisonment
which may extend to 3 years or with the fine shall
minimum be of Rs.2 lakh and may extend to Rs.5 lakh or
both. This section is applicable to both secured or
unsecured debenture holder. [S.71(11)]
(v ) S.164(2)(b) imposes for disqualification of the directors
of the company who has defaulted in redemption of the
debentures on the date of maturity and if such default has
continued for one year or more.

(vi) The Companies Act 2013, provides that any

company who failed to repay any deposit or
payments of interest shall not give any loan or
guarantee or make any acquisition. [S.186(8)]

[Note: Redemption word is used somewhere, it means, it is a

process of repaying debentures (with interest) issued by a
company to its debenture holders.]
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Ques No. 6. What do you mean by Sweat Equity Share

 (Shares without monetary considerations)?
Discuss the legal provisions relating to the
sweat equity share. [Imp]

Ans. (I) Introduction.

Issue of sweat equity shares for a private company used to be
regulated by the S.79 A, and Unlisted Companies (Issue of
sweat Equity Shares) Rules,2003 under Companies Act,1956.
Now the same is regulated by S.54 and Chapter 4 under
Companies Act, 2013.
Sweat Equity shares represent a unique avenue for
companies to reward their employees for their hard work and
dedication. This innovative approach allows employees to
acquire ownership in the company through their
contributions of time, efforts and expertise, rather than solely
through monetary investment.
(II) Sweaty Equity Shares:
Sweaty equity shares mean such equity shares as are issued
by a company to its directors or employees at a discount or
for consideration, other than cash, for providing their know-
how or making available rights in the nature of intellectual
property rights or value additions by whatever name called.
(III) Issue of Sweat equity shares.
A listed company whose equity shares are listed on a
recognised stock exchange shall issue sweat equity shares to
its employees in accordance with S.54 of the Companies Act,
2013 and SEBI (Share Based Employees Benefits and Equity)
Regulations, 2021.
However, a company which is not a listed company, is not
required to comply with the Securities and Exchange Board of
India, Regulations on Sweat equity and abstain to issue sweat
equity shares, unless a special resolution authorising such
issue is passed by the company in general Meeting.
[Note: The amount of sweat equity shares issued shall be
treated as a part of managerial remunerations, if certain
conditions are fulfilled.]
(IV) Eligibility for Sweat Equity-
A permanent employee of the company, who has been
working in India or outside India, for at least last one year,
shall be eligible for sweat equity.
(V) Mandatory Requirements:
1) An approval is obtained from the
shareholders/members by passing a special
resolution in a duly convened general Meeting.
2) An undertaking of the valuation of the know-how
or intellectual property rights or value addition is
obtained by a merchant banker.
3) A certificate obtained from the secretarial audit
and placed to the effect that the issue of sweat
equity shares is in accordance with the provisions
of the applicable laws and resolution passed for
the same.
4) Sweaty equity shares issued to directors or
employees shall be locked in or will be non-
transferable for a period of 6 months from the date
of trading approval.

(VI) Time for issuing Sweat Equity Shares-

Allotment of sweat equity shares shall be made

within 12 months from the date of passing special
resolution. There should be at least 1 year between
commencement of business and issue of such
shares.
(VII) Limit of shares to be issued-
In a year, sweat shares shall not exceed 15% of the
existing paid- up equity share capital or shares
having value of Rs. 5 crores, whichever is higher.
However, it should not exceed 25% of the paid- up
equity capital of the Company at any time.

(VIII) Register of sweat equity shares.

A register of sweat equity shares is maintained in
the Registered Office of the Company. The entries
shall be authenticated by the Company Secretary
or any person authorised by the Board.

(IX) Disclosing the outcome of the meeting-

The listed entity shall disclose to the Stock
Exchange where its shares are listed about the
 outcome of the Board Meeting within 2 working
days on its website.

(X) Submission of a statement pertaining to the issue

of sweat equity shares to the recognised Stock
Exchange-
A statement containing the information of sweat
equity shares showing the details is furnished:
(i) Number of sweat equity shares;
(ii) Price at which sweat equity shares issued;
(iii) Total amount received towards sweat equity
shares;
(iv) Details of persons to whom the sweat equity shares
issued.

(XI) Issuance of share certificates:

(a) The company shall issue the share certificate within 2
months from the date of allotment of shares.
(b) Every share certificate of the share shall be attracting
stamp duty as per the provisions of the Indian Stamp
duty Act of the respective state where the issuer is
located.

Ques No.7. Discuss in detail as to how “Buyback of

Shares” are an important mechanism for
Conservation of Corporate Finance.
Ans.
 (I) The power of company to purchase its own
securities is given under S.68 of the Companies Act.

Buy Back Shares.

“Buyback share means the purchase of its own shares
or other specified securities by a company.”

Buyback is a procedure where a company buys its

own shares or other securities from the holders
thereof for any purpose.

(II) Objectives of Buyback:

Shares may be bought back by the company on
account of one or more of the following reasons—
(1) To increase promoters holding;
(2) To increase of earning per share;
(3) Rationalise the capital structure by writing off
capital not represented by available assets;
(4) Support share value;
(5) To thwart (obstruct or prevent) takeover bid;
(6) To pay surplus cash not required by business.
In fact, the best strategy to maintain the share price in *a
bear run is to buy back the shares from the open market at a
premium over the prevailing market price.
[ ‘A bear run’ means a period of time when a financial
market’s prices are consistently declining].

(III) Resources of Buyback:

A company can purchase its own shares from-
(a) Free reserve:
Where a company purchases its own shares out of
free reserves, then a sum equal to the nominal
value of the share so purchased shall be transferred
to the capital redemption reserve and details of
such transfer shall be disclosed in the balance
sheet; or
(b) Securities premium account; or
(c) Proceeds of any shares or other specified securities.
However, no buyback share of any kind of shares or other
specified securities can be made out of the proceeds of an
earlier issue of the same kind of shares or same kind of other
specified securities. Thus, the company must have at the time
of buyback, sufficient balance in any one or more of these
accounts to accommodate the total value of the buyback.
 “Specified securities” as referred to in the explanation
to the section includes employees stock option or other
securities as may be notified by the Central Govt. from
time to time.
 “Free reserves” as referred to in the explanation
includes securities premium account.

(IV) Conditions of buyback:

S. 68 sub section (2)- No company shall purchase its own
shares or other securities;
(1) unless—
(a) The buyback is authorised by its articles; The primary
requirement is that the Articles of the Association of the
company should authorise buyback.
If no such provision is there, it would be necessary to alter
the Articles of Association to authorise buyback.
(b) A special resolution has been passed at a general
meeting of the company authorising the buyback;
Provided that the buyback is 10% or less of the total paid-up
equity capital and free reserve of the company; and means of
such resolution passed in the meeting, the board is
authorised for buyback.
(c) The notice of the meeting at which the resolution is
passed shall accompany by an explanation stating that:
(i) A full and complete disclosure of all material facts;
(ii) Necessity of such buyback;
(iii) The class of shares or securities intended to be
purchased under the buyback;
(iv) The amount to be invested under buyback; and
(v) The time limit for completion of the buyback.
(d) The buyback is 25% or less of the aggregate of paid up
capital and free reserve of the company.
(e) All the shares or other specified securities for buyback
are fully paid up.
(f) The buyback of the shares or other specified securities
listed on any recognised stock exchange is in accordance with
the regulations made by the SEBI.
(g) Every buyback shall be completed within a period of ONE
YEAR from the passing of the special resolution.

(V) Sources from where the shares will be

purchased:
The securities can be bought back from-
(1) Existing security holders on proportionate basis;
Buy back of shares may be made by a tender
through a letter of offer from the holders of shares
of the company; or
(2) The open market;
(3) Book building process;
(4) Stock exchange; or
(5) Purchasing the securities issued to employees of
the company pursuant to a scheme of stock option
or sweat equity.

(VI) Filing of return with the Regulator.

A company shall after the completion of the buyback under
this Section 68 of the companies Act, file with the Registrar
and the Security Exchange Board (SEBI), a return containing
such particulars relating to the buyback within 30 days of
such completion, as may be prescribed.

Ques No.8. What are the provisions relating to

Managerial Remuneration and payment of
 Commission and Brokerage?
Elaborate with reference to conservation of corporate
Finance.

