, I I I • •

a Ashw ln's Commerce Wor ld 0 Ashwln's Commerce Wor ld

SOURCES OF FINANCE
FOR A JOINT STOCK CO MP AN 'l

BA SIC CONCEPTS
. SOURCE
l I
I I Short -term F i n - I
I Long -term Pina .- I J.
J. 1.Pub lloOa poelt e
t,&q ulty ..,_ 2. COm mertc al Bank a
2. Pr9,. ,..ioe • •,.. 3, 'nade Cred it ..
3. Retai ned Earni ngs 4, CUet omer AdW lnoM
4. Debe ntur9 9 a.~ no
15. Loan e from Comm erGla l Bank a e. Inter- Corp orate Oapo ette
e. Loan • from Finan ctal 1net1tutton• 7, lnetalment Cred it

from two types of sources

Both long-term and short-term funds can be raised ngs. These funds belong to the
y shares, preference shares & retained earni
a) owne d funds: Owned funds consist of equit
owners. rs. Debentures, public deposits, trade
borro wed funds or loan capital: Borro
wed funds belong to the creditors or lende
b) repayable after a specified time
titute the borrowed funds. These funds are
credit, instalment credit, loans, etc. cons

EQ UIT Y SHARES_·•.
TURES. . .
shares and debenture s.
qulty shares are issued prior to preference ble only after It Is
e shares carry no preferential right s in the payment of dividend. Dividend is paya
ral Meeting
the equi ty shareholders in the Annu Gene
al
sed by the Board of Directors and approved by
mpany.
of winding up of the company.
are capital Is repaid In the last in the event profits of the
s. They are also entitled to the residual
equity shares generally enjoy voting right

rights and
se no 1. Equity shareholders enjoy voting
e the controlling pow er over the company.
Is limited to
t the 2. The liability of equity shareholders
the face value of shares subs cribed by them.
, o the I
the rate of dividend
roflts. 3. In case of successful business,
a moto rs
share capital is refunded can be very high. For example, Hero Hond
the year
ding up of the company. has paid 900% dividend on equi ty shares in
remains with the company 2002-2003.
ve right to
lty as to repayment. 4. Equity shareholders have ·the pre-empti
subscribe to new shares issue d by the company,
Such shares are called 'Right Shar es'.
shares may
5. The value of Investment In equi ty
perit y of
Increase man ifold durin g boom and pros
capital
company with substantial the company-holders of these shares earn
mands prestige In the investment gains.
Is hi h u o hi h credit

[&J] @ashwinJll
 (5
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- Ashwln's Commerce World

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1. Manipulation of control. Equity shares carry full

Ashwln's Commerce World

1. Perpetuation of ~ontrol by a fe~. Any new issue of

voting rights. This gives rise to many undesirable equity shares has to be first offered to the existing
practices by persons who seek to gain control over the shareholders {right issue). As a result the company
company. Often there is cornering of votes and comes to be managed by a handful of persons.
manipulation of control by cliques (small group) of 2. High risk. Dividend and refund of capital are both
shareholders to their own advantage. uncertain. The right to declare dividend lies with the
2. Danger of over-capltallsatJon. Capital raised through Board of Directors. Shareholders cannot increase the
equity shares is not refundable during the life time of the rate of dividend recommended by the Board of
company. Mistakes in estimation of financial Directors. Prices of shares keep on fluctuating.
requirements or over-enthusiasm may lead to over- 3. Unhealthy Speculation. Very often there is unhealthy
capitalisation resulting in lower rate of earnings and speculation in the prices of equity shares. This is more so
dividends. Financial structure becomes inflexible. during boom when the prices are rising.
3. No trading on equity. ·when the entire share capital is Directors and officers of the company may also indulge
raised through equity shares, the benefit of trading on in speculation on the basis of inside knowledge about
equity is not available. the company. Innocent and ignorant investors suffer.
4. Costly. The cost of issuing equity shares is higher than
the cost of issuing other types of securities. Underwriting
commission, brokerage and other issue expenses are
very high for equity capital.
S. lnflexlble. A company cannot issue shares in excess of
its authorised capital as stated in the Memorandum of
Association.

Preference shares are the shares which carry certain privileges or preferential rights-both regarding the dividend
and the return of capital. _
first, dividend at a fixed rate must be paid on preference shares before any dividend is paid on equity shares.
secondly, in the event of winding up of the company, preference shareholders must be paid back their capital before
equity shareholders.
Preference shares are a hybrid security comprising features of both equity shares and debentures. Like equity
shares, dividend on preference shares ls payable only when there are profits. Like debentures, preference shares
carry a fixed rate of dividend and enjoy priority over equity shares but no voting rights.

1. Cumulative and non-cumulative preference shares.

In the case of cumulative preference shares dividends not paid in a particular year are carried forward to the
next year. Such unpaid dividends go on accumulating and become payable out of the profits in subsequent years.
Generally, preference shares are cumulative. •
On non-cumulative preference shares dividends do not accumulate. In case the company does not have
sufficient profits in any year, the right to dividend in respect of that year is lost forever. The dividend claim Is not
carried to subsequent years. Shareholders cannot claim arrears of dividend in subsequent years.

2. Participating.and non-participating preference Shilres!

Participating preference shares give the holder the right to share In the profits left after the payment of dividend
to preference and equity shareholders. Holders of participating preference shares are entitled to participate In
the surplus profits of the company in addition to their normal fixed rate of dividend.
on the contrary, the holders of non-participating preference shares do not enjoy the right to share In the
surplus profits. They get only the fixed dividend.

(<1) @thecommerceworldl [8] @ashwin_jll 23 IP age

-=- Ashwi n's Comm erce World e Ashwi n's Comm erce World
3. Conve rtible and non-co nvertib le prefer ence shares
Holde rs of conve rtible prefere nce shares can get such
. d
shares conve rted into equity shares after a fixe perIO
d
On the other hand, prefere nce shares which canno t be •
conve rted into equity shares are known as non-c onver
prefer ence shares. tible
4. Redee mable and Irrede emabl e prefer ence shares
. .
The holder s of redeem able prefere nce shares can be
refund ed their capita l after the expiry of a specif ied
The intent ion to return money should be made clear period .
when the shares are issued.
Non-r edeem able prefer ence shares canno t be redeem
ed before the windin g up of the compa ny.