Ans. Introduction.
Managerial remuneration is compensation for the services
provided to a company in a managerial capacity. This can
include cash payment, along with other benefits like stock
options, health insurance, and bonuses. Managers are
typically paid more than the people they supervise, although
they tend to make less than the executives at the head of the
company.
People in managerial usually sign employment contracts with
the terms of their appointment clearly outlined, and these
contracts can include a discussion of remuneration. A salary
or hourly wage can be a part of the compensation package
along with any other benefits. Performance linked benefits
are common for managers, to encourage them to up
efficiency and production. People may get extra payments for
meeting production targets.
As the managers rise in the ranks and acquire seniority, their
pay can increase. Publicly traded companies and Govt.
agencies may be subject to caps on managerial remuneration,
and these stipulations ensure that employees do not receive
unreasonable compensation for working in management
positions. They can be applied by legislation or through
shareholder votes, in the case of a public company.
 Further, subject to the provisions of S.197 of Companies
Act,2013 and V, a managing director, whole time directors or
managers shall be appointed, and terms and conditions of
such appointments and remunerations payable be approved
by the Board of Directors at a meeting which shall be subject
to the approval by a resolution at the next general meeting of
the company or by the Central Govt. In case such
appointment is at variance to the conditions as specified in
the schedule-V.
Overall maximum managerial remuneration and
managerial remuneration in case of absence or inadequacy of
profit: (S.197 of the Companies Act,2013):
(1) The total managerial remuneration payable by a
public company to the directors, including managing
director and whole-time director, and its managers in
respect of any Financial Year shall not exceed 11% of
the net profit of that company.
Provided that the company in General Meeting
may, with the approval of Central Govt., authorise the
payment of remuneration exceeding 11% of the net
profits of the company.
Provided further that, except with the approval of
the company in General Meeting—
(i) The remuneration payable to any one
managing director, or whole-time director or
manager shall not exceed 5% of net profits of
the company.
 If there is more than one such director, the
remuneration shall not exceed 10% of net
profits to all such directors and managers
taken all together.
(ii) The remuneration payable to directors who
neither managing directors nor whole-time
director or manager shall not exceed--
(a) 1% of the net profits of the company, if
there is a managing or whole-time
director or manager;
(b) 3% of net profits in any other case.
(2) The aforesaid percentage shall be exclusive of any
other fees payable to the directors.
(3) If any financial year, a company has no profits or its
profits are inadequate, the company shall not pay to
its directors, including managing or whole- time
director by way of remuneration any sum exclusive of
any fees payable to the directors.
(4) The remuneration payable to directors shall be
determined in accordance with the provisions of the
articles passed by the company in General Meeting.
Provided that any remuneration for services
rendered by any such director in other capacity shall
not be so included if—
(a) The services rendered are of a professional
nature; and
(b) In the opinion of the Nomination and
Recommendation Committee, the director
 possesses the requisite qualification for the
practice of the profession.
(5) A director may receive remuneration by way of fee for
attending meetings of the board. The amount shall
not exceed as prescribed.
(6) A director or manager may be paid remuneration
either by way of a monthly payment or at specified
percentage of net profits of the company, partly by
one or partly by other way.
(7) The net profits shall be computed as prescribed under
S.198 of the Companies Act.
(8) If any director receives directly or indirectly, by way of
remuneration any such sum in excess of limit, he shall
refund the amount to the company.
(9) The company shall not waive the recovery of sum
refundable to it, unless permitted by the Central Govt.
(10) Every listed company shall disclose in the Board’s
report, the remuneration paid to each director.
(11) Where any insurance is taken by the company on
behalf of the director, manager, company secretary
etc., the premium paid is treated as remuneration
paid.
In case the said officials are proved to be guilty, the
premiums paid on such insurances shall be treated as
a part of the remuneration.
(12) Where the company has inadequate or no profits, the
company or Central Govt. may fix the remuneration
within the limit prescribed in this Act, keeping in view
the conditions as stipulated below:
 (a) The financial position of the company;
(b) The remuneration or commission drawn by the
individual;
(c) Remuneration by the individual from other
company;
(d) Professional qualifications and experience of the
individual;
(e) Such other matters as may be prescribed.

Brokerage Fee.
A brokerage fee is a fee or commission, a broker charges
to execute transactions or provide specialised services on
behalf of the clients. Broker-charge or brokerage fees are
charged by broker or agent for providing services such as
purchases, sales, consultations, negotiations, and delivery.
There are many instances of brokerage fees charged in
various industries such as financial services, insurance, real
estate, and delivery services, among others.
 A broker or agent charges the fee to execute
transactions or provide specialised services.
 Brokerage fees are based on a percentage of the
transaction, as a flat fee, or as a hybrid of the two, and
vary according to the industry and type of broker.
 There are three main types of brokers:
(a) Online brokers-
A new form of digital investment that interacts
with the customer on the internet.
(b) Discount brokers-
 A discount broker is a stock- broker who acts for
buy and sale orders at the reduced commission
rate.
(c) Full-service brokers-
A full -service brokerage provides a wide range of
professional services to customers, such as tax tips,
investment advisory, equity researching etc.
There are different types of Brokerage specialisations:
(i) Stock brokerage-
They buy and sells assets in the interest of the
client on the most favourable terms.
(ii) Credit brokerage-
They are the specialists with necessary
information and professional contacts with
credit institution.
(iii) Leasing Brokerage-
A leasing brokerage’s main clients include
legal entities and commercial organisations.
(iv) Forex brokerage-
A forex broker is an intermediary who
provides access to the forex currency market.
(v) Real estate brokerage-
In real estate, brokerage charges are between
1% to 2% from the buyer and seller to provide
mortgage loan and other services.
(vi) Insurance brokerage-
In Insurance Industry, such brokerage charges
are claimed to find the best insurance policies
 to meet customer’s need. Sometimes, the
brokerage charges are collected from the
insurer and individual buying the insurance
policy.
-------------------------------------------------------------
-----------------
Ques No.9. “Dividends are receipts of profit of trading
company by the members in proportion to its
respective shares.”
Critically evaluate the provisions of law which control the
payment of dividends for *conservation of Corporate
Finance. [IMP]
[“Conservation” is the act of preserving or protecting
something, especially through management.]

Ans. (I) Introduction.

Dividend is the part of net profit which is payable as return
on equity and preference shares. The payment of dividend is
not obligatory on the part of the company, but once it is
declared by the shareholders in Annual General body
meeting, it is like a debt to the company.
(II) Meaning of Dividend.
Dividend means a portion of net profit payable to the
members of the company. In other words, dividend is a
return on the paid-up share capital and payable to the
members of a company.
S.2 (35) of the Companies Act,2013, dividend includes any
interim dividend.
The dividend is the liability to the company after its
declaration by the shareholders of the company. On other
side, the shareholders have the ‘Right to Claim’ dividend only
after a dividend is declared by the company in General Body
Meeting.
(III) Types of Dividends.
(1) Final dividend:
Dividend is said to be a final if it is declared in the annual
general body meeting of the company. Final dividend once
declared comes a debt enforceable against the company.
Final dividend can be declared if it is recommended by the
Board of Directors of the company.
(2) Interim dividend:
Dividend is said to be an interim dividend if it is
declared by the Board of Directors between two
annual general body meetings of the company.

(III) Payment of dividend.

(1) Dividend should be paid within 30 days of
declaration.
(2) The amount of dividend after deducting tax at
source should be deposited in separate bank
account within 5 days of its declaration.
(3) Dividend should be paid in cash, not in kinds.
 (4) Dividend payable in cash, by cheque or
warrant or demand draft may be deposited in
the bank account of the member in terms of a
mandate given by the member.
(5) Initial validity of the dividend warrant should
for 3 months.
(6) A duplicate warrant should be issued only after
the expiry of validity of 3 months after taking a
declaration/an undertaking from the
shareholders, in case, an original instrument is
not tendered to the company.
(7) Dividend warrant must accompany of a
statement showing the details of tax
deduction.
(8) Dividend warrants are returned by the bank
after making payment. The register of divided
should be preserved for a period of 8 years.

(IV) Declaration of Dividend.

1) Payment of dividend to be authorised by the Article:

As per S.51 of the Companies Act,2013, a company may,

if so, authorised by its Article, pay dividend in proportion
to the amount payable on each share. If not, the Articles
have to be amended accordingly.