oweve r, the Companies Act 2013 lays down that prefer

ence shares cannot be lssu~ •~~~. CJ== -:::..= --
ars. Therefore, a com an cannot Issue Irredeemable
reference shares
ADVANTAGES
ROM COMPANY'S POINT OF VI l.!R!! :!O,r. l!!~~~ ~li!J. !!D!!~ ~=~,. s.i== -
1. Appeal to cautious investors. Preference shares greatly
1. Investors get a more stable and regula r divide nd
appeal to those invento rs who look for reasonable
before payme nt of equity dividend. Rate of divide nd
safety of their capital along with a fixed but higher
is fixed.
return than that of debentures.
2. The risk involv ed Is compa rativel y less because
2. No burden on profits. Preference shares do not put
a prefere nce share capita l is payab le before equity
fixed burden on finances as dividends are payable only
share capita l on the windin g up of the company.
out of profits. The cost of finance is also less.
3. Preference shareholders can expect to get back their
3. No interference in management. Generally, prefere nce
invest ment after a certain time period .
shares do not carry voting rights. Therefore, promo ters
4. In case of cumul ative prefer ence shares the arrears
can retain exclusive contro l over the company by
of divide nd also accum ulate and are payable In
issuing preference shares to outsiders. There is no
future .
dilutio n of control.
4. No charge on assets. Issue of prefere nce shares does
not involve any mortgage or charge on the assets of the
company. The company can keep its fixed assets free to
be used for raising loans in future.
flexibility. In case of redeemable preference shares the
amoun t can be repaid as and when the company does

~
/
raising finance throug h /
1. Lack of,,voting rights: Preference shares do not carry
greater than that of debentures. voting rights in the norma l course. When the
s not deduc tible for tax ur oses. company's earnings rise rapidly, holders of such shares
ivldend on preference shares has do not get a share in the prospe rity of the company
te before an dividend is aid on except In case of partici pating prefere nce shares.
the compa ny Incurs loss the 2. Fear of being shown the door: Holders of redeemable
high especially In case of preference shares have to face yet anothe r unpleasant
ares. prospect. The company raises capital from them when
Ion of prefere nce shares it Is badly in need of funds. But once its purpose Is
ons. served, it bids good-bye to them by paying back their
al to money.
refer 3. No capital appreciation: Preference shareholders do
ares. r:1ot get the benefi t of appreciation in their investment.
rough They do not share in the prospe rity of the compa ny
during boom period.
4. No guarantee of dividends: .Payment of dividend
on
prefere nce shares is not guaranteed. Rate of dividen d
Is genera lly modest.

(IJ] @ashwin_jll 24 IP age

a Ashwln's Commerce World
Preference shares -,,.y be.a
e
Ashwin's Commerce World
_;a:11,1ta1;..,~foi~a!!co!m!:'.pany~~u~nder~~the~fo:-:U::-awl-:;na~co=nc11t1:ai;ji::o=ns.-:--""!"""":-:;~r,;;7
1) When the
2) When hi h I mo •
3} When the co ment..

eREFERENa SHARES & EQUITY SHARES

SL. NO.
SHARES EQUITY SHARES
FACE/ Nominal Value High Low
Risk Involved Low High
Right to receive Dividend Before Equity Shares After Preference Shares
Appeallngto Cautious investor Risky Investor
Order of Refund of Capita; Before Equity Shares After Preference Shares
Rate of Dividend Generally Fixed Generally Variable

BONUS SHARES OR BONUS ISSUE

Sometimes, a company may have large undistributed profits which it wants to distribute among its shareholders.
Instead of distributing these profits as dividend, the company issues fully paid shares to them free of charge in
proportion to their existing shareholdings. These shares are called Bonus shares. Issue of bonus shares is also known
as Bonus Issue or capitalisation of the undistributed profits of the company.

A company must comply with the following conditions before issuing bonus shares:
(i) Articles of Association of the company must authorise the issue of bonus shares.
(ii) It has, on the recommendation of the Board, been authorised in the general meeting of the company.
(iii) It has not defaulted in any outsiders' payment.

• The bonus issue could not be made until the expiry of 12 months from any public or right issue and there is
no restriction as to the timing of one bonus issue and another.
• The bonus issue should be made within a period of 6 months from the date of approval of the Boards of
Directors thereof and the company has no option of changing that decision.

RIGHTS SHARES OR RIGHTS ISSUE

Section 62 of the Companies Act, 2013 provides that whenever a company proposes to increase its subscribed
capital through a further Issue of shares, it should offer such shares to the existing members of the company. The
shares which are so offered to the existing members are called Right Shares and the right of members to be so offered
is called Right of Pre-Emption.
The offer of right shares shall be made by notice specifying the number of shares offered. The notice shall give at least
30 days for the acceptance of the offer. If the offer is not accepted within this period, it shall be deemed to have been
declined. The shareholders have the right to renounce all or any of the shares offered to them in favour of their
nominees.
After the expiry of the time specified In the notice or on receiving intimation of decline of the offer, the Board of
Directors are free to dispose of the shares in such manner as they think is most beneficial for the company.

DIFFERENCES BETWEEN RIGHT SHARES & BONUS SHARESl'lli[' ;-.~J" _j;

1st. NO. ·~t-:;;:~~.>:. \)RIGHT SHARES BONUS SHARES,1~-; '. •
~- - -~-~). ·_,·(U ~~,.l.J...l.;l.; -~J_;~•.·; ....
•• 'ridlstrlbuted
.. -: ~.. ~
,~~ ~;
·toacce ,' .. _ _

(d) @thecommerceworldl [&l] @ashwin_jll 25 IP age

,- ... --- - - - --- --· - - ---- ---, ---- ----

I~{ -
. -
.. . A sh wins
• ' Commerce w orId ~
. . , , Ashwin 's Comme rce World
EMP LOY EE STO CK OPT ION PLA NS (ES OP)
An employ ee stock option plan is a scheme under which an employ ee of
the co~pa ny i~ given a right to pure
specifi ed numbe r of its shares at a stipula ted price (usually below
the marke t pnce) during a given period of ti
Only those employ ees are given this right who fulfil the specifie
d eligibil ity conditi ons (e.g., minim um period of se
in the compa ny).
Merits : The merits of stock option schem e are:
(i) This scheme can link compensation package closely to perform
ance.
{ii) This scheme enables the companies to retain efficien t employ
ees with the compa ny, thereb y red
employ ee turnove r.
Limita tions: The limitati ons of the schem e are:
(i) This scheme can be used by only the profit-m aking compa nies.
(ii) Share prices do not always reflect fundam entals.

WE AT EQU ITY SHA RES

Sweat Equity shares are the shares issued by a compa ny to employ
ees or directo rs
1. at a discount (to the market price) or
2. for consideration other than cash or
3. for providi ng know-h ow or making availab le intellec tual
proper ty rights.
The sweat equity shares are issued in accord ance with the regula
tions made by the Securit ies and Exchange Boa
India in this behalf.