2) Sources for payment of dividend:

 No dividend shall be declared or paid for any financial
year except current and previous year profits or money
provided by the Central Govt. or State Govt.
(A) Current and Previous year profits:

(i) Out of the current year’s profits of the company

as arrived at after providing depreciation; or
(ii) Out of the previous year’s profits of the company
arrived at after providing for depreciation and
remaining undistributed; or
(iii) Out of both.
Provided that in computing profits, any amount
representing unrealised gain or liability at fair value shall
be excluded.
(B) Money provided by the Central Govt. or
State Govt.
If money is provided by the Central or State Govt. in
pursuance of the guarantee given by the Govt., the dividend
shall be payable.
(3) Transfer of profit to Reserve:
A company may transfer some of its profit’s percentage to the
reserve of the company before the declaration of any
dividend in any financial year. This shall be done after
providing the depreciation of assets of the company.
(4) Dividend to be declared only from free reserve:
No dividend shall be declared/paid by a company from its
reserve other than Free Reserve.
(5) Set off of Losses:
Before declaring dividend out of profit for the year, any loss
for the previous years or amount of depreciation for the
previous years whichever is less, should be set off against
such profit.
In case a company has incurred/sustained loss in any previous
financial years, the amount of loss shall be set off against the
profit of the company.
(6) Interim dividend:
Interim dividend, if declared is payable out of the estimated
profit for the period for which interim dividend is to be
declared after taking into consideration of depreciation for
full year or arrears of previous years.
(7) Dividend should be declared only on the
recommendation of the Board in the annual
general body meeting of the shareholders. The
board cannot declare its own decision without any
annual general meeting is held.

(8) Dividend once declared becomes a debt and

should not be revoked.
(9) A company is prohibited to issue Bonus shares in
lieu of dividend.
(10) Dividend in case of absence or inadequacy of
profits:
 In case of inadequacy or absence of profits in any
financial year, any company may declare the
dividend out of the previous year’s accumulated
profits.
Provided that -
(a) the rate of dividend declared shall not exceed the
average of the rates at which dividend was declared
by it in the 3 years immediately preceding that year.

(b) the total amount to be drawn from such accumulated

profits shall not exceed 1/10 of the sum of its Paid-up
Share Capital and Free Reserve as per latest audited
financial statement.
(c ) the amount so drawn shall be first be utilised to set-
off the loss sustained in the financial year in which
dividend is declared.
(d) the balance of Free Reserve after withdrawal shall
not fall below 15% of its Paid-up Share Capital.

(11) Unpaid dividend account:

(i) The unpaid dividend and unclaimed dividends
of shareholders shall be transferred to the
special account.
(ii) The amount unpaid/unclaimed dividend shall
be kept in this account for 7 years.
 (iii) After 7 years, the company has to transfer the
unpaid/unclaimed dividend to “Investors
Education and Protection Fund.”

Ques No. 10. What are Mutual Funds?

What are the Collective Investment Schemes?

Ans. Introduction.
A mutual fund is an investment vehicle where many
investors pool their money to earn return on their capital
over a period. This corpus of funds is managed by an
investment professional known as a Fund Manager or
Portfolio Manager. It is his/ her job to invest the corpus
(collection of money) in different securities such as bonds,
stocks, gold and other assets and seek to provide potential
returns. The gains (or losses) on the investment are shared
collectively by the investors in proportion to their
contribution to the fund.

What is a Mutual Fund?

A mutual fund is a collection of money from multiple

investors that is invested in a variety of securities, such as
stocks and bonds. The money is managed by a professional
fund manager who uses the fund’s investment strategy to buy
and sell the securities.
 Schemes of Mutual Funds:
Some important mutual fund schemes under the following
three categories based on maturity period of investment.
(I) Open- Ended.
(II) Closed-Ended.
(III) Interval.

(I) Open-Ended:
An open- ended fund is one that is available for subscription
throughout the year and is not listed on stock exchanges. The
majority of mutual funds is open-ended funds. Investors have
the flexibility to buy or sell any part of their investment at any
time at a price linked to the fund’s Net Asset Value.
(1) Debt/ Income- In a debt/ income scheme, a major
part the investment fund is channelised towards
debentures, Govt. securities, and other debt
instruments. Although, the capital appreciation is
low (compared to the equity mutual funds), this is a
relatively low risk-low return investment avenue
which is ideal for investors seeing the steady
income.
(2) Money Market / Liquid- This is ideal for
investment looking to utilization of their surplus
funds in short term debt instruments while
 awaiting better options. These schemes invest in
short-term debt instrument and stock to provide
reasonable returns for the investors.
(3) Equity / Growth- Equities are a popular mutual
fund category amongst the retail investors.
Although, it could be a high- risk investment in the
short term, investors can expect capital
appreciation in the long run. If an investor is at
prime earning stage, and looking for long-term
benefits, growth schemes could be an ideal
investment.
Under this category, there are further three
schemes.
(a) Index Scheme: Index scheme is a widely
popular concept in the west. These follow a
passive investment strategy when the
investments replicate the movements of
benchmark indices like Nifty, Sensex, etc.
(b) Sectoral Scheme: Sectoral funds are invested
in a specific sector like infrastructure, IT,
Pharmaceuticals, etc. or segments of the
capital market like large caps, mid -caps, etc.
this scheme provides a relatively high risk-high
return opportunity within equity space.
(c) Tax Saving: As the name suggests, this
scheme offers tax benefits to its investors. The
funds are invested in equities thereby offering
long-term growth opportunities. Tax saving
 mutual funds (called Equity Linked Saving
Schemes) has a 3 years lock- in-period.
(4) Balanced: This scheme allows investors to enjoy
growth and income at regular intervals. Funds are
invested in both equities and fixed income
securities; the proportion is pre-determined and
disclosed in the scheme related offer document.
These are ideal for the cautiously aggressive
investors.
(II) Closed-Ended.

In India, this type of scheme has a stipulated

maturity period and a closed-ended fund
has a fixed number of shares outstanding and
operates for a fixed duration (generally ranging
from 3 to 15 years. Investor can invest only during
the initial launch period known as the NFO ( New
Fund Offer) period. The fund would be open for
subscription only during a specified period and,
there is an even balance of buyers and sellers, so
someone would have to be selling in order to be
able to buy it. Close end funds are also listed on the
stock exchange so it is traded just like other stocks
on an exchange or over the counter. Usually, the
redemption is also specified which means that they
terminate on specified dates when the investors
can redeem their units.
 Capital Protection: The primary objective of this
scheme is to safeguard the principal amount while
trying to deliver the reasonable returns.
 Fixed Maturity Plan: FMPs, as name suggests, are
mutual funds schemes with a defined maturity period.
These schemes normally comprise of debt instruments
which mature line with the maturity of the scheme,
thereby earning through the interest component (also
called coupons) of the securities in the portfolio.

(III ) Interval.
Operating as a combination of open and close ended
schemes, it allows investors to trade units at pre-
defined intervals.

[ Note: This question if asked for may be kept on

option to attempt. So many things involved in it,
which create confusion, therefore, may be last item to
attempt]

Ques No. 11. What is a Share Capital?

What are its kinds?
How the Share Capital is reduced?
[IMP]
Ans Introduction.
The company is a big form of business
organisation. The amount required by the company
for its business activities is raised by issue of shares.
The amount so raised is called “Share-Capital” (or
capital) of the company. It may be noted that a
company limited by shares will have Share Capital.
The persons who buy the shares of a company are
called ‘Shareholders.’
The amount of share capital reports on its
balance sheet only accounts for the initial amount for
which the original shareholders purchased the shares
from the issuing company.
Share Capital refers to the portion of a
company’s *equity that has been obtained by trading
stock to a shareholder for cash. In its strict sense, as
used in accounting, share capital comprises of the
nominal values of all shares issued, (that is, the sum
of their par values, as printed on the share
certificates).
If the allocation price of shares is greater than
their par value, e.g. as in a rights issue, the shares are
said to sold at a premium (called share premium,
additional paid-in capital or paid-in capital in excess
of par.)

[*Equity is the value of an investor’s stake in a

company, represented by the value of the shares they
own.]
(I) Meaning of Share Capital.
Share capital denotes the amount of capital raised by
the issue of shares, by a company. It is collected
 through the issue of shares and remains with the
company till its liquidation.
Share capital is owned capital of the company, since
it is the money of the shareholders and the
shareholders are the owners of the company. The
total share capital is divided into small parts and each
part is called a ‘Share’. Share is the smallest part of
the total capital of a company.

According to S.2(84) of the Companies Act,2013-

share means “a share in the share capital of a
company, and includes stock except where a
distinction between stock and share expressed or
implied.” Thus, it is clear that wherever the word
share, ‘it would include stock.’

(II) Kinds of Share Capital. (Sec.43)

The share capital of companies limited by shares shall
be of TWO KINDS, namely—
(A) Equity Share Capital.
(B) Preference share capital.