RET AIN ED EAR NIN G

• C , , •• • • ·: •• MEANING: . ' ' ·.. · • . ; .. ~_.,-.. . ,·' .-,·· ,·
Retained earnings or Ploughing back of profits refers to the
year and reinvesting the same in business. This source is als
finance, Retained earnings are a popula r source of capital for

• . FACTORS AFFECTING REl

. .. . .
-

1. Generally, more are the net profits of a compa ny, greater

..Js the capac ity to plough back profits
.
2. A compa ny which follows a policy of paying liberal and regula
_,. r divide nd every year may not be able to
retain as much profits as a compa ny followi ng a conser vative
dividen d policy. . •...
3, The age of the compa ny affects the practic e of self-fin ancing
. New compa nies genera lly do not retain much
profits due to their desire to satisfy the shareh olders . ,__.,,..
✓---. ·- 0 ;.

The future plans of the compa ny regard ing mode rni~io n

and expan sion also have an l!"fluen ce on
retaine d earning s.
/

It Is the most conven ient and econom ical (i) Shareh olders of a compa ny having large
ethod of finance . No legal formal ities are reserve s and surplus get the benefi t of safety
lved and no negotia tions are to be made. of fnvest ment.
nancia l-struc ture 9'f the compa ny (ii) Shareh olders will receive regula r dividen ds as
llv flexible . No charge Is create d deficiency of one year will be made good out
ets and no restric tions are put of the undist ributed profits of previous years
of manag ement . (iii) Plough ing back of profits will add to the
Joflts adds to the financial profita bility and earnin g capaci ty of the
ltworth lness of the company. Shareholders will benefi t from the
prospe rity of the company.

[Ci] @ashwin_Jll
a Ashwln's Commerce World O
face unforeseen contingencies and trade
Ashwin's Commerce World
FOR THE SOCIETY ·t 1
cycles with ease and economy. (i) corporate savings accelerate the rate of capi a
(iv) Retained earnings can be used to redeem formation in the country. h
debts and to replace obsolete assets. (ii) Surplus makes the economy more stable. T e
(v) Reserves created by ploughing back of profits rate of corporate failure is reduced due to
can be used to stabilise the rate of dividend on greater capacity of enterprises to absorb
equity shares. Regular dividends help, to depression and other crises. . .
improve, relations with shareholders. (iii) Companies can adopt modernisation a~d
rationalisation schemes. These add to industrial
productivity and flexibility.
. .. .DEMERITS . . f
(i) The management of a company may not always use the retained earnings in the best mtereSts 0
shareholders. It may invest them in unprofitable fields or may spend them wastefully.
(ii) Too much dependence on retained earnings may tempt the management to issue bonus shares to the
equity shareholders. Frequent capitalisation of profits may result in over-capitalisation.
(iii) The practice of ploughing back of profits may be used to manipulate share prices on the stock exchange.
Vested interests may speculate in the company's shares to deceive genuine and uninformed investors.
(iv) Heavy reinvestment of earnings year after year may cause dissatisfaction among shareholders as they
get low dividends.
(v) Indiscriminate use of retained earnings may result in monopoly and concentration of economic power in
a few hands.

It is an acknowledgment of debt as well as an undertaking to repay the specified sum with interest on or before
the prescribed date. A debenture is a certificate issued by a company under its common seal as acknowledgement
of debt with or without a charge on the company's assets.
Interest on debentures is paid at a fixed rate and it is payable periodically until the maturity and repayment of
debentures. •
Debentures car no votin ri hts bu h • pany's assets.

1. Debentures represent borrowed funds.

2. Interest on debentures is paid at a fixed rate.
3. Interest Is payable every year irrespective of whether there are profits or not.
4. Debentures generally carry no voting rights.
5. Debentures generally involve a charge on the assets of the company.
~i=es~~~&+..,,..................-'":""'""....,...~'.'m~
1. Naked and mortgage debentures.
Naked or simple debentures are not secured as no property is pledged or mortgaged on their issue. There are
more promises to pay: In case of default the debenture holders can merely sue the company for recovering
their money.
On the other hand, mortgage or secured debentures are issued by creating a fixed or floating charge on the
company's assets. In case, the company makes a default in payment, the debenture holders can recover their
dues from the mortgaged property.
• A fixed charge is created on specific and existing assets of the company. The company cannot dispose
off these assets without the consent of the debenture holders.
• On the other hand, a floating charge is created on both the existing and future assets of the company.
The company can use these assets in the ordinary course of business. •
2. Redeemable and irredeemable debentures:
Redeemable or callable debentures are repayable on a predetermined date or at any time prior to their
maturity at the option of the company.
But irredeemable or perpetual debentures are repayable only at the time of winding up of the ii!====
( ~) @thecommerceworldl [&l] @ashwin_jll 27 IP age
1/

a
3
Ashwln's Commerce World
• Bearer and registered debenture s.
O Ashwin's Commerce World

the Regi
Bearer debentures can be transferred by mere delivery as no record of such debentures is kept in
. No lega
of Debenture holders. Interest is paid on the production of coupons attached to such debentures
formalities are required for their transfer and no formal intimation to the company is necessary.
only to the
But registered debentures are recorded in the Register of Debenture holders. Interest is payable
registered holders. Such debentures can be transferred only by transfer deed or intimation to
the company and
not mere delivery.
4. Convertible and non-convertible debentures.
s Into
In case of convertible debentures, the debenture holders are given the option to convert their debenture
conditions . This serves as an incentive to the debenture
equity shares after a specified period and on certain
holders who can in course of time participate in the profits and management of the company.
Nonconve rtible debentures do not carry any right to be converted into equity shares.
ADVANTAGE
From the viewpoint of debenture holders From the viewpoint of the company

1. Appeal to cautious investors. Large amount of 1. Economical source. A company can raise funds
finance can be raised by issue of debentures through debentures at a relatively low cost. This Is
from cautious and orthodox investors who because investors consider debentures a safe
prefer safety of investment and a fixed return. In investment. Debentures can be sold more easily than
tight money conditions, debentures are the best shares. Underwriting commission, brokerage and
source of finance. other expenses of issue are lesser.
2. Regular return. Debenture holders are paid 2. Freedom of management. Debentures do not carry
interest at a fixed rate and at periodical intervals, voting rights. Therefore, a company can raise fun
Irrespective of profits. Therefore, debenture without diluting or weakening the control of the
holders are free from risk of fluctuations in the existing members. The management retains Its
company's earnings. independence as there is no interference from
3. Safety of investment. Debentures are usually . ,.,
debenture holders.
·--- •
3. Trading on equity. Interest on debentures Is paid at
secured by a charge on the company's assets.
Therefore, their repayment is assured. a fixed rate. After payment of interest, the
remaining profits are available to shareholders.
/ When the earnings of the company Increase, the
rate of dividend on equity shares can be Increased.
This is known as trading on equity.
DISADVANTAGE

urden of Interest. Interest on , 1:' 'Nov'"o'tlng 'rights. ·oebenture holders have no votlns
has to be paid every year rights in the managem ent of a company. Therefore,
e of profits. During periods of they remain at the mercy of the shareholders.
, It becomes a heavy burden on the Debenture holders have little /
apP,eal to investors
,,,,,,,,.
mlngs. who want a share in the prosperity of the company.
. The credit- 2. High' unit price. The unit price of debentures Is
Issued a large generally higher than that of shares. Therefore,
orrowing from small investors may not be able to purchase
ons becomes debenture s.
3. Unattractive~-Enterprising Investors who want high
ually Involve· return and appreciation of capital find debentures
nnotralse unattracti ve. Debentures of new companies do not
It has appeal to the Investors.
. of
- Ashwin's Commerce World O
4. Reduction In dividend. During times of low
Ashwin's Commerce World

earnings, very little profit might be left after

payment of Interest on debentures. The company
may not be able to pay enough dividends and
the market value of Its shares may go down.