(A) Equity Share Capital:

“Equity share Capital” means all share capital which is not
preference share capital-
(a) With voting rights; or
 (b) With differential rights as to dividend, voting or
otherwise in accordance with such rules as may be
prescribed.

(B) Preference Share Capital:

Preference Share Capital of the issued share capital of the
company which carries or would carry a preference right with
respect to—
(a) Payment of dividend, either as a fixed amount or an
amount calculated at a fixed rate, which may either be
free of or subject to income tax; and
(b) Repayment, in the case of share capital paid-up or
share capital deemed to have been paid-up, whether
or not, there is preferential right to the payment of
any fixed premium or premium on any fixed scale,
specified in the memorandum of articles of the
company.

Kinds of Preference shares:

Preference shares which carry preferential rights with regard
to the payment of dividend and repayment of capital and to
the return of capital when the company goes into liquidation
are called, “Preference Shares.”
The rate of dividend is fixed. Dividend will be paid first to
preference shareholders. When a company is wound up,
capital will be refunded first to the preference shareholders.
Thus, preference shareholders enjoy the priority over other
classes of shareholders.
Preference shareholders do not enjoy voting rights except
under certain circumstances. They cannot get higher rate of
dividend when the company makes large profits. Preference
shares are the best for those who are cautious.

The preference shares may be of the following kinds:

(1) Commulative and non-cumulative:
If a company does not have the financial resources to pay a
dividend to the owners of the its preference shares, then it
has still liability to pay the dividend. The dividend goes
accumulating till it is fully paid. The arrears are carried
forward. The company is bound to pay dividend only if, it has
sufficient profit available for distribution.
Non-cumulative: if a company does not pay a scheduled
dividend, it does not have the obligation to pay the dividend
at a later date. Such shareholders will not get any dividend, if
the company sustained loss and does not earn sufficient
profit. They cannot claim arrears of dividend of any year out
of the profits of subsequent year.
(2) Participating and non- participating:
The issuing company must pay an increased dividend to the
owners of the preference shares if there is a participation
clause in the share agreement. This clause states that a
certain portion of earnings will be distributed to the owners
of the preference shares in the form of dividends.
 In absence of this clause in the said agreement of
preference shareholders, it shall be deemed Non-
Participating.

(3) Convertible preference share:

These are the shares which entitle their holders to convert
them into equity shares within a certain period. The owners
of these shares have option, but not obligation to convert
their shares.
(4) Non-convertible preference shares:
These are the shares which do not confer on their holders a
right of conversion into equity shares.
(5) Redeemable preference shares:
A company has power to issue redeemable preference
shares. These shares are repayable after a certain agreed
period. These shares can be taken back by the company from
the shareholders after paying them of. These shares get fixed
dividends. These can be issued in certain circumstances.
These are repayable out of money received by fresh issue of
shares or out of accumulated profits. These shares must be
fully paid.

“Reduction of Share Capital.” [IMP]

A company may, for commercial reasons, wish to reduce its
share capital. This process of reducing share capital will
reduce a company’s shareholder equity. Some common
reasons for doing so include—
 To return the members the paid- up capital that the
company no longer needs.
 To simplify its capital structure to be more efficient.
 To compensate shareholders who wish to cancel their
shares in the company.
 To allow the company to pay up dividends, buyback
shares or generate funds to meet other corporate
needs.
 To eliminate losses which may be preventing the issue of
dividends.
 To reduce or cancel the company’s paid-up or un-paid
shares capital.
 To cancel share capital that is no longer represented by
available assets in the company.
A company may reduce its share capital by doing either of the
following:
(i) Seeking member’s approval by special resolution in
general body meeting.
(ii) By filing an application in the court/tribunal, and
getting the order from court/tribunal.
Member’s approval:
The following procedure is applied by the company which
wants to reduce its share capital by seeking member’s
approval.
(1) The company shall pass a special resolution that shall
be approved by the members.
(2) Company directors must make a solvency declaration
which will be valid for 20 days for private companies
or 30 days for public companies.
(3) The tribunal shall give notice to every application
made to it for reduction of share capital of the
company, including the Central Govt., Registrar of the
Companies, and to SEBI in case of listed companies
and also creditors of the company.
(4) The representations if any made in response of the
notice are considered. If no representations are
received from the Central Govt, Registrar of
Companies, SEBI or Creditors, it is assumed that they
have no objection to the reduction of share capital.
(5) If the tribunal is satisfied that the claims of every
creditor has been discharged and nothing is
outstanding, the tribunal makes an order confirming
the reduction of share capital on such terms and
conditions as deemed fit.
(6) The order of confirmation of the reduction of share
capital by tribunal shall be published in the daily
newspapers by the company.
(7) The company shall furnish the certified copy of the
order of tribunal along with the minutes of the terms
and conditions approved by it. The following details
are also given.
(a) The amount of share capital;
(b) Number of shares into which it is to be divided;
 (c) Amount of each share;
(d) The amount if any, at the date of registration
deemed to be paid-up on each share.
(8) On receipt of the information as shown in Para-7,
within 30 days of the order of tribunal, the Registrar
of the Companies shall register and issue a certificate
of the share capital after reduction. S.78 E.
(9) Every person, who was a member of company on the
date of registration of the reduction by Registrar shall
be liable to contribute to the payment of that debt on
claim.

No. 12. What is need to protect Creditors?

What are the rights of the creditors in making
company’s decisions affecting creditor’s interest?
How can creditors do self-protection in the company?
[Imp]
Ans. (I) Need for Creditor Protection.
Corporate Insolvency is a ground for liquidation which is a
matter of serious concern. Effective solvency procedure needs to be
established for protecting the interest of the creditors efficiently.
Without effective procedures, the creditors may not be able to
collect their claims which may have an adverse effect on credit
availability. The provisions of the Indian Companies Act have
somewhere failed to address the interest of the creditors at the time
when a company becomes insolvent.
Creditor Protection.
 (Creditor’s Protection meaning)
Creditor protection is a collective term that is used in two different
ways:
 One common use has to do with the various resources that
provide debtor with an equitable amount of protection from
creditors in the event that the debtor is unable to pay off an
existing obligation according to the terms and conditions
related to the transaction.
 The other application of this term has to do with the protection
of the creditors, in terms of limiting the loss incurred when a
debtor defaults on an outstanding debt.
When creditor protection is used to describe laws,
procedures or regulations that are aimed at protecting the debtor
from action by the creditor, the term usually refers to prohibitions
that keep the creditor from acquiring all the debtor’s financial assets
to live what is considered to be a basic standard of living. This
prevents the debtor from becoming dependent on the local Govt. for
necessities such as food, clothing and shelter.
For example- if a debtor defaults a bank loan, the bank has the
right to sue for recovery of the outstanding balance. If the creditor is
awarded a judgement, then the court will order that the funds be
withheld from the debtor’s wages in order to settle the debt. Rather
than withholding the entire sum of wages each pay period, the
creditor protection statutes will bind the court to determining the
percentage of income that will be withheld and forwarded each pay period
to the creditor, until the debt is discharged in full. As a result, the
debtor is still left with enough money to cover his or her basic
expenses.
(III) Rights in making company decisions affecting creditor’s
interest.
 Each creditor is entitled to:

(a) A notice-
A notice of each court proceeding, decision, meeting or
other relevant concerning to business rescue proceedings.
(b) Participation-
Participating in any court proceedings arising during the
business rescue proceedings.
(c) Participation in business rescue plan-
Formally or informally participation in those proceedings by
making proposals for business rescue plan to practitioners.

(d ) Right of vote-
A right to vote to amend, approve or reject a proposal
business rescue plan, in the matter contemplated in the
prescribed in the section.
( e) Formation of consultant Committee-
The creditors of a company are entitled to form a committee
which may consult the practitioner during the development
of the business rescue plan.

“The Model law for protection of creditor’s interest”:

The model law contains the following provisions to protect the
interest of the creditors, particular local creditors-
 The court may modify or terminate the relief granted if so,
requested by the person affected thereby;
 In addition to those specific provisions, the model law in a good
way provides that the court may refuse to take an action
 governed by the model law, if the action would be manifestly
contrary to the public policy of the enacting State (State that
enacts law).
(III) Creditor’s self- protection.
Companies after the amendment of IBC can issue their shares
at a discount to its creditors when their debts have been
converted into equity in the pursuance of a resolution plan
given under the IBC. Further, the companies who have
defaulted in the payments of dues to any bank or an NBFC
(Non-Banking Financial Company) or any of the secured
creditors will now have to take the prior approval of such
lender before giving out managerial remuneration. There can
be a cash flow monitoring the creditors also.
(A) Creditors Meeting.
Meetings of creditors is used to define a meeting which has
been set up by the company to formulate a scheme for an
arrangement with the creditors. The companies Act,2013
gives out the power of the company to negotiate with the
creditors and the mechanism by which it can be done.
The creditors and the company can both approach the
NCLT, with different propositions in mind. The company
would approach the Bankruptcy court for any kind of relief in
which they can settle dues with creditors.
However, the creditors approach the NCLT (National
Company Law Tribunal) under the Insolvency and Bankruptcy
Code (IBC), 2016. This is when the creditors take the
defaulting company to the court under the IBC,2016, a
committee of creditors take over the management of the
company and a resolution professional is appointed.
Furthermore, a resolution professional comes up with a
resolution plan in the case of IBC. In the case of the company
approaching the NCLT, the management comes with a plan to
settle with the creditors. An informed decision would be
when a company can predict that the creditors will approach
the NCLT and the company approaches the NCLT under S.
230, whereby the management can retain control on the
company.
Tribunal can also dispense with the meeting of creditors or a
class of creditors under S.230 (9), which states that, such
creditors or class of creditors, having at least 90% value and
have agreed by the way of an affidavit, to the scheme of
compromise or arrangement.
(B) Corporate Debt Restructuring (CDR).
CDR is a mechanism where the lenders to the concerned corporate can come
together and form to restructure the debt. The lenders see the company’s
business model and try to see if the problem being faced by them is temporary
or permanent. Further, the banks take the help of specialists to help them to
assess the market and how that particular company is positioned. Post these
forensic audits and analysis, they restructure the corporate debt lent to the
company by rescheduling the payments so that the company gets a breathing
space to sort matters out or give a top or an additional loan for stabilizing the
operations of the company. All these activities form part of CDR.
Any scheme of corporate debt restructuring has to be consented by more
than 75% of the secured creditors in value. Further, the plan has to be given
with the safeguards for the protection of other secured and unsecured
creditors. Report by the auditor that the fund requirements of the company
after the said restructuring shall conform to the liquidity test based upon the
estimates provided by the board. Companies also have to give a statement to
the effect, if they are proposing to adopt the corporate debt restructuring plan
specified by RBI.
However, the Reserve Bank of India in the latest Financial Stability Report (FSR)
makes the important point clear that the creditors as a whole, have been
empowered by the Bankruptcy Code to recover the debt.
----------------------------------------------------------------------------------------------

Ques No. 13. Why spend Control over company is necessary? [Imp]
Ans. Control over corporate spending.
When it comes to managing company expenses, it may be tempting to over
optimize the way company spends money. But doing so, can actually cut into
the revenue by making it more difficult for a team to do its jobs and maintain
daily operations.
Spend control is the business process of monitoring and managing
purchasing across the organisation in order to maximize operational efficiency
and reduce unnecessary spending. It is common saying, “you have to spend
money to make money.”
All expenses, whether internal or external fall into the category of company
spend. Companies naturally have to spend to boost their own revenue, and
spend control is the practice of monitoring and managing the money flowing
out of the company as a result of daily operations.
What spend control is not:
There is key difference between cutting cost and spend control. All expenses
are incurred within the framework of the budget allocation under the heads
fixed for each item. The money is used properly to get more production, it
means it is not spending unnecessarily.
Spend Control vs Cost Control.
Spend control is also different from what most businesses refer to as “cost
control.” While regular expenses like utilities, rent, essential raw materials, and
employee’s salaries are worth managing, they are consistent enough that little
discretion is necessary when money is spent on them. Spend control largely
deals with the variable expenses that are more difficult to manage, such as
company credit cards or any expenses handles by the accounts payable
department.
To achieve spend control, companies should strive for spend visibility, or an
awareness of where purchases are made and who makes them. Spend data
are, therefore, the main weapon against frivolous transactions.
Controlling where the money flows is paramount in any organisation regardless
of size of the industry. If there is no proper visibility into corporate spend, there
runs the risk of Cash flow problem.
In short it can be said:
(i) The expenses related directly connected to production are not futile
expenses as they are controlled by budgetary provisions to enhance
the productions.
(ii) The expenses that the company incur are the expenses on sundry
items there may be variation.
(iii) The expenses which are connected to the labour and advertisements,
fuels etc. are controlled by keeping in view the necessities of such
expenses. They are controlled by the different teams of the managers
engaged for the jobs.
------------------------------------------------------------------------------------------------------

Que. No. 14. Discuss various rights available to the

investors which provide them protection?

Ans. Introduction.
Investors are the backbone of the securities market and they
play a vital role in the activity of stock market along with
enhancing the level of activity in the economy. Earlier the
Companies Act,1956, was unable to assure the investor’s
interest and overcome corporate crime. It did not compete
with the need of changing business environment.
In the companies Act,2013, the provisions to
safeguard/protect the interest of investors are made. This Act
is equipped with or embedded with new provisions, and the
regulating for transparency and accounting in company’s
management and safeguarding investor’s interests.
The main aim the Companies Act,2013 is to attract or in
enhancing the penalties for breach and non-compliance of
the provisions made in it.

The objectives and needs of investor’s protection include:

 Enhancing investor’s confidence.
 Promoting orderly growth of securities market.
 Providing free and fair market conditions.
 Developing the economy of the nation.

Rights of investors include:

 To receive the share certificates on allotment or transfer
as the case may be, in due time.
 To receive copies of the Director’s report, balance sheet
and P&L A/c and the Audit’s report.
 Th participate and vote in General Body Meeting either
personally or through proxies.
 To receive dividend in due time once approved in the
General Body Meeting.
  To receive corporate benefits like rights, bonus etc.,
once approved.
 To proceed against the company by way of civil or
criminal proceedings.

The Companies Act, 2013.

The Companies Act, 2013 provides several new provisions to
safeguard to protect and promote interest of investors in the
securities market.
(1) Acceptance of Deposits:
S.73 of the Act prohibits any company from
accepting deposits from general public and its
violation is a punishable offence.
(2) Mis-statement in Prospectus:
S.34 of the Act deals with the criminal liability for
mis-statement in the prospectus issued by a
company. The prospectus issued, circulated or
distributed shall not include any untrue or
misleading statement which prompts any person to
make an investment.
(3) Non-payment of dividend:
S.125 of the Act provides for the establishment of
“Investor’s Education and Protection Fund” by the
Central Govt. The fund is to be credited with the
unpaid/ unclaimed amount of application money/
matured money or matured deposits, such
accumulations of the fund are to be utilised for
promotion of investor’s awareness and protection
 on the investor’s interest.

(4) Right to demand Financial Statements:

S.136 of the Act gives to a member a right to obtain
copies of the Balance Sheet and Auditor’s Report.
--------------------------------------------------------------------------

Ques No.15. Discuss the control of various

authorities such as SEBI, ROC and RBI
which provide Administrative
Regulation on Corporate Finance.
[Imp.]

Ans. A role plays by the RBI, SEBI and ROC in

Corporate Finance.

(I) “Control by Reserve Bank of India.”

Regulations of Reserve Bank of India over Corporate Finance.

(1) RBI empowered-

Deposits of non-banking companies attracted official
attention only in 1964 when the RBI was empowered
to regulate the quantum of company deposits.
(2) Objectives-
The primary objective of exercising control over
deposit acceptance on companies is to regulate the
 growth of deposits outside the banking system as
also afford a degree of indirect protection to the
depositors.
(3) Acceptance of deposits-
The acceptance of deposits by the companies is
regulated by the RBI and control over the deposit
acceptance activity of non-financial companies is
vested in Department of Company affairs.
(4) Ceiling of Interest-
Restrictions on quantum and tenure of deposits and
ceiling of interest rates.
(5) Maintain liquid assets-
They require certain type of companies to maintain
liquid assets and all companies to submit returns/ Balance-
sheet.
(6) The RBI Regulation of Public Deposits has SIX main
aspects:
(i) Ceiling of quantum deposits-
There is ceiling on the quantum of deposits in
terms of paid-up capital and reserves by the
company because undue accumulation of
short-term liabilities in the form of deposits
can lead a company into financial difficulties.
(a) Deposits-
Any money received by non-banking company
by way of deposits or loan or in any other
form but excludes money raised by the way of
 share capital or contributed as capital or
contributed as capital by proprietors.
(ii) Limit on Period-
The Reserve Bank Regulation is the limit on
the period of such deposits. Formerly, in
order to avoid direct competition with the
short-term public deposits, companies were
prohibited from accepting deposits for a
period of less than 12 months. But the
Amendment of 1973 reduced the period to
less than 6 months. The short- term deposit is
now pegged down (bound to follow the rules)
to 10% of the aggregate to the paid-up
capital.
(iii) Information about repayment-
The RBI has made obligatory on the part of
the companies accepting deposits to regularly
file returns giving detailed information about
them their repayment, etc.
(iv) Advertisement in newspapers-
The RBI has stipulated that while issuing
advertisement in the news-papers, certain
information regarding the financial position
and the working of the company must
accompany.
(v) Auditors-
The RBI has entrusted the auditors of the
companies with additional responsibilities of
reporting to it that the provisions under the
 Act had been strictly followed by the
company.
(vi) Issued Brochure-
The RBI has issued brochure, “RBI directives
and Company Deposits” in order to clarify its
role in protecting depositors.