Redemption certain period.

Yleld of Profit
· Order of Rep

LOANS FROM COMMERC IAL BANKS

Commercial banks usuallv provide short-term finance because most of their deposits are short-term deposits.
Meaning: Under a term loan, a bank advances a fixed amount in lumpsum to the borrower for a specified period. The
interest is changed at a fixed rate on the sanctioned amount. The loan is advanced against the security of some assets
or on the personal guarantee of the borrower.
Advantages:
(i) Funds are available for the specified period.
(ii) Loans from commercial banks provide the benefit of trading on equity.
(iii) Relationship with a reputed bank is beneficial for the borrower.
(iv) Can be repaid In easy instalments.
(v) Funds are provided In many ways. Borrower has many choices.
Disadvantages:
(i) Assets may have to be pledged or mortgaged for raising bank loans.
(ii) Several time-consuming formalities are involved in raising loans from commercial banks.
(iii) Interest on bank loans has to be paid irrespective of profit/loss.

LOANS FROM FINANCIAL INSTITUTIO NS

Meaning: The Government of India had set up several special institutions In the country to provide long-term and
medium-term finance to business enterprises. They provide finance both in the form of equity and debt.
These institutions are not simply financial institutions. They also provide promotional, technical and managerial
services. •
IFCI (Industrial Finance Corporation of India), IDBI {Industrial Development Bank of India), ICICI (Industrial Credit
and Investment Corporation of India), SIDBI (Small Industries Development Bank of India) are well-known
development banks in the country.

Advantages: The main advantages of institutional finance are as follows:

1. Both risk as well as loan capital is available. Special financial Institutions provide underwriting facllltles also.
Benefits of trading on equity are available.
2. New companies which may find It difficult to raise financial from the public can get finance from these
institutions.
3. As these Institutions carry out a thorough Investigation before granting assistance to a concerned relationship
with them helps to Increase the creditworthiness of a company.
4. loans and guarantees In foreign currency and deferred payment fadlltles are available for the Import of
required machinery and equipment.

(o•] @thecommerceworldl [&]] @ashwin_jll 291Page

 a Ashwin's Commerce World G Ashwin's Commerce World
5. !he rate of interest and repayment procedures are convenient and economical. Facilities for repayment In
instalments are made available to deserving concerns.
6 • Along With finance, a company can obtain expert advice and guidance for the successful
administration of projects.

Disadvantages: However, institutional financing may involve the following limitations: .

1. The concern requiring finance from special financial institutions has to submit itself to a thorough investlgatlo
number of formalities and documents are involved.
2. Many deserving concerns may fail to get assistance for want of security and other conditions laid down byt
institutions.
3. Sometimes these institutions place restrictions on the autonomy of management. In some cases, they insl
the appointment of their nominees on the Board of Directors of the borrowing company.

PUBLIC DEPOSITS
P • osits refer to th ublic with non-bankin
re cans from the reholders of the co
deposits originated when banks were not well developed in India.

Advantages: As a source of finance, public deposits offer the following advantages:

(i) Economical. The interest payable on public deposits is lower than the interest charged by banks and spe
financial institutions. Interest paid on deposits is a deductible expense for income tax purposes
(ii) Simple. Administrative cost of deposits is lower than that involved in the issue of shares and debentures.
procedure of inviting public deposits is simple and lesser formalities are involved.
(iii) Trading on equity. As the rate of interest is fixed the company can derive the benefits of trading on equity,
using public deposits, a company can pay a higher dividend to equity shareholders and thereby raise
reputation.
No charge on assets. The public deposits generally do not involve a charge·on.the asse'ts of the company.
company can use its assets as security to borrow from other sources.
Flexibility: Public deposits introduce flexibility in the financial structure of the company. There is no danger
over-capitalisation and the deposits can be repaid when they are not required. , . ,r
Interference. There is no dilution of shareholders' control because the depositors have no voting righ
ey cannot interfere with the internal management of the company. ,- •
/.-
: The method of raisin finance throu h the ublic de osltssuffers from the followin disadvanta
Public deposits are an uncertain and unreliable source of finance. The~e• ositors ma
n the conditions in the econom are uncertain. De osits ma be/withdrawn whenever
I the com an is in a sha osition. Therefore, public deposits are called 'fair weather friend
to depend upon them for long-term financing.
posltors face high risk as they do not get any security for their investment. Manageme
s It likes.
Public deposits are generally not available to new companies and those wit

idespread use of public deposits restricts the growth of a healthy capita

te pattern and results in the dearth of sound industrial securities. A spurt I
credit planning and plan priorities of the Government.
nv may be tempted to Indulge in over-trading and speculation wit
o Its get blocked in fixed assets, the company may fail to repay
 0 Ashwln's Commerce World

~ Jeans and Advances. A loan is a direct advance made in lumpsum which is credited to a separate loan account in th e name
of the borrower. The borrower withdraws the full amount In cash immediately and undertakes to repay it in one, or more
Instalments. d
The borrower Is required to pay the interest on the whole amount from the date of sanction. Loans may be secure or
unsecured. Loans granted for some immediate need, e.g., to hold stocks are known as transaction loans. .
J,, Cash Credits. It Is a formal and revolving credit agreement under which a borrower is allowed to borrow up_ to a ce,:tain
limit. Unlike a loan, it is a running account from which the amounts can be withdrawn and paid back from time to time,
subject to the stipulated amount. Interest Is charged only on amount used. . .
Cash credit is of two types. When the cash credit Is not backed by any security, it is known as clean cash credit. Un_der it,
the borrower submits a promissory note which is signed by two or more sureties. In case of secured cash credit. the
borrower Is required to give security In the form of tangible assets or guarantees.
In both types of cash credit, the borrower has to pay Interest only on the amount actually utilised.
£ Bank Overdrafts.Jt is a kind of a temporary financial accommodation extended by a bank to its regular customers. U~fdi·eedr
this arrangement, a customer having a current account with the bank is allowed to overdraw his account up to a speci
amount. A business enterprise can enter into this arrangement to take care of a temporary (a few days) shortage of working
capital. Interest Is charged on the amount actually overdrawn and not on the amount sanctioned by the bank.
!,. Discounting of BIiis. This implies procuring cash from a bank in exchange for credit instruments. Commercial banks provide
short-term finance to business concerns by discounting their bills of exchange. Banks charge some commission for this
service by paying a price lower than the face value of the credit instrument. The holder of the instrument remains liable
to the bank if the instrument is dishonoured on maturity.

Bank credit has several advantages: Bank credit suffers from some disadvantages:

1. It is flexible and can be repaid whenever desired; 1. The borrower has to perform several legal
2. Banks maintain secrecy of the borrower's affairs; formalities;
3. Ban~s provide funds in many ways and the borrower 2. Banks grant loans generally against some security
has a choice; and a charge is created on the company's assets;
4. Banks do not interfere in the management of the 3. Bank loans are available for a short period and there
client's business; is uncertainty of renewal;
5. Loans can be repaid in easll instalments. In deserving 4. Banks charge a high rate of interest and a fixed
cases banks reschedule payments burden is created on profits.

RADE CREDIT
Trade credit is the credit extended by one business firm to another as incidental to sale or purchase of goods and
services. It is also known as mercantile credit. Trade credit may be defined as credit extended by sellers to buyers at
all levels of the production and distribution process down to the retailer
It arises out of transfer of goods and is unsecured. Trade credit is usually granted for periods ranging from 15 days to
three months. .
Advantages: Disadvantages:

1. Trade credit is a very simple and convenient method 1. The prices charged for credit sales are usuallll higher.
of raising short-term finance. 2. The supplier has to bear loss of bad debts In addition
2. No formalities are involved and the credit is readily to the costs of administering credit accounts.
available to reputed business firms. 3. He requires a larger working capital to supply goods
3. No interest is pallable and no security Is to be paid. on credit.
4. It is flexible source of finance as no charge is created 4. The buyer loses cash discounts.
against the assets of the company.

(c:1) @thecommerceworldl [&l] @ashwin_jll 31 IP age

r
As hw ln's Co mm erc e Wo
rld • G Ash wln 's Co mm erc e Wo rld

• I
. credit. The buyer
h f .. . and oth er durable goods on
Ins talm ent cre dit ref~rs t O t e ac,llty of buying machinery, equ ipm ent in a num ber of lnstalme
pay a par t of the the balance Is payable
pric e of the ass et at the tim e of del ive ry and t of inst alm ent Itse lf. ·
sup pl" h
nce due and the inte res t is included in the amoun
bala
,er c arges inte res t on the
the
. ngement, the ownership of
fi d • chase basis. Under this arra
A bus.iness firm maY aI so b uy uce assets on hire pur Purchase of fixe d ass ets on Ins talm ent a
plie r unt il all the inst alm ents are paid by the buyer. s, ma de from such u
rem ain s With the sup nts out of the ear ning
h bles a bus ines s firm to util ise the asset and make payme
p~r c ase ba~is ena
be paid in each instalment.
hig h rat e of inte res t has to

ADVANTAGES: cost at the tim e of delivery.

nt can be ma de in inst alm ents afte r paying a par t of the
• The balance pay me ment out of the earnings.
to use the asset and make pay
• It enables the business firm
DISADVANTAGES:
be paid in each instalment
• High rate of inte res t has to not be needed.
purchasing asset which may
• Unnecessary expenditure in low earnings.
instalments in futu re due to
• It ma y become diff icu lt to pay

(A CC O UN TS R EC EI VA BL E FINANCING)
FA C TO R IN G the safe or mortgage of boo
k debts. Finance com
ugh
anl
g implies raising finance thro eivable or a ainst the sec
Accounts receivable financin thro u h out ri ht urchase of accounts rec
nce to bus ines s con cer ns
factors rovide fina
m. The debt
accounts receivable. ts receivable pledged with the
ies gen era lly ma ke adv anc es up to 60% of the accoun deb tors ma y be requl
The finance compan pany. Sometimes,
nts to it whi ch in turn forw ards the m to the finance com wn as 'fac tori ng' .
the firm make payme pan y Ou trig ht sale of accounts
receivable is kno
ctly to the fina nce com But it is an ex ensive m
make payments dire effo rt of collect in debts and
bad deb t losses.
n is reli eve d of the cost and
The business concer discount.

/
e
advance pay me nt at the tim
suppliers of goo ds req uire the customers to dep osi t an ere d/b ook
cases, manufacturers or ds ord
s a par t of the price of the goo
customers advance represent
ore the del ive ry of goods. The
e
ers to be supplied at a late r
date. wa itin g per iod for delivery,
pro duc ts wh ich are in sho rt sup ply or wh ich inv olv e a of the artl
ent Is used In case of dellver y
such advance. At the tim e of
nominal interest is paid on
lep hon e connection, etc. A ,,, /P
article.
~usted against the price of the

which has surplus f

::..i.=-iW!.l::....o.:<..:e:.:..:.:m. n""'
..
,_,o t""hs,..) from ano the r company
~~.JQ~;: a financier. These de
The lCD s are gen era lly uns ecured and are arranged by
. row er is not disclos
lega l form alit ies are invo lved. The ide ntit y of the bor
e no the tim e period. In
n the am oun t involved and
n ICDs varies depending upo s. ICDs are ava
banks and financial inst ion
itut
n that payable on loans from

ies are Involved.

nlm"m form alit ies / less legal formalit
banks).
Uy low er (tha n tha t charged by
and brokers.
'1,r ous h per son al contacts
no change on assets / no fixed or floa ting charge

II not dlsdosed.
a Ashwln's Commerce World e Ashwln's Commerce World
SOURCES OF FINA NCE OF JSC - DIRECT QUESTION BAN K
~
ISC-2 014
the main forms in which financial assistance from a comme ISC-1 993
rcial bank may be
MARKS
The main terms In which financial assistance from a bank may 2
be available are:
(i) Cash credit
(ii) Loan/advances/loans & advances
(iii) Bank overdrah/Bank O/D
(iv) Discounting of Bill

between bearer debentures and registered debentures.

Transfer Bearer debentures can be Registered debent ures can be

transferred by mere delivery transfe rred by transfe r deed.
Legal No legal formalities are require d for Intimat ion to the company for their
Formalities their transfe r and no intimat ion to transfe r is necessary.
the company is necessary
Record No record of such debentures kept Registered debent ures are record ed in
in the register of debent ure holders the register of debent ures holders .
Interest Interes t is paid on the produc tion of Interes t is paid by the company to
Payments coupons attached to such registe red debent ure holders withou t
debentures. presen ting coupons.