(II) Securities and Exchange Board of India. (SEBI) [Imp]

SEBI Control over Corporate Finance.
“SEBI and its Functions”
It is the duty of the Board to protect the interests of the
investors in securities and to promote the development and
regulate the securities market.
The acceptance of the deposits by companies is regulated by
SEBI and control over the deposit acceptance activity of Non-
Financial- Companies is vested in Department of Company
Affairs.
“Functions of the SEBI”
Following are the functions of the SEBI to control over
Corporate Finance.
(1) Regulating the business in stock exchanges and any
other securities markets.
(2) Registering and regulating the working of stock
brokers, sub-brokers, share transfer agents, Registrar
to an issue, merchant bankers, portfolio managers,
etc.
 (3) Registering and regulating the working of collective
investment schemes including Mutual Fund.
(4) Promoting and regulating self-regulatory
organizations.
(5) Prohibiting fraudulent and unfair trade practices in
securities market.
(6) Promoting investors education and training of
intermediaries in securities market.
(7) Prohibiting insider trading in securities.
(8) Regulating substantial acquisition of shares and
takeover of companies.
(9) Calling for information, undertaking inspection, audit
of the stock exchanges, etc.
(10) Levying fees or other charges for carrying out of this
section.
(11) Conducting research for the above purpose.
(12) Performing such other functions as may be prescribed
by the Govt.

(III ) Registrar of the Companies. (ROC) [IMP]

Control by the Registrar of the Companies on Corporate
Finance.
(1) The Registrar of Companies (ROC) is an officer under
the ‘Indian Ministry of Corporate Affairs’ that deals
with administration of the Companies Act,1956 and
Companies Act,2013.
(2) There are 22 Registrars of Companies (ROCs)
operating from offices in all major States of India.
(3) The ROCs also ensure that LLPs (Limited Liability
Partnerships) companies fulfil with statutory
requirements under the Companies Act.
(4) The Union Govt. maintains administrative control over
ROCs through Regional Directors (RD). There are 7
Regional Directors who supervise the functioning of
ROCs within their respective regions.

‘Registrar of Companies’
The ROCs of the companies also certify that the LLPs
company fulfils with the legal requirements contained in
the Companies Act. They maintain a Registry of Records
concerning with companies which are registered with them
and allow the general public in accessing this information
on payment of a stipulated fee.
The Central Govt. preserves administrative control over
the Registrars with the help of Regional Directors.
‘Their functions are to check’-
 Functions of the ROCs.
 How the companies are registered by the ROCs.
 ROCs can refuse to register.
 The role of ROC continues even after the registration of
a company.
 Filling resolution with ROCs.

“Functions of Registrar of the Companies.” (ROCs)

Following are the functions of the ROCs-
 (1) The ROC takes care of registration of a company (also
referred to as incorporation of the company) in the
country.
(2) It completes regulation and reporting of companies
and their shareholders and directors and also
administers Govt. reporting of several matters which
include the annual filing of numerous documents.
(3) The ROC plays essential role in fostering (promoting)
and facilitating business culture.
(4) Every company in the country requires the approval of
the ROC to come into existence. The ROC provides
incorporation certificate which is the conclusive
evidence of the existence of any company. A company,
once incorporated, cannot cease unless the name of
the company is struck-off from the ROCs.
(5) Among other functions, it is worthy to note that the
Rocs could also ask for supplementary information
from any company. It could search its premises and
seize the books of accounts with the prior approval of
the court.
(6) Most importantly, the ROCs could also file a petition
for winding up of a company.

Ques No. 16. Discuss the provisions relating to creation of

charge explaining in detail ‘fixed charge’ and
‘floating charge’ with reference to debt finance.
OR
 Critically evaluate the law related to Debt
Finance with special reference to Charges and Mortgages.
(IMP)

Ans.
Creation of Charges.
‘Charge’ is defined under S.2 (16) of the Companies Act,2013,
which basically says that Charge can be-
(i) An interest or *lien;
(ii) Created on the property or assets of a company;
and
(iii) Any of its undertakings or both as security and
includes a mortgage.
[*Lien – A lien in company law is a legal claim or right to a
property or asset that is used as collateral to secure a debt
or obligation.]
Charge is defined in the Property Act,1882, also where
S.100 says that an immovable property of one person is by
act of parties or operation of law under security for the
payment of money to another and the transaction does
not amount to a mortgage, the latter person is said to have
a charge on that particular property.
Meaning and Definition of Charges:
A charge is created when a property, whether existing or in
future, is agreed to be made available as a security for the
repayment of debt. However, the creditor gets no legal
 right over the property so charged, but only gets a right to
have security made available by an order of the court in
the event of non-payment of debt.
A charge is a right created by any person including a
company referred to as “the borrower” or its assets and
properties, present and future, in favour of a financial
institution or a bank, referred to as “the lender”, which has
agreed to extend financial assistance.
Kinds of Charges.
Charge on the property of the company as security for
debts may be of the following:
(i) Fixed or specific Charge.
A charge is fixed or specific when it covers assets
which are ascertained and definite or are capable
of being ascertained and defined, at the time of
creating charge.
For example- Charges created on land, building, or heavy
machinery. A fixed charge is a charge created against certain
specific property and the company loses its right to dispose
of that property.
A fixed charge will typically prevent the debtor from
disposing of the charged asset without the lender’s consent
and will require the debtor to maintain the asset while it
remains in the debtor’s possession.
(ii) Floating Charge.
A floating charge is a charge created on floating assets or
unidentified assets of the company. In other words, a
floating charge is not attached to any definite property, but
covers property of a fluctuating type like stock-in-trade.
“The essence of a floating charge is that the security
remains dormant until it is fixed or crystallized.”
The advantage of a floating charge is that the company
may continue to deal in any way with the property which
has been charged. The company may sell, mortgage or
lease such property in ordinary course of its business, if it
is authorized by its Memorandum of Association.
A floating charge *crystallizes, and the security
becomes fixed--
(i) when the company goes for liquidation.
(ii) when company ceases to carry out on the business
on the happening of the event specified in the deed.
[ *In company law, Crystallization is a process of a
floating charge converting into a fixed charge when
certain events occur.]
“Mortgage.”
Definition of Mortgage:
A mortgage is an agreement that allows a lender to seize
property when a borrower fails to pay. In most cases, the
term mortgage is used to refer to a home loan. If you don’t
pay the loan as agreed, the lender can *foreclose on the
property.
 [* Foreclose is a legal process that allows a lender to take
possession of a mortgaged property and sell it to recover
the balance of a loan from a borrower who has defaulted
on the loan.]
A mortgage is the transfer on an interest in specific
immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of
loan, an existing or future debt, or the performance of an
engagement which may give rise to a pecuniary liability.
The transferor is called a ‘Mortgagor’, the transferee a
‘Mortgagee’; the principal money and interest of which
payment is secured for time being are called the
‘Mortgage-money’, and the instrument (if any) by which
the transfer is affected is called a ‘Mortgage-deed’.

Difference between Charge and Mortgage.