COMMENTS: Follow ing were the commo n errors made by candid

ates while writing this answe r: differe nces
given did not correla te with one anothe r; answers were inadeq
uate and incomp lete; many candid ates got
confused betwee n the points of transfe rability , legal formal ities
and record .
Question 3
ISC - 2014
xt of right shares, bring out the meanin g of pre-em ptive right.
Answe r 3
Section 62 of the Companies Act, 2013 provides that whene
ver a compa ny proposes to Increa se
Its subscribed capital throug h a further Issue of shares, It should
offer such shares to the existin g
membe rs of the company. The shares which are so offered
to the existin g memb ers are called
Right Shares and the right of members to be so offered is called
Right of Pre-Em ption.

COMMENTS: Many candid ates did not write the term 'existin
g shareh olders '. They wrote that these shares are
issued to directo rs or promo ters or employ ees, instead of writing
that the right shares are issued to the existin g
shareh olders. Some candid ate confused 'right shares' with sweat
equity shares and bonus shares.
Questi on 4
ISC - 2014
What are equity shares? Explain any three advantages of
Issuing equity shares from the point of ISC-
view of a company. 2018

Equity shares: The shares which carry no prefere nce rights MARKS
or priority in the payme nt of dividen d
and in the repaym ent of capital are called equity shares. 4

(01 @thecommerceworldl .(ml @ashwin_jll 33 IP a g E

 - Ashwln's Comm erce World O Ashwin's Commerce World
VANTAGES FROM COMPANY'$ PO/NT OF vti
S. N0 •b the company's resources because
Urden on earnings. Equity shares impose no burden on
th e divide nd on such shares is payable only at the discretion of the management, subject to
h t· f . d" f h
6 . !:;.:.:a nllabl lity of adequ ate profits. 1Y at t e 1me o win mg up o t e
· ent capita l. Equity share capita l is refund ed on
ny for ever. There Is no liabilit y as
compa n~. Therefore, equity capital, remains with the compa
to ~paym ent.
7 No charg e on assets. Equity shares do not create any charge or mortga ge on the assets of the
•
loans.
compa nl!, The compa ny is free to use its prope rty for raising

--·
ny with substa ntial equity capita / commands prestige In the
Source of strength. A compa
credit worthi ness.
Inves tment marke t. Its ability to borrow is high due to high

ISC - 201 1
ISC- 20J •
What are swea t equity shares?
Answ ers
to employees or directo rs
Swea t Equity shares are the shares issued by a compa ny
4. at a discou nt (to the marke t priceJ or
S. for consid eratio n other than cash or
prope rty rights. 'i
\
6. for provid ing know- how or makin g availa ble intelle ctual
The sweat equity shares are issued in accord ance with the regula tions made by the Securities if
i.
and Exchange Board of India in this behal f and bo
sed betwe en sweat equity shares, right shares 11 ,

COMM ENTS : Major ity of the candidates got confu

shares.
ISC-2 01',
Quest ion 6 ISC- 202(1
of trade credit as a short term
What is mean t by trade credit ? Menti on two advan tages ISC- 2001'
•
sourc e of financ e.

firm to anoth er as incide ntal to sale or

Trade credit is the credit extended by one business
ntile credit. Trade credit may be define d
purch ase of goods and services. It is also know n as merca
produ ction and distrib ution proces s down
as credit exten ded by sellers to buyer s at a/I levels of the
to the retaile r
15 days to three month s.
Trade credit is usuall y grante d for period s rangin g from
vanta es:
short- term financ e.
rade credit Is a very simple and conve nient metho d of raising
ble to repute d busine ss firms.
forma lities are involv ed and the credit is readil y availa
able and no secur ity is to be paid. --
candi dates wrote about cash credit or they wrote th.,
I NTS: Instea d of writin g about trade credit , some
• ,coun t allow ed by the seller to the buyer .
ISC- 2015
any can collect ISC- 2018
types of debentures throu gh which a Public Limited Comp ISC- 2006
tal from the public.
 Ashwln's Commerce World 0 Ashwln's Commerce World

What Is retained earning? Explain any two of Its merits and two of Its demerits.
OR
A company has large undistributed profits which It wants to capitalise. Name and explain the
security which should be Issued by the company.
MARKS
Retained earnings or ploughing back of profits refers to the process of retaining a part of the net 5
profit year after year and reinvesting the same in business. This source is also called 'self-
financing' as it is an internal method of finance. Retained earnings are a popular source of capital
for modernisation and expansion of business.
MERITS
(vi) It is the most convenient and economical method of finance. No legal formalities are
involved and no negotiations are to be made.
(vii) The financial-structure of the company remains fully flexible. No charge is created
against the assets and no restrictions are put on the freedom of management.
DEMERITS
(vi) The management of a company may not always use the retained earnings in the best
Interests of shareholders. It may invest them in unprofitable fields or may spend them
wastefully.
(vii) Too much dependence on retained earnings may tempt the management to Issue
bonus shares to the equity shareholders. Frequent capitalisation of profits may result in
over-capitalisation.

low
Before Eqlity Shares ference Shares
Cautious investor or
enceShares

t by participating preference shares?

Participating preference shares give the holder the right to share In the profits left after the
payment of dividend to preference and equity shareholders.
Holders of participating preference shares are entitled to participate in the surplus profits of the
company in addition to their normal fixed rate of dividend.

(d) @thecommerceworldl [Gl] @ashwin.Jll 3S IP age

 e Ashwin's Commerce World

Sometimes, a company may have large undistributed profits which it wants to distribute among
its shareholders. instead of distributing these profits as dividend, the company issues fully paid
shares to them free of charge in proportion to their existing shareholdings. These shares are called
Bonus shares. Issue of bonus shares is also known as Bonus Issue or capltallsation of the
undistributed profits of the company.

Explain the meaning of debentures. State any four disadvantages of debentures.

It Is an acknowledgment of debt as well as an undertaking to repay the specified sum with interest
on or before the prescribed date. A debenture is a certificate issued by a company under Its
common seal as acknowledgement of debt.
Interest on debentures is paid at a fixed rate and It is payable periodically until the maturity and
repayment of debentures. Debentures carry no voting rights but they generally Involve a charge
on the company's assets.
DISADVANTAGE
From the viewpoint of the company
s. Permanent burden of Interest. Interest on debentures has to be paid every year Irrespective of
profits. During periods of depression, it becomes a heavy burden on the company's earnings. •
6. Reduction in credit standing.. The credit-worthiness of a company which has issued a large
number of debentures is low. Borrowing from banks and financial Institutions becomes difficult.
_ From the viewpoint of debenture holders
No voting rights. Debenture holders have no voting rights In the management of a company.
Therefore, they remain at the mercy of the shareholders. Debenture holders have little appeal to
investors who want a share in the prosperity of the company.
High unit price. The unit price of debentures Is generally higher than that of shares. Therefore,
small investors may not be able to purchase debentures.

rl11B IS a way of raising short term finance through sale or mortgage of book debts/Accounts
ble/Debtors. Finance companies (LIKE Bajaj Finance) purchase Accounts Receivable and
to 609' advances against accounts pledged with them.
ness Is relieved of the cost and effort of collectlng debts and bad debts losses. The debtors ~I
.,I
flnn malce payments to ft, which In turn forwards them to finance compani~s. i
";J

':. 1.11 NI~· 1\.1,lfly c.1ndidate~ misinterpreted 'factoring' as 'factory' and hence wrote about factors of production
·,,,·.I r,, p, o(,." th<' rd w m.1 terial into finished goods. The terms Fixed Assets and Current Assets were substituted
.,, , ,,1111h H,•ct>iv.ib/L• /Jy ~omt' candidates.

ISC- 2018
louahlna back of roflt, from the company's point of view.

Othecommerceworldl IIJJ @ashwlnJll

a Ashwin's Commerce World 0 Ashwin's Commerce World

Answer 13 ADVANTAGES OF RETAINED EARNINGS FOR A COMPANY

I. It is the most convenient and economical method of finance. No legal formalities 3
are involved and no negotiations are to be made.
II. The financial-structure of the company remains fully flexible. No charge is created
against the assets and no restrictions are put on the freedom of management.
Ill. Ploughing back of profits adds to the financial strength and creditworthiness of
the company. A company with large reserves can face unforeseen contingencies
and trade cycles with ease and economy.
IV. Retained earnings can be used to redeem debts and to replace obsolete assets.

.
COMMENTS: Several candidates gave the merits of retained earnings from t
,- . .
•• 1n 1
What are the different types of short-term financial assistance provided by the commercial
banks to business houses?
OR
Explain Bank Overdraft and Bill Discounting.

1. Loans and Advances. A loan is a direct advance made in lumpsum which is credited to a separate
loan account in the name of the borrower. The borrower withdraws the full amount in cash
immediately and undertakes to repay it in one, or more instalments.
The borrower Is required to pay the Interest on the whole amount from the date of sanction.
Loans may be secured or unsecured.
2. Cash Credits. It is a formal and revolving credit agreement under which a borrower is allowed
to borrow up to a certain limit. Unlike a loan, it is a running account from which the amounts can
be withdrawn and paid back from time to time, subject to the stipulated amount. Interest is
charged only on amount used.
3. Bank Overdrafts. Under this arrangement. a customer having a current account with the bank
is allowed to overdraw his account up to a specified amount. A business enterprise can enter into
this arrangement to take care of a temporary (a few days) shortage of working capital. Interest is
charged on the amount actually overdrawn and not on the amount sanctioned by the bank.
4. Discounting of BIiis. This implies procuring cash from a bank In exchange for credit instruments.
Commercial banks provide short-term finance to business concerns by discounting their bills of
exchange. Banks charge some commission for this service by paying a price lower than the face
value of the credit instrument. The holder of the instrument remains liable to the bank if the
instrument is dishonoured on maturity.

COMMENTS: Majority of the candidates wrote about trade credit, instalment credit or factoring instead of cash
credit.

Question 15 ISC- 2019

short-term sources of finance for a Joint Stock Company.
Answer 15
Short-term sources of finance for a Joint Stock Company are:
• Loans and advances
• Cash credit
• Discounting bills of exchange
•
Bank overdraft
•
Trade credit
•
Customer advances
COMMENTS: Many candidates, instead of explaining the short-term sources of finance, explained the long-term
sources of funds like shares and debentures.

[O') @thecommerceworldl [&l] @ashwin_jll 37 IP age

..
. . . Ashwin's Commerce Wor
Id
V
, . Ashwin's Commerce World
ISC- 20
ISC- 2l1
Give three differences between Shares and Debentures.
SQP- 2r1 •
• ·1_
Shares Debentures
Basis
Shareholders are the owners of Debenture holders are the creditors
Status
the company/owned fonds of the company/borrowed funds
Returns Equity Shareholders are paid Debenture holders are paid fixed
fluctuating dividend out of the interest irrespective of the
profits/ Appropriation of profits profits/Charge against profits
Order of Shareholders are paid after the Debentures holders are paid before
repayment debenture holders. the shareholders.
Voting rights Equity shareholders get full Debenture holders get no voting
voting rights. rights.
Terms of Shares are usually irredeemable/ DebenttJres are usually redeemable
repayment/ Shares are redeemable at the after a fixed period of time.
Redemption time of winding up.
Risk to holders Shares are not secured and carry Debentures are generally secured
high risk. and carry low risk.
Restrictions on There are certain restrictions on There are no restrictions on the issue
issue the issue ofshares. of debentures.
Convertibility Shares cannot be converted into Debentures may be converted into
debentures. equity shares.
COMMENTS: This was answered correctly by most of the candidates.

Question 17 ISC- 201<.

ree disadvantages of issuing ares, from th

constitute an important pa hare capital

. many
sons who seek to ain control over the com an . Often there is
ulation of control by cliques (small group) of shareholders to their

. .
pltalisation: Capital raised through equity shares is not refundable during the
pany. Mistakes in estimation of financial requirements or over-enthusiasm may
lisation resultin in lower rate of earnin s and dividends. Financial structure

._When the entire share capital is raised through equity shares, the benefit
Is not available. I 0

of Issuing equity shares Is higher than the cost of issuing other types of
mmission brokera e and other issue ex enses are ve hi h fore uit

cannot Issue shares in excess of its authorised capital as stated in the

·.11,clicl,1tl",. instead of writing the demerits of issuing equity shares, wrote the merit·.
t- tlH· d1c<1dvilnt,1ges from the shareholders point of view.

ISC-2020
 Answer 18
Ashwln's Commerce World G
Ashwin's Commerce World
MARKS
ISifieS'of Debentures from the viewpoint of the Holdeij Debttnture
3
4. Appeal to cautious Investors. Large amount of finance can be raised by issue of debentures
from cautious and orthodox Investors who prefer safety of Investment and a fixed return.
In tight money conditions, debentures are the best source of finance.
5. Regular return. Debenture holders are paid interest at a fixed rate and at periodical
Intervals, Irrespective of profits. Therefore, debenture holders are free from risk of
fluctuations in the company's earnings.
6. Safety of Investment. Debentures are usually secured by a charge on the company's assets.
Therefore, their repayment is assured.
COMMENTS: Most candidates wrote the merits of debentures from the viewpoint of a Company, like having no

.
voting rights. Some candidates got confused between debentures and shares.

louestion . .
hlal1!11¥!1!,."'...
19
Explain four advantages of raising funds from Commercial Banks.
ISC-2017
ic;:r, - 2020
"'-*.,,r.r--:..:....,e_::..::...c:..:....:....::.:..:..:..:..:-"---'...:.:..:..:..:c.:....;_.:_.._---'--'------------------j-MARKS
Advantages of raising funds from Commerclal Banks: 4
(vi) Funds are available for the specified period.
(vii) Loans from commercial banks provide the benefit of trading on equity.
(viii) Relationship with a reputed bank is beneficial for the borrower.
(ix) Can be repaid in easy instalments.
(x) Funds are provided in many ways. Borrower has many choices.