(i) Meaning
Charge refers to the security for securing the debt, by way
of pledge, hypothecation and mortgage, whereas the
Mortgage implies the transfer of ownership interest in
particular immovable asset.
(ii) Creation
Charge is created either by the operation of law or by the act
of the parties concerned. But the Mortgage is a result of the
act of parties.
(iii) Registration
When the charge is a result of the acts of the parties,
registration is compulsory otherwise not.
Under the Mortgage, it must be registered under Transfer of
Property Act,1882.
(iv) Term
In case of Charge, it is not fixed. But in the Mortgage the term
is fixed.
(v) Personal liability
No personal liability is created in case of charge. However,
when it comes into effect due to a contact, then personal
liability may be created.
In general, Mortgage carries personal liability, except when
excluded by an express contract.
------------------------------------------------------------------------------
Ques No 16. Write notes on- [IMP]
(1) Depositories;
(2) Indian depository receipts; (IDRs)
(3) American depository receipts; (ADRs)
and
(4) Global depository receipts. (GDRs)

(1) Depositories.
Meaning:
A depository is an entity which helps an investor to buy or
sell securities such as stock and bonds in a paperless manner.
Securities in depository accounts are similar to funds in the
bank accounts. A depository institution provides financial
services to personal and business customers. Deposits in the
institution include securities such as stock or bonds. The
institution holds the securities in electronic form also known
as book-entry form, or in dematerialised or paper format
such as a physical certificate. Companies become members of
depositories and keep electronic records of all their issued
equity and debt securities with the depositories.
A depository is a facility such as a building, office, or
warehouse in which something is deposited for storage or
safeguarding. It can refer to an organisation, bank or
institution that holds securities and assists in the trading of
securities.
The term also refers to an institution that accepts currency
deposits from customers such as bank or a saving association.
Types of Depositories.
There are three main types of depository institutions:
(i) Credit unions;
(ii) Saving institutions;
(iii) Commercial banks.
(i) Credit unions.
Credit unions are non-profit companies highly focussed on
customer services. Customers make deposits into a credit
union account, which is similar to buying shares in that credit
union. The credit union earnings are distributed in the form
of dividends to every customer.
(ii) Saving Institutions.
Saving institutions are for-profit companies also known as
saving and loan institutions. These institutions focus primarily
on customer mortgage lending but may also offer credit cards
and commercial loans. Customers deposit money into an
account, which buys shares in the company.
For example- During a fiscal year, a saving institution may
approve 71,000 mortgage loans, 714 real estate loans,
340,000 credit cards, and 252,000 auto and personal
customer loans while earning interest on all these products.
(iii) Commercial banks.
Commercial banks are for-profit companies and the largest
type of depository institutions. These banks offer a range of
services to customers and businesses such as checking
accounts, customer and commercial loan, credit cards and
investment products. These institutions accept deposits and
primarily use the deposit to offer mortgage loans,
commercial loans, and real estate loans.
‘Regulator’
The SEBI is responsible for the registration, regulation and
inspection of the depository.
****
(2) Indian Depository Receipts (IDRs).
An Indian Depository Receipt (ADR) is an instrument
denominated in Indian Rupees in the form of depository
receipt created by the Domestic Depository (custodian of
securities registered with SEBI) against the underlying equity
shares of issuing company to enable the foreign companies to
raise funds from the Indian Securities Markets.
Eligibility to issue IDRs:
The eligibility criteria given under IDR rules and guidelines are
as under-
The foreign issuing company shall have:
 Pre-issue paid-up capital and free reserves at least 50
million American dollars and have a minimum average
market capitalization (during last 3 years) in its home
country of at least 100 million American dollars;
 A continuous trading record or history on a stock
exchange in its home country for at least THREE
immediately preceding years;
 A track record of distributable profits for at least three
out of immediately preceding 5 years;
 Listed in its home country and it has not been
prohibited to issue securities by any regulatory Body
and has a good track record with respect to compliance
with securities markets regulations in its home country.
The size of an IDR issue shall not be less than Rs.50
crores.
*****
(3) American Depository Receipt (ADR).
An American Depository Receipt (ADR) is a negotiable
certificate issued by a US depository bank representing a
specified number of shares—or as little as one share—
investment in a foreign company’s stock. The ADR trades on
markets in the US as any stock would trade.
Key Takeaways:
 An American Depository Receipt (ADR) is a certificate
issued by a US bank that represents shares in foreign
stock.
 ADRs trade on American Stock Exchanges.
 ADRs and their dividends are priced in US dollars.
 ADRs represent an easy, liquid way for US investors to
own foreign stocks.
Types of ADRs:
There are three different types of ADR issues:
1. Sponsored Level- 1 ADRs. [“OTC” facility (Over-the-
Counter].
This is the most basic type of ADR where foreign
companies either don’t qualify or don’t wish to have
their ADR listed on an exchange. Level-1 ADRs are found
in the over-the-counter market. This type of ADR can be
used to establish a trading presence but not to raise
capital.
Level-1 depository receipts are the lowest level of
sponsored ADRs that can be issued. When a company
issues sponsored ADRs, it has one designated
depository who also acts as its transfer agent. A
majority of American depository receipt programs
currently trading is issued through a Level-1 program.
 This is the most convenient way for a foreign company
to have its equity traded in the United States.
Level-1 shares can only be traded on the OTC market,
and the company has minimal requirements with the US
Securities and Exchange Commission (SEC).
The companies with shares trading under a Level-1
program may decide to upgrade their program to a
Level-2 or Level-3 program for better exposure in the
United States Markets.

2. Sponsored Level-2 ADRs (“Listing” facility)

This type of ADR is listed on an exchange or quoted on
NASDAQ (National Association of Securities Dealers
Automatic Quotation System). Level-2 ADRs have slightly
more requirements from the SEC, but they also get higher
visibility trading volume.
Level-2 depository programs are some more complicated for
a foreign company. When a foreign company wants to set up
a Level-2 program, it must file a registration statement with
the SEC, which is under SEC regulation. In addition, the
company is required to file a form 20-F annually. Form 20-F is
the basic equivalent of annual report (Form-10-K) for a US
Company. The advantage of it is that, the company by
upgrading its program to Level-2, the shares can be listed on
a US Stock exchange. These exchanges include the NEW YORK
Stock Exchange (NYSE), NASDAQ and the NYSE MKT. While
listing on these stock exchanges, the company must meet the
exchange’s listing requirements. If it fails to do so, it may be
delisted and forced to downgrade its ADR program.
Sponsored Level-3
It is the most prestigious of the three levels, this is when an
issuer floats a public offering of ADRs on a US exchange.
Level -3 ADRs are able to raise capital and gain substantial
visibility in the US financial market. It is the highest-level, a
foreign company can sponsor. Because of this distinction, the
company is required to adhere to stricter rules that are
similar to those followed by US companies.
Risk of ADR.
1) Political Risk-
If the Govt. in the home country of ADR is not stable,
there is a possibility of loss.
2) Exchange Rate-
If the currency of home country of ADR is devalued, this
will result in a big loss.
3) Inflationary Risk-
Inflation is the rate at which the general level of prices
of goods and services is rising. Inflation can be a big
blow to business because the currency of a country with
high inflation becomes less and less valuable each day.
*****
(4) Global Depository Receipt, (GDR)
A global depository is also known as an ‘International
depository receipt’, is a certificate issued by a depository
bank, which purchases shares of foreign companies and
deposits it on the account.
 Global depository receipt is an instrument in which a
company located in domestic country issues one or
more of its shares or convertibles bonds outside the
domestic country. In GDR, an overseas depository bank,
i.e. bank outside the domestic territory of a company
issues shares of the company to the residents outside
the domestic territory. Such shares are in the form of
Depository Receipt or Certificate created by overseas
the depository bank.
 Issue of Global Depository Receipt is one of the most
popular ways to tap the global equity shares in a foreign
country.
 GDRs represent ownership of an underlying number of
shares of a foreign company and are commonly used to
invest in companies from developing or emerging
markets by investors in developed markets.

Characteristics.
(i) It is in an unsecured security;
(ii) It may be converted into number of shares;
(iii) Interest and redemption price is public in foreign
agency;
(iv) It is listed and traded in the stock market.

Global Depository Receipt Mechanism.

 The domestic company enters into an agreement with
the overseas depository bank for the purpose of issue of
GDR.
 The overseas depository bank then enters into a
custodian agreement with the domestic custodian of
such company.
 The domestic custodian holds the equity share of the
company.
 On the instructions of the domestic custodian, the
overseas depository bank issues shares to foreign
investors.
 The whole process is carried out under the
strict guidelines.
 GDRs are usually denominated in US dollars.
------------------------------------------------------------------------

Ques No.17.

Critically evaluate the role of Public Financing

Institutions and Institutional Investments in Corporate
Fund raising. [IMP]

Ans.
(A) The following are the Public Financing Institutions
which play a vital role in corporate Fund raising.
(i) Industrial Development Bank of India.
(IDBI)
(ii) Industrial Credit and Investment
Corporation of India. (ICICI)
 (iii) The Industrial Finance Corporation of
India. (IFC)
(iv) State Financial Corporations. (SFC)

(B ) Institutional Investments.
Also, there are Institutional investors which
are legal entities accumulate funds for
corporation. Institutional investors are generally
considered to be more proficient at investing
due to the assumed professional nature of
operations and greater access to companies
because of the size.
They are as under:
(i) Life Insurance Corporation of India. (LIC)
(ii) Unit Trust of India. (UTI)
(iii) Banks.

(A) Public Financial Institutions:

(i) Industrial Development Bank of India. (IDBI)
This bank was set up in 1964 to provide long-term
finance to the industry. The Govt. of India decided to
establish the Industrial Development Bank of India for
TWO reasons-
(1) Firstly, there was a need for a new financial
institution with large financial resources to meet
the growing financial requirements of the both
new and established industrial enterprises.
 (2) Secondly, there was the need for co-ordinating
the activities of all agencies which are concerned
with the provision of finance for industrial
development.
Main functions:
 The main function of the IDBI is to finance industrial
enterprises such as manufacturing, processing, mining,
shipping, road transport and hotel industry.
 Other major functions of the IDBI are location and filling
in of the gaps in the industrial structure, marketing
investment, research surveys, techno-economic studies.
 The IDBI grants direct assistance by way of project loans,
underwriting of and direct subscription to industrial
securities, soft loans, technical refund loans and
equipment finance loans.
 The bank can guarantee loans raised by industrial
concern in the open market from scheduled banks, state
Co-operative Banks, and other ‘notified financial
institutions.
 The IDBI extends financial assistance to industrial
projects directly under Direct Finance Scheme.
 It can refinance term loans to industrial concerns
repayable within 3 to 25 years.

(ii) Industrial Credit and Investment Corporation of

India. (ICICI)
The ICICI was set up in 1955 under the Indian Companies Act
on the basis of recommendations of the World Bank Group.
  The primary purpose for which the ICICI makes available
funds is for the purpose of the Capital Assets in the form
of land, buildings and machinery. Even though, there are
no fixed limits on the size of assistance granted,
ordinarily Rs. 5 lakhs were considered to be the lower
limit for a loan.
 ICICI aims at stimulating the promotion of new
industries, to assist the expansion and modernisation of
existing industries and to furnish technical and
managerial aid so as to increase production and afford
employment opportunities.
 The industries that have so far received the assistance
are those manufacturing paper, pharmaceuticals and
chemicals, electrical equipment, textiles sugar, metal
ore, lime and cement works, glass manufacturers etc.
 In 1977, the ICICI promoted the Housing development
Finance Corporation (HDFC). The main object was to
provide long-term finance to individuals in middle and
lower- income brackets for construction and purchase of
residential houses all over the country.

(iii) The Indian Finance Corporation of India (IFCI).

The IFCI is a national level development bank, set up in1948,
with the objective of providing medium and long-term
finance to eligible industrial concerns in India. The main
functions performed by IFCI are as under:
(1) Finance for new projects and expansion,
diversification and modernisation programs.
(2) Equipment finance and advances against usance bills.
(3) Merchant banking.
[Merchant banking is a financial service that provides
specialized services to large corporations, high net
worth individuals, and institutional investors.]
(4) Promotional services, mainly through sponsored
organisations and supported activities in the form of
Technical Consultancy Services, Risk capital
Assistance, upgradation of managerial skills,
entrepreneurship development and development
banking.
(5) Financial assistance is also made available to
industries engaged or to be engaged in manufacture,
preservation or processing goods, shipping, mining,
hotel, generation, storage or distribution of electricity
or any other form of energy, transport, setting up or
development of industrial estates etc.
(6) The limit of assistance to any single concern is now
Rs.1 crore (in the beginning, it was Rs.50 lakhs). The
loan is given for a period not exceeding 25 years.
(7) The facilities and services provided by it under three
categories:
(a) Project finance;
(b) Financial services; and
(c) Promotional services.

(IV) State Financial Corporation.

The State Govts. have set up 18 SFCs. The Govt. of India
passed the State Financial Corporation Act in 1951 and
made it applicable to all the States.
Functions:
 It can guarantee loans raised by industrial concerns
which are repayable within a period not exceeding 20
years, and which are floated in the public market.
 It can underwrite the issue of stocks, shares, bonds or
debentures of industrial concerns.
 It can grant loans and advances to industrial concerns
repayable within a period of not exceeding 20 years.

Results of its failure:

(a) There are certain weaknesses which have hindered
their growth. The recovery of loans has been far
from satisfactory. Because of non-recovery, its
functions have adversely affected.
(b) Another weakness is that the share of the loans
going to very small units (those units seeking loans
up to Rs. Fifty thousand) has shown a decline in
recent time.
(c) Moreover, these corporations have achieved very
little in rehabilitation of sick units falling in their
sphere of operations.
******

(B) Institutional Investments.

(1) Life Insurance Corporation of India. (LIC)

LIC is an Indian state-owned insurance group and investment
corporation owned by the Govt. of India.
The LIC was founded on 1st September,1956, when the
Parliament of India passed the Life Insurance of India Act,
that nationalised the insurance industry in India. Over 245
insurance companies and provident societies were merged to
create the state-owned Life Insurance Corporation of India.
LIC is a leading financial institution of the country with
assets under management of Rs.15 lakh crores. One of the
major activities of LIC is to provide long term finance to
various entities.
The corporation provides long term debt finance as under:
(i) To corporate entities by way of (minimum
eligibility).
 Subscription to bonds;
 Subscription to debentures.
(ii) Towards subscription to Alternative Investment
Funds (minimum eligibility).
(iii) For project finance through *consortium lending
(minimum eligibility).
[* Consortium is a group of two or more
individuals, companies, or governments that work
together to achieve a common goal.]

(2) Unit Trust of India (UTI) investment.

 Unit Trust of India (UTI) is the statutory body. It was set up
on February 1, 1964 as per the Unit Trust of India Act of
1963. It was established with a view to encouraging saving
and investment and participation in the income, profits, and
the gains accruing to co-operation from holding,
management and disposal of the securities.
The Unit Trust of India (UTI) provides the investor with a safe
return of investment. Whenever there is a requirement of
funds the Unit Trust of India provides a daily price record and
also advertises it is in news-papers. Therefore, two prices are
the purchase price and the sale price of the units.
The price may fluctuate on daily basis but the fluctuations are
very nominal on a monthly basis. The price usually varies
between July and June.
The main and the basic objective of the Unit Trust of India are
to offer both small as well as large investors. The means of
acquiring shares in the properties results from the steady
industrial growth of the country.
Therefore, the main objectives of the UTI can be summarised
as:
 Promotion of savings from the ‘lower and middle
income groups’ of the country who may not have the
means to directly access the stock exchange market.
 Provide to these group the beneficial results of
investment returns and promote industrialisation in all
part of the nation.
Functions:
(1) UTI mobilizes the savings of the relatively small
investors.
(2) It also channelises the small savings into productive
investments.
(3) It also converts the small savings into industrial
finance.
(4) It gives investors an opportunity to share the benefits
and the fruits of industrialisation in the country.
(5) It also grants loans and advances to the investors.
(6) It provides leasing and hire purchase business.
(7) It allows buying or selling or making a deal in foreign
currency.
*****
(3) Banks.
Banks help corporations finance their needs in a
number of ways, including:
 Loans-
Banks offer a variety of loans, including fixed-term,
short term, long-term and asset based loans.
 Equipment financing-
Banks provide equipment financing through fixed-loan
or leasing.
 Bridge finance-
Banks provide interim funding for Mergers and
Acquisitions (M&A).
 Letters of credit-
Banks provide letters of credit, which are the promises
from the bank to make payments.
  Investment Banking-
Banks help corporations raise debt and equity, and
assist with M&A transactions.
 Trade finance-
Banks provide trade finance services.
 Cash management-
Banks help corporations to manage their cash flow.
 Treasury services-
Banks provide treasury services.
 Risk management-
Banks help corporations managing risks.
Corporate banking is a specialised area of banking that
focuses on the financial needs of large businesses,
corporations, and institutions. Corporate bankers work
closely with businesses to understand their financial goals
and offer strategic financial solutions.
[The answer to the question is long. Sometimes, one-part,
Public Financing Institution is asked, and other part
Institutional Investment in corporate is asked. But both the
parts are important.]
Note: (1) The questions and their answers are based strictly
according to the syllabus prescribed by the university.
Nothing is added extra. So, it is prepared within the syllabus.
(2) It is observed from the question papers, a long
paragraph is written as a question, in that case, the last line
of the question is actual question which is to be replied. For
example- 2017 [w],2018[s], 2017[s]. w- winter, s-summer.
---------------------------------------------------------------------------------
-- The End