Explain any 2 advantages and 2 disadvantages of Public Deposits.

rm■a----=----------"'----____:.------------rlillMARKS

Advantages: 4
(vii) Economical. _The interest payable on public deposits is lower than the interest charged by
banks and special financial institutions. Interest paid on deposits is a deductible expense for
income tax purposes.
(viii) Trading on equity. As the rate of interest is fixed, the company can derive the benefits of
trading on equity. By using public deposits, a company can pay a higher dividend to equity
shareholders and thereby raise its reputation.
Disadvantages:
(vi) Unreliable._Public deposits are an uncertain and unreliable source of finance. The depositors
may not respond when the conditions in the economy are uncertain. Deposits may be
withdrawn whenever the depositors feel the company is in a shaky position. Therefore, public
deposits are called 'fair weather friends.
(vii) Risk to Investors. ·Depositors face high risk as they do not get any security for their
investment. Management may use the deposits as it likes.

ISC-2023
What are Preference Shares? Give any four types of Preference Shares. ISC-1993
MARKS
Preference shares are the shares which carry certain privileges or preferential rights-both s
regarding the dividend and the return of capital.
First, dividend at a fixed rate must be paid on preference shares before any dividend is paid on
equity shares. Secondly, in the event of winding up of the company, preference shareholders must
be paid back their capital before equity sharehoi'ders.
Preference shares are a hybrid security comprising features of both equity shares and
debentures. •
TYPES OF PREFERNCE SHARES:

[ d] @thecommerceworldl [Gl] @ashwinjll 39 IP age

-
I CuAshwin's commerce World IIIJt.
" Ashwln's Commerce World
• n IIIUlative Preference Shares: In the case of cumulative preference shares dividends
ot Paid in a partl~ular year are carried forward to the next year. Such unpaid dividends
~o on accumulating and become payable out of the profits in subsequent years.
II. N~~era!_ly, Preference shar~s are cumulative.
• on-Cumulative Preference Shares: on non-cumulative preference shares, dividends
do not accumulate. In case the company does not have sufficient profits in any year, the
right to dividend in respect of that year is lost forever. The dividend claim is not carried
t_o__s~bsequent years. Shareholders cannot claim arrears of dividend in subsequent years.
Ill.
~mulatlve Preference Shares: Participating preference shares give the holder the right
to share In the profits left after the payment of dividend to preference and equity
shareholders. Holders of participating preference shares are entitled to participate In the
~urplus profits of the company in addition to their normal fixed rate of dividend.
Non-Cumulative Preference Shares: On the contrary, the holders of non-participating
preference shares do not enjoy the right to share in the surplus profits. They get only
the fixed dividend.

Question 22
SQP- 711
hares are called hybrid securities in the capital market. Justify the statement b
ree types of Preference shares.
Answer 22
Preference shares are a hybrid security comprising features of both equity shares and debentures.
equity shares, dividend on preference shares is payable only when there are profits. Like
ntures, preference shares carry a fixed rate of dividend and enjoy priority over equity shares
no voting rights.
ccording to the given statement the followings are types of Preference Shares:
I. Cumulative and non-cumulative preference shares: In the cumulative preference shares,
dividend not paid in the particular year are carried forward to the nest year. On the other
hand, in the non-cumulative preference shares dividend do not accumulate.
0

II. Participating and non-part,icipating prefe ren.ce ·shares; Participating preference shares
give the holder the right to share in the profits left after the payment of dividend to
preference and equity shareholders. On the other hand, the holders of non-participating
preference shares do not enjoy the right to share in the surplus profits. They get only the
fixed dividend.
Convertible and non-convertible preference shares; Holders of convertible preference
shares can get such shares converted into equity shares after a fixed period. On the other
hand, preference shares which cannot be converted into the equity shares are known as
non-convertible preference shares.

SQP- 207.
h solutions, a rapidly growing start-up company, faced the challenge of attracting
p talent' In a competitive market. To address this, the company decided to
programme aimed
I
at rewarding and lncentivlslng key employees and

of shares that can be issued by the company.

ued by the company. 4

at a company Issues to Its employees or directors. The shares
ration other than cash. The purpose of Issuing sweat equity
harder and contribute to the company's success.
ding know-how or for making Intellectual property

• I :J
- Ashwln's Commerce World G Ashwln's Commerce World
The sweat equity shares issued to employees or directors must be su bJe
• ct t O a lock-in period of
f d
. • d h h cannot be trans erre
three years from the date of allotment. During the lock-in peno , t es ares
or sold by the employee or director who has been issued the shares.
ndidates.

. . . ~

Anjum Is a first-time investor wanting to invest "10 lakhs in long term capital appreciation. She
SQP-2025
ISC-2016

Is willing to take risks In return for high growth. .

Which type of security should she Invest in? Suggest any four features of this type of security.
OR
Write any four features of equity shares.
MARKS
5
Anjum should invest in Equity shares.
Features of equity shares:
Permanent shares: Stocks are permanent.
• Significant returns: Stocks can bring big profits to shareholders
Dividends: Participants share the profits of the company
• Voting right: Most of the participating shareholders have voting rights
Pre-emptive right
Equity shares participate in the surplus profit of the company
Equity shares are highly liquid investments
Partici ate in the mana ement of the com an
COMMENTS:
Candidates have to first identify the type of security that Anjum should invest in. They should then
specify any four of its features.
Some candidates wrote advantages instead of features of equity shares.
ISC-2018
ges of raising finance through Financial Institutions. ISC-1997
nswer 25
The main advantages of institutional finance are as follows: 3
7. Both risk as well as loan capital is available. Special financial Institutions provide
underwriting facilities also. Benefits of trading on equity are available.
8. New companies which may find it difficult to raise financial from the public can get finance
from these institutions.
9. As these institutions carry out a thorough investigation before granting assistance to a
concerned relationship with them helps to Increase the creditworthiness of a company.
10. Loans and guarantees In foreign currency and deferred payment facilities are available for
the import of required machinery and equipment.
11. The rate of Interest and repayment procedures are convenient and economical. Facilities
for repayment in easy instalments are made available to deserving concerns.
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